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- Written by: Kathleen M. Lach
The office of the IRS National Taxpayer Advocate Service (TAS) in its June 2017 report to Congress focused on two provisions embedded within the Fixing America’s Infrastructure (FAST) Act, signed into law in December 2015. Directly effecting taxpayers is the requirement that the IRS use private collection agencies to try to collect “inactive tax receivables.” In addition, the Act provides that the State Department may deny or revoke the passport of a taxpayer with a “seriously delinquent tax debt.” These provisions immediately raised concerns at the Taxpayer Advocate’s office. The mid-year report provides a status on the developments in these areas.
Private Debt Collectors
The IRS has been pushed by Congress to “do more with less”, and within the FAST Act, Congress thought it would help its cause by mandating that the IRS use private collection agencies (PCAs) to go after accounts that are “inactive.” This strategy has been tried twice in the past, and failed both times. No additional funds were collected over the course of the last experiment with PCAs, which was shut down in 2009. It is interesting to note that the bill was sponsored by Senators Schumer (New York) and Grassley (Iowa). Of the four approved PCAs, two are in New York, and one is in Iowa.
The section of the Internal Revenue Code on this enactment requires the IRS to assign PCAs to all inactive receivables. A “tax receivable” is defined as “any outstanding assessment which the IRS includes in potentially collectible inventory.” The statute does not define “potentially collectible inventory.” The IRS is to identify such accounts, and initiate this process by sending a letter to the taxpayer informing them that the account is going to be assigned to a PCA. It will then send a second letter confirming the case transfer.
TAS raised concerns immediately on the target cases, pointing out that hardship cases are the ones most likely to be affected. If a taxpayer has a delinquent account, and has hired a representative, it is doubtful that his case is “inactive.” Further, most representatives are aware of the Fair Debt Collection Practices Act which provides that with written notice, a taxpayer does not have to deal with an outside collection agency. The concern is for taxpayers who are unable to pay, and vulnerable to being harassed into paying. There is statutory relief for taxpayers who are unable to pay their tax debts, such as offers in compromise, installment agreements, and placing an account in “currently not collectable” status. These tools are available to the IRS. They are not available to the private collectors. PCAs make money when they collect. They have no incentive to consider the personal circumstances surrounding the debt they are trying to collect, and in any case, they do not have access to the same tools as the IRS.
TAS has begun its review of the cases assigned to the PCAs during the first half of 2017. It reviewed the assigned accounts of delinquent taxpayers, whose returns were filed in 2014 and later. The results found that 23% of the taxpayers reported income below the federal poverty level, and 53% reported incomes below 250% of the federal poverty level, which is the threshold set by Congress to receive assistance from a low income tax clinic. Keep in mind the following numbers that constitute household income below and proportionate to poverty level (relative to how many persons per household):
1 person - $12,060
2 persons - $16,240
3 persons - $20,420
4 persons - $24,600
Computed at the 250% rate equates as follows:
1 person - $30,1503
2 persons - $40,600
3 persons - $50,050
4 persons - $61,500
The TAS report states that among the elderly, the median income on returns for taxpayers who received social security benefits in 2016 was $13,200.
The difficulty arises in that the PCAs are not authorized to collect financial information in order to make a determination on collectability. Again, they are collection agencies whose job it is to collect a debt. There is no negotiation. Based on the preliminary data gathered by TAS, economically challenged individuals and families will be adversely affected by the actions of the PCAs. TAS has indicated that it will monitor this process closely, and we will look for additional information on the activities of the PCAs as the year goes on.
Passports
Another enactment within the FAST Act being closely monitored by TAS is the restriction it placed on passports, and consequently travel. The code provision requires the State Department to deny an individual’s application for a passport if they have a “seriously delinquent tax debt.” It may limit the reapplication approval as well, as long as the IRS certifies the debt. At this time, the threshold for certification is a tax debt above $50,000.
The concern here is that certain taxpayers will be taken by surprise when they are faced with an inability to travel, or if they are in another country planning to return to the U.S. The “certification” process, and a final determination, is not necessarily disclosed to the taxpayer. There is also some concern as to whether this is a constitutional violation in placing restrictions on an individual’s right to travel.
