Individuals in Kansas City should hope that a tax preparer search never again turns up a fraud like Gerald A. Poynter II. Mr. Poynter operated “Jerry Love Ministries”, a ministry that included sidelines of a karate school and tax preparation business. After first being barred from promoting a tax scam, Mr. Poynter has now been charged with a felony.

The initial sanction against Mr. Poynter resulted from his preparation of tax returns that improperly claimed refunds. Apparently, taxpayers were suckered into using Mr. Poynter’s tax preparation services based upon his claim that the government has plenty of money available for anyone who asks for it when filing a tax return.

In the latest action, Mr. Poynter has been indicted as the leader of a conspiracy involving seven “branch managers” across the US. They allegedly recruited at least 145 clients in a fraudulent tax scheme involving at least 284 tax returns. One of the branch managers operated from an office at Mr. Poynter’s karate school. According to the indictment, the IRS paid $92,974 in fraudulent refunds for returns prepared at that location claiming approximately $12,400,000 in total refunds.

At least $2,862 of tax preparer fees were collected at the “branch” office. Making matters more absurd, the fees were deposited to the bank account of the branch manager’s other business called ABC Seamless Siding.

In a related matter, Mr. Poynter represented himself in a civil suit that reveals something about his tax preparation practices. A lawyer for the Justice Department asked the judge to strike Mr. Poynter’s initial response to the civil proceeding. The document filed by Mr. Poynter is titled “Ecclesiastical Deed Poll” and is signed with a fingerprint. Justice Department pleadings complained that the document contained “sections of nonsensical works strung together in the shapes of paragraphs.” Mr. Poynter also filed a document labeled “Deed of Ecclesiastical Dishonor”, which demanded that the court explain its “constitutional convening authority.”

Among the court documents in the civil case are details about paperwork signed by Mr. Poynter’s tax clients. A Registered Tax Return Preparer should warn people to waive red flags when signatures are requested on such documents as a “non-disclosure” agreement with a $20 million penalty. Any legitimate tax procedure is public knowledge. If a plan is described as an IRS secret, it is definitely a fraudulent tax scheme.

IRS Circular 230 Disclosure

Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.

Individuals in Kansas City should hope that a tax preparer search never again turns up a fraud like Gerald A. Poynter II. Mr. Poynter operated “Jerry Love Ministries”, a ministry that included sidelines of a karate school and tax preparation business. After first being barred from promoting a tax
scam, Mr. Poynter has now been charged with a felony.

The initial sanction against Mr. Poynter resulted from his preparation of tax returns that improperly claimed refunds. Apparently, taxpayers were suckered into using Mr. Poynter’s tax preparation services based upon his claim that the government has plenty of money available for anyone who asks for it when filing a tax return.

In the latest action, Mr. Poynter has been indicted as the leader of a conspiracy involving seven “branch managers” across the US. They allegedly recruited at least 145 clients in a fraudulent tax scheme involving at least 284 tax returns. One of the branch managers operated from an office at Mr. Poynter’s karate school. According to the indictment, the IRS paid $92,974 in fraudulent refunds for returns prepared at that location claiming approximately $12,400,000 in total refunds.

At least $2,862 of tax preparer fees were collected at the “branch” office. Making matters more absurd, the fees were deposited to the bank account of the branch manager’s other business called ABC Seamless Siding.

In a related matter, Mr. Poynter represented himself in a civil suit that reveals something about his tax preparation practices. A lawyer for the Justice Department asked the judge to strike Mr. Poynter’s initial response to the civil proceeding. The document filed by Mr. Poynter is titled “Ecclesiastical Deed Poll” and is signed with a fingerprint. Justice Department pleadings complained that the document contained “sections of nonsensical works strung together in the shapes of paragraphs.” Mr. Poynter also filed a document labeled “Deed of Ecclesiastical Dishonor”, which demanded that the court explain its “constitutional convening authority.”

Among the court documents in the civil case are details about paperwork signed by Mr. Poynter’s tax clients. A Registered Tax Return Preparer should warn people to waive red flags when signatures are requested on such documents as a “non-disclosure” agreement with a $20 million penalty. Any legitimate tax procedure is public knowledge. If a plan is described as an IRS secret, it is definitely a fraudulent tax scheme.

IRS Circular 230 Disclosure

Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.
]]> http://ffaadmin.wordpress.com/2011/11/04/irs-tax-preparers-lead-people-away-from-fraudulent-schemes/feed/ 0 ffaadmin http://ffaadmin.wordpress.com/2011/11/04/income-shifting-taxpayers-need-cautionary-advice-of-enrolled-agents-2/ http://ffaadmin.wordpress.com/2011/11/04/income-shifting-taxpayers-need-cautionary-advice-of-enrolled-agents-2/#comments Fri, 04 Nov 2011 14:33:09 +0000 ffaadmin http://ffaadmin.wordpress.com/2011/11/04/income-shifting-taxpayers-need-cautionary-advice-of-enrolled-agents-2/ Continue reading →]]> Individuals with incorporated businesses are commonly encountered when conducting enrolled agent jobs. They are inclined to have complex tax situations. Unfortunately, people who control their own corporations also treat these distinctive entities as extensions of themselves. But, enrolled agents know that moving funds in and out of a corporation for personal gain has a tax impact that draws IRS attention.

