Caraker Law Firm Blog

IRS institutes Early Interaction Initiative for Employment Tax matters

Posted by Chad Caraker on Wed, Jan 06, 2016 @ 03:34 PM


Blog.January 2016


IRS institutes Early Interaction Initiative for Employment Tax matters

  It is expected that the IRS will be instituting swifter action against employers that are falling behind on their Federal Tax Deposits (FTD’s) for employment taxes.  Those taxpayers who have had interaction with a field Revenue Officer are likely hearing from those Revenue Officers more quickly if they fall behind on their required deposits.  However, the IRS announced in December 2015 that it is instituting efforts to identify employers who appear to be falling behind on their tax payments – apparently even before their employment tax return is being filed. 

            The IRS has indicated that their identification efforts will result in letters, automated phone messages, and other communications which could include a visit from a field Revenue Officer.  The IRS has indicated that this effort will reduce the likelihood of the problem becoming uncontrollable.  Many taxpayers simply do not realize how steep the penalties can be for failure to properly make tax deposits, pay employment taxes timely, or failure to file timely returns.  Further, it is unlikely that most taxpayers understand the personal liability that can be assessed from unpaid employment taxes.  A liability that is not dischargeable in bankruptcy.

            While the education efforts are beneficial, certainly there is an enforcement aspect of this activity by the IRS.  The IRS readily admits that two-thirds of federal taxes are collected through the payroll tax system.  With a reduced budget, this activity makes good sense for the IRS.  However, it is most likely going to be most burdensome for small businesses. 

            No doubt early action is best.  If you know you have been falling behind on your payroll tax obligations and need assistance planning before you hear from the taxing authorities, feel free to call. 

Tags: employment taxes, Tax, Tax Controversy, Federal Tax Deposits, Revenue Officer, IRS debt, IRS, Penalties, FTDs, Civil Penalties

Income Tax Consequences of Terminating a Whole Life Insurance Policy

Posted by Chad Caraker on Thu, Feb 20, 2014 @ 04:05 PM

               whole life insurance resized 600


The United States Tax Court just handed down a decision in Black v. Commissioner of Internal Revenue, T.C. Memo 2014-27, that explains what the income tax consequences are when this situation occurs.  In the opinion, the taxpayer had been the owner of a whole life insurance policy for over twenty years.  The policy had both cash value and loan features.  The policy allowed the taxpayer to borrow up to the cash value of the policy.  Loans from the policy would accrue interest and if the policy holder did not pay the interest then it would be capitalized as part of the overall debt against the policy.

The taxpayer had the right to surrender the policy at any time and receive a distribution of the cash value less any outstanding debt, which could include capitalized interest.  If the loans against the policy exceeded the cash value, the policy would terminate.  In this case, the taxpayer invested $86,663 in the life insurance policy, his total premiums paid for the policy.  Prior to the termination the total the taxpayer had borrowed from the policy was $103,548, however with capitalized interest over time the total debt on the policy was $196,230. The policy proceeds retired the policy debt at termination.

The taxpayers in this case were issued a 1099-R showing a gross distribution of $196,230 and a taxable amount of $109,567.  The non-taxable difference of $86,663 was the taxpayers’ investment in the policy – premiums paid. None of the information was included on the taxpayers’ return.  The taxpayers eventually amended their return and included as income the amount of $16,885 which represented the difference between the loan principal amount borrowed of $103,548 and the amount of premiums paid of $86,663.  Ultimately, the IRS disagreed with the taxpayers’ representation of the tax consequences of the life insurance policy termination.

The primary issue in the case then centered around whether or not the capitalized interest from the outstanding policy loans should be included in income. The Court explained that the money borrowed from the policy was a true loan with the policy used as collateral.  There were no income tax consequences on distribution of loan proceeds from the insurance company to the taxpayers.  Further, the Court explained that this is true of any loan as the taxpayers’ were obligated to re-pay the insurance company the debt owed.

