Monthly Archives: August 2012

The top tax rate on long-term capital gains is currently 15%.  That revelation has set off a familiar debate about whether that low rate is appropriate. Often overlooked in these discussions, however, is the fact that the days of the 15% tax rate are numbered.

On January 1, 2013, capital gains taxes are scheduled to go up sharply:

First, the 2001 and 2003 tax cuts are scheduled to expire. If that happens, the regular top rate on capital gains will rise to 20%. In addition, an obscure provision of the tax code, the limitation on itemized deductions, will return in full force. That provision, known as Pease, increases effective tax rates on high-income taxpayers by reducing the value of their itemized deductions. On net, it will add another 1.2 percentage points to the effective capital gains tax rate for high-income taxpayers.

Taxpayers traveling to the United States with unpaid U.S. tax assessments can be detained at the border, questioned, and flagged for follow-up enforcement. If a taxpayer has an unpaid tax liability and is subject to a resulting Notice of Federal Tax Lien, the IRS may submit identifying taxpayer information to the Treasury Enforcement Communications System (TECS), a database maintained by the Department of Homeland Security (DHS).

The database allows the DHS to identify taxpayers with unpaid tax assessments who are traveling to the United States (Internal Revenue Manual (IRM), §5.1.12.26).  

U.S. or non-U.S. persons with an unpaid federal tax liability whom the IRS has been unable to contact may be unaware of the tax debt until they come through U.S. Customs and are detained by Immigration and Customs Enforcement (ICE). ICE agents may ask them what assets they have in the United States, the purpose and duration of their trip, where they are staying, vehicle registration information, and similar information. The agents also may inquire about a taxpayer’s employment relationships in the United States or any personal services performed in the United States, to establish wage garnishment opportunities. Thereafter, ICE agents alert an IRS coordinator and transmit this information through a referral program. Typically, an investigation request is sent to an IRS agent in the region in which the taxpayer is traveling to follow up with the taxpayer.

To be entered into TECS, the taxpayer must live outside the United States and its commonwealths or territories (or “is about to depart to reside in a foreign country” or “travels outside the United States … on a frequent basis and [IRS agents] have not been able to contact the taxpayer”) and be subject to a filed Notice of Federal Tax Lien (IRM, §5.1.12.26.5.1).  

The IRS may file a federal tax lien on a taxpayer’s real or personal property under Sec. 6321 when the taxpayer fails to pay taxes allegedly owed after the notice-and-demand period expires. A properly filed federal tax lien publicly alerts creditors that the IRS has a priority claim against the taxpayer’s real or personal property. If the IRS files a federal tax lien in the wrong location, it will not have priority over a later purchaser, holder of a security interest, mechanic’s lien, or judgment lien creditor.

A federal tax lien is filed in the office designated by the state where any real property owned by the taxpayer is located (Sec. 6323(f)) and is a public record. For personal property, the federal tax lien ordinarily is filed in the county in which the taxpayer resides or in any other office designated by state law. However, taxpayers who reside outside the United States are deemed to reside in Washington, D.C., for lien-filing purposes. Accordingly, the Notice of Federal Tax Lien is filed with the Recorder of Deeds for the District of Columbia (IRM, §5.17.2.3.2).

A withdrawal or release of the lien, along with certain other prerequisites, is required for removal of the taxpayer’s information from TECS. Thus, the lengthy process may result in detention at the border for travelers to the United States for a period after the IRS has withdrawn or released a lien.

A taxpayer who resides outside the United States may not be aware of outstanding federal tax liabilities if the address on record for the taxpayer is outdated or otherwise incorrect. Consequently, tax advisers with clients who reside outside the United States should ensure that the correct address for the taxpayer is used on the client’s returns and, if the client no longer is required to file U.S. returns, that the IRS still is able to contact the taxpayer about previously filed returns. Taxpayers should be advised that a failure to keep the IRS apprised of a change in mailing address may result in an unwelcome—and potentially embarrassing—surprise when the taxpayer seeks to enter the United States.  

Source: Reuters

In a Chief Counsel’s Advice (“CCA”) 201231001 released recently, the IRS accepted a collateral agreement and bond from a C corporation in lieu of filing a Notice of Federal Tax Lien (“NFTL”), where the C corporation argued that filing a NFTL would ruin its business. A collateral agreement is a pledge, guaranteed by security, for the performance of a certain act, for example the payment of a delinquency or the filing of a return. Treas. Reg. 301.7101-1(a) requires the execution of a bond on an appropriate form prescribed by the Service and with a satisfactory surety. Treas. Reg. 301.7101-1(b)(1) provides that a surety holding a certificate of authority from the Secretary as an acceptable surety on Federal bonds is a satisfactory surety.

Generally, the IRS will file a NFTL in the following situations:

• Any account with an aggregate unpaid balance of $10,000 or more.
• All installment agreement cases not meeting the streamlined, guaranteed, or in-business trust fund criteria.
• A case involving both assessed and un-assessed periods that have not yet been classified as “currently not collectible.”
• A case that has an open account with an aggregate unpaid balance of $10,000 or more that has been classified as “currently not collectible.”
• Property that is exempt property for purposes of Federal bankruptcy or state insolvency proceedings.
• The taxpayer lives outside the U.S. and has known assets.
• A pending bankruptcy or other exigent circumstance exists and the government’s interest will be protected (even if the aggregate unpaid balance is less than $10,000).

In CCA 201231001, the taxpayer was a privately-owned C corporation that sold insurance and provided completion and other bonds to contractors. The taxpayer’s sole shareholder demonstrated an inability to currently pay the entire deficiency assessed on audit, and said filing of a notice of a NFTL would “ruin its business and thus prevent payment of the remaining taxes owed.” The taxpayer submitted sample payment bond language and a proposed amortization schedule for its proposed collateral payment agreement. The collateral agreement proposed payment of the shortfall over three years at a 3% interest rate, compounded monthly, with a payment schedule of 12 monthly payments. The taxpayer made a payment when it submitted the proposal.

Section 6621(a)(2) provides that the underpayment interest rate is computed by adding 3% to the Federal short-term rate. Section 6621(c)(1) provides that the underpayment rate for large corporate underpayments is the Federal short-term rate plus 5%. Section 6621(c)(3)(A) defines a large corporate underpayment as any underpayment of tax by a C Corporation for any taxable period if the amount of the underpayment exceeds $100,000. The Federal short-term rate for the first and second quarters of 2012 is 0%, and the large corporate underpayment rate for the first and second quarters of 2012 is 5%. Rev. Ruls. 2011-32, 2012-8. The taxpayer’s liability for the period at issue exceeded $100,000.

The CCA advised that the collateral agreement and bond could be accepted from the taxpayer in lieu of an NFTL, but the agreement’s terms must include interest accruing at the large corporate underpayment rate of 5%, compounded daily. This is not a fixed rate, but one that varies monthly, depending on the Federal short-term rate. The Chief Counsel’s Office noted that a collateral agreement secured by a bond with appropriate surety, authorized by 26 U.S.C. § 7101, does not compromise the tax liability, and should not be confused with collateral agreements in the context of offers in compromise. That is, this taxpayer was paying the full amount owed, and not attempting to pay a lesser amount.

The CCA also stated that the collateral agreement pledging payment of the tax deficiency should include terms required by Internal Revenue Manual § 5.6.1, including:

• that the IRS intends to offset any refunds to the delinquent account until it is paid in full or otherwise satisfied,

While Chief Counsel Advice may not be cited or used as precedent (26 U.S.C. § 6110(k)(3)), this advice may signal the beginning of an alternative means to avoid the filing of a NFTL in certain situations.