by Mat Sorensen | Mar 17, 2015 | Tax Planning, Uncategorized
The IRS has some significant collection tools it can use to collect federal taxes. The IRS can lien assets such as your home, seize cash in bank accounts and garnish wages. Although the IRS does have these significant collection tools, there are also numerous tax payer protections available during the tax collections process. The process of tax collection from the IRS can be long and “taxing” and the IRS has ten (10) years from the date when your tax liability was assessed to collect on the taxes. During this collection process, it is important that you are proactive in dealing with an outstanding tax liability. Below is a list of options that are available to taxpayers. I would note that none of these options resolve around settling for pennies on the dollar.
1. Appeals Process. If you disagree with the decision of an IRS employee at any time during the collection process, you may ask that employee’s manager to review your case. If you disagree with the manager’s decision, you have the right to file a written appeal under the Collection Appeals Program. You can appeal collection actions such as liens, levy’s of bank accounts or garnishment of wages. You are also entitled to a Collection Due Process Hearing where you can challenge the IRS’s determination of tax owed.
2. Tax Court. If you are unsuccessful in the IRS appeals process you may file a petition in the U.S. Tax Court to challenge the amount due. This appeals process is far more difficult to understand and usually requires the assistance of an attorney.
3. Installment Agreement. If you have tax owed which you do not dispute but cannot afford to pay you may set up an installment agreement with the IRS to re-pay the tax owed. Under an installment agreement the IRS does charge interest on the amount owed but will cease collection activity and will allow you to pay the tax over time. If you owe $50,000 or less then you don’t have to complete an extensive financial statement and the process can be done on-line or by phone with the IRS. If, however, you owe over $50,000, then you must complete IRS form 9465 which outlines your assets, income, and debts to the IRS.
4. Offer in Compromise. You may make a deal with the IRS under what is called an offer-in-compromise. Under an Offer in Compromise you agree to pay a certain amount to the IRS as a settlement for all amounts they have assessed as due. There are three grounds under which the IRS will accept and Offer in Compromise. First, if there is a doubt as to whether you are truly liable for the tax. Second, if there is doubt as to whether you are actually able to pay the IRS back. Lastly, an offer may be accepted if the offer promotes efficient tax administration due to an economic hardship or special circumstance of the taxpayer.
5. Office of Taxpayer Advocate. At any time in the collection process where the IRS office has been unresponsive to taxpayer requests, a taxpayer may receive the assistance of the Office of The Taxpayer Advocate. The Taxpayer Advocate is an independent office within the IRS but it is their responsibility to assist the taxpayer in dealing with other offices within the IRS. Only the IRS would have such an office. The Taxpayer Advocate can help give you advice on how to resolve your tax problem. We have used the Office of the Taxpayer Advocate in many instances and while they are within the IRS office they can be helpful in getting responses to requests for information and in obtaining decisions on Offer in Compromises and Appeals.
Many CPA’s and Attorney’s are familiar with tax collection and it is crucial that a taxpayer facing collection actions be aware of the procedural options available to them. We have helped numerous clients in our office resolve difficult tax situations by using some of the procedures above. The key is to be proactive in your case to ensure that you don’t miss deadlines and other opportunities to resolve your tax problem.
By: Mathew Sorensen, Attorney and Author of The Self Directed IRA Handbook
by Mat Sorensen | Mar 10, 2015 | Uncategorized
Fidelity Investments, the largest provider of 401(k) plans, recently announced data on their 13 million 401(k) customers accounts that provides an insight into saving for retirement. One of the most interesting items from the report itself was the fact that 401(k) millionaires, those with $1M or more in their 401(k) account, has grown to 72,000. This is twice as many as in 2012 and fives times as many in 2004. While I know many of my readers favor self-directed accounts and “alternative” assets as to their investments, this report offers some good insight into how to save and contribute to your retirement account so that you have funds to invest. Here are some interesting saving and contribution facts that these 401(k) millionaires had in common.