Using closely held corporations as a means to shift income into lower tax brackets is tempting. For example, an individual in the 35 percent tax bracket finds that moving income to a corporation can produce an overall lower tax. The first $50,000 of corporate income is taxed at only a 15 percent rate. Withdrawing that income as a dividend for personal use creates another 15 percent tax. The combination is still less than 35 percent.

An adviser with enrolled agent training can help taxpayers avoid income-shifting tricks that cause IRS trouble. One of the common ways that income is moved between a corporation and its operating shareholder is “management fee” arrangements. The problem with suddenly moving money using this technique was recently revealed in a tax court decision. This case serves as a valuable illustration for enrolled agent review.

The taxpayer has a hauling business that is a regular C corporation. In addition, the taxpayer has an LLC that owns 30 trucks, which it leases to the C corporation. The income for this single-member LLC was reported on the taxpayer’s personal tax return, which is the correct process learned in an enrolled agent course.

In 2004 and 2005, the LLC paid management fees of $101,382 and $108,000 to the C corporation. The taxpayer therefore deducted these LLC expenses on his personal tax returns and added the amounts as C corporation income. The IRS disallowed about $120,000 of the fees for the two years.

The Tax Court agreed. No management contract existed and the inter-company invoices failed to define the services provided. The taxpayer argued to no avail that the C corporation employees spent a lot of time performing work for the single-member LLC. However, to the Tax Court, services performed by the C corporation employees appeared to embody work they would have performed anyway and did not benefit the LLC. Work provided by the taxpayer seemed to involve operation of his own LLC rather than consulting services for the LLC delivered as an employee of the C corporation.

The Tax Court found that the taxpayer simply conducted income shifting at year-end solely for the purpose of optimizing the tax effect. Whenever enrolled agent work encounters “management fees”, precautions are demanded to assure that fees are paid under a formal contract and not an arrangement strictly for tax purposes. That advice can save the pain of a 20 percent accuracy penalty, which the Tax Court may impose.

IRS Circular 230 Disclosure

Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.

Using closely held corporations as a means to shift income into lower tax brackets is tempting. For example, an individual in the 35 percent tax bracket finds that moving income to a corporation can produce an overall lower tax. The first $50,000 of corporate income is taxed at only a 15 percent rate. Withdrawing that income as a dividend for personal use creates another 15 percent tax. The combination is still less than 35 percent.

An adviser with enrolled agent training can help taxpayers avoid income-shifting tricks that cause IRS trouble. One of the common ways that income is moved between a corporation and its operating shareholder is “management fee” arrangements. The problem with suddenly moving money using this technique was recently revealed in a tax court decision. This case serves as a valuable illustration for enrolled agent review.

The taxpayer has a hauling business that is a regular C corporation. In addition, the taxpayer has an LLC that owns 30 trucks, which it leases to the C corporation. The income for this single-member LLC was reported on the taxpayer’s personal tax return, which is the correct process learned in an enrolled agent course.

In 2004 and 2005, the LLC paid management fees of $101,382 and $108,000 to the C corporation. The taxpayer therefore deducted these LLC expenses on his personal tax returns and added the amounts as C corporation income. The IRS disallowed about $120,000 of the fees for the two years.

The Tax Court agreed. No management contract existed and the inter-company invoices failed to define the services provided. The taxpayer argued to no avail that the C corporation employees spent a lot of time performing work for the single-member LLC. However, to the Tax Court, services performed by the C corporation employees appeared to embody work they would have performed anyway and did not benefit the LLC. Work provided by the taxpayer seemed to involve operation of his own LLC rather than consulting services for the LLC delivered as an employee of the C corporation.

The Tax Court found that the taxpayer simply conducted income shifting at year-end solely for the purpose of optimizing the tax effect. Whenever enrolled agent work encounters “management fees”, precautions are demanded to assure that fees are paid under a formal contract and not an arrangement strictly for tax purposes. That advice can save the pain of a 20 percent accuracy penalty, which the Tax Court may impose.

