Michigan Estate Planning Blog

Should I have an Irrevocable Trust?

 

You may have heard the terms “revocable trusts” and “irrevocable trusts.” Both are created to hold assets for different purposes. The differences are explained in a recent article from Kiplinger, “With Irrevocable Trusts, It’s All About Who Has Control.”

Both types of trusts are separate legal entities created through contracts. They name a trustee who is in charge of the trust and its assets. The trustee is a fiduciary, having a legal obligation to manage the assets in the trust for the beneficiaries. Depending on how the trust is structured, these are the people who will receive assets or income generated by the assets in the trust.

With the revocable trust, the grantor—the person who creates the trust—can be a trustee and maintain total control of the trust. They can change the terms of the trust, beneficiaries, and successor trustees at any time. In exchange for this level of control, however, come some downsides. The revocable trust doesn’t have the same level of protection as an irrevocable trust while the grantor is living.

The irrevocable trust trades control for benefits. The grantor of an irrevocable trust can’t change the trust once it’s been created, nor can they move assets in and out of the trust at will. Beneficiaries may not be changed either. However, when the irrevocable trust is properly created with an experienced estate planning attorney, they achieve many estate and tax goals.

Your estate planning attorney will be able to explain which irrevocable trust suits your situation, as there are many different kinds.

An irrevocable trust where the grantor is also the beneficiary is referred to as a Domestic Asset Protection Trust or DAPT. The grantor is allowed to be the beneficiary of the trust, but it has to be created in one of the 20 jurisdictions where the grantor is allowed to be the beneficiary. You can have a trust created in a jurisdiction other than your own.

The first step is to determine how to fund an irrevocable trust, where assets are transferred into the trust. There are fine points here. For instance, you can’t fund an irrevocable trust if there are issues with the IRS or the threat of litigation from a creditor. If the dispute goes to court, a judge can set aside the transfers into the trust as they were made with the intent to circumvent a creditor’s claim under fraudulent transfer laws.

Creating irrevocable trusts, like much of estate planning, needs to be completed before issues arise. Decisions about naming trustees, successor trustees, beneficiaries, and funding sources should be discussed with an experienced estate planning attorney first.

Reference: Kiplinger (April 28, 2024) “With Irrevocable Trusts, It’s All About Who Has Control”

Would Your Family Benefit from a Living Trust?

 

Estate planning is rarely on top of anyone’s bucket list. However, taking charge of your legacy is a gift to your family and should be done sooner rather than later. A recent article from The Motley Fool explains why a living trust should be part of your estate plan. The title says it all: “3 Reasons to Seriously Consider Using a Living Trust to Pass Inheritance to Your Family.”

At its essence, a trust is a way for one person to own and manage another person’s property or even to manage their own property. The IRS definition of a trust is as follows: “In general, a trust is a relationship in which one person holds title to property, subject to an obligation to keep or use the property for the benefit of another.”

A living trust requires you (the grantor) to transfer assets into it. If you manage the trust yourself, you are also the trustee. This lets you make all decisions for the trust while leaving instructions in very specific language for its distribution by a successor trustee (or two successor trustees) after you pass away.

Having the correct language is essential for the trust to achieve your goals, which is best prepared by an experienced estate planning attorney. They will know how the laws of your jurisdiction treat trusts and what language must be included for the trust to be valid.
Property can also be distributed through a last will and testament. However, there are several advantages to using a living trust.

Trusts avoid the time and costs of probate. During probate, the court supervises the distribution of assets. It takes time—months or, depending on the complexity of the estate, years. During this time, heirs don’t have access to assets, which they may have been counting on to pay for final expenses or maintain a home.

Trusts keep your life and death private. Once a will is filed with the court, it becomes a public document. Anyone who wants to can review its contents. Creditors, ex-spouses, estranged family members and salespeople can all review the will. This is why phone calls and mailings from realtors and financial advisors after a death in the family often besiege loved ones. Trusts remain private and are only reviewed by the trustee and, in some cases, beneficiaries.

Revocable trusts are flexible. While a revocable trust doesn’t provide the same level of tax protection as an irrevocable trust, it allows you, as the grantor, to make changes. You can add or delete beneficiaries, move assets in or out of the trust and change your appointed successor trustees.

