Sacramento Tax Law Blog

Tax controversies often involve questions about the actions of taxpayers who may or may not have intended to file a false return. However, recent reports show a significant increase in fraudulent returns filed in connection with taxpayers' stolen identities.

The IRS has reported a significant rise in the number of identity theft cases, which are impacting taxpayers and IRS resources. These fraudulent filings have also caused delays in the agency's processing of returns. In fact, California ranks among the top three states per capita in tax controversy claims such as identity theft, and the IRS is currently struggling to keep up with the burgeoning number of cases.

required to recognize income from discharge of indebtedness, gain deferred pursuant to its installment sale, or gain on a disposition of an installment obligation.

The taxpayer sold property to a new corporation controlled by a private equity firm in exchange for cash and installment notes. The notes were issued by two LLCs. A collateral note was purchased to finance the payments of interest and principal required by one of the installment notes. The collateral note was then pledged in exchange for a guaranty of payment of principal and interest to the installment note's holder.

In this case, the taxpayer formed a wholly owned subsidiary, and that subsidiary in turn formed another wholly owned subsidiary that held the installment note and the guaranty. Both subsidiaries were disregarded entities for tax purposes. This transaction allowed the taxpayer to defer reporting the gain on the sale of the property until the installment note's maturity or until another event triggered Internal Revenue Code section 453 gain recognition. As a result of a bankruptcy filing, a default event occurred on the installment note. The taxpayer asserted that it did not have to recognize gain on the income from the installment note until the bankruptcy becomes final and any payout to the taxpayer is transferred to the holders of the notes.

In Notice 2012-34, the IRS has announced it will delay the proposed effective dates for information reporting by securities brokers for transactions related to debt instruments and options by one year.

The new regulations recommend changes to the reporting requirements for transactions involving all covered securities, including stock. Under the proposed Treasury Regulations, a broker must report the information required under Internal Revenue Code section 6045(g) for certain debt instruments acquired on or after January 1, 2013. The IRS will also require a broker to provide the information required under section 6045(h) for some options granted or acquired on or after January 1, 2013. Additionally, brokers will be required to provide the information required under section 6045A for a transfer of some debt instruments or options that occurs on or after January 1, 2013, and the information required under section 6045(B) for an organizational action occurring on or after 2012, that affects a debt instrument or an option.

You can read Notice 2012-34 here.

To say that audits are slightly stressful for California business owners may be the understatement of the year. For many people in Sacramento County, audits can be one of those most intimidating parts about running a business. Even savvy business owners get nervous when the IRS comes knocking and demands to find out the company's financial inner workings.

Fortunately, there are a number ways of dealing with an audit. Oftentimes, the IRS will simply send out a letter that claims there was a math error in the tax filing. Other times, the agency will indicate that it received a 1099 form that wasn't included in the tax returns that were originally filed. Though the IRS may require a penalty fee after the error is confirmed, this is usually only a minor setback. If it turns out there is actually no error, then the only necessary step may be to send a letter to the IRS with an explanation and a request to have any tax penalties waived.