jainen

>>they've crossed the line between silly and downright stupid<< You asked her to "pick up as many Forms 8109-B as they would hand out." Next time you will be able to give her more specific instructions, since you now know the exact number. Speaking of instructions, have you seen the ones for Form 8109-B? They specify that it can only be used for an immediate need before the printed forms come.

>>This board is to clear any doubts and that's how I wanted to present my case here on this forum.<< That's fine. I stand by my answer. As you presented the case, the facts did not establish a theft loss. Assuming additional facts, the tax treatment could be in the ways I described. I'm pretty sure Old Jack's reference to chastity wasn't about me.

>>I am making my case based on these facts<< In my opinion at least, these facts are not enough to establish that a theft occurred. Someone, you won't say who but a person whose life history the client knows, had direct access to his mail. You avoid saying this person was not authorized to open the box and haven't indicated any other arrangements for the two month absence. You don't seem interested in having this investigated as a postal crime or bank fraud, and dismiss the police opinion as "almost irrelevant." The bank apparently feels the check was properly deposited. For me, this is an example of how a client's statements might contain internal inconsistencies that Circular 230 requires to be resolved before I could sign the tax return.

>>The two things missing are: the thief and the money<< Also still missing (at least from my point of view) is how "the person" obtained the check. Well, assuming this is in fact a theft, you probably won't have to deal with calculating an NOL. The casualty loss will only offset 90% of the retirement income, and there are other effects such as making Social Security taxable and the switch away from standard deduction.

>>your client needs to take positive steps to NOT be a resident of VA<< The steps to establish a new domicile are similar to a new residence. The main difference is that a domicile is the permanent place to which you intend to return even after living someplace for a long time. It isn't enough to say you haven't decided where you will go in the future, especially if you keep assets such as bank accounts or real estate in Virginia. Give up all those old ties and get permanent Australian replacements. Then you can pay tax to Australia instead of Virginia.

>>what the police said is almost irrelevant<< No, what the police said is extremely relevant. You see, the bank knows (and must have told the police) who the account holder was. SSN, contact info--they probably even have a picture of the depositor at the ATM. So if the police haven't said much in over a year, there probably just isn't that much to say. You made a generic comment about mail theft, but did NOT say that was the way this went down. You didn't mention postal or bank inspectors, or the FBI. If the police didn't bring anybody else in, they must have their reasons. When I say you haven't been responsive, I mean that you haven't explained who took the check and how he (or she) got hold of it. Since we don't know the facts, we can only speculate about different audit tactics and your potential for success. We certainly don't all agree that the IRS is right--none of us knows for sure. It isn't even a single answer. The IRS letter could be correct, and your client could still avoid taxation through one or more of the methods we have discussed.

>>the benefits of Theft or NOL if (as KC correctly pointed out) his basis is 0<< KC said the ACCOUNT has no basis, for purposes of determining income on distribution. His basis in the $200,000 cash (or equivalent) that he lost was $200,000. An NOL can be used to get a refund of tax for prior years, and prevent tax in the future. It will, for example, help ensure that Social Security is non-taxable. >>everybody, except for Zeke, is saying... you lost your money and now you have to pay more than 50K to the IRS<< I believe he was subject to tax when he withdrew the money, regardless of what happened after that. But I never said your client was "wrong," and I offered several different theories and reasonings for avoiding payment. Your question did not catch me off guard. I believe a professional tax representative could accomplish quite a bit, and I also suggested other professionals who could help him. >>do not think that I am taking this personally<< You know, I am a little shy this morning of expressing personal opinions. Nevertheless, I have observed that you were not very responsive to our questions about why exactly this incident should be considered a theft. Perhaps watching too much CNN recently makes me wonder if a person who doesn't answer questions doesn't want the answer to be known.

>>I would make the full withdrawal and then deposit it in an existing IRA account<< The fund will probably withhold 20% of your withdrawal for federal taxes. To rollover that portion, you would have to find additional money from somewhere else.

>>"constructive receipt" has not been shown<< If this were my client, I would certainly argue that the taxpayer never received the money. But I would not expect to win that point. Constructive receipt has nothing to do with actual receipt. The taxpayer was entitled to the money and gave instructions for its mailing; therefore he controlled the funds. He could have given another address or made other arrangements for handling his mail during his absence. The fact that he chose to not do those things is not relevant to the question of constructive receipt. That would not prevent me from representing him in vigorously contesting the taxes. If he were my client, I would need to confer with him about the most effective way to approach this. Offhand, theft/NOL seems a more promising argument to me, with a fallback position of limiting Collections. With 200K at stake, he could surely find an attorney to challenge the bank and the homeowner's insurance, and give the police a push.

