Kea Posted August 20, 2009 Report Share Posted August 20, 2009 OK, I screwed up. Client received a CP2000 for 2007. I didn't find out about it until last month at which point she had misplaced some of the pages. IRS resent the letter and I got copy today. Turns out original was sent out some time ago because it requested response by 4/8/09. Anyway, when working on 2007 return, (70 year-old retired) client gave me a 1099 Misc with $3111 in box 7. I set it aside to ask her what it was for. Turns out it was for babysitting her twin great-granddaughters while her daughter was trying to get custody from the kids mom. I don't remember all the details, but it was going through Social Services or some similar agency and so my client was being paid by Greater Austin Area Worksource. Somewhere in this process I managed to completely leave it off the return. IRS letter is adding SE tax since income is in Box 7. This was not something she was doing as a regular job, so I would have included it on line 21 if I hadn't screwed up. Am I correct that this should not have SE tax? Can I still fix that if the original response date has passed? The only other deadline I see on the form is that the last day to petition the tax court is 8/31/09. Or, at this late date, is the only option for my client to pay the total IRS is requesting? Obviously, I'll pay any interest & penalties. Thanks Quote Link to comment Share on other sites More sharing options...
rfassett Posted August 20, 2009 Report Share Posted August 20, 2009 I don't QUITE understand why your position on whether it is line 21 or line 12 income gets tainted because the IRS sent an inquiry. Take your stand and stick with it. So you have a couple of options. First, if you have not yet done so, get a POA post haste. Then contact the IRS, preferably through the practitioners' hotline, and explain what you just explained here and then ask the rep to tell you how they (the IRS) want you to handle this. If you can not get an immediate "stay of execution" and assistance toward resolution from the IRS, which I highly doubt will be the case, then fax form 911 to your local taxpayer's advocate group to get the stay taken care of. Make sure you tell the IRS that you understand that the taxpayer owes the income tax portion of the assessment and that your client (assuming your client will do this) will pay that portion right away. Or, you could send a letter to the IRS explaining all of this, but you would likely give up the August 31 deadline. I would want to keep that in place until I talked to the IRS - preferably TODAY. Good luck - and have a Great Day! Quote Link to comment Share on other sites More sharing options...
jainen Posted August 20, 2009 Report Share Posted August 20, 2009 >>get an immediate "stay of execution"<< Actually, the stay of execution is already in place--IRS isn't allowed to take any action until 8/31. On the other hand, almost nothing the IRS agrees to can change that date, at which time the assessment (including penalty and interest) is pretty much locked in. So keep an eye on that date, and if you can't get it rescinded in writing you must file with the court. That will kick the whole thing back to the Appeals Office, which will probably not put up much of a fight, at least about P&I. The problem is that the IRS position, backed with decades of court and other rulings, is that personal services constitute a "trade or business" when they are performed in a regular and ongoing manner and paid under a formal arrangement at market rates. What evidence do you have to refute this in your client's particular case? Quote Link to comment Share on other sites More sharing options...
ed_accountant Posted August 20, 2009 Report Share Posted August 20, 2009 Sounds like a small amount of SE tax to dispute. I would not spend too much time on it. I would probably have the taxpayer pay the IRS invoice, reimburse them for penalties/interest and move on to making money... If you really wanted to dispute it, you could amend the return to recaculate without the SE tax. Then send a letter with the notice and amended return back to IRS. Quote Link to comment Share on other sites More sharing options...
jainen Posted August 20, 2009 Report Share Posted August 20, 2009 >>send a letter with the notice and amended return back to IRS. << Since a notice of deficiency has already been issued, the normal response should be to petition the tax court. The IRS would most likely ignore an amended return until after the assessment is final on August 31. But whether you go to court or find someone at IRS to listen to you, there is still the problem of how to document your position. It sounds to me like the taxpayer intended to get paid a regular fee for taking care of the kids. Quote Link to comment Share on other sites More sharing options...
