Author Archives: c11634410

New Tax On Lawsuit Settlements — Legal Fees Can’t Be Deducted

Many plaintiffs will face higher taxes on lawsuit settlements under the recently passed tax reform law. Some will be taxed on their gross recoveries, with no deduction for attorney fees even if their lawyer takes 40% off the top. In a $100,000 case, that means paying tax on $100,000, even if $40,000 goes to the lawyer. The new law should generally not impact qualified personal physical injury cases, where the entire recovery is tax free. It also should generally not impact plaintiffs who bring claims against their employers. They are still allowed an above the line deduction for legal fees (although there are new wrinkles in sexual harassment cases).

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For most other types of claims, if the suit is not related to the plaintiff’s trade or business, there may be no write-off for legal fees or costs. That means you are taxed on 100% of your recovery. Examples of settlements facing tax on 100% include recoveries:

    1. From a website for invasion of privacy or defamation;
    2. From a stock broker or financial adviser for bad investment advice, unless you can capitalize your legal fees;
    1. From your ex-spouse for claims related to your divorce or children;
    2. From a neighbor for trespassing, encroachment, etc;
    3. From the police for wrongful arrest or imprisonment;
    4. From anyone for intentional infliction of emotional distress;
  1. From your insurance company for bad faith;
  2. From your tax adviser for bad tax advice;
  3. From your lawyer for legal malpractice; or
  4. From a truck driver who injures you if you recover punitive damages.

The list of lawsuits where this will be a problem seems almost endless. The new tax law wiped away miscellaneous itemized deductions and deductions for investment expenses. But part of the tax problem is historical. In 2005, the U.S. Supreme Court held that plaintiffs must generally recognize gross income equal to 100% of their recoveries. even if their lawyers take a share. See Commissioner v. Banks, 543 U.S. 426 (2005). That means plaintiffs must try to deduct fees paid to their lawyers. Fortunately, Congress enacted an above the line deduction for employment claims and certain whistleblower claims. For employment and some whistleblower claims, this deduction remains in the law, so those claimants will pay tax only on their net recoveries.

Yet plaintiffs in employment claims that involve sexual harassment face new tax problems. The new law denies tax deductions for legal fees and settlement payments in sexual harassment or abuse cases, if there is a nondisclosure agreement. Virtually all settlement agreements include confidentiality or nondisclosure provisions. Even legal fees paid by the plaintiff in a confidential sexual harassment settlement are evidently covered. Congress probably intended only to deny defendant tax deductions. But even plaintiffs may have to worry about tax write-offs in sexual harassment cases after Harvey Weinstein.

Up until now, even if you did not qualify to deduct your legal fees above the line, you could deduct them below the line. A below the line (miscellaneous itemized) deduction was more limited, but was still a deduction. Now, there is no below the line deduction for legal fees. Do two checks (one to lawyer, one to plaintiff) obviate the income to plaintiff? Not according to Banks. IRS Form 1099 regulations generally require defendants to issue a Form 1099 to the plaintiff for the full settlement, even if part of the money is paid to the plaintiff’s lawyer.

One possible way of deducting legal fees could be a business expense if the plaintiff is in business, and the lawsuit relates to it. Some may claim that the lawsuit itself is a business, but in the past, that tax argument usually failed. There will also be new efforts to explore potential exceptions to the Supreme Court’s 2005 holding in Banks. The Supreme Court laid down the general rule that plaintiffs have gross income on contingent legal fees. But general rules have exceptions, and the Court alluded to some in which this general 100% gross income rule might not apply.

For example, court awarded fees, statutory fees, or a partnership between lawyer and client divide the proceeds are all worth discussing. But tax advice early–before the case settles and the settlement agreement is signed–are going to be essential.  For many, no tax deduction for legal fees will come as a bizarre and unpleasant surprise after the fact. Plaintiffs who have some advance warning and advice may go to new lengths to try to avoid the lawyer’s share being income to them, or to somehow deduct it. Few plaintiffs receiving a $100,000 recovery will think it is fair to pay taxes on the full amount, when legal fees consumed a third or more.

Add higher contingent fees, high case costs, and bigger recoveries, and the tax problems get even more pronounced. Contingent fee lawyers may try to help plaintiffs where they can. Plaintiffs paying taxes on their gross recoveries–even on the share earned by contingent fee lawyers–is a new tax problem plaintiffs will need time to try to plan around. For those who can’t somehow avoid the tax, it could impact whether cases settle, and if they do, at what amount.

 

Private Collection Company

If a private collection company contacts you on behalf of , here’s how to find out if it’s legitimate.

Trust me you will already know if you owe the IRS money.  Do not fall for anyone calling you as a scam.  If you get a call from someone saying you owe money and you have not received a letter from the agency indicating why and how much you owe, call me right away.