There are provisions for exceptional circumstances within the code section. These primarily deal with family emergencies. It remains to be seen how the IRS will handle requests for exceptions, and under what circumstances they will be allowed. The issue of restricted passports and travel is a significant restriction on taxpayers, of which clients should be made aware. This is another area closely monitored by TAS, and we are certain to hear more about it as it is implemented this year.
The Taxpayer Advocate
The office of the Taxpayer Advocate is a part of the Internal Revenue Service that operates completely independently, and is an advocate and protector of taxpayers’ rights. A taxpayer’s first course of action if an IRS issue occurs is to quickly respond to any IRS contact letter or notice she receives. However, if continuing efforts are made to resolve a matter with field personnel or the Service Center (ACS), and the taxpayer (or you as a representative of the taxpayer) reaches an impasse, the TAS office is there to assist you in working with field personnel or ACS to resolve your matter.
Each state has a local TAS office. Contact information including local telephone and fax numbers may be found on the IRS website. Generally, assistance from TAS is initially requested by filing Form 911, Request for Taxpayer Assistance Order. This may be faxed to the local office, which is the avenue for the quickest response. TAS is a valuable resource in assisting with taxpayer issues that are not easily resolved, as well as monitoring actions such as the above legislation recently passed, which directly impacts taxpayers, and may impact taxpayers’ rights.
Kathleen M. Lach is a Partner in the Tax and Litigation Departments of Arnstein & Lehr LLP. She represents clients before a variety of different tax authorities, including the Internal Revenue Service, the Illinois Department of Revenue, and the Illinois Department of Employment Security.
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- Written by: Joshua Fluegel
Time is money for every CPA. Not utilizing your time and billing software to it’s full potential is a waste of that time. CPA Magazine approached creators of time and billing software to get their thoughts on how best to utilize your time and software.
Shafat Qazi CEO and Founder of BQE Software
What is an underutilized aspect of time and billing software?
Project management and the employee performance data that is obtained when time and expenses are tracked regularly are often not utilized by managers, principals and partners. In addition to that, the ability to assign tasks with allocated hours to employees—and have them track their time against them—helps keep project costs under budget. These functionalities are often underused.
How do you optimize time and billing software's use?
The key to optimizing the use of time and billing software is to reduce the usage friction between the user and the software. A mobile app is a perfect example of how users can capture their time and expenses quickly with just a few taps.
Adding artificial intelligence also cuts the time it takes to process invoices. Intelligent billing features prepare the invoices automatically on scheduled dates and submits them to the managers for their final review. This allows for the billing to happen quickly and obviously improve the cash flow.
Brett Owens CEO & Co-Founder of Chrometa
What is an underutilized aspect of time and billing software?
Making more money! Time and billing software must help drive earnings higher. It can do this by helping us find more billable time that otherwise would have been lost, by encouraging clients to pay electronically (and hence faster and more reliably) and showing how firms are spending time between profitable and money-losing activities.
How do you optimize time and billing software's use?
It must be “optimized” around current business processes. This means you don't change how you work to fit software - you pick software that helps you automate what you already do. Think of it as if you were looking to hire someone. You don't hire a new person randomly and then create a job around their strengths; you hire for a job and that person does it. The same goes with time and billing software.
Fred Lindsley President of ImagineTime, Inc.
What is an underutilized aspect of time and billing software?
Not reviewing managerial reports on a monthly or quarterly basis to analyze staff performance, as well as, pinpoint profitable and non-profitable clients.
Resistance to change. Some firms want their new software to work very much like the old. Backward compatibility with established practices has its place, but must be balanced with the adoption of new habits and ideas that improve efficiency and profitability using today’s technology. For example, it is more efficient for staff to enter their own time. Some firms continue to insist on centralized time keeping. It is gratifying to see these firms adopt and benefit from using new methods. Oftentimes these changes must be gradual in order to allow adoption.
How do you optimize time and billing software’s use?
Configure ribbon menus for the specific staff levels avoiding unnecessary choices and reducing the learning curve. Configure permissions to restrict staff access to sensitive information. For smaller firms, use of a basic simpler menu will be more quickly absorbed than a full practice management ribbon menu.
