There are categories of business entities responsible for paying shareholder-employee reasonable compensation. An S Corporation[1] is one such corporation. An S Corporation is defined as a type of corporation that elects to be taxed under a section of the U.S. Internal Revenue Code. “S corporations must pay reasonable compensation to a shareholder-employee in return for services that the employee provides to the corporation before non-wage distributions may be made to the shareholder-employee” (IRS.gov, “S Corporation Compensation and Medical Insurance Issues,” 8/31/2013). The shareholder cannot receive an amount of S Corporation reasonable compensation that exceeds the amount the shareholder receives either directly or indirectly.
Brotman Law
IRS Innocent Spouse Relief Rules
This article discusses the IRS innocent spouse relief rules. When couples file jointly, the law makes both parties responsible for the entire tax liability. Under tax law, this is called joint and several liability,[1] which is defined as two or more persons who share responsibility with respect to the same liability (i.e., event or act).
IRS Innocent Spouse Relief Requirements
IRS Innocent Spouse Relief Requirements – What is Innocent Spouse Relief?
You and your spouse are jointly responsible for paying federal tax due, interest accrued, and any applicable penalties under the IRS innocent spouse relief requirements. This is especially true if you and your spouse filed a joint return. However, if you believe that your current or former spouse should be solely responsible for a particular item or the underpayment of tax on the joint tax return, then you may be eligible for Innocent Spouse Relief.
IRS National Standards
IRS National Standards
The IRS has developed IRS national standards as guides for taxpayers responsible for resolving their tax liabilities. The IRS national standards (or IRS Collection Financial Standards) are defined as five categories of necessary expenses developed and used by the IRS to calculate a taxpayer’s payment potential. The standards are used for the purpose of calculating repayment of federal tax liability. “IRS National standards have been established for five necessary expenses: food, housekeeping supplies, apparel and services, personal care products and services, and miscellaneous” (IRS.gov, “IRSNational Standards: Food, Clothing and Other Items,” 8/25/2013). For example, under the category of food, the IRS allows for calculations of both food at home and food away from home. “Food at home refers to the total expenditures for food from grocery stores or other food stores. . . . Food away from home includes all meals and snacks, including tips, at fast-food, take out, delivery and full-service restaurants” (“National Standards: Food, Clothing and Other Items”).
Income and Expense Table and Future Income
The IRS Income Expense Table
Similar to the asset/equity table, the IRS income and expense table (IET) outlines necessary living expenses, where the taxpayer lists both total income and expenses. The IRS income and expense table is divided into two major categories where the taxpayer eventually calculates the net difference multiplied by one or more amounts to get to “amount that could be paid from future income” (IRS.gov, “Income and Expense Table,” 8/25/2013).
IRS Offer in Compromise Rules
IRS Offer in Compromise Rules – Salability of Assets
Salability, or marketability, is defined in terms of liquidity, “the ability to quickly convert property to cash or pay a liability” (IRS.gov, “Discount for Lack of Marketability: Job Aid for IRS Valuation Professionals, September 25, 2009, page 5” 8/25/2013). Under the IRS offer in compromise rules, liquidity is essentially the ability to convert an asset into cash without losing the principal. Conversion is not only specific to the term asset; it may include business, business ownership interest, and/or security.
IRS Financial Analysis
IRS financial analysis is conducted by the IRS in order to both analyze and verifies financial information. When conducting an IRS financial analysis, the IRS evaluates the income and expenses of the taxpayer to calculate for disposable income. Disposable income is defined as gross income less all allowable expenses. During their IRS financial analysis, the IRS also analyzes assets to resolve balance due accounts. To do this, the IRS will request that the taxpayer makes full, immediate payment if their cash on hand is equal to the total liability. In addition, the IRS will identify key sources of funds, “liquid assets which can be pledged as security or readily converted to cash” (IRS.gov, “Part 5. Collecting Process, Chapter 15. Financial Analysis, Section 1. Financial Analysis Handbook,” 8/24/2013). Identification of key sources of funds is also extended to considering unencumbered assets, interests in estates and trusts, and lines of credit (“Section 1. Financial Analysis Handbook”). When analyzing assets to resolve balance due accounts, the IRS will also determine the priority of the Notice of Federal Tax Lien.
IRS Form 433-A Breakdown
IRS Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals is used to collect financial information about the taxpayer and the taxpayer’s ability to repay a current tax liability.
Offer in Compromise Requirements
Offer in Compromise Requirements- Choosing Between the Types of Offers
Lump Sum Cash Offer
A taxpayer may choose the lump sum offer, which is defined as an offer where the taxpayer makes five or fewer installment payments within 24 months after the offer is accepted. “If a taxpayer submits a lump sum offer, the taxpayer must include with the Form 656, Offer in Compromise a nonrefundable payment equal to 20 percent of the amount. This payment is required in addition to the $150 application fee” (IRS.gov, “Topic 204 – Offers in Compromise,” 8/22/2013). Under the offer in compromise requirements, the nonrefundable amount cannot be returned to the taxpayer if the offer is either rejected or accepted. Instead, it will be applied to the taxpayer’s liability.
Pros and Cons of Offer In Compromise
You must weigh the pros and cons of offer in compromise in light of the other options available to you. When considering whether to choose this option, you must also consider the advantages and disadvantages. The offer in compromise allows you the opportunity to reduce your tax liability relative to your current financial situation. However, settling with the IRS by way of offer in compromise might be the second-best option. For example, the requirements for accepting an offer in compromise are stringent. Taxpayers are required to have low monthly income and practically no assets. “Thus you may end up wasting time and money on trying to [settle] with the IRS when that effort could have been applied toward a better method of resolving your tax liability” (IRSSolution.com, “Pros and Cons of An Offer in Compromise,” 8/24/2013).