Do you have to pay taxes on divorce settlement amount?

I recently answered a question on a legal bulletin board, and I thought the topic was relevant for our broader practice audience.

I recevied 444,000 as a divorce settlement; I am liable for the taxes on this amount?

Short answer: probably.

More complex answer: Did you already have this money in your accounts? If so, then probably not. Dividing money already accounted for on previous tax year filings is not taxable again. However, withdrawing money from pensions, or drawing a gross "alimony" settlement at once...yes. So, as always, it depends. Alimony payment may be deducted from the payor (the one who pays), and is taxable to the payee (the one who receives).

Your divorce settlement or order should always include language that states:

"Any and all taxes related to the payment of any sum under this agreement is the responsibility of the party receiving such funds and will be fully deductible by the payor to the maximum extent permitted by law."

In fact, this statement doesn't cover any new ground. However, it ensures that you don't mistakenly miss something that will end up causing litigation later (i.e. someone thought that the cash-out of the IRA would be taxable to the payor, not to the individual receiving the money...etc.).

If ye olde taxes are due, to minimize impact (ouch), you need to speak to a tax advisor -- either a CPA or a lawyer. Now, your divorce attorney ought to have spoken with you about this before taking a lump sum settlement. So, check with him or her, first. However, anytime you have a potential taxable event of $50,000 or more, you need to be very careful. Such large, one time actions, tend to draw the attention of the automated checking systems at the IRS. $444K? Almost surely would.

If you need help reviewing a divorce decree or settlement agreement, contact us! You need to have those documents professionally reviewed, and a strategy developed to address that type of potential income.

Hanover Law, PC
Offices in Fairfax, VA and Washington, DC
www.hanoverlawpc.com
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A question of BANKRUPTCY -- can you hide an asset?

I was discussing bankruptcy on an Internet legal site, and was asked the following question:

Question:
If a family member is on the verge of bankruptcy, can I purchase their house for the small amount still owed to the bank and have the house exempt as an asset when they declare bankruptcy? Or, would this be considered conspiracy to commit bankruptcy fraud?

My answer:

There is no conspiracy here!

Interesting idea, though. Generally, when a person declares bankruptcy, any asset is fair game for creditors. If the house in question has a good amount of equity, and the person declaring bankruptcy sells it for "a song" just before declaring bankruptcy, the trustee will yank it back (generally, a sale within 2 years of bankruptcy will be scrutinized -- beyond that, only if one of creditors ask for an investigation).

He or she will void the sale and take possession of the property in the interest of the other creditors. Now this is just a general overview -- there are exemptions (called "homestead") at both the state and federal level (you must choose one, not both), and there are certain protected transactions.

The bottom line, however, is before someone declares bankruptcy, they should consult a qualified professional to make sure they don't step on a landmine. If you need help with your bankruptcy, or advice on how to proceed, feel free to give us a ring! We have considerable experience in tax, bankruptcy an maximizing exemptions for both!

http://www.hanoverlawpc.com
703-402-2723

Sean R. Hanover, Esq.
Principal Attorney
The Hanover Law Firm is located in Washington, DC and Fairfax, VA. We practice
in both state and federal courts in VA, MD, and DC.

Tax Liability and Divorce

So what happens when your love is shattered on the shoals of acrimonious divorce? Well, according to the tax man (aka Federal Government) -- not much. A joint tax liability waits for no man (or woman!), regardless of the current status of the divorce. Let me explain what this means, and then a few tricks to address the problem.

Okay -- here's the scenario. Wife and Husband have been married for five years. They created a joint basket business supplying eager underwater artists. The business was a success but the marriage was not. On the eve of the fifth anniversary, wife informs husband that the honeymoon is over, and serves him with a causes bellos for mensa et thoro in Virginia. All is progressing as these actions are want to do, with a large joint asset pool, including vehicles, an expensive home, and two kids. Then -- the unexpected happens.