Best practices should encourage firms to begin implementation as soon as possible after purchase of the software and to achieve staff consensus before making the purchase. Delayed implementation often results in failed implementation. Interactive web-based training optimizes the software implementation process by ensuring that CPAs and accountants are made aware of the most effective and efficient methods to meet their specific firm requirements. The cost of a web based customized training session results in many benefits including reduced time in creating invoices, time recorded with more accuracy, and protection of sensitive information from being viewed by all the office. Extended support plans in the first year allow time to ensure that users establish best practices both during and after initial implementation.
Chris Vandersluis CEO of HMS Software
What is an underutilized aspect of time and billing software?
The most underutilized aspect of time and billing software is the integration with other aspects of the organization. People often select time and billing software to solve a very narrow challenge of getting invoices generated, but when other aspects of the organization are not involved this is likely to cause more than one timesheet to be selected. Time and billing will have one, HR will have another, payroll yet a third. Perhaps Finance needs tracking for R&D tax credits, and so on. Looking to see how the selection of time and billing software can integrate into other corporate processes before selection and deployment might be a huge benefit.
How do you optimize time and billing software's use?
You can optimize your time and billing systems by making sure it’s multi-functional and flexible enough to manage the requirements of other aspects of the organization.
Thomas S. Dawson President TPS Software
What is an underutilized aspect of time and billing software?
Employee metrics in smaller firms, especially realization by employees. I believe because it requires extra effort to allocate markup/downs on billing processes.
How do you optimize time and billing software's use?
Keep the program open all day, so you can launch to the client’s folder, email from the program and monitor workflow. Running reports as needed!
Curt Finch CEO of Journyx
What is an underutilized aspect of time and billing software?
The highest ROI is when project time is measured. Automating payroll and billing is great, but understanding where you’re profitable or not is transformative. This can only come from understanding the cost of expensive labor and where it is being aimed. Imagine you have 100 expensive engineers working on hundreds of projects - some big, some small. You cannot guess, in any useful way, what project costs are. Your intuition will almost always be wrong. Our research shows that about 12% of these employees will be working on projects that have no hope of ever moving your company forward. Redirecting those people successfully will release over a million dollars per year in lost productivity, even more in revenue and profit. By comparison, the effort of tracking and monitoring the time data, while not small, is relatively modest.
How do you optimize time and billing software's use?
The most common problem we see is that systems are overcomplicated to the point that nobody can use it to enter accurate time. If you have 20,000 projects in a system, with no methodology for restricting access to these projects by role or department (or in some way), then the system will produce bad data. You have to design the system with usability in mind, as well as have an understanding of the most critical things you need to understand about your labor pool.
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- Written by: Joshua Fluegel
Payroll Processing Software Roundtable
Many things must be considered when selecting payroll processing software for your firm. One of the more prevalent is compliance. CPA Magazine gathered the thoughts of industry leaders in payroll processing on compliance and what pitfalls CPAs should avoid.
Chandra Bhansali Co-Founder and CEO of AccountantsWorld
What are some major compliance considerations when selecting payroll processing software?
Compliance is the most complex and time-consuming part of payroll processing. The most important consideration when selecting a payroll solution should be that it does most of the compliance work, including direct deposit, tax deposit, e-filing of tax forms, automatically on time – without anyone to manually triggering it. The software should also perform the printing and filing of W-2, W-3, 1099s, etc. in a batch mode to save time.
What is a misstep you have seen CPAs make when using payroll processing software?
A common misstep is that many CPAs don’t have the proper internal processes needed to run an efficient payroll practice. Another thing is that many accountants are still using desktop solutions, and it’s costing them a lot of time and lost profits that they could realize by using a cloud-based professional payroll solution.
Connie Martin President and CEO of Adaptasoft
What are some major compliance considerations when selecting payroll processing software?
As the modern workplace continues to change and evolve, compliance concerns are equally dynamic. It may seem that the moment a compliance issue is resolved, a new regulation surfaces. However, several compliances remain fundamental. When your business is selecting a payroll processing software, it is crucial to ensure that these are met before any others – as failure to do so could result in serious legal consequences. In other words, these payroll compliances are nothing short of an absolute must.
