HOW TO AVOID CRIMINAL PROSECUTION FOR NON PAYMENT OF TAXES

I recently read an article by Jose Marrero written in Rachlin and Cohen's monthly newsletter.  The article pointed out that you may have had good intentions when filing your tax return or thought you were up to date and low and behold you owe so much in taxes that IRS claims there are criminal violations.  So the question is what should you do?  Marrero says:  "The IRS has a program that allows individuals to voluntarily disclose situations that may be considered attempts to evade taxes, enabling them to avoid criminal prosecution.  This programs has been successfully utilized to avoid prosecution and reduce taxes, penalties and interest in various situations such as:

• Employment Taxes...where the courts have made it clear that any person, regardless of corporate title, may be held liable for unpaid employment taxes if (1) the person knew or should have known that the employment taxes were unpaid; and (2) they had some connection with the corporation to affect a decision on the payment of the taxes.
• Income Taxes...During divorce proceedings, one or both spouses may be aware of unreported income or false deductions related to previously filed federal income tax returns...Violations and penalties can arise regarding any form of income, employment, excise, gift or estate tax, with the most common being:  tax evasion, failure to collect or pay over tax, signing a return known to be fraudulent or containing false material statements, aiding in the preparation of a false return, etc."

"...While a voluntary disclosure will not automatically guarantee immunity from prosecution, it may be the only opportunity you have to avoid a prosecution recommendation.  To qualify for consideration, any communication to the IRS must be truthful, timely and complete.  And, you must demonstrate a willingness to cooperate to determine the correct tax liability.  You also need to make good faith arrangements with the IRS to pay in full all taxes, interest and penalties determined to be applicable.  An early review and analysis of any financial and related tax issues in these situations could save you from an expensive criminal investigation, potential prosecution and additional taxes, penalties and interest.  The amount of tax due is not the determining factor, but rather the timeliness and truthfulness of the information disclosed."

SIMULTANEOUS EXCHANGES--ARE THEY VALID TODAY?

A simultaneous exchange occurs when the taxpayer sells its property to its buyer and then simultaneously purchases its replacement property on the same day.  And the answer to the question is--of course they are valid under Section 1031.   

The real issue is how many taxpayers really transact simultaneous exchanges?  The answer is very few people transact simultaneous transactions. 

The reason is that most taxpayers like the option of having 45 days from the closing of the sale of their relinquished property to select (identify) properties they possibly will purchase.  Additionally under Section 1031, the taxpayer has 180 days to close on the purchase of the replacement property from the date they closed on the sale of their relinquished property.   This is a wonderful option, putting a lot less pressure on the taxpayer and giving them a lot more time to select what they want to purchase and to figure out how they will pay for that purchase should they need additional funds.   

I might add, this option of the additional time is one of the major reasons Section 1031 tax deferred exchanges have become so popular.  For you history buffs, the regulations giving the time line options came out in 1991, resulting in Section 1031 becoming a very popular tax tool

DO THE RIGHT THING WHEN YOU GIVE TO A CHARITY !!

    I realize this blog is supposed to be about Section 1031.  Most of our articles are written on that subject--but I also like to include some other consumer oriented issues in the blog.  For example:  Chris Weir, a residential mortgage broker, has a newsletter that I receive about once a month.  The following is a well written excerpt from his most recent newsletter.  The subject: making donations to charities.

"Most everyone has received requests from various organizations and charities asking you to donate to their causes. And it sure sounds like a good idea to help disadvantaged children, the local police officers, or help find a cure for cancer. But a call for a donation from the ASPCJ - American Society for the Protection of Cat Juggling - might warrant some further investigation. So how can you tell if the charity that you are considering supporting is legit?

First stop... the web:
    Check to see that their website is full of information about their programs, history and goals. Look into the various programs they support, as much of the time you are unable to specify exactly where your contribution will be used. Be extra cautious of organizations with websites that are skimpy or out of date.

Next stop... the IRS:
    The IRS maintains a list of all organizations that are classified as charities for purposes of tax deductions. You can search for information on the IRS website by hitting this link: IRS Charitable List.

Avoid a nasty surprise by understanding the type of organization you are contributing to. For example, the Sierra Club is not considered a charity, but rather a lobbying group, and as such, donations to the Sierra Club are not tax deductible. However, donations to the Sierra Club Foundation are tax deductible, as it is the charitable organization arm of the Sierra Club.

Important note - if you plan to make a donation other than money (clothing, household goods, car, etc), you will need to keep careful records of exactly what you donated and its value, as the IRS is cracking down on over-inflated valuations of donated goods. This is especially important if the value exceeds $5000, in which case an actual appraisal is required.

