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IRS Written Advice Abatement Procedures | IRS Tax Lawyer

This is the concluding article in our series of articles on the topic of the IRS Written Advice Defense. In prior articles, we have outlined the general legal test of the IRS Written Advice Defense and described each of the three prongs of this test. In this article, I would like to discuss the IRS Written Advice Abatement Procedures – i.e. the actual administrative process for requesting abatement of penalties based on this defense.

This article is for educational purposes only and I strongly encourage you to retain the services of an experienced tax attorney before engaging in the IRS Written Advice Abatement Procedures.

IRS Written Advice Abatement Procedures: Form 843

The centerpiece of the IRS Written Advice Abatement Procedures is Form 843. Taxpayers who are entitled to an abatement of penalties pursuant to 26 U.S.C. §6404(f) should complete and file Form 843. At the top of Form 843, taxpayers should write: “Abatement of penalty or addition to tax pursuant to section 6404(f).” Furthermore, taxpayers should state on Form 843 whether the penalty or addition to tax has been paid.

IRS Written Advice Abatement Procedures: Documents to Be Submitted with Form 843

The taxpayers must submit copies of the following documents together with their Form 843 (note that these documents are directly related to the three-prong legal test for the IRS Written Advice Defense):

1. A copy of the taxpayer’s written request for the IRS advice (with a statement of adequate and accurate facts);

2. A copy of the erroneous written advice provided by the IRS to the taxpayer and relied upon by the taxpayer; and

3. A copy of a report (if any) of tax adjustments (the report should identify the penalty or addition to tax and the item for which the erroneous IRS written advice was requested).

In addition to these required documents, I recommend that most of Form 843 abatement requests be accompanied by a detailed description of facts, the erroneous IRS written advice, the taxpayer’s reliance on this advice and how this reliance led to the imposition of a penalty.

IRS Written Advice Abatement Procedures: Time Limitations for Filing Form 843

The IRS regulations also address the issue when Form 843 should be submitted in order to be considered a timely request for abatement. The regulations specified that any abatement of a penalty or addition to tax pursuant to 26 U.S.C. §6404(f) will be permitted only if the request for such an abatement “is submitted within the period allowed for collection of such penalty or addition to tax, or, if the penalty or addition to tax has been paid, the period allowed for claiming a credit or refund of such penalty or addition to tax.” Treas. Reg. §301.6404-3(e).

IRS Written Advice Abatement Procedures: Where to File Form 843

The mailing address of Form 843 depends on whether the incorrect IRS advice is related to an item on a federal tax return. If the advice is related to an item on the taxpayer’s tax return, then Form 843 should be submitted to the IRS center where the tax return was originally filed. On the other hand, if the erroneous IRS advice is not concerning any item of the taxpayer’s federal tax return, then the taxpayer should submit Form 843 to the IRS Center where the taxpayer’s return was filed for the taxable year in which the taxpayer relied on the erroneous advice.

Contact Sherayzen Law Office for Professional Help With Respect to Abatement or Reduction of IRS Penalties

If the IRS imposed a penalty with respect to your prior noncompliance with US international tax returns, such as FBAR, Forms 926, 3520, 5471, 5472, 8621, 8865, 8938, et cetera, you should contact Sherayzen Law Office to explore your IRS penalty reduction options. Sherayzen Law Office is an international tax law firm that has helped US taxpayers around the world to deal with these penalties. We can help You!

Contact Us Today to Schedule Your Confidential Consultation!

IRS AI Software to Analyze Tax Data | IRS Tax Lawyer Minneapolis

On November 18, 2016, Mr. Benjamin Herndon, the current IRS director for research and analytics, confirmed the recent rumors that the IRS AI Software is being tested to help IRS agents find patterns of tax noncompliance.

The idea is to supplement human analysis of data with the IRS AI software that would analyze any piece of data not only by itself, but also in conjunction with the other data available to the IRS. This way, the IRS AI Software is expected to analyze a very large amount of various data to identify tax noncompliance patterns.