There are two categories of compliances a business should consider when selecting a payroll processing software: legislative mandates and HR compliances.
Legislative Mandates
It is paramount that these legislative mandate compliances are present in the payroll processing software your business is considering:
• Labor laws
• Correct Classification of Workers
• Wages
• Income Taxes
• Employer Contributions: Social Security, Medicare, FUTA, SUTA
• Employee Deductions: Social Security, Medicare, and in some states SUTA
• Employee Contributions: Retirement Plans: 401K, IRA, Roth, etc.
• Third Party Sick Pay
• Garnishment of Wages
• These compliances are established to assure that your organization is abiding by both government legislation and industry regulations.
HR Compliances
HR compliances are also an important consideration. In order for your business to serve as the “one-stop-shop” for employers, a payroll service provider should strongly consider offering compliance tracking from the HR perspective, as these are closely integrated with payroll.
These HR compliances could include features such as:
•ACA Compliance Tracking
•Offering of Benefits
•Record of Timekeeping
•Onboarding-employee paperwork compliance, IE, I-9, W-4, etc.
No two businesses are exactly alike, which is why you should be familiar with the unique benefits and software features offered by different providers. Businesses should conduct thorough research when choosing a payroll processing software, keeping these mandates and compliances at the forefront of their purchasing decision. Doing so protects and empowers your business so you can plan for the future.
What is a misstep you have seen CPAs make when using payroll processing software?
Payroll processing software has transformed business operations across the globe, offering a practical solution that uses fewer resources while increasing productivity, accuracy and return on investment. However, with the growing number of businesses choosing to invest in payroll processing software, there are common missteps that can take place. These can be avoided with adequate planning.
One particularly common misstep that we see CPAs make when using payroll processing software is underestimating the flexibility of the payroll software and the vast complexity of payroll rules. When working with payroll, there are often multiple paths to a solution, with very specific rules that apply. The key is knowing precisely which path is correct in a given instance while still adhering to the rules of the payroll software.
For example, in order to account for the possibility of every imaginable type of deduction, we allow a user to specify which taxes do and do not apply to the deduction; it’s imperative that the user either understands the laws of the specific deduction and its associated taxes, or has access to a qualified individual possessing that knowledge. The scope of payroll processing can be incredibly different from what a CPA deals with on a day-to-day basis, such that further training may be required to become truly skilled with the processing software.
In order to get the greatest benefit out of your business’s payroll processing software, it is vital for every employee to be sufficiently trained and informed. This way, you can mitigate errors, avoid frustration, and equip your business for success.
Chris Rush Division Vice President of Strategy & Business Development, ADP Small Business Services of ADP
What are some major compliance considerations when selecting payroll processing software?
There are several compliance considerations pressing on accounting firms and their ability to accurately process payroll for their clients. The changing composition of the workforce and employee classification, myriad local, state and federal regulations, meeting filing and deposit deadlines, and reporting worker’s compensation for annual audits are just some of the regulations making it imperative that accounting firms help ensure that their clients accurately manage compliance requirements. Offering a cloud-based, integrated, compliant payroll solution helps firms meet these obligations for their clients. It also provides them an opportunity to strengthen client relationships and benefit from additional, recurring revenue.
What is a misstep you have seen CPAs make when using payroll processing software?
One common misstep is failing to integrate a payroll solution with other service offerings. Advancements in technology not only are enabling accounting professionals to efficiently handle more payroll clients, they also are transforming how accounting firms integrate payroll with other services they provide their clients.
Accounting firms may benefit from presenting the entire scope of their capabilities as a comprehensive offering. This may help them enhance and deepen their client relationships, as well as position the firm to capture more of their client’s business as they continue to add relevant, valuable services.
Integrating payroll with other services can produce a steady, reliable stream of revenue and potentially lower general operating costs. It also may help smooth out revenue and staff workload throughout the year.
Ken Hilton President of Red Wing Software
What are some major compliance considerations when selecting payroll processing software?