In August of 2012, the IRS contacts the husband (nominal CEO of the basket business). They are being audited. The tax returns from 2007 - 2012 were filed jointly (1040) and include, primarily, the income from the business as the income for the couple. Additionally, although wife is listed as the only member of the basket weaving business, in fact the 1120S forms show husband as owning 49% (via K1's). The audit progresses, and it is determined there is a liability of $60,000.

Now, you would expect this debt (joint) to be considered a marital debt to be determined by the state court handling the divorce. However, the IRS is demanding payment NOW or levies will be had (now = August 2013), and the payment demanded is $60,000. Husband is no longer communicating with wife, and she has no way to get him to pay his part of this prior to the final merits hearing on the divorce, which is not scheduled for April 2014.

So, what options are out there to handle the impending debt? First, they need to be three months behind before the IRS starts rattling the lien-sabre. Interest will accrue, but nasty messages will be minimal.

The solution to this is to have the wife pay the IRS debt and then sue in state court to be re-paid...but what is husband is likely to be a no-show at the hearing, or has no money to pay?

Then the couple should file for a payment plan or reduction in the punishment amount from the IRS via a form 433A. This is a request for payment plan and abatement of collection operations. This will allow a payment plan to be implemented until a final judgment from the state judge may be had. Of course, both parties must sign. However, you can ask the court to enforce payment pendente lite or conversely require that the state court require the reticent party to agree to complete the 433A.

Interestingly, on a joint case were share with another law firm, one of their associates came up with a clever idea to get a home equity loan on the house to pay the tax debt, then sort out the home equity loan in the state court. That would work, too.

Finally, you can petition the IRS to split the tax liability by filing amended returns. This is the least palatable option as it causes significant disruption to the agreed on tax resolution.

What you must advice your client, however, is that the IRS does not care about his/her state divorce operations. A joint debt is joint and severable. Someone will pay, or both will get liens. Do not let on of the parties use a suicide-technique of just "sacrificing" themselves via tax lien to hurt the opposing party (i.e. do nothing just so that the parties will be hit with the liens). That is gross bad act, and warrants state court action to injoin. Need help with a tax or family matter? Give us a ring! We'll discuss your case for free on the phone. We have several VA, DC, and MD lawyers who have considerable experience in sorting out messy and complex litigation matters.

http://www.hanoverlawpc.com
703-402-2723

Sean R. Hanover, Esq.
Principal Attorney
The Hanover Law Firm is located in Washington, DC and Fairfax, VA. We practice
in both state and federal courts in VA, MD, and DC.

IRS Form 443 -- Help, I can't pay my taxes!

So what really happens when you are waaayyy behind in your taxes? You see those ads on TV that promise to reduce your debt -- "Call us! We'll handle the IRS for you!" How true are they? What is an offer in compromise, and what it the process for contactin the IRS Field Office? Can you do this without an attorney? Are they unfriendly!? Enter the IRS form 433A.

These are great questions! And, yes, you can do much of this without an attorney. This blog post will talk about what is required to "fix" deliquent taxes. Remember, an attorney (that would be Hanover Law, of course!) can really help sort through the mess and guide you in the process. However, believe it or not (gasp) -- the IRS is rather helpful in providing pointers and tips on how to move forward. The difference with an attorney is that we can often get help faster for you, and usually talk directly to the folks that make decisions on your case. More on that in a moment.

So is there a magic button? NO

If you owe taxes, you have a serious problem that must be resolved. The IRS will not hesitate to garnish your wages or place liens on your propert. However, it is often possible to schedule payment, or even place yourself in non-collectible status, based on your income. This process requires you complete an IRS form 433A.

A 433 form asks for information about assets and income, and is designed to let the IRS know all about your personal situation. If you filed jointly, you must also have your partner sign. There was, for some time, an interesting question as to how married, gay couples, would file 433's or other IRS documents that require married couples to jointly file various documents. However, that issue now seems to have resolved in favor of same-sex couples being treated as married couples as appropriate.

Be truthful! Avoid answering questions on the phone. If you request that an IRS representative contact you, you may be asked to complete the 433 on the phone. DO NOT DO THIS, as you are apt to make errors or mis-state amounts.

