jainen

>>the same taxpayer that you beat me up about a few weeks ago<< Hmmm, well I'm not feeling as feisty as I was last month. I thought we had pretty well run out the subject, but if that big Mondavi is still in the game, so am I. Let's review. I recall that I felt there was little basis for an audit reconsideration, but no harm in trying. 2003 in particular seems off limits because the balance due was already paid. 2005 too, come to think of it. 2006 you won, did you? Is that the source of the 4549 that you want to apply to the earlier years? I also recall that I suggested the taxpayer might have been banned from EIC for reckless disregard of the rules, and maybe that is why he can't get it now. In my humble opinion he deserved it--but I digress. My main advice concerning the audit reconsideration is something you in particular should think a lot about, so I am going to repeat it word-for-word. "Do NOT give them a bunch of detail in the request--save that for the audit itself. Keep your letter to a SINGLE page with lots of white space so they can understand it in ten seconds, which is all they'll give you. Make your point to the IRS point of view--effective tax administration and maybe a little public image. Don't bother appealing to fairness. The taxpayer already had the same chance as everybody else, and the IRS doesn't care about that anyway. Stick to the technical facts. A very small dig at the poor service of national companies might fit in, but don't get into the blame game. Just explain that the taxpayer realizes his past mistakes and has engaged a competent professional to ensure future compliance now that he is married, and he just needs to clear up this old mess as simply as possible. Describe the key new records that you have organized and how they will show that the previous audit result was not adequate. Do not run on to a second page." Focus on why the client should get an audit reconsideration. Save the arguments about why he should get EIC for the hearing. As for the inconsistent application of qualified child, that's not a bad argument in the category of effective tax administration. Be careful about using it in those earlier years, though. It only defined EIC then, not dependents and HoH.

>>Is it possible to have a dual monitor setup when you work off a laptop?<< There are several ways to achieve this. If your video chipset has multi-monitor support, the external VGA port can be configured with appropriate drivers. Otherwise, you can add a second video card, either inside the box or externally with a docking station or expansion setup.

Leona Helsmley died today at age 87. The tax prep industry will always honor her for taking the fall, and giving us our best marketing slogan, "Only the little people pay taxes!" Interesting family, too. She had four marriages but only three husbands, and was survived by 16 descendants but no children. No wonder she couldn't get those 1040's right.

>>Is there a certain length of period where house sale is exempt from capital gains?<< No, the estate can't use Section 121. But presumably there was a basis step-up on date of death (depending on how title was held). That will probably eliminate all or most of the capital gain anyway.

>>its the first mortgage which is satisfied<< Since she defaulted on both mortgages, either one could act. If the 1st wants to foreclose, they would give the 2nd an opportunity to pay off the 1st themselves. Otherwise, the 2nd only gets whatever is left over (if anything) after the 1st is covered by the sale.

>>Do you really think the house market is the one causing this<< It is very complicated. The demand for housing is as high as ever, but the credit markets are all messed up. The easy-qualifier mortgages of the past five years were used to back various mutual funds and other securities. They turned out to be poor performers, which is more history than predicting. Now those securities have less value, which has created a "liquidity" problem for the entire market world-wide. At the same time, the U.S dollar, which has been the world's reserve currency, has been devalued because the U.S. has borrowed heavily from foreign countries. And the worst part of all is that the Federal Reserve (which is neither federal nor a reserve of anything) continues to make "money" that is not backed by anything at all, not even a promise to pay. In the last week the financial markets have been "rescued" by an extra $50 billion dollars. Where did that come from? No where. They just pretended it was there.

>>I have two questions<< Answer is yes to both. The bank CAN "go after" those resources. Whether it is worth trying, and whether they will succeed, is something for the lawyers to argue about. Assuming the foreclosure did not fully satisfy the debt (which probably under law it did), the bank can force her into court to reveal all her assets. Seizing property overseas is very hard and expensive so they might not bother. They might be able to attach the husband's house if they can prove she has a marital property interest. My advice would be for her to pay her legal debts. It's almost always cheaper to do that, all things considered.

>>allocate to AK as income<< I'm sure the client would appreciate that because Alaska doesn't have income tax, but let's get back to AR! Regardless of where the bank or payer is, interest and pension income is sourced to the state of residence at the time received. So for example if the taxpayer moved away and then phoned back to his Arkansas bank to send out his IRA funds, that would probably not count as AR income. But it's a little tricky, because having a bank account is one of the main indications of residency. AR might argue that he had not changed his residence until the accounts were all moved. Note that it is entirely possible to be a resident of BOTH states at the same time, because each has separate rules.