When selecting payroll processing software, it is important to make certain that the software can handle the myriad methods of calculating overtime. In addition to the standard federal definition of calculating overtime, many states have their own rules, and specific unions may have specific methods defined in their collective bargaining agreements.
What is a misstep you have seen CPAs make when using payroll processing software?
While CPAs are very good at processing payroll for their clients, it can be difficult for CPAs to keep up with all the changes that take place in their clients’ businesses with regard to employee status, pay rate changes, vacation/PTO pay, etc. This can inadvertently lead to payroll errors. One misstep I’ve seen is the lack of a good communication plan between the client and the CPA. With a solid communication plan, this can be avoided.
James Paille Director, Chief Compliance Officer, Corporate Secretary myPay Solutions of Thomson Reuters
What are some major compliance considerations when selecting payroll processing software?
• Vendor’s ability to quickly get software updates to update the payroll provider’s tax engine and rates (cloud-based is preferred).
• Backed by security experts that have experience in delivering on the promise of keeping data secure and assuring client confidentially; a system that does not rely on emails, faxes, “external functions.”
• Immense depth and breadth of available federal, state, and local tax compliance forms and/or e-filing abilities.
• Secure and proven ACH and banking process.
• Ability to mask and control personably identifiable information.
What is a misstep you have seen CPAs make when using payroll processing software?
• In-house processing approach, staffing for payroll, but only providing payroll as a courtesy to 10-20 clients. It’s a loss leader without building the client base beyond 70-80 clients. New opportunities exist to keep control of the client, yet not have to be invested in the day-to-day tasks and still make money.
• Know your niche; do not elephant hunt or take on clients outside of your expertise or comfort zone. Properly qualify your prospects in the sales process.
Assuming that current bookkeeping and tax staff can perform the payroll service needs with accuracy. Hire payroll experts for your operations.
Ken Garen President of UBCC
What are some major compliance considerations when selecting payroll processing software?
The major considerations should be:
• Is the software designed for payroll service bureaus or single company use? For example, can you run all of your 941s from a batch process instead of one by one.
• Can you change the software’s behavior for only one client and not affect other clients?
• Can you have custom enhancements made and have those enhancements included in future revisions of the software at no additional cost?
• Does the software have pay-as-you-go workers compensation and will it work any broker or just the one that software company works with?
• Does the software have a sophisticated automatic billing module for your fees?
• Can you combine multiple clients into one file for direct deposit and child support payments?
• Can you impound and track funds for taxes and/or full gross to net to effectively compete with ADP and Paychex?
• Can you do daily bank reconciliation of your impound bank account?
• Can you easily customize reports for clients?
• Can you include historical checks in a new customized report?
• Can you import cleared checks into your bank reconciliation?
• Does the payroll fully integrate with the GL and BK? And does it allow you to select different client IDs to use for EFT, GL and BK?
• How quickly can you run on new technology?
What is a misstep you have seen CPAs make when using payroll processing software?
• Not considering the productivity of different software and its effect on their profit.
• Only considering the cost and not the benefits of the cost/benefit equation.
• Not considering how much computer infrastructure is needed to run the software.
• Not considering if the software is designed to allow for multiple users to be in the same client at the same time.
• Not considering if the software will have performance degradation as historical information is added.
• Not considering how easy is it to import and export information.
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- Written by: Steven V. Melnik, LLM, J.D., CPA
Let’s face it–events happen that you can’t control. Sometimes you’ve exhausted all means to get your financial life back in order – for you personally and/or your business. Bankruptcy now becomes an option, a legal process in which bad debts are either extinguished or a plan may be implemented for repayment depending on which chapter of bankruptcy you file your petition. On the personal side, a bankruptcy filing only discharges income tax debt – it does not discharge other types of taxes including payroll taxes, trust fund recovery penalties, etc.
Filing for a bankruptcy places an automatic stay on collection action by the IRS, but extends the IRS collection statute expiration date so that it has more time to collect on any remaining tax debt that was not discharged. Seldom is bankruptcy a better option than trying to negotiate directly with the IRS for moneys owed it. The exception would be if aggressive collection action is being taken against you, filing for bankruptcy will obtain a stay on the collection process. Depending on which chapter you file, you may force the IRS to accept a payment plan, which would include some or all of your income tax debt being reduced, or having it completely discharged.