The Court explained that when a policy is terminated then the loan is treated as if the proceeds were paid out to the taxpayers and the taxpayers then retired the outstanding loan by paying it back to the insurance company. The Internal Revenue Code provides that proceeds paid from an insurance company, when not part of an annuity, are generally taxable income for payments in excess of the total investment.  The insurance policy at issue treated the capitalized interest as principal on the loan. Therefore, when the policy is terminated, the loan, including capitalized interest, is charged against the proceeds and the remainder is income. This outcome makes sense or else the return on investment inside of the policy would never be taxed.

The taxpayers ended up with a large tax bill and a tough pill to swallow.  Ultimately, the result is logical in the context of capturing deferred income tax consequences.  Clearly, it would have been beneficial for the taxpayers to have consulted with counsel prior to preparing their tax return in order to avoid an unwelcome tax bill, penalties and interest.

Should you have transactions that you are unsure of when it comes to their income tax consequences, feel free to contact our office.  If you find yourself in receipt of an adjustment to your tax return based on exam action that you disagree with, or an assessment has been made and you have simply decided you were incorrect in your analysis, call us, we can help.

Tags: Life Insurance Policy Surrender, Financial Planning, Estate Planning, Tax Delinquency, Retirement Planning, Life Insurance, Interest, IRS, Income Tax, Penalties, Capitalized Interest

Tax Responsibilities during government shutdown

Posted by Chad Caraker on Thu, Oct 10, 2013 @ 03:00 PM

Government shutdown

Government shutdown does not relieve tax responsibilities of individuals and businesses.

Some individual and business taxpayers are wondering if they still need to meet their tax obligations, even though the federal government is shut down.  The easy answer is absolutely. The IRS has had to dramatically reduce its workforce during the shutdown, but the extension date of October 15, 2013 remains for individual return filers of Form 1040 who timely filed for an extension to file their returns.   Additionally, employment tax returns due October 31, 2013 for 3rd Quarter remain due on that date.  Businesses that are required to deposit their employment taxes remain obligated to deposit timely.  So, for example, the next monthly deposit due date for Form 941 is October 15, 2013.  That date will be the due date, regardless of whether or not the federal government is open or closed.

Failure to meet proper filing and payment deadlines could result in significant penalties.  It is unclear if the IRS would waive penalties based on reasonable cause.  It is presumed that the argument for failure to file or pay while the government is shut down would be that the taxpayer assumed there would be no federal employees to accept the return or payment. IRS automated phone lines and the official IRS website make it very clear that the taxpayer is required to continue filing and paying taxes during the government shutdown.  It is believed that there would be limited relief for late filers and payers based on this argument.  First time penalty abatement requests may very well be honored, however.

Taxpayers should note that penalties associated with non-payment and non-filing can be significant.  An individual or corporate taxpayer that fails to properly deposit will be assessed with a failure to deposit penalty that could be as high as 10% of the amount of underpayment.  Additionally, late payment penalties could apply that equal ½% of the unpaid tax for each month, or part of a month, that the taxpayer doesn’t pay a balance.  This penalty maxes out at 25%.
Failure to timely file penalties are some of the fastest accruing penalties the IRS assesses.  The IRS will assess a penalty equal to 5% of the unpaid tax for each month or part of a month that you file late.  This penalty will accrue monthly until is maxes at 25%.  This can happen quickly - in only five months.  If a taxpayer is on extension for his or her 1040 and has a due date of October 15, 2013, but assumes it is not necessary to timely file because the government is not open, then the taxpayer would be assessed a 5% penalty, at a minimum, even if they file their return on October 16, 2013 - assuming the government re-opened on that day. 

Heed the advise on the IRS website: “Individuals and businesses should keep filing their tax returns and making deposits with the IRS, as they are required to do so by law” during the current lapse in appropriations which has resulted in the current federal government shutdown.

If you have any questions regarding these issues, please don’t hesitate to contact our office. 

Tags: employment taxes, Income Taxes, Government Shutdown, IRS, IRS Shutdown, Penalties