IRS to Increase Audits Next Year

The Wall Street Journal, in the November 23, 2005 edition, emphasized that the IRS intends to "increase the number of audits it conducts next year."  IRS Commissioner Mark W. Everson says the " aim is to strengthen public confidence in the tax system and slash the "tax gap."  I was asked by a co-worker, how this would effect the 1031 industry.  My response was that the IRS is  contemplating the requirement of having all taxpayers, when completing form 8824 for their 1031 tax deferred exchange, to list the name and contact information of their Qualified Intermediary (QI).  The purpose of this requirement is to insure that the transaction was handled correctly and professionally.  For those of you that have not been involved in a section 1031 Exchange, the law requires that you have someone completely independent hold the funds and be responsible for the 1031 documentation.  99% of the time a Qualified Intermediary(QI) is involved.  So the obvious question and one asked to me by Money Magazine(see their December 2005 issue), is how should you select a Qualified Intermediary?  There are 4 issues that should be reviewed:  (1) Price;           (2) Experience; (3) Service and (4) Safety of Funds.  Let me address all four issues. 

PRICE (How much is it going to cost me?) is the first question that most taxpayers ask.  It is the least important of the four issues, but is always asked. 

EXPERIENCE is important---ask the QI, how long they have been handling 1031 tax deferred exchanges?  How many 1031 exchanges do they handle a year? Hint--they should be handling thousands a year and have been in the 1031 business for a number of years.  Are they a member of the FEA (Federation of Exchange Accommodators)?  Do they have a CES (Certified Exchange Specialist) on their staff?  If NOT--why don't they?  A CES designee is one who has passed a very difficult examination relating to 1031 exchanges and is generally recognized in the industry as an individual who is well versed on tax deferred exchanges (presently there are less than 200 CES designees in the United States). 

SERVICE--How fast can the 1031 exchange documents be completed and how accurately do they comply with Secton 1031 regulations? 

Finally, what I consider to be the most important issue is --HOW SAFE ARE THE FUNDS?  The QI should be a part of a large company or be a large company, who has mucho assets, in case a loss or claim has to be made by the taxpayer.  Additionally, how much insurance do they have? Are they bonded?  Some QI's state that they have the funds in a separate account (implying that this makes the  taxpayer's funds safe).  That is NOT a correct assumption becuase the FDIC only insures the first $100,000 per account.  The more important questions are how much insurance do they have, what are the QI's assets and are they bonded?  The QI (Qualified Intermediary) should be insured for million's of dollars, bonded for millions of dollars and have at least 500 million in assets. 

People Often Say Death and Taxes Are the Same, But They're Wrong. Death is a Taxable Event, But Taxes Never Die.

What a great quotation from the infamous person "Anonymous".  A member of my marketing staff sent me the above quote.  Death can be a taxable event, but with proper tax planning one's heirs can avoid paying tax on a good portion, if not all, of an individual's taxable estate.  I certainly am not the expert on estate planning.  However, I have worked with numerous financial planners, CPA's and Tax Attorney's who, because of proper planning, have worked miracles on the amount of taxes that were no longer applicable.  "Taxes never die"---the second portion of that quote is true--but you don't have to be the person who pays them because with proper planning, a non-tax situation upon death can be the result.   I see numerous 1031 tax deferred exchanges every day, and one of the major reasons to conclude a Section 1031 tax deferred exchange is to avoid paying taxes in the present.  With proper tax planning, your estate may not have to pay taxes in the future.  To reiterate, anyone who believes they might have a taxable estate should talk to their financial adviser, CPA and/or Tax Attorney, now.

personal residence and Section 1031

Just received a telephone call from someone who wanted to use Section 1031 when they sell the residence they live in.  Unfortunately I had the tell the prospective exchanger that the sale of her personal residence does not qualify for tax deferred status under Section 1031 of the IRC.  Should that taxpayer have converted the personal residence into an investment property, they could have used an unknown section of the IRC, Section 840, and could have not only gotten a tax deferral ,  but also the first $250,000 per person or $500,000 per couple tax free.  But alas, our taxpayer had not owned the property as her personal residence for more than 2 years.  This is a great technique if she could have qualified.  I am finding more and more taxpayers giving us a call believing they can exchange their personal residence for another ,  when in fact they cannot.

Hurricane Provides Some Benefits: Extending the Time Limits

At a recent seminar in Virginia, I was asked whether you can obtain an extension for the 45 day and 180 day time limits.  The IRC Section 1031 has two major time limits.  One, after selling the relinquished property, the taxpayer has 45 days to identify the property(ies) the taxpayer would like to purchase as their replacement property.  Two, the taxpayer must close on their purchase of the replacement property no later than 180 days from the sale of the relinquished property.  So to answer the question, "Can I extend either the 45 day or the 180 day time periods?" the answer is yes. 

Section 7805 IRC, subsection A, contains a list of time-sensitive acts that the IRS may postpone, including the above time limits, if affected by a Presidentially declared disaster.  In addition, taxpayers that are serving in combat zones also get an extension on such time limits.  I know you are now asking yourself, as was the followup- question, who and what qualify for the extension.  What if the property was in the disaster area?  What if the taxpayer was in the disaster area?  What if the taxpayer's Qualified Intermediary was in the disater area?  Allow me to answer these questions.  If the Property that was identified as a replacement property; if the taxpayer lives in the disaster area; or if the Qualified Intermediary has its processing office in the disaster area----then in all of those cases the taxpayer will get an extension. 

Recently, Hurricanes Katrina and Wilma hit South Florida.  A Presidential order was signed covering South Florida, declaring it a disaster area.   This order authorized extensions to the taxpayer if they were in South Florida, or their property was in South Florida or their Qualified Intermediary had their place of business in South Florida.  The company I work for, Bayview Financial Exchange Services, LLC, has its servicing department in South Florida and was without electricty for quite some time (thank goodness for generators).  All of our exchangers that had sold their relinquished property, prior to either of the hurricanes, have now, as a result of the Presidentially signed orders, been given extensions until February 28, 2006.  So if any benefit can be found in being hit by the hurricanes, it was that all of our cleints(taxpayers) have the possibility of getting extensions for their identification periods and/or their final closing dates on the purchase of their replacement property(ies).