Bankruptcy and Your Credit
The downside to filing a bankruptcy petition is that this action will last on your credit report for 10 years. This may prevent you from qualifying for various loans, as well as jobs. Prior to filing bankruptcy, you should weigh the pros and cons and determine whether it would cause more harm than good.
Differences Between Chapter 7 and Chapter 13 Bankruptcies
The two most common forms of bankruptcy that provides some assistance in resolving an IRS tax debt are Chapter 7 and Chapter 13 bankruptcy. It is important to understand that each form resolves IRS tax debt differently. Chapter 7 is the only bankruptcy option that may discharge some or all of your IRS tax debt, while Chapter 13 may either reduce a portion of your debt, and establish a payment plan to repay the remaining balance, or simply establish a repayment plan for paying off your IRS tax debt. In a bankruptcy proceeding, it is important to know that only income tax debt can be discharged. All other tax debts cannot be discharged by filing bankruptcy.
Chapter 7 Bankruptcy
In a Chapter 7 Bankruptcy, the court may either discharge all or a portion of your IRS income tax debt. However, in order for the income tax debt to be discharged, it must meet the following guidelines:
• The tax debt must have been due at least three years prior to your bankruptcy filing. This is called the Three-Year Rule.
• The tax return must be filed at least two years prior to your bankruptcy filing. This is called the Two-Year Rule.
• The taxes owed must have been assessed against you at least 240 days prior to your bankruptcy filing. This is called the 240- Day Rule.
• The tax debt cannot be the result of tax fraud or tax evasion.
• The tax debt must be income tax debt only.
If approved, a Chapter 7 discharge of income taxes will remove your obligation to pay back the taxes owed. However, if any tax liens were filed against you prior to bankruptcy, the tax lien will remain in effect up to the value of your equity in assets. For example, if a tax lien of $50,000 has been filed against you, but your remaining assets are valued at $10,000, the tax lien will remain in effect up to $10,000.
A Chapter 7 filing is not recommended for individuals who may have substantial assets, as some assets may be exempt while others are not. All assets not exempted will be included in the bankruptcy and may be used to satisfy outstanding debts.
Chapter 7 Bankruptcy can only be filed once every six years, but is the only bankruptcy option for discharging IRS income tax debt.
Chapter 13 Bankruptcy
The most common form of a bankruptcy filing is a Chapter 13. It is used for resolving IRS income tax debt within a repayment plan that will be determined by a court trustee. It does not discharge the income tax debt but will require that you make monthly payments for a specified amount and for a specified length of time which may be a minimum of three years to five years maximum.
The court trustee may also reduce the amount of the income tax debt if four conditions are met:
1. The debt must be income tax debt.
2. The Three-Year Rule must be met.
3. The 240-Day Rule must be met.
4. No liens were filed by the IRS, or if a lien was filed, there is no property upon which the lien may be applied.
If these conditions are not met, the tax debt must be paid in full, and the payment plan established in the bankruptcy proceeding will be adjusted in order for the tax debt to be paid in full within the allotted time. The Two-Year Rule requiring that all tax returns must be filed prior to filing a Chapter 7 is not applicable in Chapter 13.
The benefit of Chapter 13 is that it will stop all penalties and interests from continuing to accrue from the date the bankruptcy is filed, unlike an IRS Installment Agreement or Streamlined Installment Agreement where the penalties and interests will continue to accrue. It may also reduce penalties and interests owed to the IRS. Chapter 13 also forces the IRS to accept the repayment plan proposed by the Bankruptcy Court and cannot collect more than the judge approves. This option may also be beneficial in cases where a revenue officer is assigned that refuses to establish a reasonable Installment Agreement or resolution.
Divorced and Debt Aren’t Always Separate
Individuals are considered divorced on the date that the divorce is made final in a court of law. Contrary to what many believe, divorce does not discharge a tax debt. The IRS holds that husband and wife are jointly and severally liable for the tax debts in which a joint return was filed. As a result, it may pursue one or both parties in order to collect the full amount of tax debt owed as both are held liable for the tax debt that was created during the marriage.
