Gulf Coast Tax Attorney Says BP Oil Spill Payments for Lost Wages are Taxable

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A significant number of individuals in New Orleans and other parts of Southern Louisiana and Mississippi have received payments for lost wages as a result of the Deepwater Horizon BP Oil Spill.  It seems established that the payments will be taxable as income.  However, very different tax consequences are possible depending on whether the individual is an employee or is self employed.  For self employed individuals, the IRS takes the position that the payment should be included in gross income, which would make the BP payment subject to the self employment tax.

See Gulf Oil Spill: Questions and Answers, Updated: June 25, 2010, at http://www.irs.gov/pub/irs-pdf/p4873a.pdf.

However, for employees, the IRS excludes the payment from the definition of wages, reasoning that the payments are not wages under the “social security tax and Medicare tax because it is not an actual payment for employment.”  Id.  The result is that self employed individuals will have a higher employment tax obligation than their employee counterparts.  Why the different treatment by the IRS is not clear, but the result under the IRS guidance does appear equitable.  Please note that the tax court has held that certain business interruption payments are not self employment income, and because the BP payments seem similar to business interruption payments, authority may exist for self employed individuals to treat the BP Payment as non-self employment income.  If this issue is analyzed and properly reported under the guidance of a qualified tax professional, self employed individuals could take this position on their 1040, contrary to the IRS guidance.

For a general discussion of the Oil Spill tax issues, See: Tax Issues and the Gulf of Mexico Oil Spill, at http://www.nationalaglawcenter.org/assets/crs/R41323.pdf.

If you need immediate assistance, please call us at (504) 302-4949.  We Can defend you during an IRS audit. Be protected and do not give in because you are afraid. Let our experienced IRS lawyers defend you.

IRS Attorney New Orleans Says Don’t Get Bullied

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IRS attorney New Orleans Paul Grego says do not let the Internal Revenue Service bully you during a tax audit.  One of the worse mistakes a tax peer can make during an audit is to just simply give up their hard earned money and pay the fines without first speaking to an IRS attorney in New Orleans.  In many cases, if you “go it alone” without a tax attorney, you may expose yourself to criminal prosecution.

If you need immediate assistance, please call us at 504-302-4949.  We Can defend you during an IRS audit. Be protected and do not give in because you are afraid. Let our experienced IRS lawyers defend you.

IRS Wage Garnishment

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Generally speaking an IRS wage garnishment, or deduction of money from a taxpayer’s paycheck, should come as little surprise. The IRS has a series of notices they send taxpayers, each with a more serious tone than the previous one. The wage garnishment is one of the IRS’s more aggressive forms of tax collection and should be taken very seriously. You must understand how wage garnishments work in order to protect your livelihood and that of your family.

How Does the IRS Take a Portion of Your Paycheck?

If you have ignored the repeated warnings of the IRS in the form of letters and notices, then the IRS may contact your employer and order them take part of every paycheck and send that money to the IRS. Should your employer refuse to do so, they can be held responsible for any amount which was not levied therefore it’s a safe bet to assume your employer will comply with the orders from the IRS. The IRS is legally allowed to take a portion of your regular wages, any bonuses you might be entitled to, and in some cases even money from your retirement plan.

Typically the IRS will take 25% or more of your pay without a thought as to how—or if—you will pay your bills and feed your family. The wage levy will endure until a sufficient amount of your monthly paychecks have been seized to fulfill your tax obligation along with any assessed interest and penalties. Remember that it is entirely likely that the IRS will take greater amounts of your paycheck than they will if you cooperate with them and set up a payment plan or other alternate form of payment. Tax garnishments are costly to the IRS however they find them an extremely effective scare tactic and will not hesitate to implement this tactic if the taxpayer refuses to pay.

How to Get Your IRS Wage Garnishment Released

Of course the most obvious way to have the wage garnishment released is to pay the IRS in full, including any interest and penalties. Unfortunately most people who are in this situation simply don’t have the funds to pay the IRS in full. You could consider a loan from friends or family, the sale of an asset or even refinancing your home in order to pay the IRS the money owed them. You could also file for an offer in compromise with the IRS which is essentially your offer to make alternative arrangements.

Many times this will allow taxpayers to settle their taxes for only a fraction of what is owed, however it can be extremely difficult to reach such a settlement with the IRS. Filing for an offer in compromise is a complex matter, and if you are considering pursuing this option you should definitely consult an experienced tax attorney to assist you. The IRS would be more likely to agree to a payment plan which would allow you to pay your back taxes in the form of a monthly installment plan over a period of three years. So long as you continue to make your regular, agreed-upon payments, your wage garnishment will be suspended and you will be back in relative good standing with the IRS.

