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Monthly Archives: November 2011

Offers in Compromise and Dissipated Assets


Under IRC Sec. 7122(a), taxpayers may request an offer in compromise (OIC) with the IRS to settle outstanding tax liabilities for less than the full amount owed. To qualify, taxpayers must prove that their outstanding tax liabilities exceed the amount of income and assets available to satisfy those liabilities during the time remaining in the collection period, generally, the statute of limitation. This is known as establishing the taxpayer’s reasonable collection potential (RCP).
The higher the taxpayer’s RCP, the lower the taxpayer’s chances of qualifying for an OIC. In calculating the RCP, the IRS takes into account current and potential earnings, as well as the value of assets exceeding those needed for necessary living expenses. The sum of the taxpayer’s income and assets is treated as available to satisfy the taxpayer’s federal tax liability.

Taxpayers that dispose of their assets solely to qualify for an OIC are likely to fail, since a number of court cases support the IRS’ practice of including dissipated assets in the RCP calculation. A dissipated asset is defined as any asset (liquid or nonliquid) that has been sold, transferred or spent on nonpriority items or debts and that is no longer available to pay the tax liability.

 The Tax Court recently decided two cases upholding the IRS’ rejection of OICs where the court found that the taxpayers had disposed of assets that would otherwise have been available to satisfy their outstanding tax liabilities. In Tucker, T.C. Memo. 2011-67, the individual taxpayer’s request for an OIC was denied when the examiner included dissipated assets in the RCP calculation, resulting in an RCP sufficient to satisfy the outstanding tax liability within the statutory collection period. The taxpayer was aware of his unpaid tax liabilities when he transferred funds into an online brokerage account to engage in day trading and subsequently lost a portion of the money. The IRS determined, and the Tax Court held, that the taxpayer lost the money in disregard of his outstanding tax liability. But for the failed investments, the taxpayer’s reasonable collection potential exceeded his outstanding tax liabilities, and the court held that the settlement officer did not err in determining that the taxpayer could fully pay his federal income tax liabilities.
 

Dissipated assets are not limited to those lost through negligence or disregard of one’s tax liabilities, however. In Layton, T.C. Memo. 2011-194, the taxpayer’s request for an OIC was rejected after the IRS examiner included the excess balance of an IRA distribution in the RCP calculation. The taxpayer had been unemployed for several years and had liquidated an IRA account to help pay her necessary living expenses. The remaining balance of the taxpayer’s IRA distributions, however, went to pay other nonessential debts. The taxpayer was not able to demonstrate that the debts she paid were necessary living expenses, so the Tax Court ruled in favor of the IRS.

http://www.journalofaccountancy.com/Issues/2011/Dec/20114622

Read more at: Tax Times blog

European Commission Pushes U.K., Germany to Renegotiate Terms of Swiss Tax Deals

The European Commission legal services have concluded that bilateral tax treaties signed by Switzerland, the United Kingdom, and Germany violate European Union law, but European Taxation Commissioner Algirdas Semeta is hopeful that both EU member states will revise the terms of the Swiss deals without having to revert to a long-drawn out legal challenge.

European Commission Spokeswoman Emer Traynor denied media reports that Semeta was threatening legal action against the United Kingdom over the terms of its recently agreed bilateral deal with Switzerland. She noted that the United Kingdom and Germany agreements with Switzerland have not been ratified and that the EU executive was confident that each side “will work to remove the parts that impinge on EU law.”

A legal battle between the European Commission and the United Kingdom and Germany has been brewing since August when the bilateral deals, which are designed to repatriate billions of dollars in revenue hidden in secret Swiss bank accounts, were first announced. Both agreements commit the Swiss to impose penalties but would not alter their bank secrecy laws any more than they have already done to meet OECD and G-20 requirements on tax havens.

The European Commission believes the Swiss deals with the United Kingdom and Germany are illegal because they go against the terms of the EU cross-border savings tax legislation that calls for a system of automatic information exchange.

Read more at: Tax Times blog

IRS Criminal Tax Bulletin Highlights Recent Rulings

The IRS Nov. 18 posted to its website an issue of the Criminal Tax Bulletin, published by the Criminal Tax Division of the Office of Chief Counsel, which summarizes notable federal appellate rulings addressing criminal issues between April and September 2011.

Among the decisions summarized in the bulletin were the 9th Circuit's rulings that the Fifth Amendment Privilege Is Inapplicable to Subpoena for Foreign Bank Records.
 
In re Grand Jury Investigation M.H. v. United States, 648 F.3d 1067 (9th Cir. 2011), the Ninth Circuit held that foreign bank account records required to be kept under the Bank Secrecy Act (“BSA”) fall within the Required Records Doctrine, thus rendering the Fifth Amendment privilege against self-incrimination inapplicable to a subpoena for these records.

Read more at: Tax Times blog

IRS Identifies Gift Tax Non-Filers Using State Property Records

Read more at: Tax Times blog