1. They Contribute the Maximum Employee Amount. These investors contribute the maximum employee amount every year and most receive the company maximum matching contribution available. While company plans and employer contributions vary, those who save more end up with more. But it isn’t just the extra money saved that ends up helping you in the long-run it is the investment growth of those additional dollars. I like to think of it this way, the more you can save and put away, the more players you can get on the field to score points. Sometimes, unfortunately, I think too many investors think they can just hit a home-run on an investment and solve all of their retirement problems but the fact of the matter is if you only have one or two players on the field it is hard to score too many runs without swinging for the fences. I can almost hear my little coach telling me, “just a base hit Mat, base hit.”
When it comes to maximizing contributions, if you are self-employed with a solo 401(k) then you can create the most generous employer matching contrinbutions possible and you can contribute far more than the average 401(k) millionaire form the Fidelity Report. According to the Fidelity report, the average total contribution (employee and employer) of a 401(k) millionaire was $35,700. Under a solo 401(k) a self-employer person could actually contribute up to $53,000 total giving them nearly $20,000 more per year to save, invest, and grow.
2. They Save For The Long-Term. I’m sure it is not shocking but these 401(k) millionaires save for the long-term and put money away steadily. According to Jeanne Thompson, VP Fidelity, “They really are heeding the right advice….Starting early and staying for the long term.”
3. They Take Advantage of Catch-Up Contributions. These investors are mostly over the age of 50 and as a result they can and DO take advantage of the ability to invest an additional $6,000 per year as a “catch-up contribution”. Even though these investors are on track financially for retirement, they still know a good deal when they see one and take advantage of the ability to put away up $24,000 a year as their employee contributions (keep in mind, those under 50 can contribute a maximum employee contribution of $18,000/yr.).
Learning how to set money aside so that you have funds to invest is nothing novel and we’ve all understood that the more you save the better off you will be but it is nice to see the data of the 401(k) millionaires backing up these assumptions.
By: Mat Sorensen, Attorney & Author of The Self Directed IRA Handbook
by Mat Sorensen | Mar 3, 2015 | Uncategorized
When planning your business and tax structure with your lawyer, it is important to understand what is privileged and what is not. Often times, clients divulge information to their lawyer and wonder whether that information is “attorney-client privileged” or not. Attorney-client privilege is an important legal protection offered to persons, companies, and organizations who provide confidential information and who seek counsel from their lawyer or law firm. Under law, an attorney cannot be required to provide attorney-client privileged information to a plaintiff in a law suit (e.g. creditor) or to a government agency (e.g. the IRS) except under limited situations. Here are a couple of common situations where you may lose attorney-client privileged information and some tips to make sure your confidential information provided to your lawyers doesn’t run into the exceptions.
EXCEPTIONS TO THE ATTORNEY CLIENT PRIVILEGE RULE
1. THIRD PARTY NON-LAWYER PRESENT- Was a third party present with your lawyer when the information you want to be privileged was discussed. For example, was your accountant or financial adviser present when discussing information you want to remain confidential and to remain privileged. Keep in mind that if a third party is present in a meeting or on a conference call then that third party may be required to provide information or documents from the meeting and that your accountant, consultant or adviser can’t raise the attorney-client privileged defense for you unless they are actually your attorney. If an third party professional does need to be hired (e.g. an accountant or CPA), that third party can be hired or brought into the matter by the attorney and the privileged may remain in tact. This is known as a “Kovel” hiring of the accountant and stems from a case where a lawyer engaged an accountant for the client and the accountants work therefore was covered under the lawyer’s attorney-client privilege.
TIP: For sensitive matters where you want information to remain confidential and privileged, do not involve outside parties as those outside parties or non-attorney advisers as those parties cannot raise the attorney-client privileged defense.