A trust of any kind is not a do-it-yourself project. Consult an experienced estate planning attorney to define your goals and determine the best trust for your situation.

Reference: The Motley Fool (Feb. 12, 2024) “3 Reasons to Seriously Consider Using a Living Trust to Pass Inheritance to Your Family”

What are the Rules for Inheriting an IRA?

 

Inherited Individual Retirement Accounts (IRAs) are created when the funds in an IRA or employer-sponsored retirement plans are inherited after the original owner dies. The beneficiary may not make any additional contributions to the account and must comply with a series of rules regarding the inherited account or face an expensive tax situation. A recent article from U.S. News & World Report,

“What Is the Inherited IRA 10-Year Rule?” explains the basics beneficiaries need to know.
What is the Inherited 10-Year Rule? The rule applies to those who inherit an IRA on or after January 1, 2020. In most situations, all funds must be withdrawn within ten years of the previous owner’s death, but there are exceptions depending on your age and relationship with the deceased. Spouses who inherit an IRA have options, as do beneficiaries who meet certain criteria.

The inherited IRA 10-year rule was part of the SECURE Act. Before then, a non-spouse beneficiary could take required minimum distributions (RMDs) based on the heir’s life expectancy. Following the SECURE Act, funds from an inherited IRA must be withdrawn over ten years. This eliminated the ability of the beneficiary to keep the retirement account funded for the rest of their life and gain the advantages of the long-term tax-free growth of the IRA.

Does the 10-year rule apply to you? The exceptions to the 10-year rule are:
The IRA owner’s surviving spouse
The IRA owner’s minor child
An individual who is not more than 10 years younger than the IRA owner
A disabled or chronically ill person, as determined by IRS rules.

If a minor child inherits the IRA, the 10-year clock starts ticking once they reach the legal age of adulthood.

Heirs may take the entire amount from the IRA, but it will be taxable as regular income.

For spouses, there are decisions to make. The surviving spouse may open and transfer the assets into an inherited IRA and then withdraw funds during the 10-year timeframe. If the decedent was taking RMDs from a traditional IRA at the time of their passing, the spouse would need to take the RMD during the year of death if it wasn’t already taken. Otherwise, the spouse can wait until they reach the required age to take RMDs from the account.

If funds are taken from your own IRA before 59 ½, there is a 10% penalty plus taxes on the withdrawals. However, a surviving spouse under age 59 ½ could open an inherited IRA and start taking distributions. 

There are strategies to optimize the 10-year rule. One strategy is for the owner to name a Charitable Remainder Trust as a beneficiary for your IRA. A CRT is an irrevocable trust that generates an income stream for the beneficiary with the remainder of the assets after the trust term. The trust term can be longer than the 10-year inherited IRA limit, allowing the beneficiary to stretch tax benefits longer.

An estate planning attorney can help you navigate the complex rules about inherited IRAs and determine how to use traditional and Roth IRAs to manage your tax liability.

Reference: U.S. News & World Report (Dec. 18, 2023) “What Is the Inherited IRA 10-Year Rule?”

 

What Does the Executor of an Estate Do?

 

Being named the executor of an estate usually means you’ve lost someone close to you, and it’s a challenging time. The article “What to do when you’re the executor of an estate” from Bankrate explains what you’ll need to do and outlines the steps to stay on track.

The executor is the personal representative of a deceased person’s estate until the probate process is completed and all assets have been distributed. One of the key tasks is distributing assets according to the terms of the decedent’s will.

You can say no if you are not able or willing to serve as the executor. A secondary executor may be named in the will, or the probate judge can name a replacement. However, this task is doable if you set up a detailed checklist and work with an estate planning attorney.

Obtain the death certificate. The funeral home issues these; you’ll need them to notify banks, investment firms, life insurance companies, the Social Security Administration, the Department of Veterans Affairs and others. You’ll also need them for filing final tax returns. You’ll also need to notify Social Security to turn off payments going directly into the person’s bank account.

Locate the will and any trust documents. Hopefully, the person who notified you of the death will know where these documents are. Depending on the state where the decedent was domiciled, the last will needs to be filed within a few days to a month to a year after the death. If there are trusts, the trust documents name the trustees in charge of distributing assets owned by the trusts. Trust assets can be distributed immediately by the trustees without court approval.

