In divorces where the couple amassed unpaid tax debt from jointly field returns, it is common for their divorce decree (i.e., marital settlement agreement or order of divorce) to allocate the tax liability to one or both spouses. Once properly entered on the divorce docket, this allocation is legally binding on the former spouses. But is it binding on the IRS?
To quote the IRS itself: “Many taxpayers are apparently surprised to learn that under current law their divorce decree’s allocation of liabilities is not binding on creditors (including the IRS) who do not participate in the divorce proceedings.” Stated differently, for joint tax debt, the IRS is legally permitted to collect the entire tax debt from either (or both) former spouses regardless of what their divorce decree says. If the IRS were to collect the tax debt from the spouse who is not responsible under the divorce decree, that spouse’s only recourse would be against the spouse who is responsible for the tax debt.
So to answer the opening question, when it comes to which spouse the IRS can go after for a joint tax debt, the IRS does not care what the divorce decree says.
However, the same is not true in the context of a request for innocent spouse relief based on equitable grounds. As background, Section 6015 of the Internal Revenue Code provides for three avenues to innocent spouse relief. The third, most common avenue is under subsection (f) which allows relief when it would be “inequitable” to hold the requesting spouse liable.
To ensure uniform application of the “inequitable” standard, the IRS issued a Revenue Procedure which contains a list of factors to be considered. See Rev. Proc. 2013-34. One factor on the list is whether the requesting spouse has a “legal obligation to pay the outstanding Federal income tax liability.” In this context, the term “legal obligation” is defined as “an obligation arising from a divorce decree or other legally binding agreement.”
So going back to the opening question, when it comes to a request for innocent spouse relief based on equitable grounds, the IRS does care what the divorce decree says.
If you’re navigating the complexities of divorce and facing tax liabilities, it’s crucial to have knowledgeable legal guidance. Our experienced team at Eyet is here to ensure that your rights are protected and your financial interests are safeguarded.
With the recent explosion in popularity of online sports and casino gambling, we have seen an uptick in questions from those who have received Forms 1099-MISC and/or W-2G from DraftKings, FanDuel, and the like. Here’s what you need to know about each:
Form 1099-Misc
For those lucky (or skilled) enough to have received this, it means your net winnings for the year with the issuing sportsbook/casino exceeded $600. You report the amount shown in Box 3 of the 1099-MISC as other income on your tax return. Easy enough.
But what if you place wagers at multiple sportsbooks/casinos and have a good year with one, but a bad year with another? Are you not allowed to offset your overall gambling winnings with gambling losses?
The short answer is, yes, you are, but with a big caveat: under the tax code, gambling losses do not directly offset gambling winnings; instead, gambling losses must be claimed as an itemized deduction on your tax return. However, you can only claim your losses up to the amount of your winnings. So in the scenario above where you receive a 1099-MISC from DraftKings (because you were up on the year) but do not receive one from FanDuel (because you were down on the year), you must report the net winnings with DraftKings as income, and claim the net losses with FanDuel as an itemized deduction. If your allowable gambling losses + other itemized deductions do not exceed the amount of the standard deduction, you essentially lose the tax benefit of your gambling losses. This is why we say gambling losses do not directly offset gambling winnings.
Form W-2G
This is typically only issued to those who receive big payouts from casino slot games, but it can also be issued on sportsbook payouts greater than $600 with long shot odds (+30000 or longer). Unlike Form 1099-MISC which is issued based on your yearly net winnings, Form W-2G is issued based on individual payouts you receive during the year, regardless of what your net winnings are for the year.
In other words, you could be down $2,000 for the year with FanDuel (and therefore not receive a 1099-MISC), but if you won a slot payout of $1,250 you will receive a Form W-2G. In that scenario, you are essentially in the same position discussed above where you must report the $1,250 as other income on your tax return and then claim an itemized deduction (up to $1,250) for your gambling losses. Once again, if your allowable gambling losses + other itemized deductions do not exceed the amount of the standard deduction, you will essentially lose the tax benefit of your gambling losses.
To help you keep track of how much you’ve won or lost over the course of a year, it is best to keep a record of your gambling activities. These records should include the dates and types of specific wagers or gambling activities, the name of each casino/sportsbook or other gambling establishment, and the amounts you won or lost.
Anyone who listens to the radio or watches late-night cable TV has heard or seen the seemingly endless stream of advertisements from tax debt companies promising to settle anyone and everyone’s tax debt for pennies on the dollar. And the aggressive marketing tactics of these tax debt companies—aptly labeled offer in compromise (OIC) “mills” by the IRS—don’t stop at just radio and TV waves. Anyone who has had a federal or state tax lien filed against them or their business has also likely been inundated with similar direct mail and telephone solicitations.
