At the time this article was published, Donald Trump’s Unified Framework For Fixing Our Broken Tax Code (UFFOBT) has been known to the public for only a few weeks. The main principals are as follows:
The UFFOBT reduces the number of tax rates to three (from the seven in place today). The proposed rates are 12%, 25% and 35%. It is unknown what income will fall into each rate structure.
Increased Standard Deduction
UFFOBT increases the standard deduction for married couples to $24,000 and for single filers to $12,000. This increase will reduce the number of people who itemize their deductions on Schedule A.
Increased Child Tax Credit
It is unclear what this increased credit will be. UFFOBT requires the lawmakers to determine what amount this credit will provide. It will likely be higher than the $1,000-per-child credit provided today.
Limit or Eliminate Deductions, AMT, and the Estate Tax
UFFOBT proposes to eliminate the state and local tax deduction, personal exemption allowances, abolish the Alternative Minimum Tax, and abolish the Estate Tax.
Business Tax Changes
Corporate rates would be reduced from today’s 35% rate to 20%. Pass-through entity profits would be taxed at a rate of 20%, reduced from highest individual rate today of 39.6%.
United States business, today, pay a 35% tax on overseas profits when they repatriate them to the United States. UFFOBT would reduce this rate to equal the tax rate where the funds are earned abroad with a minimum foreign tax (to avoid shifting income to low tax jurisdictions). UFFOBT would also propose a one-time “tax holiday” whereby companies may repatriate their foreign profits at a very low tax rate.
2017 Tax Planning
It is difficult to plan around the UFFOBT since it is unclear what, if anything, will become final law. We anticipate this proposal to be very fluid and it is highly unlikely that any tax reform will be identical to what is proposed today under UFFOBT. With that said, we all know there will not be any change for the worse in 2018. As a result, our advice is to sit-tight and hope for the best.
The one item to be delicate with is estate planning. We certainly want to plan to take advantage of yearly allowances and exemptions in planning, but we would be reluctant today to establish any long term vehicles, unless absolutely necessary, since there is the chance that the estate tax will be abolished.
Let’s face it–events happen that you can’t control. Sometimes you’ve exhausted all means to get your financial life back in order – for you personally and/or your business. Bankruptcy now becomes an option, a legal process in which bad debts are either extinguished or a plan may be implemented for repayment depending on which chapter of bankruptcy you file your petition. On the personal side, a bankruptcy filing only discharges income tax debt – it does not discharge other types of taxes including payroll taxes, trust fund recovery penalties, etc.
Filing for a bankruptcy places an automatic stay on collection action by the IRS, but extends the IRS collection statute expiration date so that it has more time to collect on any remaining tax debt that was not discharged. Seldom is bankruptcy a better option than trying to negotiate directly with the IRS for moneys owed it. The exception would be if aggressive collection action is being taken against you, filing for bankruptcy will obtain a stay on the collection process. Depending on which chapter you file, you may force the IRS to accept a payment plan, which would include some or all of your income tax debt being reduced, or having it completely discharged.
Bankruptcy and Your Credit
The downside to filing a bankruptcy petition is that this action will last on your credit report for 10 years. This may prevent you from qualifying for various loans, as well as jobs. Prior to filing bankruptcy, you should weigh the pros and cons and determine whether it would cause more harm than good.
Differences Between Chapter 7 and Chapter 13 Bankruptcies
The two most common forms of bankruptcy that provides some assistance in resolving an IRS tax debt are Chapter 7 and Chapter 13 bankruptcy. It is important to understand that each form resolves IRS tax debt differently. Chapter 7 is the only bankruptcy option that may discharge some or all of your IRS tax debt, while Chapter 13 may either reduce a portion of your debt, and establish a payment plan to repay the remaining balance, or simply establish a repayment plan for paying off your IRS tax debt. In a bankruptcy proceeding, it is important to know that only income tax debt can be discharged. All other tax debts cannot be discharged by filing bankruptcy.
Chapter 7 Bankruptcy
In a Chapter 7 Bankruptcy, the court may either discharge all or a portion of your IRS income tax debt. However, in order for the income tax debt to be discharged, it must meet the following guidelines:
• The tax debt must have been due at least three years prior to your bankruptcy filing. This is called the Three-Year Rule.
• The tax return must be filed at least two years prior to your bankruptcy filing. This is called the Two-Year Rule.