Seek professional advice. After reviewing the will and trust documents, you’ll better understand how complex the estate is. You may want to consult with an estate planning attorney, CPA, appraiser, or other professionals whose expertise can help you avoid any mistakes. Trying to do it yourself could leave you personally responsible for mistakes, and the process may take far longer.

File “letters testamentary.” If the estate goes through probate, the court will legally confirm your appointment as executor with letters testamentary, sometimes referred to as surrogate certificates. These are legal documents proving your authority to act on behalf of the estate, pay bills, file tax returns, manage and distribute assets, deal with beneficiaries and open or close bank accounts.

Locate and protect assets. In the best scenario, the executor is given a complete list of assets and related information. This would include wills, trusts and paperwork related to insurance, investment accounts, prearranged funeral plans, bank accounts, real property, artwork, business interests and partnerships. A complete list of digital accounts is also needed.

Pay bills and taxes. The estate is responsible for paying debts, including income and estate taxes. If the debts exceed assets, beneficiaries are not responsible for paying them. The executor opens an estate bank account, which pays bills for the estate. Before paying debts, the executor must confirm the estate’s ability to pay. If a list of monthly bills, income and debts were not left for the executor, they’ll need to figure this out.

Don’t rush. It’s common for the executor to want to get the tasks done, distribute any inheritance to beneficiaries and have done with the process. However, if you rush and miss some important tasks, you could be found personally liable. It can take six months to a year to work through an estate. Keep careful records of all transactions and a copy of everything sent and received from creditors, beneficiaries, financial institutions, the IRS, the Social Security Administration and others.

Having an estate planning attorney can help. An attorney can also mediate between the executor and beneficiaries if things take a turn for the worse.

Reference: Bankrate (Nov. 17, 2023) “What to do when you’re the executor of an estate”

 

Gift and Estate Tax Exemption Limits Increase for 2024

 

The year 2024 will bring more reasons to be generous, since the Internal Revenue Service (IRS) has increased the limits for gift and estate tax exemption amounts to their highest amounts ever. It’s good news to start the year with, reports the article “IRS Increases Gift and Estate Tax Exempt Limits—Here’s How Much You Can Give Without Paying” from yahoo! finance.

Those with large estates should always consider gifting during their lifetime to reduce taxes by using the annual gift and lifetime gift and estate tax exemptions. Right now, you may give an unlimited number of people up to $17,000 each in a single year without taxes. However, in 2024, this increases to $18,000 per person. For married couples starting in 2024, a gift of $36,000 can be made to any number of people, tax-free.

More good news: the IRS announced that the lifetime estate and gift tax exemption will increase to $13.61 million in 2024. A gift exceeding the annual limits won’t automatically prompt a gift tax. The difference is taken from the person’s lifetime exemption limit, and no taxes are owed. Your estate planning attorney will create a long-term strategy to use these exemptions to manage your estate tax liabilities.

Let’s say you were feeling generous and bought a friend a car for $20,000 in 2023. You would have exceeded the annual limit of $17,000 but wouldn’t owe any additional taxes. You’d use IRS Form 709 to report the gift and deduct $3,000 from your lifetime exemption of $12.92 million for this year. If you instead make the gift in 2024, you’d subtract $2,000 from your $13.61 million limit.

Gifts between American spouses are virtually unlimited. Couples have $24.84 million in estate tax exemptions, and going over this limit is only taxed upon the surviving spouse's death.

However, a gift to a non-U.S. citizen, regardless of whether or not they are a U.S. resident, falls under different rules and is subject to an annual tax exclusion amount. The annual amount one may give to a spouse who is not a U.S. citizen increases to $185,000 in 2024 from $175,000 in 2023.

Something else to keep in mind—unless Congress acts, the lifetime estate and gift tax exemption is due to return to the pre-2017 Tax Cuts and Jobs Act level of $5.49 million on December 31, 2025. Your wisest move is to speak with your estate planning attorney about a strategic plan for gift-giving and planning to minimize estate tax liability before the change occurs.

Reference: yahoo! finance (Nov. 14, 2023) “IRS Increases Gift and Estate Tax Exempt Limits—Here’s How Much You Can Give Without Paying”

IRS Getting Greedy Over Old “Gifts”?