This means that the IRS currently plans to use artificial intelligence for pattern recognition and visualization of data that would help IRS revenue agents uncover tax noncompliance. It is possible that the IRS AI software will even analyze a particular taxpayer’s characteristics in the context of a taxpayer’s behavior to uncover any discrepancies and potential tax noncompliance.

I believe that this is just the first step that the conservative agency is making. In the near future, one can foresee that the IRS AI software will start taking on more and more tasks such as conducting correspondence audits, certain automatized communications with taxpayers, analysis of data during a field audit (the IRS AI Software can be used most effectively during the audits of large corporations which have huge amounts of data), IRS customer support, international tax compliance (particularly analysis of data collected through FATCA and FBARs) and other vital IRS functions. Most likely, the decisions associated with penalty imposition and the negotiation of offer in compromise will rest with human IRS agents for now.

Finally, the biggest immediate impact of the IRS AI software is likely to be felt in the ability of the IRS to more effectively implement US tax laws and conduct more audits due to the fact that the IRS revenue agents will now be able to devote less time to audit analysis and more time to enforcement of tax laws.

In sum, the US taxpayers should be ready for the impending improved ability of the IRS to identify tax noncompliance and conduct more audits due to increased efficiency which will be introduced by the IRS AI Software.

Tax Year 2014: Various Tax Benefits Increase Due to Inflation Adjustments

The Internal Revenue Service recently announced an annual inflation adjustments for the tax year 2014 for more than 40 tax provisions, including the tax rate schedules, and other tax changes. Revenue Procedure 2013-35 provides details about these annual adjustments.

The tax items for tax year 2014 of greatest interest to most taxpayers include the following dollar amounts.

The tax rate of 39.6 percent affects singles whose income exceeds $406,750 ($457,600 for married taxpayers filing a joint return), up from $400,000 and $450,000, respectively. The other marginal rates – 10, 15, 25, 28, 33 and 35 percent – and the related income tax thresholds are described in the revenue procedure.

The standard deduction rises to $6,200 for singles and married persons filing separate returns and $12,400 for married couples filing jointly, up from $6,100 and $12,200, respectively, for tax year 2013. The standard deduction for heads of household rises to $9,100, up from $8,950.

The limitation for itemized deductions claimed on tax year 2014 returns of individuals begins with incomes of $254,200 or more ($305,050 for married couples filing jointly).

The personal exemption rises to $3,950, up from the 2013 exemption of $3,900. However, the exemption is subject to a phase-out that begins with adjusted gross incomes of $254,200 ($305,050 for married couples filing jointly). It phases out completely at $376,700 ($427,550 for married couples filing jointly.)

The Alternative Minimum Tax exemption amount for tax year 2014 is $52,800 ($82,100, for married couples filing jointly). The 2013 exemption amount was $51,900 ($80,800 for married couples filing jointly).

The maximum Earned Income Credit amount is $6,143 for taxpayers filing jointly who have 3 or more qualifying children, up from a total of $6,044 for tax year 2013. The revenue procedure has a table providing maximum credit amounts for other categories, income thresholds and phaseouts.

Estates of decedents who die during 2014 have a basic exclusion amount of $5,340,000, up from a total of $5,250,000 for estates of decedents who died in 2013.

The annual exclusion for gifts remains at $14,000 for 2014.

The annual dollar limit on employee contributions to employer-sponsored healthcare flexible spending arrangements (FSA) remains unchanged at $2,500.

The foreign earned income exclusion rises to $99,200 for tax year 2014, up from $97,600, for 2013.
The small employer health insurance credit provides that the maximum credit is phased out based on the employer’s number of full-time equivalent employees in excess of 10 and the employer’s average annual wages in excess of $25,400 for tax year 2014, up from $25,000 for 2013.

Details on these inflation adjustments and others not listed in this release can be found in Revenue Procedure 2013-35, which will be published in Internal Revenue Bulletin 2013-47 on Nov. 18, 2013.