Also, it is important to remember that deferred payment plans, or "uncollectable status" does not remove the IRS debt! It is stilled owed, and will still continue to accrue interest. It will, however, stop liens and garnishments.

Need help with a tax matter? Give us a ring! We'll discuss your case for free on the phone. We have several VA, DC, and MD lawyers who have considerable experience in sorting out complex IRS matters.

http://www.hanoverlawpc.com
703-402-2723

Sean R. Hanover, Esq.
Principal Attorney
The Hanover Law Firm is located in Washington, DC and Fairfax, VA. We practice
in both state and federal courts in VA, MD, and DC.

TAX: Failed to file proper Sub-S Election? IRS Proc. 2003-43

So...you are frustrated! Your sub-s company receives an IRS Notice and an IRS Letter from your accountant apologizing for an odd problem -- it appears that your IRS form 2553 (Election by a Small Business Corporation) was not received in time for this years taxes. Despite having filed the taxes timely, and sent appropriate K-1's, the IRS is now considering the company as a standard "C" corporation. This has devastating consequences for taxes and the treatment of corporate income.

You are not alone. Misfiled, lost, or not-filed elections are quite common in small business. If the IRS processes your company as a "C" corporation instead of an "S" corporation, the most obvious result is that pass-thru income is no longer a valid tool in your corporate tax tool-box. The firm itself will now owe taxes on the net income earned by the company. Individuals who received distributions from the company will still owe taxes on the amount earned. This is the cursed "double taxation" in corporate America, and the key reason for "S" corporation (and LLC's which were developed later, and receive the same tax benefits).

So what is the remedy? The IRS has several regulation that govern an "oops, I missed the filing of my election" situation. If you have a valid excuse (hard to imagine, but they do exist), then Revenue Procedure (Notice) 97-48 allows you to correct this without a direct ruling by the local district manager. If the error was inadvertent only (i.e. no excusable cause), file under Revenue Procedure 2003-43 which allows for a mistake in filing if you correct the error timely (24 months from the date the original election was due), and you are not behind on any of your corporate taxes. You will need to complete the form 2553, write across the top of form 2553 "FILED PURSUANT TO REV.PROC. 2003-43" and include (1) a statement that the filing is late because of an inadvertent filing error, (2) the principal of the business needs to sign a letter indicating that to the best of his/her knowledge, the corrected filing is accurate, (3) and each shareholder must sign that they understand and agree to the election of the Sub-S status dating back to the first taxable instance where such a status is desired.

What happens if your 2553 is rejected (after filing under REV.PROC. 2003-43)? You may always petition for a letter from the IRS director granting you an exception. These are generally granted, but unlike the 2553 avenue, you have to pay (I believe it is currently $180) for this letter ruling.

If you have questions or need help addressing a tax law question, please do not hesitate to contact us! We are experienced immigration, tax, and bankruptcy attorneys who can help with questions from any state in the US. S