So, how long does (or can) the IRS scour your financial history to find taxable gifts? Well, it seems they do (or can) go back some 41 years. Whether you are a billionaire or a regular “Joe,” a recent case is worthy of note. Enter the case of Sumner Redstone and a 1972 inter-family legal proceeding. The IRS has elected to call this “proceeding” a gift with much in past due taxes and penalties. Bloomberg recently reported on this unique fact pattern in an article titled “Billionaire Redstone Challenges IRS on Tax for 1972 Gift.” Normally the IRS is bound by a statute of limitations set to about three years. However, an exception to this rule includes the failure to file a tax return like the allegedly missing gift tax return of Mr. Redstone. Apparently, the difficulty arose over certain shares of National Amusements Inc., and a family legal agreement resulting in a “transfer” of shares. The IRS is now calling that “transfer” a “gift” with $1.1 million in taxes, penalties, and interest due and owing. According to Richard Behrendt, a former estate and gift tax auditor turned director of estate planning, “This is unheard of… I can’t remember ever hearing of anybody going back 41 years to raise an issue. It’s really unprecedented in my experience.” Note: Mr. Redstone may have become a target, given the fact he is the chairman of both Viacom and CBS, not to mention National Amusements and all the related subsidiaries of the three. Reportedly, Mr. Redstone is worth approximately $4.9 billion. Nevertheless, this 41-year-look-back is a strange precedent.

Reference: Bloomberg (May 1, 2013) “Billionaire Redstone Challenges IRS on Tax for 1972 Gift”

For more information, see www.jerryreiflawyer.com

 

The IRS Wants to Know About Your Gifts from Foreign Sources

If you have received a gift or inheritance from a loved one in a foreign country, the IRS wants to know about it. The recent Forbes article, “Beware IRS Reporting Of Foreign Gifts Too,” states that you will need to file an IRS Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, if you receive: More than $100,000 from a nonresident alien individual or a foreign estate (including foreign persons related to that nonresident alien individual or foreign estate) that you treated as gifts or bequests; or More than $14,375 from foreign corporations or foreign partnerships (including foreign persons related to such foreign corporations or foreign partnerships) that you treated as gifts. You are required to report these bequests on Form 3520 when you actually or constructively receive them. Late reporting penalties are high – five percent of the gift’s value for each month the gift is not reported, up to 25 percent of the total value. One way to avoid penalties is to consult with your estate tax attorney for counsel on your individual circumstance. Remember that income from abroad is taxable, and the IRS is looking at foreign accounts ever more closely under the Foreign Account Tax Compliance Act (FATCA). To learn more, read the Forbes article, “How to Report Foreign Gifts and Bequests to IRS.”

Reference: Forbes (August 13, 2012) “Beware IRS Reporting Of Foreign Gifts Too”

Estate Taxes – The Gift That Keeps on Taking

Death does not necessarily mark the end of your estate. In fact, for some families, it may mean the beginning of your financial legacy. On the other hand, for other families, it may mean the beginning of some serious taxes. The prospect of future tax battles with the IRS was the subject of the recent case of U.S. v. Mary Carol S. Johnson. Forbes explored this case in an article titled “When Estates Don't Pay Tax, IRS Chases Beneficiaries.” The case recounts the story of Anna Smith, her fortunes in the Stateline Hotel, and the IRS audit that ultimately led to a battle over a lost fortune. Smith’s fortune was bound up in stock in the hotel, and it was worth enough at her passing to trigger an estate tax that the family elected to pay in installments over several years (which can be done). According to her estate plan, the family distributed the stock amongst themselves under with an agreement to set aside a portion to pay the estate taxes owed. Apparently that agreement was reached in the “good days” of the hotel. In fact, those days were so good that the IRS audit on the estate tax return, years later, came up with higher numbers and a greater tax. Of course, when the IRS finally got around to making that decision, the hotel was not doing so well. However, the family agreed to pay the higher tax as a matter of duty and paid on those rates for several years. Boom. The hotel value collapsed, the stock became worthless, and the estate had nothing left to pay for the taxes on the past wealth. The IRS, not being one to forgive and forget, didn’t forget and carried on the fight to the beneficiaries and personal representatives of the estate. In the end, the IRS held two members of the family acting as personal representatives to be personally liable, even though they did the right thing by the original numbers. The original article is an interesting read and a sobering reminder, albeit far from unique. The IRS can audit any taxpayer, even if it’s an estate, and sometimes it has good reasons to do so. As a sidebar, the case demonstrates the importance of an accurate valuation. Regardless, this U.S. v. Mary Carol S. Johnson serves as a lesson for those currently planning their estates. With the current lifetime gifting exemption pegged at $5.12 million, this may be a window of opportunity to pass significant wealth before the year’s end. Bottom line: If the estate doesn’t fully pay off any amounts due, the IRS turns to the estate beneficiaries, sometimes even for amounts forgotten until years later.