>>it appears that parents still provided more than half his total support<< To the most general appearance, the parents have $36,000 which is $6,000 per household member. It would take some documentation to convince me that the child with $9000 does not provide more than 1/2 self support.

>>Heinlein's Stranger in a Strange Land's occupation of "Fair Witness"<< Of course! Thank you -- obviously I myself would not be any good at that occupation.

>>reservations as to how far I will go<< I would limit it to information I could look up in a minute or two in the Quickfinder. If he needs more detail or anything in writing like a list or spreadsheet, I would at least ask him to allow me to log time spent. That will either scare him off or lead to a formal engagement. Because of the existing business relationship, I would treat ANY contact with the same Circular 230 issues of being a paid advisor.

>>households have a need for nannies and for lawn mowers... no room for accounts or lawyers<< For some reason this reminded me of Philip K. Dick. In one of his futuristic novels he described the occupation of "witness," a kind of super-notary. The hero of the story has one who would certainly warrant a Schedule H. Usually we think of domestic help as personal caregivers and property maintenance types. But some people have white collar workers like a secretary or an accounts manager.

>>So setting up an irrevocable trust during lifetime only accomplishes freezing the fair market value of the gift<< "ONLY"? The non-tax purposes might be much more important than the tax effect. Are they sticking Medicaid for a rich person's care, or securing gifts for a mistress who can not be named an heir, or dodging creditors, or laundering embezzled funds, or hiding drug profits from forfeiture? If your client has a juicy story like this, please share it. (Or just make one up; we can't tell the difference!)

>>the answers are obvious<< When a living person establishes an irrevocable trust, the property transfer is a gift. The trust's basis is donor's with the usual adjustments and limits. The subsequent death of the grantor is irrelevant, so there will be no step-up whether the property is held or distributed.

>>So if I only do tax returns at the home of my clients am I qualified as a HH employee?<< Paper-pushers are not exempt from the rules. The key issue is stated in the instructions to Schedule H: "This is true even if you gave the employee freedom of action. What matters is that you had the right to control the details of how the work was done." Obviously most tax preparers are employees, and if they worked in the home then that's the way it would be.

>>mowing lawns for the neighborhood is SE IMHO<< I'm inclined to agree, but I would not automatically preclude HH employee status. Multiple clients is only one factor to consider. If he has two or three that he works every week or two, riding the homeowner's mower with no special skills, under supervision, he wouldn't necessarily be an independent contractor for any of them. The article describes a relationship comparable to babysitting, which for a teenager is almost always most appropriately called an employee.

>>nowhere in official or unofficial tax reference material is the early-withdrawal "penalty" actually described as a penalty. Unofficially, however, the tax on early withdrawals is usually called a penalty.<< That is simply not true. I quoted from Kitt, a Court of Appeals decision that is certainly major authority in tax cases. The trial judge in that cited specific legislative history that applied. He also described the way the charge was constructed within the code to support his extremely clear-cut conclusion that it is a penalty. Although that was a bankruptcy court, the question was whether the IRS could consider the charge as part of a tax assessment and enforce collection accordingly. Answer: no. As for Tax Court, I quoted one of those cases too and I can give you a dozen more that specifically call it a "penalty." Even in the case I suggested for the opposing point of view, the court acknowledged evidence that the IRS itself calls this a penalty. Unofficial tax reference materials--all the major guidebooks consistently call it a penalty. I suppose that's why you contradict yourself in the following sentence. And your last sentence, about the dog's legs, is my favorite. It's exactly what the trial judge said, that simply using the general word "tax" does not mean it is not actually something else.

>>Both sides have been presented about as well as they could be presented.<< That's nonsense. You guys haven't presented your side at all. You just say over and over again that the tax code uses one word instead of another. You don't back it up with anything. Why don't you at least point out that 72(t) is in the tax section of the code, not the penalty section. Come on, why don't you cite Kitt v. U.S., where the Court of Claims rejected the plaintiff's due process challenge for the way the law was passed (retroactively). "We see no reason to view the tax involved in this case as anything other than what it purports to be: an additional tax of ten percent. It is not a penalty." As Old Jack says, "you can do better than that."