IRS Announces 2014 Retirement Plan Limitations

On October 31, 2013, the Internal Revenue Service announced cost of living adjustments affecting dollar limitations for pension plans and other retirement-related items for tax year 2014. Some pension limitations such as those governing 401(k) plans and IRAs will remain unchanged because the increase in the Consumer Price Index did not meet the statutory thresholds for their adjustment. However, other pension plan limitations will increase for 2014.

Below is the description of the changes (or lack thereof) for some of the most common plans.

401(k), 403(b) and most 457 plans

The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan remains unchanged at $17,500.

The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan remains unchanged at $5,500.

IRA Annual Contribution Limitations

The limit on annual contributions to an Individual Retirement Arrangement (IRA) remains unchanged at $5,500. The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000.

The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes (AGI) between $60,000 and $70,000, up from $59,000 and $69,000 in 2013. For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range is $96,000 to $116,000, up from $95,000 to $115,000. For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $181,000 and $191,000, up from $178,000 and $188,000. For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

Roth IRA Contribution Limitations

The AGI phase-out range for taxpayers making contributions to a Roth IRA is $181,000 to $191,000 for married couples filing jointly, up from $178,000 to $188,000 in 2013. For singles and heads of household, the income phase-out range is $114,000 to $129,000, up from $112,000 to $127,000. For a married individual filing a separate return, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

Retirement Savings Contribution Credit

The AGI limit for the saver’s credit (also known as the retirement savings contribution credit) for low- and moderate-income workers is $60,000 for married couples filing jointly, up from $59,000 in 2013; $45,000 for heads of household, up from $44,250; and $30,000 for married individuals filing separately and for singles, up from $29,500.

The adjusted gross income limitation under Section 25B(b)(1)(A) for determining the retirement savings contribution credit for married taxpayers filing a joint return is increased from $35,500 to $36,000; the limitation under Section 25B(b)(1)(B) is increased from $38,500 to $39,000; and the limitation under Sections 25B(b)(1)(C) and 25B(b)(1)(D) is increased from $59,000 to $60,000.

The adjusted gross income limitation under Section 25B(b)(1)(A) for determining the retirement savings contribution credit for taxpayers filing as head of household is increased from $26,625 to $27,000; the limitation under Section 25B(b)(1)(B) is increased from $28,875 to $29,250; and the limitation under Sections 25B(b)(1)(C) and 25B(b)(1)(D) is increased from $44,250 to $45,000.

The adjusted gross income limitation under Section 25B(b)(1)(A) for determining the retirement savings contribution credit for all other taxpayers is increased from $17,750 to $18,000; the limitation under Section 25B(b)(1)(B) is increased from $19,250 to $19,500; and the limitation under Sections 25B(b)(1)(C) and 25B(b)(1)(D) is increased from $29,500 to $30,000.

Qualified Retirement and Pension Plans

Section 415 of the Internal Revenue Code provides for dollar limitations on benefits and contributions under qualified retirement plans. Section 415(d) requires that the Secretary of the Treasury annually adjust these limits for cost of living increases. Other limitations applicable to deferred compensation plans are also affected by these adjustments under Section 415. Under Section 415(d), the adjustments are to be made pursuant to adjustment procedures which are similar to those used to adjust benefit amounts under Section 215(i)(2)(A) of the Social Security Act.

Effective January 1, 2014, the limitation on the annual benefit under a defined benefit plan under Section 415(b)(1)(A) is increased from $205,000 to $210,000. For a participant who separated from service before January 1, 2014, the limitation for defined benefit plans under Section 415(b)(1)(B) is computed by multiplying the participant’s compensation limitation, as adjusted through 2013, by 1.0155.

The limitation for defined contribution plans under Section 415(c)(1)(A) is increased in 2014 from $51,000 to $52,000.

The Code provides that various other dollar amounts are to be adjusted at the same time and in the same manner as the dollar limitation of Section 415(b)(1)(A). After taking into account the applicable rounding rules, the amounts for 2014 are as follows:

The limitation under Section 402(g)(1) on the exclusion for elective deferrals described in Section 402(g)(3) remains unchanged at $17,500.