If the husband or the wife paid the tax debt in full and the other did not contribute anything to its creation, his or her only recourse is to pursue a civil action in a court of law to collect the portion that should have been paid by the former spouse.
Debt and Separation
Sometimes divorced couples still reside in the same household. When this occurs, the IRS may establish a resolution with one party that protects the other from collection activity. If they are separated or living apart, the spouse setting up the resolution with the IRS may choose to establish a resolution only for him or her and exclude the other spouse. When this happens, the IRS will perform a task called Mirroring the Account in which case, the spouse establishing the resolution will be protected from further collection action, but the IRS will pursue collection action against the former spouse.
In Offer in Compromise cases, if the offer is accepted for one party where the taxes were owed jointly, the IRS will reduce the total debt by the amount of the offer, and pursue the other party for the remaining tax debt.
In some cases where parties are divorced and living apart, they may still be able to resolve the account jointly. In Offer and Compromise cases, both parties may submit the offer jointly using separate Forms 433-A OIC, or Form 433-A and then one Form 656 if resolving joint liabilities only.
In the case of Currently Not Collectible, parties living separately cannot submit a Currently Not Collectible on behalf of the spouse (or former spouse), each person would need to submit a request for Currently Not Collectible separately. However, one spouse may set up an Installment Agreement and agree to pay back the full amount of the joint tax liability if he or she chooses to do so. This would prevent the IRS from pursuing collection action against the other spouse. Chapter 21, Resolutions, Offers and Agreements would be helpful to review so that you have a clear understanding of what each agreement is.
Assisting Your Ex
The decision to help or not to help an ex-spouse is completely within your discretion. It can provide simplicity as Mirroring cases may cause confusion when two taxpayers are making payments on the same tax liability. In some cases, such as Offer in Compromise, it may be easier to have the case resolved when both spouses are eligible for the status rather than trying to resolve the tax debt separately. You should weigh the pros and cons of your decision and make an informed choice.
Seeking Non-Liable Status
You may be considered a Non-Liable Party (NLP) – someone who lives with and shares living expenses with a taxpayer who owes back taxes to the IRS. You though, don’t owe the IRS for the back taxes. NLPs can be a spouse, parent, or roommate. When you live with an NLP, a special calculation must be done and can affect your eligibility for the resolution you are seeking.
Pro-Rating Expenses
When an NLP resides in your household, you may be required to pro-rate your shared expenses based on the income of all parties residing in the household. A percentage will be determined for which you are responsible for the shared household expenses. This percentage is determined by adding the incomes of everyone in the household, then dividing your income by the total household income.
Pro-rationing is more likely to be demanded when a taxpayer shares expenses and co-mingles bank accounts, funds, etc. This is more common among married individuals and when negotiating an Offer in Compromise.
The Pro-Ration Formula is as Follows:
Taxpayer’s share = taxpayer’s monthly gross income ÷ (taxpayer’s monthly gross income + NLP’s monthly gross income) x 100.
Example: Stephan was married to Barbie. They lived in the same household with one minor child. Barbie was not liable for Stephan’s IRS tax debt he had incurred. They shared expenses for food, clothing and miscellaneous items, housing and utilities, and out-of-pocket health care expenses. His monthly gross income was $4,000 and hers $2,000.
The national standard for food, clothing and miscellaneous items for a household of three individuals (H + W + child = 3) is $1,249. Total housing and utilities was $2,000 and was within the IRS standard for their county. The national standard for out-of-pocket health care was $180 (60 x 3 = $180). With this information, Stephan’s portion of the shared expenses is calculated as:
Income share: $4,000 (taxpayer’s monthly gross income) ÷ ($4,000 (taxpayer’s monthly gross income) + $2000 (NLP’s income) x 100 = 67%. His portion of the shared expenses is 67%. Next, multiply the shared expenses by 0.67 or 67%.
Expense portion of food, clothing and miscellaneous items: $1,249 x 0.67 = $836.83 or $837. Stephan is responsible to pay $827 for this shared expense and would report this figure on his Form 433-A or 433-F.
