Form 1065 Penalties

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IRS Form 1065 (U.S. Return of Partnership Income) is an information return used to report the income, gains, losses, deductions, credits, and related items from the operation of partnerships.

Partnerships generally do not pay taxes because they are pass-through entities. Instead, profits or losses, and related items, are reported by partners (typically based upon their partnership interests) on their individual tax returns. Despite the fact that income taxes are not owed by partnerships, the form must still be filed for those required to do so, and there are various penalties that may be imposed, for various reasons, by the IRS.

This article covers the penalties that may apply for failures to comply with Form 1065 requirements. The penalties may be steep in certain circumstances, so taxpayers subject to filing Form 1065 should be aware of them.

Failure to File Penalty

A penalty will be assessed against a partnership that is required to file a partnership return if it either fails to file the return by the due date (including extensions) or if it files a return that does not report all required information, unless such failure is due to reasonable cause. If a partnership plans to demonstrate reasonable cause, it must attach an explanation to the partnership return.

The late filing penalty is $195 for each month (or part of a month) for a maximum of 12 months that the failure continues multiplied by the total number of individuals who were partners during any part of the partnership’s tax year for which the return is due.

Failure To Timely Furnish Information

A $100 penalty (for each Schedule K-1 form for which a failure occurs) may be imposed for failure to furnish a Schedule K-1 to a partner when due and for each failure to include all required information (or the inclusion of incorrect information) on a Schedule K-1. A maximum penalty of $1.5 million for all such failures during a calendar year, may be imposed.

If the requirement to report accurate information is intentionally disregarded, the penalty for each failure is increased to the greater of $250 or 10% of the aggregate amount of items required to be reported. In such cases, the $1.5 million maximum penalty does not apply.

Trust Fund Recovery Penalty

A trust fund recovery penalty for Form 1065 may be imposed on all persons who are responsible for collecting, accounting for, and paying over various trust fund taxes (including certain excise, income, social security, and Medicare taxes), and who acted willfully in failing to collect, withhold, and/or pay such taxes (the IRS may determine who is responsible for such requirements). Such taxes are typically reported on various forms, including Form 720 (Quarterly Federal Excise Tax Return), Form 941 (Employer’s Quarterly Federal Tax Return), Form 944 (Employer’s Annual Federal Tax Return), and Form 945 (Annual Return of Withheld Federal Income Tax), among others.

The trust fund recovery penalty for Form 1065 is equal to the unpaid trust fund tax.

Contact Sherayzen Law Office For Legal Help in Dealing with Form 1065 Penalties

If you are facing Form 1065 penalties or wish to find out how to properly comply with the IRS requirements to avoid such penalties, contact Sherayzen Law Office for legal help with Form 1065. Our experienced partnership tax firm will guide you through the complex web of partnership tax requirements as well as provide vigorous ethical IRS representation if necessary.

FBAR: Reporting Foreign PayPal Accounts

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Whether an account is reportable for FBAR purposes can sometimes be a relatively complicated question. It is true that it is easy to see that a foreign bank and investment accounts should be reported on the FBAR as long as all other requirements are met. It is also well-established that a gold bullion account is reportable for FBAR purposes.

What about foreign PayPal accounts? This question has arisen in the past with some of my clients. On the other one hand, PayPal describes itself as a payment system; on the other hand, the account holder does own the funds within the account – i.e. the account holder has a present-interest value on the account that can be easily withdrawn from the account.

This is why the IRS considers a foreign PayPal account as a reportable account for the FBAR purposes. In fact, whenever I asked the IRS this question with respect to my clients, this determination has been confirmed by the IRS.

Contact Sherayzen Law Office For Help With FBAR Issues

If you have any questions with respect to the FBAR, you want to find out whether you have reportable accounts, or you wish to file your delinquent FBARs and you do not know how to approach it correctly, contact Sherayzen Law Office for legal assistance. Our experienced FBAR tax firm will help you deal with all of your FBAR issues in a professional, efficient, and effective manner.

Estate Planning: Crummey Trusts

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Are you interested in reducing the amount of possible estate taxes you may have to pay? Do you desire to avoid paying gift taxes, but have concerns about gifting your children or grandchild large sums of money when they are perhaps too young to handle it responsibly? Then a Crummey Trust may be the answer for you. This article will explain the basics of Crummey Trusts and how they are usually used in estate and gift tax planning.

Gift and Estate Taxes

Typically, taxpayers who believe that they may eventually be subject to estate taxes will make lifetime gifts to their children or grandchildren. Currently, each taxpayer may give no greater than $13,000 per year per recipient, under the annual gift exclusion, and this amount will generally be excluded from gift and estate taxes. (This amount is often adjusted by the IRS for inflation). The lifetime gift tax exemption for 2011 is $5 Million.

