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Manhattan Tax Law Blog

The Alternative Minimum Tax: Its Purpose and Potential Drawbacks

With the recent release of President Trump's 2005 tax return, many millions of Americans were introduced to the Alternative Minimum Tax (AMT). In fact, of the $38.4 million Trump paid in taxes in 2005, $31 million came from the AMT. With the AMT in the news, this is a good time to look at why the AMT exists, as well as potential pitfalls associated with the law.

The purpose of the AMT

As the name implies, the AMT forces taxpayers who reach certain income thresholds to pay some minimum amount of income tax. With an AMT, higher earners and the wealthiest should not, at least in theory, avoid paying income tax through the use of various deductions. All taxpayers, including individuals, families and businesses could be subject to the AMT if their income reaches certain levels. As a result, taxpayers should calculate their taxes under both the standard tax laws and the AMT.

Audits Are Down, but Audits on the Rich Are Likely to Increase

The number of IRS audits has decreased in each of the last five years. In 2016, only one in 143 individual taxpayers was audited. While audits are a necessary aspect of our tax system, it is safe to say most taxpayers will not lose sleep about the decreased likelihood of an audit.

Not all taxpayers will be flying under the radar, however. High earners have always faced a higher audit risk. In fact, a taxpayer with an income of more than $1 million is roughly ten times more likely to be audited than a taxpayer with income under $200,000. In 2017, the IRS has indicated that it will devote a larger share of its resources to pursuing high-earning taxpayers.

What is the IRS looking for?

The IRS isn't fully disclosing how it intends to scrutinize the assets of higher earners. It is likely that the IRS will proceed on multiple fronts, however. One step the IRS is sending out automated notices to taxpayers who claim substantial charitable contributions, large mortgage deductions, significant donations to 529 savings plans, or other large deductions. Taxpayers who provide proof of the legitimacy of deductions should be able to satisfy the IRS. These notices are the tip of the iceberg, however.

Thousands of Charities May Not Be Meeting IRS Requirements

Every year tens of thousands of charities and non-profit organizations apply to the IRS for tax-exempt status. Charities with less than $250,000 in total assets and less than $50,000 in donations in each of the past three years are eligible to file the "streamlined application", known as Form 1023-EZ. Although the IRS approves 94 percent of these applications, many of these charities may not be fully compliant with IRS requirements.

The National Taxpayer Advocate (NTA) is a federal agency that identifies and reports on issues faced by taxpayers. In its 2016 report, the NTA claims that the IRS is wrongfully approving one-quarter of Form 1023-EZ applications. The NTA reached this conclusion after reviewing a sample of Form 1023-EZ applications from 20 states.

Unpaid Tax Debts Could Put Your Passport in Jeopardy

The IRS has many tools at its disposal to enforce the collection of unpaid tax debts, among them liens, levies, and even asset seizure. Beginning in late March, the IRS, in conjunction with the State Department, will have yet other weapon in its arsenal. Very shortly, the IRS will be forwarding the State Department information regarding individuals who have substantial tax deficiencies. Upon receipt of this information, the State Department can deny a taxpayer's passport application or renewal or place other restrictions on the taxpayer's passport.

What gives the IRS and State Department the right to restrict a person's passport?

In 2015 Congress passed the Fixing America's Surface Transportation Act, or the FAST Act. One provision in this bill requires that the IRS identify individuals with "seriously delinquent tax debt" and report this information to the State Department. By doing so, the federal government would have additional leverage against delinquent taxpayers.

Tax Issues and Nonprofit Organizations

Charities, foundations and other nonprofit organizations play a crucial role at all levels of society with the overarching goal of serving the public good. While this mission is admirable, the fact remains that nonprofits must comply with a number of tax regulations in order to keep their tax-exempt status. The IRS and state tax agencies expend substantial resources in order to ensure that nonprofit organizations are enriching the public, and not enriching themselves.

In fiscal year 2016, the IRS audited nearly 5,000 nonprofit organizations. Given the possibility of an audit and the importance of tax compliance in general, nonprofits must take proper measures to protect themselves. In a previous posting, we discussed the nonprofit tax issues the IRS will devote its resources to in 2017. The IRS has indicated that the most important tax issues for nonprofits in 2017 are unrelated business income tax liability and employment taxes.