• The taxes owed must have been assessed against you at least 240 days prior to your bankruptcy filing. This is called the 240- Day Rule.
• The tax debt cannot be the result of tax fraud or tax evasion.
• The tax debt must be income tax debt only.
If approved, a Chapter 7 discharge of income taxes will remove your obligation to pay back the taxes owed. However, if any tax liens were filed against you prior to bankruptcy, the tax lien will remain in effect up to the value of your equity in assets. For example, if a tax lien of $50,000 has been filed against you, but your remaining assets are valued at $10,000, the tax lien will remain in effect up to $10,000.
A Chapter 7 filing is not recommended for individuals who may have substantial assets, as some assets may be exempt while others are not. All assets not exempted will be included in the bankruptcy and may be used to satisfy outstanding debts.
Chapter 7 Bankruptcy can only be filed once every six years, but is the only bankruptcy option for discharging IRS income tax debt.
Chapter 13 Bankruptcy
The most common form of a bankruptcy filing is a Chapter 13. It is used for resolving IRS income tax debt within a repayment plan that will be determined by a court trustee. It does not discharge the income tax debt but will require that you make monthly payments for a specified amount and for a specified length of time which may be a minimum of three years to five years maximum.
The court trustee may also reduce the amount of the income tax debt if four conditions are met:
1. The debt must be income tax debt.
2. The Three-Year Rule must be met.
3. The 240-Day Rule must be met.
4. No liens were filed by the IRS, or if a lien was filed, there is no property upon which the lien may be applied.
If these conditions are not met, the tax debt must be paid in full, and the payment plan established in the bankruptcy proceeding will be adjusted in order for the tax debt to be paid in full within the allotted time. The Two-Year Rule requiring that all tax returns must be filed prior to filing a Chapter 7 is not applicable in Chapter 13.
The benefit of Chapter 13 is that it will stop all penalties and interests from continuing to accrue from the date the bankruptcy is filed, unlike an IRS Installment Agreement or Streamlined Installment Agreement where the penalties and interests will continue to accrue. It may also reduce penalties and interests owed to the IRS. Chapter 13 also forces the IRS to accept the repayment plan proposed by the Bankruptcy Court and cannot collect more than the judge approves. This option may also be beneficial in cases where a revenue officer is assigned that refuses to establish a reasonable Installment Agreement or resolution.
Divorced and Debt Aren’t Always Separate
Individuals are considered divorced on the date that the divorce is made final in a court of law. Contrary to what many believe, divorce does not discharge a tax debt. The IRS holds that husband and wife are jointly and severally liable for the tax debts in which a joint return was filed. As a result, it may pursue one or both parties in order to collect the full amount of tax debt owed as both are held liable for the tax debt that was created during the marriage.
If the husband or the wife paid the tax debt in full and the other did not contribute anything to its creation, his or her only recourse is to pursue a civil action in a court of law to collect the portion that should have been paid by the former spouse.
Debt and Separation
Sometimes divorced couples still reside in the same household. When this occurs, the IRS may establish a resolution with one party that protects the other from collection activity. If they are separated or living apart, the spouse setting up the resolution with the IRS may choose to establish a resolution only for him or her and exclude the other spouse. When this happens, the IRS will perform a task called Mirroring the Account in which case, the spouse establishing the resolution will be protected from further collection action, but the IRS will pursue collection action against the former spouse.
In Offer in Compromise cases, if the offer is accepted for one party where the taxes were owed jointly, the IRS will reduce the total debt by the amount of the offer, and pursue the other party for the remaining tax debt.
In some cases where parties are divorced and living apart, they may still be able to resolve the account jointly. In Offer and Compromise cases, both parties may submit the offer jointly using separate Forms 433-A OIC, or Form 433-A and then one Form 656 if resolving joint liabilities only.
In the case of Currently Not Collectible, parties living separately cannot submit a Currently Not Collectible on behalf of the spouse (or former spouse), each person would need to submit a request for Currently Not Collectible separately. However, one spouse may set up an Installment Agreement and agree to pay back the full amount of the joint tax liability if he or she chooses to do so. This would prevent the IRS from pursuing collection action against the other spouse. Chapter 21, Resolutions, Offers and Agreements would be helpful to review so that you have a clear understanding of what each agreement is.