2. ONLY LEGAL ADVICE IS ATTORNEY-CLIENT PRIVILEGED – Only information exchanged when seeking legal advice is attorney-client privileged. This is especially tricky for companies who have their own “in-house” legal counsel who also offers business advice. Only the information exchanged that pertains to legal advice would be privileged. For example, was an organization chart of the companies holdings “privileged” when provided to the company lawyer also manages those assets for the business? Also, what if that lawyer disseminated that organization chart to accountants, property managers, or other non-lawyers? If they did, then that information is no longer attorney-client privileged.
TIP: If you have sensitive documents or information you want to keep in communication only with your lawyer, ask your attorney to identify the document as “Attorney-Client Privileged” and do not provide it to non-lawyers.
Not all information with your lawyer needs to be attorney-client privileged but keep these tips in mind when communicating highly-sensitive information to your attorney and let your attorney know before you provide the confidential information that you intend it to be privileged so that they can ensure that your information is properly handled and so that non-lawyer third-parties are only involved when the privilege can be maintained.
by Mat Sorensen | Feb 24, 2015 | Uncategorized
Many real estate investors and business owners often ask whether they should use an umbrella insurance policy or an LLC/Corporation to protect them from liabilities that may arise on their rental property or business. To understand which you should use you first must understand how they protect you. Unfortunately, I have found that most people who have an umbrella policy misunderstand what it actually protects. An umbrella policy is a policy of insurance that goes on top of and that adds additional liability coverage amounts to insurance coverage you already have. So, if you have auto insurance with $200K of liability coverage and business general liability insurance of $500K, then a $1M umbrella policy is going to give you $1.2M of auto liability coverage and $1.5M of general business liability coverage. The umbrella policy does not cover any additional areas of liability or risk, instead, it solely adds more coverage to coverage you already have. Because an umbrella policy does not cover additional areas of risk, but rather adds more coverage to areas you already have coverage, it isn’t as great of an asset protection tool that many people think it is.
Consider an example of a recent client of mine who was an LLC and who provided home appliance services to residential and business customers. There was a claim made by a customer against the client’s LLC for damages from an expensive failed appliance. The customer brought a lawsuit against the client’s LLC. The client had general liability insurance and an umbrella insurance policy and made claims on both. Both claims were denied by the insurance company as the general liability policy did not provide coverage for product defects. Since the general liability policy was useless and didn’t provide coverage the umbrella policy was also useless. The client did have an LLC, so their personal assets were not at risk but the business could still end up getting a large judgement against it. The case was settled by the parties but the client was really frustrated with an “umbrella policy” that he thoughts was covering gaps or areas of liability that he didn’t have coverage for. So, if you’re considering an umbrella policy, keep in mind that it only gives you more coverage in areas where you already have existing insurance coverage. The use of the word “umbrella” is a great marketing tool but anyone buying an “umbrella” policy hoping to take cover from liability may be surprised that the umbrella is full of holes and is only going on top of whatever umbrella you already have over your head.
An LLC (as well as a corporation) , on the other hand, protects the owner of the LLC from liabilities that arise in the LLC and prevents a plaintiff from being able to go after the LLC owner personally. As a result, we often say that an LLC protects a business owner’s personal assets from the risks and liabilities of the LLC business. What is at risk though in a lawsuit against the business entity (LLC or corporation) is the assets of that business itself as a creditor could collect against the assets of that business. So, for example, if you have an LLC with multiple rental properties with equity then those properties and their equity would be at risk in a lawsuit.
There are many issues and factors to consider in making this decision and there is no one-sized fits all recommendation. In many instances we recommend that you have both an LLC and an umbrella policy and in other instances we may recommend just an LLC or just an umbrella policy. The first factor to consider is the cost. The cost of an LLC in our office is $800 and on average you can expect about $$50-200 in fees a year to keep that LLC active with the State (about $900 annually in California, each state is different, AZ is zero). As a result, the major cost of an LLC is in the first year but you can plan on having about $50-200 in fees each year (each state is different) to keep your LLC active. If you have a partnership LLC or a corporation then you also have the cost of a LLC partnership tax return or a corporation partnership tax return.