Reference: Forbes (June 28, 2012) “When Estates Don't Pay Tax, IRS Chases Beneficiaries”

Estate Taxes – The Gift That Keeps on Taking

Death does not necessarily mark the end of your estate. In fact, for some families, it may mean the beginning of your financial legacy. On the other hand, for other families, it may mean the beginning of some serious taxes. The prospect of future tax battles with the IRS was the subject of the recent case of U.S. v. Mary Carol S. Johnson. Forbes explored this case in an article titled “When Estates Don't Pay Tax, IRS Chases Beneficiaries.” The case recounts the story of Anna Smith, her fortunes in the Stateline Hotel, and the IRS audit that ultimately led to a battle over a lost fortune. Smith’s fortune was bound up in stock in the hotel, and it was worth enough at her passing to trigger an estate tax that the family elected to pay in installments over several years (which can be done). According to her estate plan, the family distributed the stock amongst themselves under with an agreement to set aside a portion to pay the estate taxes owed. Apparently that agreement was reached in the “good days” of the hotel. In fact, those days were so good that the IRS audit on the estate tax return, years later, came up with higher numbers and a greater tax. Of course, when the IRS finally got around to making that decision, the hotel was not doing so well. However, the family agreed to pay the higher tax as a matter of duty and paid on those rates for several years. Boom. The hotel value collapsed, the stock became worthless, and the estate had nothing left to pay for the taxes on the past wealth. The IRS, not being one to forgive and forget, didn’t forget and carried on the fight to the beneficiaries and personal representatives of the estate. In the end, the IRS held two members of the family acting as personal representatives to be personally liable, even though they did the right thing by the original numbers. The original article is an interesting read and a sobering reminder, albeit far from unique. The IRS can audit any taxpayer, even if it’s an estate, and sometimes it has good reasons to do so. As a sidebar, the case demonstrates the importance of an accurate valuation. Regardless, this U.S. v. Mary Carol S. Johnson serves as a lesson for those currently planning their estates. With the current lifetime gifting exemption pegged at $5.12 million, this may be a window of opportunity to pass significant wealth before the year’s end. Bottom line: If the estate doesn’t fully pay off any amounts due, the IRS turns to the estate beneficiaries, sometimes even for amounts forgotten until years later.

Reference: Forbes (June 28, 2012) “When Estates Don't Pay Tax, IRS Chases Beneficiaries”

IRS “Offers In Compromise” Creates Backlog

In honor of federal “Tax Day,” I thought you might enjoy a tax-related sidebar. Have you heard the radio ads? You know, the ones promising to help you get the IRS off your back for myriad tax troubles. Well, advertising works and, combined with myriad other channels for taxpayers seeking such relief, the result has been a growing logjam of such cases at the IRS. Recently, Forbes reported on this problem in an article titled "Trying To Come Clean With The IRS? Get In Line." As reported in the article the number of “offers in compromise” has jumped 28% from fiscal year 2007 to fiscal year 2011. In real numbers, that represents 46,270 offers in 2007 and 59,411 offers in 2011. Here’s the rub: The number of IRS staff members handling the filings has decreased over the same period. So, if you have filed an offer in compromise, but it has not been processed, don’t despair. The IRS is well-aware of the problem. If you have a “promised date” (when the IRS was to get back to you), then likely the IRS will give itself more time with an extension. Should the logjam continue, expect to get an “interim” letter.