kcjenkins Posted August 21, 2009 Report Share Posted August 21, 2009 It is income, but it may not be self-employment income. The test for that is whether the grandparents are actively in the trade or business of providing child care. There was a recent case where grandparents prevailed when paid by the state of Illinois to take care of the grandchild so their daughter could work and the Tax Court specifically held it was not self-employment income despite IRS claims to the contrary. If they only take care of the grandchild and haven't previously taken care of children, I suspect you could make the case it's not self-employment income. While it's not a Tax Court case, note that Rev. Rul. 58-5 concludes that "usually" a person acting as the personal representative for a close friend or relative is not subject to self-employment tax. The case referred to above was Steele v. Commissioner, TC Summary 2009-45. Obviously not precedential, but I believe the analysis still holds--§1402 requires the active conduct of a trade or business and the Court concluded that simply wasn't the case here. Ed Zollars wrote a blog post on that one at http://ascpa.wordpress.com/2009/03/31/the-...yment-taxation/ Quote Link to comment Share on other sites More sharing options...
Kea Posted August 21, 2009 Author Report Share Posted August 21, 2009 Thanks for everyone's suggestions. I'll discuss these options with my client. I would like to eliminate the SE tax. It may seem like a small amount to some. But, my client is retired and living on a small pension and Social Security, so this amount would be significant to her. I'm sure coming up with the extra income tax will also be challenging. It's not just the tax on the 1099-Misc, but also the tax on the additional SS that is now taxable thanks to the higher income. Thanks again. Quote Link to comment Share on other sites More sharing options...
Karen Lee Posted August 21, 2009 Report Share Posted August 21, 2009 Your Input Needed on Tax Treatment of Care Payments Care payments, payments made by an individual, state, private company, or agent acting for the state or private company, to an individual for the care of an elderly or disabled individual are a significant compliance issue for the taxpayers receiving and making these payments. Caregiver services are often referred to as "chore services." The typical caregiver payment arrangement involves a caregiver who is often not in a trade or business for giving care to elderly or disabled individuals. Often, these payments are made to a spouse, parent, or child for the care of an elderly or disabled loved one. In certain instances these payments have been deemed non-taxable income to the caregiver. In other instances, the payments have been deemed taxable income and subject to self-employment tax. These determinations have been made on a case by case basis based on the facts and circumstances of each case. In order to get a broad view of the many different fact patterns that may exist, the IRS is seeking help from the practitioner community. The IRS would like the practitioner community to provide any examples of recent cases in which chore payments were an issue. Please provide the facts and circumstance as well as the outcome of these cases. The goal of the IRS is to try to develop outreach and educational products that may help taxpayers determine the taxability of chore payments. Any feedback should be submitted by August 31, 2009, to Martha Tobias at [email protected]. Looks like you may have a good argument for no SE tax since the IRS is asking us for help in making the determination. This came from NATP Tax Pro Weekly. Karen A Quote Link to comment Share on other sites More sharing options...
jainen Posted August 21, 2009 Report Share Posted August 21, 2009 >>you may have a good argument<< She may have an unassailable argument with unquestionable documentation, but to whom can she make that argument in the next eleven days? And frankly I don't think she has much of an argument figured out yet and little or no supporting records, because the original post gave a strong impression that she didn't know where to begin even back when there was time. And I also don't understand how you, after quoting an article that says the decision is only made case-by-case, can find hope for a favorable decision from the fact that IRS is seeking "a broad view of the many different fact patterns" to develop outreach and educational products to ensure compliance. Do you think the compliance they want is that too many people are paying SE tax when they don't have to? Quote Link to comment Share on other sites More sharing options...
Karen Lee Posted August 21, 2009 Report Share Posted August 21, 2009 jainen: You make my blood pressure rise and my heart beat erractically. I just can't describe the feelings and there are no words allowed on this board that can truly explain my thoughts. Until we meet again... Karen Quote Link to comment Share on other sites More sharing options...
cred65 Posted August 21, 2009 Report Share Posted August 21, 2009 jainen: You make my blood pressure rise and my heart beat erractically. I just can't describe the feelings and there are no words allowed on this board that can truly explain my thoughts. Until we meet again... Karen Jainen is really a fed spy fronting as a blogger. His real name is Doug Shulman. Quote Link to comment Share on other sites More sharing options...
Recommended Posts
Join the conversation
You can post now and register later. If you have an account, sign in now to post with your account.