>>he's not itemizing... is now lost<< I have an opinion on this which I have never seen anybody else agree with. In my opinion, he does not "lose" any deduction from not itemizing. Rather, he gets ADDITIONAL deductions that exceed what he is otherwise entitled to, because the standard deduction covers everything he can claim plus more. The supplemental unemployment insurance described in the Kleinrock article would be private union benefits. Unions being a powerful lobby, they have special tax breaks for their own stuff.

additional facts that might indicate "constructive receipt"<< I would say that "Check for $200,000 was sent to his house" is all the facts needed for contructive receipt. >>i would expect that to be the job of the irs<< You know that's not how it works--guilty until proven innocent is the IRS way! Seriously. Pacun, you got a lot of response to this sad story. Some of our questions might make a difference, such as who this forger was (the bank has his SSN and other ID) and what the client has done about contacting the bank, the retirement fund, his insurance company, and the police. How about giving us a little more info?

>>they bend the rules to get that person's signature on the closing date<< Whatever happened to get your friends into this mess, the past isn't likely to help get them out. There is a weak legal theory that real estate agents and lenders are liable for loans that the customer can't really afford, but it is a long, long shot. Unless you can prove breach of fiduciary or fraud or forgery or something very serious, there is no going back. On the other hand, the future doesn't look any worse for your client who owes the money than for the lender who hopes to get paid. Mortgage news is all bad these days, and the banks are really afraid of racking up too many defaults. Some are going to end up explaining themselves to their insurance companies, the state licensing boards, and even the SEC. I would advise the homeowners to call their lender with a real tough story and see what they can shake loose. I'm not talking refinance. I mean debt forgiveness, rate reduction, negative amortization. Perhaps the borrowers can offer additional security by pledging retirement funds, or more reliable payments with automatic withdrawals, or something.

>>He does not have any other itemizable deduction<< Theft/Casualty on Schedule A can create a net operating operating loss to carry to other years until it is used up. I'm not sure it was a theft, though, since apparently the suspect had direct access to your client's home and bank account. I presume he knows who it is, so a police report is essential. They may look at it as elder abuse even if the person was authorized to handle the money.

>>Is this not the place to come, when we aren't sure about something?<< Daisy, I never took issue with you asking the question. It deserved an accurate answer based on the tax code or at least what is normal practice in the industry. Your own proposed solution was neither, but in fairness you didn't describe how you meant to take the deduction, and you said "if anyone here has any insight, or thoughts on this, I'd appreciate it" (although there apparently are some thoughts that you do not appreciate after all). Perhaps I over-reacted to the idea that the deduction should not only be mischaracterized but even specifically identified in a way that couldn't fail to attract IRS notice of the error. Here are my sentiments about that. Every year one of the big stories is that some news agency took a tax return around to different preparers and got different answers. The public has a somewhat disapproving opinion of our professionalism in that regards. That really isn't fair because we spend a great deal of time and expense on research and updating and improving our skills. It is my feeling that tax opinions should reflect that study, so I am disturbed when they do not.

>>why would it not be a deduction to income when paid back? Do you have a cite for this?<< The citation is Section 1341, but you can look up "repayment of income" ANYWHERE. It might seem unfair in some cases, but it is what it is. What is YOUR reason for treating it as an adjustment to AGI? Is this opinion, which seems to have general acceptance on this board, based on anything at all? We can't just make things up, can we? I used the word "obviously" because all the major tax guides agree with the code and regs on this point. There is no legal basis whatsoever for amending the year the money was received, or for not treating it as an itemized deduction or credit when the debt is paid. That's how I back up my opinion. If anybody can support using Line 21 for this, by citing ANY relevant reference, instruction, authority, precedent, or other guideline, I'm your obedient servant.

>>I would use line 21 with a negative number<< There is a technical term, "claim of right," that leads to a sometimes unfair result in a system that determines taxation by calendar year. Although it relates to a fairly common situation, the correct tax treatment may not be very well known. I have edited this post to remove the suggestion that any one particular tax rule should be or even could be universally agreed upon. I apologize that my earlier statement was phrased in a hurtful way. According to Section 1341 income is taxable when received, even if it later turns out you have to give the money back. The repayment can not be treated as an adjustment to AGI. It is a miscellaneous deduction on Schedule A in the year of repayment, subject to 2% limitation, unless it is more than $3000. A higher amount can be taken as either a miscellaneous deduction NOT subject to 2%, or a non-refundable credit for extra tax determined by recalculating the prior year.

I wonder what the back story is. Some parts of the government are exceedingly interested in greater control over the Internet. The IRS, after pushing tax preparers into electronic filing and other business practices favorable to itself, has begun to express a lot of suspicion about how we go about our work. They are claiming this registration is a security measure against third-party attacks, but I can't believe that is the only purpose.