Long History of the Enrolled Agent – Expanded Role of the Enrolled Agent

Long History of the Enrolled Agent

It was at this 1973 convention that Vice President Lee Wurst shared the research he had uncovered on the long history of the enrolled agent. Enrolled agents were first recognized on July 7, 1884 by an Act of Congress signed into law by President Chester A. Arthur, which came about due to fraudulent war loss claims following the Civil War. The “Enabling Act” or “Horse Act of 1884,” which stipulated that enrollment was governed by a committee on enrollment and disbarment, was meant to ensure that enrolled “agents, attorneys, or other persons representing claimants” could help settle claims associated with property the government had seized for use in the Civil War.

Expanded Role of the Enrolled Agent

In 1913, the first income tax law became effective with the ratification of the 16th Amendment by President Woodrow Wilson. The scope of the enrolled agent was expanded to include claims for monetary relief for citizens whose taxes had become inequitable. As income, estate, gift, and other sources of taxes became more complex, the role of enrolled agent grew to include preparation of the many required tax forms. Audits increased and the enrolled agent role evolved to include taxpayer representation, resulting in a series of statutes that were combined in 1941 into a single Treasury Department Circular. Circular 230 replaced the Enabling Act and marked the first publication to specify the rules and regulations that governed procedure, practice, and enrollment. Enrolled agents, Circular 230 practitioners, are federally authorized tax practitioners empowered by the U.S. Department of the Treasury to represent taxpayers before the Internal Revenue Service (IRS) for tax issues including audits, collections, and appeals. (Lawyers and CPAs are licensed by states, whereas enrolled agents can practice in all 50 states.) Enrolled agent status is the highest credential awarded by the IRS, secured by passing a three-part Special Enrollment Exam or through previous experience at the IRS.

Let’s Talk Taxes – Home Office Deduction

Let’s Talk Taxes – Home Office Deduction

You’ve decided to start a small business working out of your home. Life is great and you can’t beat the commute. Now, how will this affect your income taxes? Can you deduct expenses for use of your home? The answer is that it depends…on a lot of things.

First of all, the business must be for profit or an expectation of profit. Next, you must set aside an area that is used exclusively for this business. Perhaps you’ve set up a room with a desk, computer, file cabinets, and storage for your product. Use the room entirely and exclusively for business purposes and it will be deductible. Beware, however, that as soon as you add a sofa bed in the corner for your in-laws to use when they come to visit, the space is no longer exclusive and you lose the deduction.

What is eligible for a deduction? This is where the math comes in. You must determine the total square footage of your home and the total square footage of the office. Example: Total house is 2000 square feet and the office area is 200 square feet. This will give you a 10% office usage equation. You will then be allowed to deduct 10% of your costs for the upkeep and maintenance of your home which includes insurance, taxes, mortgage interest (or rent if you do not own), electricity, gas, and repairs for the entire house. Additionally, you can take specific fix-up and maintenance costs in full if they are solely for the business space.

Also available is a deduction for depreciation on the home. To determine this figure, use the cost of the house, less the value of the land, and depreciate this value over 39 years (commercial use value). When you sell the home, you must make an adjustment for the amount of the depreciation taken. This depreciation adjustment is recaptured on your tax return at the 25% tax rate.

Be sure you fully understand the home office deduction and subsequent depreciation recapture before using it. Rules for the home office deduction can be tricky.  When preparing your return, I will take great care in making sure you understand how this will effect you now and in the future.

The author is an enrolled agent, licensed by the US Department of the Treasury to represent taxpayers before the IRS for audits, collections and appeals.

 

 

 

 

 

Let’s Talk Tax – IRS Notice

 

Let’s Talk Taxes

Greetings from the IRS

 

You’ve just picked up your mail and … uh oh, there among the ads, bills and too numerous offerings for credit cards is that official looking letter from the Internal Revenue Service. A feeling of dread comes over you…but don’t panic or toss it, and please DO open it. It might even be good news.

Usually, mail from the IRS is a notification that they need verification of documents or substantiation of an amount you have claimed on your tax return. Read the letter thoroughly. Determine what they are looking for, and then provide the information. Some of the most commonly missed items on a return are simple things: you forgot to sign the 1040; you didn’t attach W-2’s and required statements; if you’re paying quarterly, maybe you claimed the wrong amount as estimated tax; or, perhaps the income you listed doesn’t match the figure that was reported to the IRS on a Form 1099 by someone who paid you during the tax year.