Reference: Forbes (April 12, 2012) "Trying To Come Clean With The IRS? Get In Line"

Check Out Charities Before Cutting Check

If charitable giving is important to you, you may want to do some investigating to ensure that the charities you support are in good standing with the IRS. Fortunately, a new IRS search tool for tax exempt organizations can simplify this process for you. While the tool (known as the Select Organizations Exempt Check) isn’t exhaustive, it does offer some helpful information, to include whether an organization: • Is eligible to receive tax-deductible contributions. • Had its tax exemption automatically revoked for failing to file a required Form 990, Return of Organization Exempt From Income Tax, for three consecutive years. • Filed a Form 990-N, Annual Electronic Filing Requirement for Small Exempt Organizations, also called an e-Postcard. Such information can help a potential donor see an organization as the IRS does. However, the tool is not without some glitches, as addressed in a recent article in the Journal of Accountancy. For example, once an organization is placed on the auto-revocation list (triggered when the organization fails to file a form) it won’t be removed from the list even if the organization re-applies and is re-admitted back into tax exempt status. With that caveat, the tool provides an excellent means to check the status of a given charity. Nevertheless, if one of your favorite charities is on the auto-revocation list, then you may need to confirm the current standing directly with the charity itself. For more information, read the original article in The Journal of Accountancy and the IRS news bulletin.

Reference: The Journal of Accountancy (March 15, 2012) “New online search tool makes it easier to find information about exempt organizations”

Inheritance Protection – You Can Trust A Trust

While planning for your estate addresses many concerns, likely providing your loved ones is at the top of the list. But what if you can fully trust your loved ones to use your gifts wisely and to take care of themselves responsibly? One common alternative is to cut those problem cases out of the will through disinheritance. Nevertheless, as a recent New York Times article points out, those problem cases are all the more reason to make proper estate plans to protect your legacy and to use the inheritance to promote positive change. Problem cases for inheritances aren’t all “problem” children. You know, the gamblers, the drug addicts, and the habitually irresponsible within our families. Oftentimes, the risks to an inheritance do not necessarily originate with the problem child, rather the problems find the child… and their inheritance. Classic examples of inheritance predators include divorces, lawsuits and bankruptcies. Indeed, much of the time the concern is just over the possibility of future problems, ones you can’t foresee while planning your estate today, especially when you’re planning with young children in mind. However, the form of the inheritance can help curb present problems and work to avoid future ones by instilling character. How can you do it? The most powerful tool is the trust for a variety of reasons. At the most basic level, the trust allows limits. Regardless whether money is the cause of the problems, it’s certainly not going to help. A trust can limit the access your loved one has to the money, while still ensuring it is available when they truly need it. Within the concept of a trust, there are many varieties and options to address nearly every concern. For example, there is the “incentive trust.” This trust still restricts funds, but will make funds available if the beneficiary meets certain stated objectives. A classic example may be remaining drug-free for a certain number of years. On the other hand, it can be a character-building trigger like admission to a certain college or graduation from one. In short; the triggers can be just about anything. Experience has demonstrated, however, that this approach is most effective when you are upfront now about rules of the road regarding the correlation between future conduct and availability of the funds. Take the opportunity to pass along your positive values, rather than just set up a future gotcha program for a loved one to “game” after you are gone. For those planners who take a uniquely long view, there also is the option of the “dynasty trust.” It has all of the benefits of a trust, but extends those benefits across as many generations as possible, for as long as the funds last (according to current law), and, quite literally, works to form dynastic wealth. That means that using one properly can mean protecting the family assets from problem inheritors for several generations.

Reference: The New York Times (September 2, 2011) “Using an Inheritance to Teach Your Problem Child a Lesson”

Independent Contractor Amnesty – Will States Enter The Fray?

If you’re a small business owner using independent contractors, then you’ve probably been watching the new IRS independent contractor amnesty campaign. I’ve written about this subject here before and it has become a hot topic for many business news sources. Now, there’s a new twist – will the states adopt the campaign too? According to Forbes, states may be entering the fray in their own way. Taking on talent is a big deal. Indeed, hiring itself can be a big deal on a small budget; so many employers walk a fine line with their workers; are they employees or are they independent contractors? To the IRS, that’s no fine line and they’re not fond of those who cross back and forth knowingly (or unknowingly, for that matter). As with several other initiatives over the years, the IRS has chosen to show its kinder, gentler, side with an amnesty program to allow employers to “reclassify” independent contractors as actual employees (under the assumption that they ought to have been classified as such). The kink in the works, as with all federal issues that address issues that independently concern the states, is whether the states would follow suit. For a business owner, why accept amnesty from the IRS only to be hammered by your home state? According to Robert Wood at Forbes, some states are turning to the amnesty, like Minnesota. Of course, Minnesota also is adding some extra information requirements, extra qualifications, and a deadline where the IRS has none. Will your home state begin amnesty, as well? And if it does, how will you go about safely navigating both state and federal programs?