Final Stop... the report card:
    The Better Business Bureau operates a website (www.give.org) that tracks many charitable organizations and grades them on twenty standards. These standards range from the makeup and compensation of the board to the percentages of their donations that are used for programs vs. administrative and fund raising costs. A charity that you can feel confident in will hit all twenty of the goals, or if they miss one or two benchmarks, will have provided reasonable explanations for this shortcoming.

Some charities - now using the term loosely - hit very few of the goals, or choose not to respond to the BBB's request for information. Reconsider a donation to an organization whose fundraising and administrative expenses will consume the majority of your contributions. In a random sampling, there were several organizations whose actual pass-through to their programs was under ten percent of the total money contributed. It's important that your donations make their way to help those who need it.

STATE LAW REQUIREMENTS ON A SECTION 1013 EXCHANGE

We talk a lot about the Federal Section of the exchange process, Section 1031.  But do the individual states honor that Federal law and what about the State taxes?   For the most part, most states that have their own income tax, allow the taxpayer to defer all gain (including their own state income tax) just as the Federal law does under Section 1031.  But let me quote from my friend Mary Foster book:  "However, some states have enacted additional requirements that may surprise unwary taxpayers in an attempt to tax dispositions of property exchanged into out-of-state replacement property."  Some states require additional forms to be filled out by the taxpayer.  So it is very important that you hire good financial and legal advisors. 

AIRLINE TRAVEL A MESS ACCORDING TO WHARTON BUSINESS SCHOOL

Every year I give a lot of SECTION 1031 speeches and seminars to large real estate and tax trade organizations--some of these presentations include continuing education credit.  I fly to most of these presentations and as a result, obtain a lot of frequent flyer miles.  I love to get those miles and use them for my vacation travel.  Notwithstanding that fact, we have observed that the quality of airline service and amenities are down.  I agree with results of a Wharton Business School recent study on these issues.  Here are excerpts from that report:

"While airline service is no longer the white-glove experience it once was, it has now gone beyond bad food and snappish flight attendants. Today, when passengers board an airplane, they might well question whether there is a reasonable chance they will make it to their destination in the next few days.
"Previously, airlines worried about dissatisfied customers. Now I don't think they worry about it because the customer service at all airlines is so horrible," says Netessine, a professor of operations and information management.
Airline consumer advocates contend delays are now a routine part of air travel. For the first five months of this year, the major airlines' on-time arrival rate was 73.5%, the lowest for that period in the past seven years, according to the U.S. Department of Transportation's Bureau of Travel Statistics. Complaints about airline service were up 49% from May 2006. As if that weren't troubling enough, airline consumer advocates have testified before Congress that DOT figures do not even measure the true extent of the problems.

The reasons behind the sharp decline in airline service are many. Chief among them is a reduction in airline capacity following years in which the industry hemorrhaged money and major carriers wound up in bankruptcy court because their costs were out of line with revenue. Now, with the supply of airline seats decreasing and demand rising, there are not enough seats to go around, particularly when weather or other problems disrupt schedules.

Flights this summer are booked at historic high levels of nearly 90%. Before the industry was deregulated in 1978, flights typically ran 55% full. "If something happened back then, the airline could easily put you on the next flight because that flight was only half-full, too." He points out that an airline seat is not like canned soup or any other tangible product that can be shelved and sold later if demand is slow. As a result, airlines have honed operations to squeeze the most cash out of every seat they fly, including overbooking to make sure each seat has at least one customer.

According to Netessine, the current level of overbooking comes down to a simple economic trade-off. On one hand, the airline risks flying with an empty seat; that seat comes with a greater cost as fuel prices rise. The other side of the tradeoff is the cost of bumping a passenger. Current law requires airlines to pay passengers $200 if they are bumped but rebooked on another flight within two hours. If the delay extends beyond that period, the passenger gets $400. Department of Transportation officials are now considering several proposals to increase the bumping penalty."

ARMED SERVICES GET POSTPONEMENT?

We know that in a normal 1031 exchange, the taxpayer must identify its possible replacement properties within 45 days of the sale of the relinquished property and must close on the purchase of the replacement property(ies) within 180 days of the sale of the relinquished property. 

But what happens if you are in the armed services?  Section 7805 IRC gives a list of time sensitive acts that will automatically be postponed for those serving in our armed forces. 

The President on January 17, 1991 designated the "Arabian Peninsula" as a combat zone which entitles those serving in the military service in IRAQ a postponement of these time sensitive time lines ( the 45 day and the 180 day rule) from the date the military service begins and ends 180 days after the military service ends.   Many in our community applaud giving this extension to those serving in these military combat zones.