Given the sheer number of OIC mills and the apparent size of their marketing budgets, it begs the question: Is it really possible to settle a massive federal tax debt for pennies on the dollar?
The short answer is yes, it’s possible, but only under the right set of circumstances. Take for example, a recent client of Eyet Law who owed over $900,000.00 in back taxes that we successfully settled via an OIC based on doubt as to collectability for a one-time payment of approximately $6,000.00. Percentage-wise, that’s less than one percent, or stated differently, less than one full penny on the dollar.
Unfortunately, this astounding result is definitely the exception, not the rule, because in reality most taxpayers do not qualify for an OIC based on doubt as to collectability, and any seasoned tax defense practitioner can accurately predict the chances of success under those grounds after asking only a handful of questions. A reputable practitioner will first obtain key financial data from potential customers before giving them a realistic assessment of what their options may be.
The good news is that even if your circumstances preclude you from qualifying for an OIC based on doubt as to collectability, you still may qualify under one of the other two lesser-known and harder to achieve OIC grounds or you may even be eligible for other forms of mitigating relief.
If you have any amount of tax debt and have been contemplating calling one of the OIC mills, we recommend contacting a local CPA firm, or tax attorney, like Eyet Law, where instead you will be able to speak directly with a tax professional and receive an honest, professional assessment of your available options. Even if you have already tried using an OIC mill and did not receive the favorable result that was promised to you, we have successfully found ways to allow our clients to achieve favorable results under other available options.
On July 9, 2024, the Committee on the Unauthorized Practice of Law (the “UPLC”) appointed by the Supreme Court of New Jersey issued guidance in response to an inquiry from the New Jersey Society of Certified Public Accountants regarding the filing of beneficial owner information reports (“BOI Reports”) under the Corporate Transparency Act (the “CTA”).
UPLC Guidance
In response to an inquiry from the NJCPA, the UPLC issued guidance on whether the filing of BOI Reports constitutes the practice of law in the State of New Jersey. In general, the UPLC determined that (i) the filing of Beneficial Owner Information Reports under the Corporate Transparency Act does constitute the practice of law, but that (ii) “a licensed CPA can engage in this conduct provided the CPA notifies the client that it may be advisable to consult with a lawyer.” See NJ UPLC Dkt. No. 01-2024, at 4. The guidance goes on to further state that “[c]omplex filings require a lawyer’s judgment, training and expertise” because “the analysis may be tricky and the risk of penalties, if the analysis is faulty, is greater.” Id. In making the determination of what constitutes a complex BOI Report filing, the UPLC expressly “relies on the professionalism of CPAs to ensure that such licensees will recognize when a filing is more complex and it is in the client’s interests for a lawyer to be retained in the matter.” Id.
When is a BOI Report filing complex enough to require advice from an attorney?
Unfortunately, the UPLC guidance does not provide any examples of when a BOI Report filing is complex enough to require a lawyer’s judgment, training and expertise. It does, however, acknowledge that “most filings will be straightforward,” and provides an example of such a straightforward filing: “For example, all matters where there is a single owner of a limited liability company will be simple—that single owner is the beneficial owner of the entity for purposes of the [CTA].” Id.
Takeaways
Although not stated in the UPLC guidance, the “complex filings” contemplated therein likely revolve around the definition of what constitutes a “reporting company” and who is a “beneficial owner” of the reporting company under the CTA. On the first definitional question, the CTA identifies twenty-three categories of exempt entities. See 31 U.S.C. § 5336(a)(11)(B). On the second definitional question, a beneficial owner is defined as an “individual who, directly or indirectly . . . (i) exercises substantial control over the entity; or (ii) owns or controls not less than 25 percent of the ownership interests of the entity.” 31 U.S.C. § 5336(a)(3)(A).
Thus, it seems that the initial determination of whether a particular entity is exempt from the CTA’s filing requirements would most easily satisfy the complexity threshold discussed in the UPLC guidance. And for entities who have corporate officers and/or tiered ownership structures, the secondary determination of which individuals have “ownership interests” or exercise “substantial control” over the entity would seem to most easily rise to the level of complexity requiring a lawyer’s judgment, training and expertise to complete the filing as contemplated by the UPLC.
Matt Eyet, Esq., founder of Eyet Law, was recently interviewed on Lawyers Who Care, the video show and podcast that highlights attorneys that go above and beyond for their clients.