However, the problem with outright gifts of large amounts of money to young children is obvious to many parents. Once the money is gifted, it can be difficult to control how it will be spent. Thus, often taxpayers will want a better way to reduce their estate taxes, without giving up control of how the money given will be used.

The Problem with Standard Trusts

Because of the drawbacks listed above, taxpayers may desire instead to use a standard trust. A typical trust may help reduce estate taxes, and at the same time, if set up properly, will place limitations upon how and when the money is distributed to any beneficiaries.

The problem with common trusts, however, is that the annual gift tax exclusion is only available for present interests (e.g., gifts, because they allow a recipient unfettered control of the money), and gifts made to a trust will not usually meet this legal definition because they often constitute future interests under the conditions of the trust.

The Crummey Trusts

A possible way around this predicament then is to use a “Crummey Trust”. A Crummey Trust, named for the taxpayers who first created it, allows individuals to set conditions on how and when money transferred to the trust will be distributed to beneficiaries, and at the same time gives taxpayers the ability to take the annual gift tax exclusion. A Crummey Trust also has the advantage that it can be created for multiple beneficiaries.

Under a Crummey Trust, beneficiaries to the trust are given a window period granting them the right to withdraw money from the trust as soon as the money is deposited (typically within 30 days). The right to immediate withdrawal only applies to the current amount of money gifted to the trust ($13,000 or less (following the number as adjusted by the IRS), per recipient and per year), and not any other sum of money accumulated in the trust. Under the legal case involving the original Crummey Trust, the court determined that the right to immediately withdraw the money constituted a present interest, and therefore was valid for purposes of the annual gift tax exclusion.

Thus, for the Crummey Trust purposes, it is a legal requirement that the right of withdrawal exists. If the money is not immediately withdrawn, it then remains with the trust’s funds, subject to its applicable conditions.

Taxpayers often have concerns under Crummey Trusts that young beneficiaries will decide to immediately take out the money, thus destroying the basic advantages of this type of trust. However, this potential problem is often addressed by pointing out the practical aspects of estates and by notifying beneficiaries that, if any of the money is immediately withdrawn, then that beneficiary will not receive any more money or inheritance – in a large estate, these amounts will likely far exceed the one-time $13,000 withdrawal.

The Crummey Trust can thus be a powerful tool to reduce your estate taxes, avoid gift taxes, and help fund your children’s or grandchildren’s future dreams and plans.

Contact Sherayzen Law Office for Proper Estate and Gift Tax Planning

This article can only provide a broad overview of the highly complex topic of Crummey Trusts; therefore, it should not be relied upon to determine whether this type of trusts is the best option in your particular case. For a sound legal advice with respect to estate and gift tax planning, contact Sherayzen Law Office to create the right plan for you.

Form 1120S Penalties and Interest

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Form 1120S (US Income Tax Return for an S Corporation) is used to report the income, gains, losses, deductions, credits, and related items, for any tax year covered, of a domestic corporation or other entity that elects to be treated as an S corporation by filing Form 2553. If the IRS accepts the election, Form 1120S must be filed as long as the election remains in effect.

This article will examine the penalties and interest that may be applied for failure to comply with the rules and regulations concerning the filing of Form 1120S when required. The penalties can be severe in some instances, so taxpayers subject to the requirements of the form should take notice of them.

There are numerous penalty and interest provisions that apply to the requirements of Form 1120S.

Late Filing of a Return

A penalty may be imposed if a return is filed after the applicable due date (including extensions), or if the return does not report all of the required information required, unless the failure to comply is due to reasonable cause.

For returns on which no tax liability is owed, the late filing penalty as of the time of this writing is $195 for each month (or part of a month), up to 12 months that the return is late or does not include the necessary information, multiplied by the total number of persons who were shareholders in the corporation for the tax year (during any part of the corporation’s tax year) in which the return is due. If a tax is due, this same penalty mechanism will be applied, plus a 5% penalty on the unpaid tax for each month (or part of a month) that the return is late. The maximum penalty will be capped at 25% of the unpaid tax. The minimum penalty for a return that is due, and more than 60 days late, is the lesser of the tax owed or $135.

Taxpayers who claim that the failure to timely file was due to reasonable cause must include an attached explanation with the return.

Late Payment of Tax

In general, a corporation that has a tax liability, but does not pay the tax when due, may be penalized ½ of 1% of the unpaid tax for each month (or part of a month) that the tax is unpaid. The late payment penalty is capped at a maximum of 25% of the unpaid tax. As with the failure to file penalty, taxpayers may be able to prevent or limit the imposition of the late payment penalty, provided that reasonable cause can be demonstrated.