Assisting Your Ex
The decision to help or not to help an ex-spouse is completely within your discretion. It can provide simplicity as Mirroring cases may cause confusion when two taxpayers are making payments on the same tax liability. In some cases, such as Offer in Compromise, it may be easier to have the case resolved when both spouses are eligible for the status rather than trying to resolve the tax debt separately. You should weigh the pros and cons of your decision and make an informed choice.
Seeking Non-Liable Status
You may be considered a Non-Liable Party (NLP) – someone who lives with and shares living expenses with a taxpayer who owes back taxes to the IRS. You though, don’t owe the IRS for the back taxes. NLPs can be a spouse, parent, or roommate. When you live with an NLP, a special calculation must be done and can affect your eligibility for the resolution you are seeking.
When an NLP resides in your household, you may be required to pro-rate your shared expenses based on the income of all parties residing in the household. A percentage will be determined for which you are responsible for the shared household expenses. This percentage is determined by adding the incomes of everyone in the household, then dividing your income by the total household income.
Pro-rationing is more likely to be demanded when a taxpayer shares expenses and co-mingles bank accounts, funds, etc. This is more common among married individuals and when negotiating an Offer in Compromise.
The Pro-Ration Formula is as Follows:
Taxpayer’s share = taxpayer’s monthly gross income ÷ (taxpayer’s monthly gross income + NLP’s monthly gross income) x 100.
Example: Stephan was married to Barbie. They lived in the same household with one minor child. Barbie was not liable for Stephan’s IRS tax debt he had incurred. They shared expenses for food, clothing and miscellaneous items, housing and utilities, and out-of-pocket health care expenses. His monthly gross income was $4,000 and hers $2,000.
The national standard for food, clothing and miscellaneous items for a household of three individuals (H + W + child = 3) is $1,249. Total housing and utilities was $2,000 and was within the IRS standard for their county. The national standard for out-of-pocket health care was $180 (60 x 3 = $180). With this information, Stephan’s portion of the shared expenses is calculated as:
Income share: $4,000 (taxpayer’s monthly gross income) ÷ ($4,000 (taxpayer’s monthly gross income) + $2000 (NLP’s income) x 100 = 67%. His portion of the shared expenses is 67%. Next, multiply the shared expenses by 0.67 or 67%.
Expense portion of food, clothing and miscellaneous items:$1,249 x 0.67 = $836.83 or $837. Stephan is responsible to pay $827 for this shared expense and would report this figure on his Form 433-A or 433-F.
Housing and utilities portion:$2,000 x 0.67 = $1,340. He will claim $1,340 for this item on his Form 433-A or 433-F.
Note: If Stephan’s housing and utilities exceeded the national standard for the housing and utilities for his household size based on his county, he would pro-rate his share based on the maximum allowed by the national standard if negotiating an Offer in Compromise. In Currently Not-Collectible or an Installment Agreement cases, he may be allowed to exceed the national standard if he provides proof of this expense.
Out-of-pocket health care portion:$180 x 0.67 = $120.60 or $121. As a result, he would claim $121 for this expense on his Form 433-A or 433-F.
Non-Disclosure of Income by a Non-Liable Individual
Some people are married; some are not. In a situation where one does not have a liability or responsibility for the debts of the other, the NLP may not want to include his or her income so that a proper pro-ration may be conducted. When that happens, the IRS may try to obtain what the income is internally if the NLP is a spouse. Previous joint tax returns would include income and the Social Security number. If information is obtained internally, the IRS will perform its own pro-rationing calculation. You should double check the representative’s calculation based on the information they have obtained as the representative may pro-rate incorrectly. In cases where the information cannot be obtained, the IRS will then use the default pro-ration of 50% of all shared expenses. The most common shared expense is housing and utilities. All other allowable expenses will be based on what you submitted to the IRS.
Example: Lars and Marisa were roommates but were not married. Lars owed the IRS but Marisa was not liable for his tax debt. She refused to provide her income to him so that he could pro-rate the shared expenses. When he informed the IRS representative of this, the representative tried to obtain her information internally, but was not successful. So the representative used the default pro-ration of 50% in order to determine his share of the housing and utilities expenses.
Lars reported that his total housing and utilities expense for him and his roommate was $1,400. The representative then determined that his share was $700 ($1,400 x 0.50 = $700). All other expenses were based on what he reported.
This is an excerpt from Tax Relief and Resolution by Steven Melnick, CPA. Melnick is a licensed attorney, LLM in Taxation. He is also a professor of tax law, and a Chairman of Continuing Education Programs for Tax Professionals at the City University of New York.