Reference: Forbes (October 25, 2011) “States Start Conforming to IRS Independent Contractor Amnesty”

Gift Tax Return Gotcha

Surprise. It’s a big year for the IRS and they’ve been opening many new fronts in the drive to assert tax law compliance. One of the largest and most unique fronts the IRS has opened has been a far-reaching gift tax audit on real estate transfers. As a recent Forbes article reports, the battle is tough going for the IRS, too. The IRS estimates that somewhere between 60% and 90% of taxpayers will fail to file a gift tax return, despite having engaged in activity that requires a filing. As a result, it’s clear this is neither a petty problem in the Service’s eyes nor is it merely chump change waiting to be claimed. The problem with enforcing the gift tax has been the inability to catch someone in the act. Never fear, the IRS has found just the right tool in the form of land records maintained at the state and local levels. Why? These public records allow the IRS to independently track the movement of properties between persons that haven’t shown up in gift tax returns. Family homes are just the sort of thing to pass easily between family members. However, things are rarely that easy when the IRS gets involved and that is just what’s happening now. The lesson to be learned, regardless whether you have transferred any land in the past, is to be aware and diligent. While there are many ways and means to accomplishing your wealth transfer goals, you have to use the right tools. Alternatively, those taxpayers who have transferred property without due diligence to the IRS’s gift taxes (and anyone following this story) have a grand development to watch. The IRS needs the states’ compliance to make their plan work and, while this has meant a great deal of cooperation in much of the country, it has met with resistance in California. There the courts have bristled at the IRS’s attempts to demand records. Forbes has a story to tell in the original article and the question remains: Will State courts further mire the IRS’s great gift tax audit effort?

Reference:  Forbes (October 19, 2011) “The New Gift Tax Audits: IRS Identifies Non-Filers Using State Property Records”

Independent Contractor Calamities

Are you a small business owner? Do you have any “independent contractors”? Really? Then, watch out! The IRS is looking for revenue. Surprised? Don’t be. If you use independent contractors, then you might need to exercise a bit more diligence. Why, the IRS may consider them to be “employees” masquerading in a tax-cheating disguise. It’s quite common for small business owners to rely on independent contractors, especially in lean times. And, from the perspective of the IRS, the difference can be huge in tax and legal terms. Why? An employer doesn’t have to withhold taxes or pay any benefits (instead, the worker pays a self-employment tax.). Unfortunately, some business owners intentionally classify workers inaccurately… and the IRS is working to prevent it in several ways. However, the IRS isn’t the only one on the worker classification campaign. Forbes has a series of recent articles to keep us informed. Robert Wood has paid special attention to the issue, reporting here that the IRS has updated its SS-8 Form to inquire about the employee classification and it is slanted more heavily toward the classification of “employee” versus “independent contractor.” The threat of improperly classifying a worker is always that the IRS will “reclassify” them, enforce penalties, and demand the back taxes on that classification. Nevertheless, this too may become more difficult and even more of a threat. In another article, Woods points out how recent examples indicate that the IRS is working far more closely with the Department of Labor and state governments to evaluate worker classifications. As a result, the consequences of an IRS reclassification also could mean unwanted attention from those bodies as well. Finally, the IRS has started the Voluntary Compliance Settlement Program (VCSP) to give employers incentive to come forward and reclassify. In exchange, the IRS is offering a reduced penalty of a flat 10% on all employment tax liabilities for the past year. Note: This includes both the employer and the employee sides of Medicare and Social Security taxes, since the employer would have had to withhold the employee side from the employee’s pay in the first place. Stephen Dunn reports on that development here, along with the suspicion that it is actually an illusory classification program, since the IRS doesn’t have a leg to stand on in that effort. Hopefully, you don’t have anything to hide. Who wants any extra attention from the IRS?

Reference: Forbes (September 21, 2011) “IRS, DOL and State Mount Independent Contractor Attack”; and (September 27, 2011) “Employers Beware of  IRS’  Illusory Worker Classification Program”