If you have the correct information, it’s a simple matter to fix. Make copies of your documents verifying the information on your return and send the copies back to the IRS along with a copy of the letter they sent to you. If, in fact, you didn’t include an amount on your return that should have been there, sign the form agreeing to the change and send them a check for the amount of tax due by the deadline date given for compliance. Usually, penalties and interest will be added—so, the sooner you comply, the less it will cost.

If your IRS letter advises you that your return has been selected for audit, you would be wise to seek professional advice. That’s where I come in.  You should contact that me for help with the audit. If you prepared your own return, you may wish to contact me immediately.  I am an Enrolled Agent.  Enrolled agents are authorized by the U.S. Treasury Department to represent taxpayers before all administrative levels of the IRS for audits, collections, and appeals.

Now you’re thinking, what about that possible good news mentioned earlier? It could be that the notice is for an unexpected refund, of course. Now, open that letter!

The author is an enrolled agent, licensed by the US Department of the Treasury to represent taxpayers before the IRS for audits, collections and appeals.

 

 

 

Let’s Talk Tax – Non Filer

 

Let’s Talk Taxes

Solace for the Non-filer

 

Has it been awhile since you filed a tax return? Feeling guilty? Scared? Don’t know what to do? Do you even need to file?

Many people become non-filers each year for a number of reasons. They lose the paperwork, they couldn’t pay, or they forgot about it. Sometimes illness, family crisis or depression plays a role. The list goes on and on.

If you are a non-filer, don’t procrastinate any longer. You may be hoping the IRS has forgotten about you, but that rarely happens. In truth, the longer you wait, the more costly it will be if you owe money. And if you are due a refund, the statute of limitations on that refund expires three years from the date the return should have been filed. Don’t risk losing your money.

It’s not uncommon to feel overwhelmed when you haven’t filed for a while, but don’t despair. Lost paperwork can be reconstructed. If you owe, it’s better to file and negotiate an installment agreement because this will stop the late filing penalties although interest will continue until the tax bill is paid. Sometimes, penalties can be abated if the circumstances are serious, such as family crisis, illness or other catastrophic situations.

Contact me, I am a tax professional. I will  help you get the monkey off your back.  I am  an enrolled agent (EA) is licensed by the Treasury Department to represent clients who have problems with tax filing and with the IRS. I can act on a your behalf and can help to get taxes filed, negotiate an installment agreement if you can’t pay in full or, possibly, negotiate an offer in compromise to reduce taxes, penalties and interest. Don’t wait for the IRS to come looking for you; it’s far better to voluntarily come forward.

Every U.S. citizen and resident is required to pay his or her fair share of taxes. No more, no less. The IRS has a matching program whereby all 1099s, W-2s, etc., are entered in their computers. They match this information with the tax returns that have been filed to ensure that all income has been reported and that everyone who is legally required to do so has filed a return. So, if you haven’t filed for whatever reason, get moving before the IRS comes looking for you!

The author is an enrolled agent, licensed by the US Department of the Treasury to represent taxpayers before the IRS for audits, collections and appeals.

 

 

 

 

 

 

Let’s Talk Tax – IRS Radar


Let’s Talk Taxes

Staying off the IRS Radar Screen

 

Nothing strikes terror in the heart of the American taxpayer quite like finding a letter in the mailbox from the IRS! In an effort to help you avoid that unpleasant scenario, provided below are examples of some common pitfalls to avoid if you don’t want the IRS lining up to be your new pen pal.

It’s surprising how many people mail their returns to the IRS without a signature. Before mailing, be sure to recheck everything and don’t forget to sign your return. An even better solution is to file electronically. Returns filed electronically have safeguards and controls to eliminate common errors. Additionally, the return goes directly to the processing center and the information does not have to be keyed into a computer by an IRS employee, which could result in additional errors.

Did you remember to include all income on the return? If you received a Form 1099 from anyone, be sure this income is on the return in the right place or you will receive a notice. Even if you did not receive a 1099 for work done independently, you are required to report the income. IRS receives copies of 1099s from banks, stock brokerage firms, rental agencies, and subcontractors and these are checked against income reported.

If you made estimated payments or paid your taxes quarterly, check the amounts and the dates the taxes were paid. Forgetting to include a payment is a frequent error that makes your tax burden look heavier. Many people forget to include the January payment, so keep in mind that the first payment of the year is sent in April, followed by June and September payments and concluding with the January payment in the following year.

If you file or pay late, you will receive a notice of delinquency and be charged interest and penalties, so try hard to avoid that. If you can’t pay taxes that are due by April 15, be sure to file the return on time with a Form 9465, Installment Agreement Request, either electronically or paper filed.

Incorrect social security numbers will generate a notice or a disallowance of your dependents. Don’t mail the return without verifying that all social security numbers have been entered correctly. Transposing those numbers is more common than you’d think.