Our industry’s workforce is changing rapidly and is skewing younger than ever. Retaining this workforce requires changing our mindset and introducing innovative programs that allow for balanced lives. CPA firms must be aware that individuals have needs and wants that go beyond work. Firms that have a legacy of long hours and weekend schedules and don’t allow for balance will undoubtedly have retention issues. Younger workers do not want that kind of work environment and are aware they have other choices. It is also wise to pay attention to evolving generational attitudes, as younger workers do not feel tied to a single firm. They have a different mindset on what loyalty means, and can be quick to move to another opportunity.
In order for a firm to successfully retain talented people, it needs to acknowledge that each employee is a whole person and give employees the opportunity to take care of all aspects of their lives. At my firm, we allow employees opportunities for regular self-care and give them the opportunity to spend quality time with their families. Most importantly, recognizing that “family” may be different for everyone and doesn’t always look like two - three kids and a dog – it’s important to give equal weight to any relationships that provide a valuable emotional support system. To be successful, our talent needs to be in balance in all aspects of their lives for their overall well-being and success; firms need to incorporate a “be more” philosophy.
This philosophy pushes a firm to encourage employees to be the best they can be and enjoy life to the fullest. Why? Healthy people create a healthy firm, and a healthy firm attracts and retains the best and the brightest. Firms should consider a commitment to anytime/ anywhere work, support of a flexible work environment and financial encouragement towards individual health and wellness, so that employees can live their best lives.
I have put this philosophy to work in my own life. I’m a father of four kids, and my life at home is often busier than life at the office. “Work-life balance” and “flex schedule” are two phrases that have been thrown around and are overused in the accounting profession. In concept, they are great. They provide the opportunity for me to fit more things into my day. In reality, work life balance and flex programs have just made us all busier. Finding ways to do the important things in life with intention, at both work and home, becomes something leaders must model and share to influence firm culture.
Creating New Career Paths
Another reason firms can lose employees to the competition is career paths tend to get narrower, choking off opportunity to grow and develop. That is only true if there is a rigid system in place. Firms need to look for ways to help people customize their careers and have the goal to give people the opportunity to do more things — which they traditionally might not get the opportunity to do. In my own career, I had the opportunity to sit on the executive committee early on, which has been invaluable to my new role as managing partner. I also have headed the information technology strategy and planning for the firm for the past 10 years, which reflected one of my personal passions and turned out to be another key contributor to my future success. As a firm, we have an ongoing process to define, execute, and refresh our firm’s vision, and we encourage everyone to get involved with the firm’s long-term strategy much earlier in their careers than most firms would. This encourages buy-in and retention, as well as develops some great ideas.
Getting People Involved in Innovation
A firm that has a passion for innovation can also retain talent. Most firms that are successful find ideas to innovate not only outside but also from within the firm. One way we express that is through our Innovation Incubation Lab. Our employees submit ideas about ways the firm can start to do things in a more innovative way. There is a $5,000 prize, and ideas can be for any area, such as talent management, technology, billing, timekeeping, new service offerings or internal efficiency processes.
For example, we incorporate this idea by asking that any ideas submitted reflect one of the three central parts of our firm’s vision: 1) our success is driven by retaining the best, diverse talent; 2) we invest in our people and technology to deepen firm expertise and fuel sustainable growth; and 3) we partner with our clients locally and globally to deliver innovative solutions. The process is transparent throughout but the only caveat is that the employee submitting the idea must be willing to spend the time necessary to help bring the idea to fruition, if chosen.
We Are in This for the Long Haul
If a firm wants to retain talent, then it’s essential to view these strategies as long-term and work toward them every day. One of our core values is to grow great people. By being able to really promote and execute on a healthy work/ life philosophy, any firm will allow people to break out of the traditional confines of work and expand things in their personal lives and with themselves. By far, the most important thing is to embrace a “be more” philosophy and make it a central part of how to treat each other. It has a direct correlation with retention; your firm will see lower turnover and more productive individuals in serving clients and developing other people. Allowing people to have success in life will translate to success at the firm and gives them a tangible reason to stay and grow with your firm.
Tom Barry, CPA is a partner at Green Hasson Janks, a Los Angeles accounting firm that specializes in nonprofit, food and beverage, health and wellness, and entertainment and media companies. Barry can be reached at tbarry@ greenhassonjanks.com.