Bergen Bar Tax Bulletin, Volume 38, No. 4

Written by: Theodore M. David, Well Retired

Chair, Tax Law Committee

Current Items:
1) Can’t Pay Up?
2) Justice on Fire
3) Crowdfunding?

1). So you owe back taxes. Big deal. Work out an arrangement with IRS to pay up. We have fine lawyers who can help all over the state. The amount you’ll be allowed to keep out of your income is determined by using forms on the IRS website taking into consideration some standard allowances. These Collection Financial Standards are used to help determine a taxpayer’s ability to pay a delinquent tax liability. Allowable living expenses include those expenses that meet the necessary expense test. The necessary expense test is defined as expenses that are necessary to provide for a taxpayer’s (and his or her family’s) health and welfare and/or production of income.

National Standards for food, clothing and other items apply nationwide. Taxpayers are allowed the total National Standards amount monthly for their family size, without questioning the amount actually spent.
National Standards have also been established for minimum allowances for out-of-pocket health care expenses. Taxpayers and their dependents are allowed the standard amount monthly on a per person basis, without questioning the amount actually spent.

Maximum allowances for monthly housing and utilities and transportation, known as the Local Standards, vary by location. In most cases, the taxpayer is allowed the amount actually spent, or the local standard, whichever is less.
Generally, the total number of persons allowed for necessary living expenses should be the same as those allowed as dependents on the taxpayer’s most recent year income tax return.

If the IRS determines that the facts and circumstances of a taxpayer’s situation indicate that using the standards is inadequate to provide for basic living expenses, we may allow for actual expenses. However, taxpayers must provide documentation that supports a determination that using national and local expense standards leaves them an inadequate means of providing for basic living expenses.

The Collection Financial Standards are used in cases requiring financial analysis to determine a taxpayer’s ability to pay. The vast majority of installment agreements secured by Collection employees are streamlined agreements, which require little or no financial analysis and no substantiation of expenses.

In cases where taxpayers cannot fully pay and do not meet the criteria for a streamlined agreement, they may still qualify for the six-year rule. The timeframe for this rule was increased in 2012 from five years to six years.
The six-year rule allows for payment of living expenses that exceed the Collection Financial Standards, and allows for other expenses, such as minimum payments on student loans or credit cards, as long as the tax liability, including penalty and interest, can be full paid in six years. Taxpayers are required to provide financial information in these cases but do not have to provide substantiation of reasonable expenses. The revised standards are effective for financial analysis conducted on or after April 25, 2022. Not much humor in that pile of words, but if you owe… it will come in handy.

2) The Justice Department releases monthly cases the public ought to know about. I’m sure their goal is not to supply information but to let the taxpaying public believe they are there doing their job chasing tax cheats of all varieties. On March 25, a federal court in the Southern District of Florida permanently enjoined two Miami-area tax return preparers and their businesses from preparing federal tax returns or operating any tax return preparation business in the future. The court ordered that they disgorge more than $60,000 in return preparer proceeds to the United States. The court also issued a narrower injunction against a third preparer and his business.

The complaint alleged that defendant Tammi King owned and operated two return preparation businesses, Kingsworld Financial Services Corp. and Brightstar Management Corp. in South Florida, and employed defendant Norman Williams Jr. to prepare tax returns. The complaint also alleged that a third individual, John Gay Jr., owned a return preparation business called the Tax Doctor LLC, with which King was affiliated at one time. According to the complaint, King, Williams and Gay all prepared tax returns for customers that included fraudulent self-employment expenses, false energy credits, and fake charitable contributions. As one example, the complaint alleged that Williams, a Miami-area firefighter, fabricated more than $1,300,000 in fraudulent cash charitable contributions for 96 of his fellow firefighters for the 2019 tax year. Really Norm, what were you thinking? I guess you were on fire!

3) Don’t feel bad I didn’t know what crowdfunding was either. It sounds like what people did at a Dead concert. Apparently, the IRS is poking around on the Internet looking for sources of revenue. Crowdfunding is a method of raising money through websites by soliciting contributions from a large number of people. The contributions may be solicited to fund businesses, for charitable donations, or for gifts. In some cases, the money raised through crowdfunding is solicited by crowdfunding organizers on behalf of other people or businesses. In other cases, people establish crowdfunding campaigns to raise money for themselves or their businesses.

The crowdfunding website or its payment processor may be required to report distributions of money raised if the amount distributed meets certain reporting thresholds by filing Form 1099-K, Payment Card and Third Party Network Transactions, with the IRS. If Form 1099-K is required to be filed with the IRS, the crowdfunding website or its payment processor must also furnish a copy of that form to the person to whom the distributions are made. The American Rescue Plan Act clarifies that the crowdfunding website or its payment processor is not required to file Form 1099-K with the IRS or furnish it to the person to whom the distributions are made if the contributors to the crowdfunding campaign do not receive goods or services for their contributions.

Prior to 2022, the threshold for a crowdfunding website or payment processor to file and furnish a Form 1099-K was met if, during a calendar year, the total of all payments distributed to a person exceeded $20,000 in gross payments resulting from more than 200 transactions or donations.

For calendar years beginning after December 31, 2021, the threshold is lowered and is met if, during a calendar year, the total of all payments distributed to a person exceeds $600 in gross payments, regardless of the number of transactions or donations. Feel free to Crowdfund this now-retired lawyer…. but does IRS consider this Bulletin a good or service?

Thanks to the IRS for saving my neck again in the writing of this bulletin