Failure to Timely Furnish Information

A $100 penalty may be imposed for each failure to furnish a Schedule K-1 to a shareholder when due and/or for each failure to include on Schedule K-1 all required and accurate information. The penalty is applied to each Schedule K-1 for which a failure occurs. If a taxpayer intentionally disregards the requirement to report correct information, the penalty for each failure is increased to the greater of $250 or 10% of the aggregate amount of items required to be reported.

A reasonable cause exception is also available for this penalty.

Trust Fund Recovery Penalty

A trust fund recovery penalty may be imposed on all persons, including S-corporations, who are responsible for collecting, accounting for, and paying over various trust fund taxes (including certain excise, income, social security, and Medicare taxes) and who acted willfully in failing to collect, withhold, and/or pay such taxes (the IRS may determine who is responsible for such requirements). Such taxes are typically reported on various forms, including Form 720 (Quarterly Federal Excise Tax Return), Form 941 (Employer’s Quarterly Federal Tax Return), Form 944 (Employer’s Annual Federal Tax Return), and Form 945 (Annual Return of Withheld Federal Income Tax), among others.

The trust fund recovery penalty imposed is equal to the full amount of the unpaid trust fund tax.

Other Potential Penalties

Penalties can also be imposed for Form 1120S purposes under IRC sections 6662 (Imposition of accuracy-related penalty on underpayments), 6662A (Imposition of accuracy-related penalty on understatements with respect to reportable transactions), and 6663 (Imposition of fraud penalty).

Interest

In addition to the penalties described above, interest can be charged for failure to comply with various Form 1120S requirements.

Interest will be charged on taxes that are paid late even if a taxpayer is granted an extension of time to file. Interest can also charged on penalties imposed as a result of failure to file, fraud, negligence, substantial valuation misstatements, substantial tax understatements, and reportable transaction understatements from the due date (including extensions) to the date of actual payment. See IRC section 6621 and regulations for the applicable interest rates charged relating to such penalties.

Contact Sherayzen Law Office For Legal Help With 1120S Penalties

Whether you are facing substantial 1120S penalties, looking for proper tax planning to avoid such penalties, or just need assistance to comply with 1120S tax requirements, please contact Sherayzen Law Office.  Our experienced tax firm will guide you through the complex maze of the corporate tax law, provide rigorous IRS representation in disputing the penalties, and help you create and implement a creative ethical tax plan.

Tax Consequences of Converting a Rental Property into a Primary Residence

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Do you own a residential rental property that you plan to convert into your primary residence? Are you wondering if by doing so, you could still qualify for the capital gains exclusion on sales of a primary residence, when you do eventually sell? This article will examine these questions, and will explain some of the basic tax rules involved in turning a rental property into a primary residence.

The Capital Gains Exclusion for Sale of a Primary Residence- General Rules

In general, under Internal Revenue Code (IRC) section 121, taxpayers who reside in a primary residence, and who have both owned and lived (or used as a primary residence) in a home for at least two years within a five year period may qualify for the full capital gains exclusion of $500,000 on a joint filed tax return ($250,000 per spouse). However, taxpayers must not have already claimed this exemption within the past two years. Typically, each spouse of a married couple must meet both requirements in order to get the full exclusion. Certain exceptions may be available if the requirements are not met, depending upon the taxpayer’s circumstances. You will need to consult a tax attorney on this issue.

In converting a residential rental property into a primary residence, it should be noted that any depreciation taken while the property was a rental will not qualify for the capital gains exclusion, and will instead be subject to depreciation recapture. Depreciation deducted before May 6, 1997 will reduce the adjusted basis of a rental property, whereas depreciation deducted after that date will be taxed as a capital gain.

Non-qualified use of a Rental Property

In 2008, Congress amended IRC section 121, with the Housing and Economic Recovery Act, to add a limitation of the capital gains exclusion due to “nonqualified” use of a converted rental-to-primary residence. “Qualified” use is defined as any use of the property as a primary residence. “Non-qualified” use is defined as any use of the property other than as a primary residence, such as as a second home, a vacation property, a rental or investment property, or use of the property in a trade or business.

In general, the effect of the change is to limit the amount of capital gains exclusion to an allocation formula dependent upon non-qualified and qualified use of the property. For example, if the property is held for ten years and then sold, and for six of those years it was used as non-qualifying property, then 6/10 of the capital gain, would not be excluded. However, subject to certain exceptions, non-qualified use prior to January 1, 2009 will be ignored for purposes of the section

Contact Sherayzen Law Office For Tax Planning With Respect to Rental-Primary Residence Tax Planning

Taking advantage of the IRC section 121 capital gains exclusion may require detailed knowledge of the relevant tax rules and careful tax planning. Obviously, this article only provides some general background information for education purposes and should NOT be relied upon as a legal advice. Rather, you should contact Sherayzen Law Office to set up a consultation to discuss your particular fact situation. Our experienced tax firm will help you determine whether you may be able to take advantage of the IRC section 121 and how to do it.