A few minutes of extra time reviewing your return will pay off in peace of mind and help you stay off the IRS radar screen.

The author is an enrolled agent, licensed by the US Department of the Treasury to represent taxpayers before the IRS for audits, collections and appeals.

 

Let’s Talk Tax – Donations

Let’s Talk Taxes

Tis the Season to be GIVING …..

 

Face it, you’ve been putting it off all year. Maybe you have to turn sideways to get in the storage room or have given up on parking your car in the garage. Well, it’s the end of the year and now you have a big incentive to clean out all that stuff! You could get a tax deduction for it.

If you itemize your deductions (use Schedule A), Uncle Sam will give you a bonus – a deduction on your tax return for donating all that stuff to a charity. This could result in a larger refund for you, but there are a few simple rules you must follow to benefit from this tax break.

First, the charity must be recognized as an exempt charitable entity. Qualifying are churches, schools, Red Cross, Amvets, Scouts, Salvation Army, Disabled American Vets, public libraries, etc. If in doubt, ask the organization or check the IRS website at IRS.gov.

Second, make sure you get a receipt from the charity for the donation. You’ll need it as proof of your donation. If your total non-cash donations are less than $500, you can list the amount on Schedule A.

Think of all those kitchen appliances no longer used; old toys the kids have outgrown; clothes that don’t fit or are out of date; books, tools, games, furniture and anything else you no longer want. It is fairly easy to rack up $500 in fair market value resulting in an additional refund of $125 if you are in the 25% tax bracket. Remember that clothing must be in above average condition – no old socks, underwear and soiled clothes you used for painting! So, get busy – get rid of the extra stuff, simplify your life and enjoy that larger refund!

The author is an enrolled agent, licensed by the US Department of the Treasury to represent taxpayers before the IRS for audits, collections and appeals.

 

 

 

 

 

 

Let’s Talk Tax – Tax Shelters

 

Let’s Talk Taxes

The Best Tax Shelter around—your Personal Residence!

If you’re a homeowner, Uncle Sam has thrown you a tax shelter that’s beyond compare. You may deduct the mortgage interest paid on your annual tax return and deduct the property taxes on your Schedule A. If you don’t currently own a home, this tax benefit is significant enough to make you look seriously at home ownership.

“Points”

The concept is simple, but it starts to get a little more complicated when you add in “points.” Points are one type of fee paid at closing to your lender. If you pay points when you buy your new home, these may be deducted in full in the year of purchase. However, if you refinance your loan, the points must then be deducted over the life of the new loan. In the event you are deducting points annually and then decide to refinance again, you will be able to deduct the balance of the points when you pay off the old mortgage. Of course, all these deductions are based on being able to itemize your deductions on Schedule A.

There are some limitations.

  • Points must not be more than amounts generally charged in your area.
  • Funds provided at closing must be at least equal to the points.
  • Loan must be used to buy or build taxpayer’s main home.
  • Points are stated as a percentage of the principal amount of loan.
  • Points are clearly stated on the settlement statement as charged for the mortgage.

Predictably, there are limits on mortgage interest deduction. Only the interest on the first $1 million of home acquisition debt is deductible. (Acquisition debt is defined as debt to purchase, build or substantially improve the residence.) Home equity debt limits are the lesser of the fair market value of the home reduced by the acquisition debt or $100,000 ($50,000 if married filing separately).

Probably the greatest advantage of home ownership occurs when you decide to sell your home. If you have owned and lived in your personal residence for two out of five years, you can sell the home and not be taxed on a profit up to $250,000 for singles and $500,000 for couples. The way home values have decreased in recent years, this may seem like a far-off opportunity. However, home sales are on the rise in much of the country. This rule seems very straight forward and simple, but beware! There are a number of exceptions.

Job related move—if you have to move out of your area (a 50-mile radius), and are unable to meet the two year time period, you can prorate the time based on a formula utilizing a ratio consisting of the number of days that you owned and lived in the home to the total number of days in the relevant 24-month period (approximately 730), multiplied by the exclusion amount.

Health problems requiring a sale—if health problems force you to move from your principal residence, you can prorate the time and exclusion based on the formula above.

Ideally, a couple that kept good records of time of ownership could buy and live in a home for two years, sell for a profit and then repeat this process. Still, there are a number of pitfalls that cause tax problems, such as the special rules surrounding home offices and move out/rent/return situations that effect the two in five requirement (this involves adjusting for depreciation recapture). Given the many regulations and nuances of the tax laws, many people opt to hire me, a licensed tax practitioner, because I am an enrolled agent.

The author is an enrolled agent, licensed by the US Department of the Treasury to represent taxpayers before the IRS for audits, collections and appeals.