Reporting Offshore Holdings? Watch out for an Audit.

In recent years, the IRS has devoted vast resources to compel taxpayers to report and pay taxes on offshore assets. As a result of these efforts, the IRS has recovered billions in unpaid taxes. Perhaps the most widely-known tool the IRS uses is the Offshore Voluntary Disclosure Program, or OVDP. When taxpayers submit to the OVDP, they will have to file up to eight years of amended tax returns and Foreign Bank and Financial Account (FBAR) statements, while paying taxes, interest and a penalty of 27.5%, or up to 50%, of the highest balance of these accounts.

Another less publicized but still powerful tool at the IRS's disposal is the Streamlined Offshore Procedure. Qualifying taxpayers with undeclared foreign holdings could use either the Streamlined Domestic Offshore Procedure or the Streamlined Foreign Offshore Procedure. For taxpayers with undeclared foreign income, the Streamlined Domestic or Foreign Offshore Procedure may be an advantageous method to report this income. On the other hand, using these streamlined methods could have unintended negative consequences.

The Many Ways Same-Sex Couples Can Benefit From a Tax Lawyer's Counsel

The universal right of same-sex couples to marry their partners has been the law of the land since June 26, 2015. Even before the Supreme Court ruled in favor of marriage equality, hundreds of thousands of same-sex couples were legally married in many states. In the present, approximately one million Americans are wed in same-sex unions.

While many of the legal issues same-sex couples face are identical to the issues that other married couples face, tax and financial matters are of critical importance. Many of these issues may be new to some couples. Further, given the government's power when it comes to collecting taxes, it is critical to enlist the aid of a skilled tax lawyer.

The IRS Wants to Take a Bite Out of Bitcoin

Increasing numbers of businesses and individuals across the world are using Bitcoin, a form of digital currency. Coindesk, a company that analyzes digital and virtual currency, states that on average, there are more than 200,000 Bitcoin transactions each day in 2016. This is roughly twice the number of Bitcoin transactions that took place in 2015.

Bitcoin enthusiasts point out that this form of currency is private, not controlled by a central bank, and is not prone to inflationary pressures. Of course, for many of these same reasons, the IRS is looking carefully at Bitcoin transactions. For tax purposes, virtual currency is subject to taxation in the same manner as traditional currency.

What Are the Tax Implications When Spouses Are in Business Together?

Spouses can be more than life partners. Spouses can also be business partners, or have an employer-employee relationship. Spouses involved in business together must be mindful of the various tax considerations.

Spouses who are in business together and have not incorporated must first define the nature of their business relationship, and whether it is a partnership or an employee-employer relationship. The IRS defines a partnership as a relationship in which:

  • Both spouses equally share decision-making responsibilities in the business
  • Both spouses "provide substantially equal services"
  • Both spouses provide business capital

If a married couple meets this definition of partnership, the next question to answer is whether the spouses should consider themselves a partnership or a qualified joint venture for tax purposes.

Tax Filings for Married Same-Sex Couples: Joint or Separate?

For more than a year now, marriage equality has been the law of the land. While some states had recognized same-sex marriages, the 2015 Supreme Court case of Obergefell v. Hodges struck down the federal Defense of Marriage Act (DOMA) and recognized same-sex marriage rights across the United States. Along with marriage equality, same-sex couples have the right to make a number of important financial decisions.

One important decision every married couple must make is whether to file a joint or separate tax return. Filing jointly or separately could, in some instances, significantly reduce or increase a couple's tax burden. While every couple's situation is unique, here are some factors to consider.

When Should Married Couples Consider Filing a Joint Tax Return?

When each spouse earns a roughly average income, the couple should probably file a joint tax return. When one spouse earns much more than the other, it may be sensible to file a joint tax return as well, since combining incomes could place the higher-earning spouse into a lower tax bracket. This is sometimes referred to as the "marriage bonus." Furthermore, joint filers are entitled to a larger marriage tax deduction, deductions for student loan interest, and other deductions. For this reason, the majority of married couples should probably file jointly, although there are clear exceptions to this rule.

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