Sean R. Hanover, Esq
HanoverLawPC.com
Contact Us ------------- SUMMARY OF THE CODE: In part, Rev.Proc 2003-43 reads: SECTION 1. PURPOSE This revenue procedure provides a simplified method for taxpayers to request relief for late S corporation elections, Electing Small Business Trust (ESBT) elections, Qualified Subchapter S Trust (QSST) elections and Qualified Subchapter S Subsidiary (QSub) elections. Generally, this revenue procedure provides that certain eligible entities may be granted relief for failing to file these elections in a timely manner if the request for relief is filed within 24 months of the due date of the election. Accompanying this document is a flowchart designed to aid taxpayers in applying this revenue procedure. . . . .02 Eligibility for Relief. Relief is available under section 4.04 of this revenue procedure if the following requirements are met: (1) The entity fails to qualify for its intended status as an S corporation, ESBT, QSST, or QSub on the first day that status was desired solely because of the failure to file the appropriate Election Under Subchapter S timely with the applicable service center; (2) Less than 24 months have passed since the original Due Date of the Election Under Subchapter S; (3) Either, (a) the entity is seeking relief for a late S corporation or QSub election and the entity has reasonable cause for its failure to make the timely Election Under Subchapter S, or (b) the S corporation and the entity are seeking relief for an inadvertent invalid S corporation election or an inadvertent termination of an S corporation election due to the failure to make the timely ESBT or QSST election and the failure to file the timely Election Under Subchapter S was inadvertent; and (4) Either, (a) all of the following requirements are met: (i) the entity seeking to make the election has not filed a tax return (in the case of QSubs, the parent has not filed a tax return) for the first year in which the election was intended, (ii) the application for relief is filed under this revenue procedure no later than 6 months after the due date of the tax return (excluding extensions) of the entity seeking to make the election (in the case of QSubs, the due date of the tax return of the parent) for the first year in which the election was intended, and, (iii) no taxpayer whose tax liability or tax return would be affected by the Election Under Subchapter S (including all shareholders of the S corporation) has reported inconsistently with the S corporation election (as well as any ESBT, QSST or QSub elections), on any affected return for the year the Election Under Subchapter S was intended; or (b) all of the following requirements are met: (i) the entity seeking to make the election has filed a tax return (in the case of QSubs, the parent has filed a tax return) for the first year in which the election was intended within 6 months of the due date of the tax return (excluding extensions), and (ii) all taxpayers whose tax liability or tax returns would be affected by the Election Under Subchapter S (including all shareholders of the S corporation) have reported consistently with the S corporation election (as well as any ESBT, QSST or QSub elections), on all affected returns for the year the Election Under Subchapter S was intended, as well as for any subsequent years. .03 Procedural Requirements for Relief. (1) Procedural Requirements When a Tax Return Has Not Been Filed for the First Year of the Intended Election Under Subchapter S. If the entity seeking the election has not filed a tax return for the first taxable year of the intended Election Under Subchapter S, the entity may request relief for the late Election Under Subchapter S by filing with the applicable service center the properly completed election form(s). The election form(s) must be filed within 18 months of the original Due Date of the intended Election Under Subchapter S (but in no event later than 6 months after the due date of the tax return (excluding extensions) of the entity (in the case of QSubs, the due date of the tax return of the parent) for the first year in which the election was intended) and must state at the top of the document "FILED PURSUANT TO REV. PROC. 2003-XX." Attached to the election form must be a statement establishing either reasonable cause for the failure to file the Election Under Subchapter S timely (in the case of S corporation or QSub elections), or a statement establishing that the failure to file the Election Under Subchapter S timely was inadvertent (in the case of ESBT or QSST elections.) (2) Procedural Requirements When a Tax Return Has Been Filed for the First Year of the Intended Election Under Subchapter S. If the entity seeking the election has filed a tax return for the first taxable year of the intended Election Under Subchapter S within 6 months of the due date of that tax return (excluding extensions), then the entity may request relief for the late Election Under Subchapter S by filing with the applicable service center the properly completed election form(s) and the supporting documents described below. The election form(s) must be filed within 24 months of the original Due Date for the Election Under Subchapter S and must state at the top of the document "FILED PURSUANT TO REV. PROC. 2003-XX." Attached to the election form must be a statement establishing either reasonable cause for the failure to file the Election Under Subchapter S timely (in the case of S corporation or QSub elections), or a statement establishing that the failure to file the Election Under Subchapter S timely was inadvertent (in the case of ESBT or QSST elections.) The following additional documents must be attached to the election form (if applicable): (a) S Corporations. An entity seeking relief for a late S corporation election must file a completed Form 2553, signed by an officer of the corporation authorized to sign and all persons who were shareholders at any time during the period that began on the first day of the taxable year for which the election is to be effective and ends on the day the election is made. The completed election form must include the following material: (i) Statements from all shareholders during the period between the date the S corporation election was to have become effective and the date the completed election was filed that they have reported their income (on all affected returns) consistent with the S corporation election for the year the election should have been made and for all subsequent years; and (ii) A dated declaration signed by an officer of the corporation authorized to sign which states: "Under penalties of perjury, I declare that, to the best of my knowledge and belief, the facts presented in support of this election are true, correct, and complete."