IRS taxes

at
Categories
Tags

 

 

G-1Frances moved in with her mother, Beatrice, when Beatrice’s health started to fail. Frances cared for her mother as a devoted child would and never expected anything in return. When Beatrice needed to move to a nursing home, she legally transferred the home to Frances for $1,000 and “other valuable consideration.” The house had cost Beatrice $50,000 many years ago, and on the date of the transfer it was valued at $150,000. At the time of the transfer, Beatrice was insolvent, as she owed the IRS $250,000 in back taxes and interest for several years. A few months after the transfer of the house, the IRS filed a notice of federal tax lien for Beatrice’s unpaid taxes. The IRS has filed against Frances for $150,000 of her mother’s taxes, as Frances is in possession of the only valuable asset Beatrice has owned. Can the IRS collect taxes from Frances?

G-2The IRS audited the Loser Corporation’s return filed two years ago. The IRS found substantial under-reporting of income and is proposing to review Loser’s returns for the six prior years. Loser knows it underreported its taxable income on its timely filed tax return five years ago. It reported $80,000 of gross sales, $10,000 product returns, and $60,000 costs of goods sold. Its actual amounts were $100,000 gross sales, $2,000 returns, and $40,000 cost of goods sold. Does the IRS have the right to audit this return from five years ago?

G-5Paul and Patty Nelson own a home in Nelsonville, Ohio, and maintain apartments in Lexington, Kentucky, New York City (part year), and Philadelphia (part year). Their cars are registered in Kentucky, and they have driver’s licenses from Kentucky. However, the Nelsons consider Nelsonville their “home” because their house was inherited from Paul’s parents and has been in the family for more than 150 years. During the year, Paul traveled between Kentucky and Nelsonville numerous times. Patty did not usually accompany Paul, as she works for a consulting firm on engagements in New York City and Philadelphia. The home office of her employer is in Chicago, but she never works in Illinois. Paul’s sales region for his job is Kentucky and Indiana. For purposes of taking expenses while away from home, Paul and Patty use their Nelsonville home. Is this correct? Where is the Nelsons’ tax home?

 

 

Sample Solution

Can the IRS Collect Taxes from Frances? (G-1)

Probably, but Frances has options.

The IRS can likely collect some taxes from Frances, but the amount might be less than $150,000. Here’s why:

  1. Fraudulent Transfer:The low sale price ($1,000) compared to the house’s value ($150,000) raises suspicion of a fraudulent transfer. This means Beatrice might have transferred the house to avoid paying the IRS.
  2. Solvency:Since Beatrice was insolvent (owing more than she owned), the transfer could be seen as an attempt to shield assets from creditors (the IRS).

Frances can argue her case by demonstrating:

  • Fair Consideration:She provided legitimate care for her mother and the $1,000 was fair compensation, not just a token amount.
  • No Knowledge:She wasn’t aware of her mother’s tax issues and acted in good faith.

Possible Outcome:

  • The IRS might seize the house and sell it to pay the debt, but Frances might get some money after the sale if she can prove fair consideration.
  • A court might require Frances to pay a portion of the taxes based on the house’s value.

Does the IRS Have the Right to Audit Loser Corporation? (G-2)

Yes, the IRS has the right to audit Loser Corporation’s return from five years ago.

The IRS generally has three years to audit a tax return after the filing deadline. However, there are exceptions:

  • Substantial Understatement:If the IRS finds a significant under-reporting (like in this case), the audit window extends to six years.
  • Fraud:If the IRS suspects fraud, the audit period has no limit.

Loser Corporation clearly underreported its income, giving the IRS the right to audit the past five years.

Where is the Nelsons’ Tax Home? (G-5)

The Nelsons’ tax home is likely Nelsonville, Ohio.

The IRS considers several factors to determine tax home:

  • Business Necessity:Is travel away from home required for work?
  • Regularity:How often does the taxpayer travel?
  • Duplication of Business Headquarters:Does the taxpayer maintain another office elsewhere?

Here’s why Nelsonville might be their tax home:

  • Inherited Home:Owning a permanent residence suggests ties to the location.
  • Paul’s Work:His sales region includes Nelsonville, making travel a business necessity.
  • Patty’s Work:While she travels, her employer’s HQ is not where she works.

However, the IRS might scrutinize Patty’s situation. They might question why she doesn’t use Nelsonville as her work base while in Ohio.

Recommendation:

The Nelsons should consult a tax advisor to solidify their case for Nelsonville being their tax home, especially regarding Patty’s work situation.

 

This question has been answered.

Get Answer