Housing and utilities portion: $2,000 x 0.67 = $1,340. He will claim $1,340 for this item on his Form 433-A or 433-F.
Note: If Stephan’s housing and utilities exceeded the national standard for the housing and utilities for his household size based on his county, he would pro-rate his share based on the maximum allowed by the national standard if negotiating an Offer in Compromise. In Currently Not-Collectible or an Installment Agreement cases, he may be allowed to exceed the national standard if he provides proof of this expense.
Out-of-pocket health care portion: $180 x 0.67 = $120.60 or $121. As a result, he would claim $121 for this expense on his Form 433-A or 433-F.
Non-Disclosure of Income by a Non-Liable Individual
Some people are married; some are not. In a situation where one does not have a liability or responsibility for the debts of the other, the NLP may not want to include his or her income so that a proper pro-ration may be conducted. When that happens, the IRS may try to obtain what the income is internally if the NLP is a spouse. Previous joint tax returns would include income and the Social Security number. If information is obtained internally, the IRS will perform its own pro-rationing calculation. You should double check the representative’s calculation based on the information they have obtained as the representative may pro-rate incorrectly. In cases where the information cannot be obtained, the IRS will then use the default pro-ration of 50% of all shared expenses. The most common shared expense is housing and utilities. All other allowable expenses will be based on what you submitted to the IRS.
Example: Lars and Marisa were roommates but were not married. Lars owed the IRS but Marisa was not liable for his tax debt. She refused to provide her income to him so that he could pro-rate the shared expenses. When he informed the IRS representative of this, the representative tried to obtain her information internally, but was not successful. So the representative used the default pro-ration of 50% in order to determine his share of the housing and utilities expenses.
Lars reported that his total housing and utilities expense for him and his roommate was $1,400. The representative then determined that his share was $700 ($1,400 x 0.50 = $700). All other expenses were based on what he reported.
This is an excerpt from Tax Relief and Resolution by Steven Melnick, CPA. Melnick is a licensed attorney, LLM in Taxation. He is also a professor of tax law, and a Chairman of Continuing Education Programs for Tax Professionals at the City University of New York.
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- Written by: CPA Magazine
Consider for a moment, the largest retailer doesn’t own a single store, the largest provider of sleeping rooms doesn’t own a single hotel and the largest provider of transportation doesn’t own a single car?
The world has shifted in recent years to the sharing or collaborative economy – largely enabled by technology and will expand to touch almost all aspects of society in ten years or less.
The biggest change to finance and accounting is expected to be the blockchain, the underlying distributed mechanism for Bitcoin and other digital currencies. Think of the blockchain as a way of keeping track of trusted transactions based on distributed computing sometimes referred to as the Internet of Money. The blockchain is essentially a global cryptography accounting ledger in the cloud.
The blockchain has already provides programmable smart contracts for payouts between two parties once certain criteria has been met, much like collections, providing government the ability to add a small transaction tax built into the blockchain itself.
Positive Impacts of Blockchain
• Increased financial inclusion in emerging markets, as financial services on the blockchain gain critical mass.
• Disintermediation of financial institutions, as new services and value exchanges are created directly on the blockchain.
• An explosion in tradable assets, as all kinds of value exchange can be hosted on the blockchain.
• Better property records in emerging markets, and the ability to make everything a tradable asset.
• Contacts and legal services increasingly tied to code linked to the blockchain, to be used as unbreakable escrow or programmatically designed smart contracts.
• These contracts are secured in the blockchain as “self-executing contractual states,” which eliminates the risk of relying on others to follow through on their commitments.
• Tax collected for the first time by a government via a blockchain.
Unknown Impacts of Blockchain
• It is unregulated and not overseen by any central bank, meaning less control over monetary policy.
• Real-time taxation
• A 2016 mayoral candidate of London has suggested implementing technology to upgrade the existing government ledger for land and for the city’s financial and budget records. Because these records are kept permanently, there is a strong possibility (without the blockchain) for them to be altered or faulted.
The current total worth of bitcoin in the blockchain is around $20 billion, or about 0.025% of global GDP of around $80 trillion.
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