>>An organization described in subsection © or (d) or section 401(a) shall be exempt from taxation<< There is a scheme out there that supposedly takes advantage of this. For a handsome fee, the company will establish a new retirement fund that you can transfer your pension into. Then the rollover fund invests in your project! Voila--tax-free money to start a new business (which statistically has an 85% chance of failing within the first two years, thus risking your future for an unlikely profit).

>>After being poked at by the mighty Jainen, what will a little IRS auditor be able to do to me?<< It doesn't matter how much you flatter me, I'm still not going to trade you my Willie Mays baseball cards. A little IRS auditor can do plenty if she gets vindictive. I already mentioned the risk of EIC sanctions and calling in the girlfriend's returns. She can also refuse to budge on 2006, forcing you into appeals which is a big nuisance. She can run up more hours than the client will pay for, and drag the whole thing out (by, for example, going on vacation or a training assignment) until your client begins to question your abilities and you begin to question your own sanity. I'm telling you again. I'm warning you. Do whatever you want for those past years; you have nothing to lose there. But get that 2006 closed this week.

>>interest rates... may have pushed him over in the qualification process.<< Oh, you don't suppose the fact that he now has terrible credit might have anything to do with it? I mean, if he can't make his current payments, why would the bank lend him more money with HIGHER payments? I haven't sorted out my feelings about this scenario which we will see more and more of. "Predatory" is a pretty heavy word. If he was tricked or forced then of course he should seek remedies. Otherwise, he has some personal responsibility too.

>>I have to agree<< Hmmm, KC doesn't agree with me all that often, so I'll have to reconsider. Actually, as soon as I posted I immediately regretted that I had been too harsh. In fact, there is plenty a professional can do for this client. For one thing, the 2006 audit needs to be closed. Amended returns might still make sense, especially since we haven't heard from California yet. You need to make sure the client isn't being sanctioned for EIC errors. You need to recalculate penalty and interest--IRS is notoriously wrong about that, and you can appeal it by mail without opening the whole file. You need to stop collection enforcement by setting up an installment plan they can afford. And you need to explain why this all happened, what you can and can't do about it, and why it won't happen again. There is no harm in trying an audit reconsideration or an OIC. I just think the chance of success and the total tax bill is not in proportion to the professional fees for that kind of work.

>>HOH versus Single makes nearly no difference<< Tom, it makes ALL the difference. It is the key to this whole engagement. The simple FACT is that your client tried to run a little game, but he got caught. The IRS gave him every normal opportunity to come clean about it, but he just shined them on. Seriously, you say his whole defense was a letter from Block? Now, years later, he wants to play another hand. Well, if this were my client, I would still accept the engagement. With a $2500 non-refundable retainer, that is. That's a conservative estimate for the amount of your time this is going to take, digging a hole in the ocean.

>>The way you are portraying my client is not correct.<< That may well be. I'm only trying to suggest how the IRS will see it. The client has the burden of proof, and failed to meet it in the ordinary way. >>Show me a form where the IRS lays out the exact proof that they will accept when making a dependency determination?<< How about starting with the Worksheet for Determining Support (Worksheet 1 in Pub 501)? For years prior to 2006, dependency requires SUPPORT, which in all your long descriptions of new documentation you have hardly referred to at all. Head of Household status, which your client also traded off year to year, depends on similar elements of expense. Lay out who wrote what checks, and maybe that will convince an auditor that your client indeed "has never taken an improper position on his tax return." By the way, don't get distracted by the request to prove household composition. That's just the IRS being lazy -- they know it doesn't matter except for the girlfriend, and her exemption is small compared to the other tax benefits in question. >>2003 is hard to get any information<< That year is a done deal. It isn't even in Collections any more.

>>the T/P is responsible for this situation<< Like I said, I never did a reconsideration. I don't know anybody who has. There is sort of an assumption that the IRS is not very keen on reopening an audit that wasn't even appealed. This case doesn't really appear to have new information. There is nothing that wasn't originally available to the IRS through the taxpayer, although you might make a narrow claim that the documentation was not specifically considered. That doesn't seem to fit with the purpose of audit reconsideration, so I don't know how the IRS would look at it. My overall impression is that the taxpayer decided filing status and dependency in tandem with his girlfriend to maximize the various credits and exemptions. The impression is stronger when you consider all the years together. You may not want to push the IRS too hard about this--the taxpayer could be disqualified from EIC for reckless disregard of the rules, or the IRS could decide to take a look at the girlfriend's returns too. That hint about child support suggests the IRS has information YOU have not considered. Anyway, since 2003 has already been paid it is not eligible for audit reconsideration, which makes your work even less worthwhile.

>>A very detailed, comprehensive letter attempting to prove that the taxpayer is in fact eligible for the denied credits, complete with supporting documentation<< I've never done an audit reconsideration, but I think I would approach it like a normal appeal. 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.