The annual compensation limit under Sections 401(a)(17), 404(l), 408(k)(3)(C), and 408(k)(6)(D)(ii) is increased from $255,000 to $260,000.

The dollar limitation under Section 416(i)(1)(A)(i) concerning the definition of key employee in a top-heavy plan is increased from $165,000 to $170,000.

The dollar amount under Section 409(o)(1)(C)(ii) for determining the maximum account balance in an employee stock ownership plan subject to a 5 year distribution period is increased from $1,035,000 to $1,050,000, while the dollar amount used to determine the lengthening of the 5 year distribution period is increased from $205,000 to $210,000.

The limitation used in the definition of highly compensated employee under Section 414(q)(1)(B) remains unchanged at $115,000.

The dollar limitation under Section 414(v)(2)(B)(i) for catch-up contributions to an applicable employer plan other than a plan described in Section 401(k)(11) or Section 408(p) for individuals aged 50 or over remains unchanged at $5,500. The dollar limitation under Section 414(v)(2)(B)(ii) for catch-up contributions to an applicable employer plan described in Section 401(k)(11) or Section 408(p) for individuals aged 50 or over remains unchanged at $2,500.

The annual compensation limitation under Section 401(a)(17) for eligible participants in certain governmental plans that, under the plan as in effect on July 1, 1993, allowed cost of living adjustments to the compensation limitation under the plan under Section 401(a)(17) to be taken into account, is increased from $380,000 to $385,000.

The compensation amount under Section 408(k)(2)(C) regarding simplified employee pensions (SEPs) remains unchanged at $550.

The limitation under Section 408(p)(2)(E) regarding SIMPLE retirement accounts remains unchanged at $12,000.

The limitation on deferrals under Section 457(e)(15) concerning deferred compensation plans of state and local governments and tax-exempt organizations remains unchanged at $17,500.

The compensation amount under Section 1.61 21(f)(5)(i) of the Income Tax Regulations concerning the definition of “control employee” for fringe benefit valuation purposes is increased from $100,000 to $105,000. The compensation amount under Section 1.61 21(f)(5)(iii) is increased from $205,000 to $210,000.

 Various Income Limitations

The Code also provides that several pension-related amounts are to be adjusted using the cost-of-living adjustment under Section 1(f)(3). After taking the applicable rounding rules into account, the amounts for 2014 are as follows:

The deductible amount under Section 219(b)(5)(A) for an individual making qualified retirement contributions remains unchanged at $5,500.

The applicable dollar amount under Section 219(g)(3)(B)(i) for determining the deductible amount of an IRA contribution for taxpayers who are active participants filing a joint return or as a qualifying widow(er) is increased from $95,000 to $96,000. The applicable dollar amount under Section 219(g)(3)(B)(ii) for all other taxpayers (other than married taxpayers filing separate returns) is increased from $59,000 to $60,000. The applicable dollar amount under Section 219(g)(3)(B)(iii) for a married individual filing a separate return is not subject to an annual cost-of-living adjustment and remains $0. The applicable dollar amount under Section 219(g)(7)(A) for a taxpayer who is not an active participant but whose spouse is an active participant is increased from $178,000 to $181,000.

The adjusted gross income limitation under Section 408A(c)(3)(B)(ii)(I) for determining the maximum Roth IRA contribution for married taxpayers filing a joint return or for taxpayers filing as a qualifying widow(er) is increased from $178,000 to $181,000. The adjusted gross income limitation under Section 408A(c)(3)(B)(ii)(II) for all other taxpayers (other than married taxpayers filing separate returns) is increased from $112,000 to $114,000. The applicable dollar amount under Section 408A(c)(3)(B)(ii)(III) for a married individual filing a separate return is not subject to an annual cost-of-living adjustment and remains $0.

The dollar amount under Section 430(c)(7)(D)(i)(II) used to determine excess employee compensation with respect to a single-employer defined benefit pension plan for which the special election under Section 430(c)(2)(D) has been made is increased from $1,066,000 to $1,084,000.