Category Archives: Dealing with the IRS

Our “Voluntary” Tax System: Dispelling the Myth

Every once in a while, some uninformed bloke or other will pontificate about how income taxes in this country are all “voluntary,” and therefore those who don’t pay aren’t really violating the law.

But the IRS points out that the requirement to pay taxes is NOT voluntary and is clearly set forth in Section 1 of the Internal Revenue Code, which imposes a tax on the taxable income of individuals, estates, and trusts, not to mention Section 11 which similarly imposes income tax on corporations. And beyond all of that, Section 6151 requires taxpayers to submit payment with their tax returns. Failure to pay taxes could subject the malingerer to criminal penalties, including fines and imprisonment!

And in discussing Section 6151, the Eighth Circuit Court of Appeals noted, “when a tax return is required to be filed, the person so required ‘shall’ pay such taxes to the internal revenue officer with whom the return is filed at the fixed time and place. The sections of the Internal Revenue Code imposed a duty on Drefke to file tax returns and pay the ….. tax, a duty which he chose to ignore.” (United States v. Drefke, 707 F2d 978, 981, 8th Cir. 1983)

And the same goes for the actual filing of returns — not “voluntary” either, according to IRC Sections 6011(a), 6012(a) et seq, and 6072(a). And as the IRS will tell you, the word “voluntary,” as used in IRS publications, refers simply to our system of allowing taxpayers to determine the correct amount of tax and complete the appropriate returns themselves, as opposed to having the government determine the tax for them.

Foreign Account Reporting Deadline Looms

Any U.S. person who had a financial interest or signature authority over any financial account located outside of the U.S. in 2010 is required to file form TD F 90-22.1, “Report of Foreign Bank and Financial Accounts” (FBAR) by June 30, 2011. The filing requirement applies if the aggregate value of those accounts exceeded $10,000 at any time during the calendar year. The form must be received by June 30 – not just mailed by that date. And there are no extensions granted!

The definition of a “financial account” includes a securities, brokerage, savings, demand, checking, deposit, time deposit, or other account maintained with a financial institution. A “financial account” also includes a commodity futures or options account, an insurance or annuity policy with a cash value, and shares of a mutual fund or similar pooled fund.

A “foreign financial account” is a financial account located outside of the U.S., such as an account maintained with a branch of a U.S. bank that is physically located outside of the U.S.
And the definitions go on, and get more complicated. A U.S. person has a “financial interest” in a foreign financial account for which:

1. He is the owner of record or holder of legal title, regardless of whether the account is maintained for the benefit of the U.S. person or for the benefit of another person; or

2. The owner of record or holder of legal title is, among other things, an agent of the U.S. person, a corporation in which the U.S. person owns more than half of the value of the shares, a partnership in which the U.S. person owns more than half of the partnership’s income or capital, or a trust with respect to which the U.S. person has some relationship.

Consult a tax pro on this one — a person required to file an FBAR and who fails to properly file may be subject to a civil penalty of up to $10,000! Willful failure to file may subject you to a civil penalty equal to the greater of $100,000 or 50% of the balance in the account at the time of the violation!!

IRS Hangs Tough on IRA 60-Day Rollover Deadline

In a recent private letter ruling (PLR 201118025), IRS got pretty tough with a taxpayer whose IRA rollover took a bit longer than the permissible 60 days.

IRS sometimes offers a bit of leniency in these cases. Rev Proc 2003-16 outlines the situations in which leniency might be appropriate, and notes “The Service will issue a ruling waiving the 60-day rollover requirement in cases where the failure to waive such requirement would be against equity or good conscience, including casualty, disaster or other events beyond the reasonable control of the taxpayer.” But not so in this case.

Here, the taxpayer and his siblings wanted to help their elderly mother purchase (for cash) a new residence, necessitated by her mobility limitations which made it unsafe for her to remain in her two-story residence. So, the taxpayer took a distribution from his IRA and applied the funds toward a new residence for his mother who then secured a reverse mortgage to generate the funds to repay the taxpayer and his siblings.

Despite assurances from the bank (that the mortgage process would be completed in time to enable the taxpayer to meet his 60-day rollover requirement) delays ensued and the taxpayer missed the deadline. He pled mercy — claiming that his failure to timely complete the rollover was due to “numerous and unreasonable processing delays” which “were beyond his control.”

But IRS concluded that the taxpayer had not presented any evidence as to how any of the factors outlined in Rev Proc 2003-16 affected his ability to timely complete the rollover. Those factors include:

  1. Errors committed by a financial institution;
  2. Inability to complete a rollover due to death, disability, hospitalization, incarceration, restrictions imposed by a foreign country or postal error;
  3. The use of the amount distributed; and
  4. The time elapsed since the distribution occurred.

IRS’ position in this case was that none of the above applied — the taxpayer’s IRA funds were simply used to make a short-term loan to Mom. Period.

Bottom line — push the 60-day time limit at your own peril.