>>I cannot believe any court would uphold any such play on words << As a matter of fact, taxxcpa, any court would be REQUIRED to resolve the ambiguity in favor of the party that did not write the words. On the other hand, I doubt a court would find intentionally leaving out the phrase "due to our error" to be ambiguous, and no court is going to believe Jackson-Hewitt was not completely aware of every word in its guarantee. What evidence do you have to support your statement that, "The intent of JH's guarantee is to reimburse the client for any additional expense due to errors made by JH"? That is clearly not what they say, even knowing what their chief competitor says. It is much more likely that the corporation's intent was to gain market advantage, and that would certainly call for a broader guarantee. I find it kind of ironic to insist on a literal reading of the tax code words, but not the guarantee. As to whether a court would ever hold a service provider liable for "an amount clearly owed from the word 'go' by the client," it happens all the time. A real estate seller fails to close on time and blows a tax-deferred exchange; the court awards the entire amount of tax due, not just an actuarial value that would reflect the deferred status of gain in an exchange. A couple breaks up; the court splits the value of marital assets with an adjustment for the potential taxation that one or the other faces. Whether pre-existing or not, underlying tax is a common element in settlements, and indeed in any business negotiation. It is perfectly reasonable to demand it. Your last question is a bit off topic, because the wrong line would not usually involve a penalty. And anyway, this was not just a typo. The nature and timing of the income were mischaracterized. My main argument is that the tax preparer reported the income as such-and-such with a particular tax effect. Because the preparer was wrong, the taxpayer is now subject to additional charges NOT assessed on the original return. That's exactly what the guarantee speaks to. Why else would they introduce it with, ""Q: Do you stand behind your work?"? Maybe they should reword the answer: "Listen, buddy, if the IRS changes what we do, so be it. You are stuck with whatever you are stuck with." You might still predict that I couldn't convince a court the extra charges are a penalty. All I can say is that others have done so before, and if I use their logic I can expect their success. Certainly I don't know what JH can cite that supports any other interpretation of 72(t), except perhaps this ATX Community.

>>trying to sell a cereal box without the cereal<< Ha, Ha! Well do I know your scheme, Old Jack. You're a smart grifter, but you aren't going to scam me out of my Willie Mays Breakfast of Champions. That's forever.

The purpose of the engagement letter is to say what I will do, some things I won't do, and what I need the client to do in regards to tax preparation. I don't put retention information there; that would just add unnecessary length. I like my 1040 engagement letter to be under one page. I certainly wouldn't promise to be the client's document repository for seven years.

>>this post was not about bankruptcy cases<< True, the case was about interpreting taxation outside the tax system itself. The original post is also about a non-tax issue, the guarantee. But the judge was looking directly at the tax code when he reviewed Congressional intent and quoted specific language. He drew from precedent to state baldly, "The IRS argument ignores the express intent of the congressional drafters." You say "congress intended to penalize the taxpayer just like they do with all taxes." That's not the purpose of taxation, and you know it. You also know that "to legislate from the bench" is a misstatement of the court's Constitutional role. This court, tax court, and others equate this particular use of the word "tax" with a penalty. "Additional" is also a general term. Late filing and other penalties are established in the code with variations of the very same words, such as "add to tax." I hope you aren't mentally overwhelmed by the word "tax" appearing in the tax code. You still have to figure out what it means.

>>The tax code 72(t) clearly calls it an additional tax so we should quit calling it a penalty<< In a 1991 lawsuit called IN RE CASSIDY, JR., the IRS said the very same thing trying to assert priority against a bankruptcy estate. The court absolutely shut them down. First, the judge observed that "merely denominating an obligation as a tax does not mean it is such for all purposes." Then he quoted the Senate Finance Committee report, summarizing that "Congress's main intention was to penalize those taxpayers who made early withdrawals from qualified pension plans." In the resulting order, "the Court concludes that the Section 72(t) exaction is a penalty and does not constitute a tax." That ruling was affirmed by the Court of Appeals. There are many other cases where the courts have called it a penalty. I would certainly argue that it is well within the scope of what Jackson-Hewitt guarantees.

>>a careful reading of JH's guarantee doesn't make that distinction<< Thanks, John. I appreciate you and KC helping to nail that down. As a follow-up, I think it is reasonable to believe that this wording is not accidental. Big corporations are usually exceedingly careful about what they promise. JH probably saw a competitive advantage in having a broader guarantee than H&R. I think the taxpayer has an excellent chance filing a truth in advertising complaint and suing in small claims court. My other point is more obscure. What exactly was the error in preparation? Was it that if the tax return had properly reported the income the 10% would have been assessed? Or was it that if the income had actually been as reported, the 10% would not have been assessed?

>>It is only logical to conclude that JH should only pay any amount over and above what the client would have owed<< I don't understand that logic at all. Please explain your premise and how you reached such a conclusion. It seems to me that the only thing JH "should" pay is what they put in their guarantee. It says what it says, and it doesn't say what it doesn't say. How does what the taxpayer might otherwise have owed figure into that? If it had been up to you or me, the guarantee would probably be very different, more like H&R's. But it wasn't, and it isn't.