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Boston Tax Law Blog

New IRS rule simplifies rollover of after-tax 401(k) funds

If you have recently changed jobs, one important step is to rollover retirement savings from a company sponsored 401(k) plan into an Individual Retirement Account or Roth IRA.

Last week, the Internal Revenue Service issued new rules that allow you to roll any after-tax money in your 401(k) plan into a Roth IRA. The benefit for doing this is that the money can grow tax-free. In many cases it will no longer be necessary to pay taxes on the distribution to account for the percentage of pre-tax money in the 401(k).

Congress may extend mortgage relief for principal write-downs

Homeowners with underwater loans face the possibility of a large tax bill if they obtain a principal reduction through a deal with their lender, a foreclosure or a short sale in 2014. Congress recently returned from its summer vacation and now many wonder whether legislators will pass relief for struggling homeowners.

Bank of America recently agreed to a settlement with the U.S. Department of Justice over toxic loans, which includes borrower relief through principal write-downs. The problem is that the tax code treats the amount forgiven as ordinary income. For example, a $10,000 reduction in principal could result in a surprise tax bill and federal tax lien if you cannot pay. A temporary exception to the general rule had been in effect, but expired December 31.

Surprised by an IRS audit? Innocent spouse relief may help

Often in a marriage, one spouse handles the majority of the finances and gets the taxes done each year. The other spouse may just sign on the line. If a later audit shows that a spouse or former spouse failed to report income or overstated deductions, you could jointly owe additional tax, interest and penalties.

If you were unaware of the tax issues, you may be entitled to relief as an innocent spouse. This would mean the IRS could not collect the back taxes from you. To apply for innocent spouse relief, you must file Form 8857 and meet various criteria.

IRS takes closer look at fringe benefits in company audits

Technology employers have been known to offer the benefit of free meals to encourage collaboration and also longer hours. While not all employers go to the extent of free meals, most do offer coffee, tea and the occasional gift card as perks to improve performance.

During some routine company tax audits, the IRS has looked closer at free meals, according to a Wall Street Journal article. If an employer does not withhold taxes to cover the meals, the agency can seek back taxes amounting to as much as 30 percent the fair market value of the meals.

What is the cost of failing to apply IRS Levy?

A recent case details what can happen when a bank does not immediately apply an Internal Revenue Service levy to freeze a bank account. The bank was on the hook for the amount that its customer withdrew.

When a taxpayer is unable to pay a tax bill, the IRS has various collection tactics. The agency can take money directly from your bank account or paycheck through a bank levy or wage garnishment. Here, the IRS notified a taxpayer that it intended to levy his bank account.


Payroll taxes and the Trust Fund Recovery Penalty

The Internal Revenue Service does not have the resources to audit every single tax return and thus prioritizes its collection efforts. The agency keeps a close eye on the payment of employment taxes withheld from employee paychecks.

When a company does not immediately transfer these funds, also called trust fund payments, to the IRS there are serious consequences. All responsible persons with an ownership interest in or signatory authority for the company can be held liable.

In an effort to encourage prompt payment of these trust fund payments, congress passed the Trust Fund Recovery Penalty. The IRS can assess multiple owners with the 100-percent penalty. Technically any person responsible for collecting or paying withheld income and employment taxes who willfully fails to collect or pay them is liable.

Relief from tax debt possible, but beware of lofty promises

The Federal Trade Commission recently went after a company that made claims they could settle tax debt for pennies on the dollar. The problem was that once consumers sent an upfront fee they often did not receive any tax-debt relief.

Under the FTC settlement, the agency will refund $16 million to 18,000 customers. The agency secured millions in assets, including jewelry and a Ferrari from the company and its owners. However, customers should not expect a full refund because much of the money is gone.

This case provides a warning that if a claim sounds too good to be true, it probably is. The IRS does offer some relief in limited cases of severe financial hardship. For instance, our April 16 post noted an increase in the Offer in Compromise acceptance rate to 42 percent. An experienced tax attorney can discuss requirements and advise whether the program may help.

IRS correspondence tax audit: Open the letter

The Internal Revenue Service has increased the number of correspondence audits in lieu of in person tax audits. When an envelope with the IRS logo arrives in the mail, do not ignore it.

Often a letter or notice from the IRS will request additional information. The agency might be requesting additional tax and a penalty if it discovered an error or miscalculation. In either case, the request may only allow 30 days to respond to the tax audit.

Former NFL quarterback hit with tax lien

Musicians, actors and sports stars sometimes make news when they run into issues with the Internal Revenue Service. On this blog, we have discussed tax liens filed against celebrities, such as Lionel Richie, Sinbad and Lindsey Vonn.

Reportedly, former NFL player Kordell Stewart is the most recent celebrity to face a serious tax lien. Allegedly, he failed to pay his state tax bill and owed the State of Georgia $8,532 in unpaid taxes from 2012. With interest and penalties, the outstanding balance climbed to more than $13,000.

If he fails to pay the taxes owed, he could lose his home or money in bank accounts. The government placed a levy on his assets, which allows the government to seize possessions and sell them to recover the money owed.

This case illustrates how quickly interest and penalties can increase a tax balance owed. It also raises the question: How do you deal with a tax lien?

Remote office? Can you claim a home office deduction?

With expanded access to broadband and wireless internet connections, more employees work remotely from a home office. Running a start-up from a home office is also common and many business owners keep their main office in their home.

Last year, the U.S. Internal Revenue Service offered a simplified option for the home office deduction.

This post will explain how to calculate the deduction under the simplified approach. In addition, we will discuss basic requirements. Failure to meet the requirements could prompt an IRS tax audit.

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