Claiming Financial Hardship

If you can prove that the wage garnishment against you by the IRS is causing you severe financial hardship, the IRS will be obligated to temporarily stop collection actions until your financial standing has improved. In other words, if the IRS wage garnishment leaves you unable to pay normal living expenses, then they will not be able to implement the garnishment. You must prove this fact, however, as they will hardly take your word for it. You will have to file specific paperwork and provide financial records in order to prove to the IRS that you don’t have sufficient income for a wage garnishment. Some people who have found themselves under an IRS wage garnishment either change jobs or simply quit. If you change jobs it will likely take the IRS a few months to catch up to your new job and start garnishment proceedings again. You could also file for bankruptcy, which automatically stops wage garnishment, however this is a major step and should only be used as a last resort. If you are under threat of IRS wage garnishment don’t wait—consult with a knowledgeable tax attorney immediately to discuss your options.


2011 Reporting for 2010 Roth Rollovers and Conversions

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The IRS has released guidance on “2011 Reporting for 2010 Roth Rollovers and Conversions.” See http://www.irs.gov/retirement/article/0,,id=251832,00.html. While amounts transferred into Roth accounts are subject to income tax, these conversions are not subject to the 10% penalty tax for early withdrawals from qualified retirement plans. Unless elected otherwise, taxpayers converting Roth IRAs in 2010, “must report half of the taxable amount of these 2010 rollovers and conversions on your 2011 income tax return” and the other half in 2012.

As additional resources, see:

Publication 590, Individual Retirement Arrangements (IRAs)

Retirement Plans FAQs: IRAs

Topic 413 – Rollovers from Retirement Plans

Notice 2009-75, Rollovers from Employer Plans to Roth IRAs

Notice 2010-84, Guidance on In-Plan Roth Rollovers

Standard Mileage For Taxi Cab Owners

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For the 2011 tax year, taxi cab owners (non fleet owners) may now use the standard mileage deduction on schedule C. The IRS in Rev. Proc. 2010-51 and Notice 2010-88 revised the definition of cars for hire, and included them in the vehicle types that would qualify as eligible for the standard mileage deduction. Please note that listed property, under IRC Section 274, and Reg. Section. 1.274-5T require that the taxpayer be able to substantiate the business use of the taxi by keeping adequate records documenting the business and the miles driven. Please consult your tax professional on the adequacy of your mileage records.

What to Do About an IRS Tax Lien

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Receiving notice of an IRS tax lien can strike fear in the hearts of almost anyone. If you have received notice of an IRS tax lien it’s important that you fully understand the lien process including the types of property the lien attaches to, the consequences of a tax lien, how long the lien can be attached, and the priority of the tax lien. You will also want to know what circumstances will prompt the IRS to remove the tax lien. Any time a taxpayer neglects to pay taxes owed to the IRS, a federal lien may be filed against real and personal property of the taxpayer. Bank accounts, as personal property, are often subjected to federal tax liens however difficulties can arise when the accounts are jointly held by the taxpayer and any other person. Generally speaking, if you have back taxes which remain unpaid and have ignored or failed to cooperate with IRS demands to make such payments, you will likely be slapped with an IRS tax lien.

How Does a Tax Lien Work?

The IRS will send you, the taxpayer, a letter detailing the amount unpaid along with late payment penalties and interest. If this first letter is ignored, a series of four more letters with serious titles (CP-501, CP-503, CP-504 and LT11 or L1058) will follow. Each letter will be more and more threatening, and the final one will note the IRS intention to place a lien on your property. Should you continue to ignore these notices, a Notice of Federal Tax Lien will be filed which prevents you from selling or borrowing against any assets you currently own. If you’ve received a Notice of Federal Tax Lien you can be assured that the lien has already been filed and made a public record.

What Does a Tax Lien Mean for Me?

Should you have an IRS tax lien placed against your assets you will likely be financially crippled for a significant period of time. You will be unable to receive credit in order to buy a car or home, and will have to rely on others for any financing needs. You will not be able to hold any assets in your name, and all your creditors, including your mortgage company will be notified. The IRS will keep a tax lien against you for as long as they legally can—typically ten years—or until you have paid your IRS bill. The IRS have made themselves the highest priority creditor, so selling your house or car would only mean the IRS would snatch any proceeds from the sale. Should you do nothing about the tax lien the IRS can begin seizing your assets, selling them at a public or private sale. Even after the tax lien is released you may find your ability to borrow, seek employment or rent a home still significantly hampered.

Getting Rid of Your IRS Tax Lien

The primary way to rid yourself of an IRS tax lien is to pay your tax debt in full at which time the IRS will release the lien within 30 days. Some taxpayers may qualify for subordination which does not remove the lien but allows other creditors to move ahead of the IRS, making getting a loan or mortgage somewhat easier. The IRS may offer you payment options in order to allow you settle your tax debt over time, and it is always a good idea to speak to an experienced tax attorney to discuss your options. Your attorney will be able to discuss the difference between a tax lien which secures the government’s interest in your property as opposed to a tax levy which actually gives the IRS the right to seize your property in order to pay your tax debt. Don’t wait until your IRS issues become serious—speak with an attorney to get the best legal advice before you take any action.