An umbrella policy is typically paid for monthly. Let’s say you are able to get $1M in umbrella protection at a cost of $50 a month. That would run you about $600 a year. Insurance policies have benefits which include attorneys whom the insurance company will appoint and pay to defend you (and protect themselves from having to pay) but also contain certain exclusions to coverage that may leave you with no coverage for the liability you incur. Another important factor to consider is the type of property you own. If you own a multi-unit property or commercial property we would recommend having both an LLC and an umbrella policy because you have more liability exposure when you have more tenants. On the other hand, if you have a single family rental in an otherwise good neighborhood where you feel less likely to be sued then we may only recommend an LLC or an umbrella policy on its own. Bottom line, consider both an LLC and an umbrella policy in your analysis and get quotes and advice upon which to make an informed decision so that you are protecting your assets in the most efficient and effective way as possible.
And lastly, I did hear an insurance joke today that relates to deciding on what insurance to buy so I might as well share it here. If you’re a transformer, do you buy auto-insurance or life insurance?
by Mat Sorensen | Feb 13, 2015 | Real Estate & Alternative Asset Investing , Uncategorized
Comprehensive Webinar: Buying Real Estate with Your IRA and a Non-Recourse Loan Mat Sorensen from Mathew Sorensen on Vimeo.
Your IRA can buy real estate using its cash and a loan/mortgage to acquire the property. Whenever you leverage your IRA with debt, however, you must be aware of two things. First, the loan your IRA obtains must be a non-recourse loan. Additionally, your IRA may be subject to a tax known as unrelated business taxable income (UBTI). This comprehensive webinar explains the requirements for non-recourse loans, as well as the various non-recourse loan options. It provides detailed information on how UDFI tax may be applied and how it is calculated. Below are the slides from the presentation as well as the recorded video presentation of the webinar. Please note that page 27 in the PDF slides below has been updated from the webinar, as I made a calculation error regarding the debt owed. The final tax numbers were still correct, though. Thanks to Roger St.Pierre, Sr. VP at First Western Federal Savings Bank, for co-presenting the topic with me.
by Mat Sorensen | Feb 10, 2015 | Retirement & IRAs, Uncategorized
President Obama’s latest budget proposal seeks to address once policy issue: the federal government wants more money. That fact is, American wealth is being concentrated into retirement accounts and the government wants more of it than it already receives. Here’s three proposals from the President’s budget proposal that would weaken the current benefits of saving for retirement.
In an effort to halt so called “Back-Door” Roth IRAs, President Obama’s budget proposal would eliminate the ability to convert “after-tax” dollars in a traditional IRA or employer based plan to Roth. You could still convert “pre-tax” dollars that are in a traditional IRA or employer plan to Roth. For example, a traditional IRA with pre-tax dollars could be converted to a Roth IRA as their is tax due on this conversion and the IRS wants your money. However, many high-income earners who could not contribute to a Roth IRA have instead made “after-tax” contributions to their retirement plan (where they receive no deduction) and they have been able to convert those amounts to Roth dollars with no taxes on the conversion (since the dollars are after-tax) under what has become known as a “Back-Door” Roth IRA. Click here for a prior article I wrote on the “Back-Door” Roth IRA.
Other bad ideas found in the budget include imposing required minimum distributions (RMD) on Roth IRAs. RMDs have never applied to Roth IRAs because taxes have already been paid on the funds but the new proposal would require RMD on Roth IRAs when the account owner reaches 70 1/2 in a manner similar to traditional IRAs.
And finally, the budget proposal would limit the ability to contribute to a retirement account once your retirement account values exceed approximately $3.4M. The account could still grow but no new contributions would be allowed. This would be a first of its kind rule as total account success has not been a restriction in your ability to contribute into the most popular retirement accounts like IRAs and 401(k)s. While most people don’t need to worry about exceeding $3.4M in their retirement account, setting a ceiling on account growth seems to be a dangerous precedent.
Want to know the good news, President Obama has never had a budget approved. Not even when his party controlled both houses of Congress.
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