You can check out the full video here, but keep reading for a recap of what you’ll get to see!
In the interview, Andrew Samalin, CFP of Samalin Wealth, spoke with Matt about his journey to becoming a tax lawyer. Because of the sheer volume of potentially applicable code sections, case law, and administration guidance surrounding tax, Matt sees every matter as being similar to a puzzle. Figuring out what applies, which code section does or doesn’t affect the case, and how best to move forward while adhering to the myriad of tax rules is all part of that strategy and solution.
In one instance, Matt represented someone who had Google searched for a tax lawyer. The client, having undergone a divorce, agreed to be solely responsible for the joint tax liability that was owed for several years leading up to the divorce. The client’s wife had been under the impression these taxes had been taken care of and hadn’t known about the owed taxes.
Given the situation, Matt worked with the wife to first request administrative relief, and ultimately to file a petition to absolve the wife of the tax liability. With this type of case, there are seven main factors that the IRS seeks to check in order to determine if the relief should be granted.
During the time the petition was pending, the wife attempted to purchase the condo she was currently renting and couldn’t get a loan because of the tax lien against her. But when Matt got a plea for help from her, he couldn’t say no, even though this task was outside the scope of what he was retained for. He drafted a letter to the bank. Given the compelling nature of the carefully crafted letter, the bank disregarded the tax liens and granted the loan.
Though the IRS wound up denying the initial request for administrative relief, Matt remained dedicated to the case and took it to the IRS Office of Appeals. After the appeal, the court only dismissed one of the three years of taxes owed, which still totaled over $160,000. Ever-committed to helping and serving his clients’ best interests, Matt took things one step further by filing a petition in U.S. Tax Court to resolve the remaining tax years. After Matt provided discovery and helped prepare both the client and ex-wife to testify, Chief Counsel’s Office at the IRS gave all the relief they requested for the wife.
While tax law can be black and white in many ways, these are the types of cases where the practical application of the tax rules and legal process make all the difference in the lives of clients.
Recently, our very own Matthew Eyet, Esq. talked with Rose Davidson, host of Talking with the Experts, a vodcast for business owners, about various hot-button business planning issues including Paycheck Protection Program (PPP) loans and estate tax under the new administration.
You can find the full conversation here, but we have put together a few key takeaways below.
PPP Loans
Many businesses have applied for PPP loans, and issues with the first draw loans from the spring of 2020 are now in the news again as federal prosecutors have committed resources to going after fraud.
However, as Matthew emphasized, PPP loans aren’t the only type of loan out there. Economic injury disaster loans (EIDL) also exist, and businesses can qualify for both. In fact, between state and federal relief programs, there are many layers of support available to businesses. It’s possible for businesses to find relief from, five or more different local state and local federal sources.
Estate tax
Matthew and Rose also delved into estate tax and possible legal changes under the Biden administration.
Matthew explained step-up in basis, which has been receiving some press attention lately: If a farming couple in Iowa bought their land for $100,000, but it grows to be worth $10 million by the time of their deaths, then the asset of the farmland has appreciated significantly—yet there is no liquidity to pay the estate tax because it’s a farm. The step-up in basis means that the inheritors of the farm will not be taxed on the gains in value, so long as the property is held in the name of an individual until their death.
The reverse is also true: You can’t claim a loss if your property depreciates from $10 million to $100,000. “Hold on to the appreciated assets until you die and sell the ones that depreciated before you die,” Matthew advised.
Another area of concern when it comes to changing tax laws is the amount of the gift and Estate tax exemption lifetime, which are currently set at a gift of 11.7 million per person. If the value of your entire estate doesn’t exceed $11.7 million, then you don’t pay federal estate tax on it when transferring the assets to the next generation (although you may have to pay state tax). Married couples get to each use the unused portion of the other’s exemption. Once you cross the threshold, you’re facing a flat tax rate of 40%.
Fourteen years ago, the lifetime exclusion amount was only $1 million—a significant difference. Will the Biden Administration succeed in shifting the threshold again? We can’t say, but it helps to be prepared.
Full-spectrum planning
As Matthew and Rose discussed, there are many forms of federal and state relief available to businesses. If you have questions about loan forgiveness, especially if you didn’t have much in payroll expenses—or if you have questions about planning for changes in estate tax—then we recommend consulting a qualified professional such as Matt to help navigate the monies you will encounter through the process.
At Eyet Law, we offer concierge legal services by providing full-spectrum support for our clients in tax law, estate planning, business law, and civil litigation. Questions? Contact us.
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