IRS Circular 230 Disclosure

Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.
]]> http://ffaadmin.wordpress.com/2011/11/04/income-shifting-taxpayers-need-cautionary-advice-of-enrolled-agents/feed/ 0 ffaadmin http://ffaadmin.wordpress.com/2011/11/04/enrolled-agent-study-covers-when-tax-exempt-entities-owe-tax-2/ http://ffaadmin.wordpress.com/2011/11/04/enrolled-agent-study-covers-when-tax-exempt-entities-owe-tax-2/#comments Fri, 04 Nov 2011 14:29:14 +0000 ffaadmin http://ffaadmin.wordpress.com/2011/11/04/enrolled-agent-study-covers-when-tax-exempt-entities-owe-tax-2/ Continue reading →]]> Tax law allows many types of entities to exempt their income from tax. As long as an activity serves a social benefit, it may apply for tax-exempt status. A business operation that uses profits for a public purpose that’s acceptable to the IRS is eligible for tax-exempt classification. Such businesses may even compete with taxable operations.

Some enrolled agent careers are solely focused on helping only entities that are tax-exempt. But the services don’t end merely when the IRS approves the non-taxable status. More enrolled agent work is available for the annual tax filing of tax-exempt organizations. They must report income despite not incurring tax.

In fact, limitations exist to the non-assessment of tax. Therefore, an enrolled agent tax preparer must consider “Unrelated Business Income Tax.” This is essentially a type of corporate income tax that is applied to any business activity of a tax-exempt entity that is unrelated to the public benefit provided by the organization.

This also applies to pension funds, which are only entitled to investment income such as interest, dividends, and capital gains. The rules about unrelated businesses also keep IRAs exempt from tax. Consequently, an IRA trustee is not entitled to operate a business.

Charities occasionally earn a profit from a nonrecurring activity. In most cases, enrolled agent study reveals these situations as taxable unrelated business. The only way a tax-exempt entity can escape this category is when a business is part of the normal IRS approved ways for the organization to raise funds for a charitable purpose.

Some EA training about tax-exempt organizations is essential for any enrolled agent who expects to advise these entities. Even enrolled agents that don’t specialize in tax work for non-taxable charities should recognize cases where an organization might incur unrelated business income tax. However, providing tax services specifically to tax-exempt entities is a growing area of enrolled agent employment.

For example, the National Education Association recently learned in Tax Court about advice it could have used from an EA practice about unrelated business income. Dues received by the NEA from its members are tax-exempt. However, the NEA publishes two magazines for members, which generate income from selling advertising. This is unrelated business income. Circulation costs were deducted against this income as a business expense.

The IRS said that some of the dues are allocable to unrelated business income because members receive the magazines, which are unrelated business activities. The Tax Court agreed, saying that a portion of membership dues is related to magazine circulation income. An appeal is likely. But, if the NEA loses, it will owe $1.1 million of tax.

IRS Circular 230 Disclosure

Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.

Some enrolled agent careers are solely focused on helping only entities that are tax-exempt. But the services don’t end merely when the IRS approves the non-taxable status. More enrolled agent work is available for the annual tax filing of tax-exempt organizations. They must report income despite not incurring tax.

In fact, limitations exist to the non-assessment of tax. Therefore, an enrolled agent tax preparer must consider “Unrelated Business Income Tax.” This is essentially a type of corporate income tax that is applied to any business activity of a tax-exempt entity that is unrelated to the public benefit provided by the organization.

This also applies to pension funds, which are only entitled to investment income such as interest, dividends, and capital gains. The rules about unrelated businesses also keep IRAs exempt from tax. Consequently, an IRA trustee is not entitled to operate a business.

Charities occasionally earn a profit from a nonrecurring activity. In most cases, enrolled agent study reveals these situations as taxable unrelated business. The only way a tax-exempt entity can escape this category is when a business is part of the normal IRS approved ways for the organization to raise funds for a charitable purpose.

Some EA training about tax-exempt organizations is essential for any enrolled agent who expects to advise these entities. Even enrolled agents that don’t specialize in tax work for non-taxable charities should recognize cases where an organization might incur unrelated business income tax. However, providing tax services specifically to tax-exempt entities is a growing area of enrolled agent employment.

For example, the National Education Association recently learned in Tax Court about advice it could have used from an EA practice about unrelated business income. Dues received by the NEA from its members are tax-exempt. However, the NEA publishes two magazines for members, which generate income from selling advertising. This is unrelated business income. Circulation costs were deducted against this income as a business expense.

The IRS said that some of the dues are allocable to unrelated business income because members receive the magazines, which are unrelated business activities. The Tax Court agreed, saying that a portion of membership dues is related to magazine circulation income. An appeal is likely. But, if the NEA loses, it will owe $1.1 million of tax.

IRS Circular 230 Disclosure

Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.
]]> http://ffaadmin.wordpress.com/2011/11/04/enrolled-agent-study-covers-when-tax-exempt-entities-owe-tax/feed/ 0 ffaadmin http://ffaadmin.wordpress.com/2011/11/04/enrolled-agent-jobs-showing-taxpayers-how-to-exercise-their-rights-2/ http://ffaadmin.wordpress.com/2011/11/04/enrolled-agent-jobs-showing-taxpayers-how-to-exercise-their-rights-2/#comments Fri, 04 Nov 2011 14:25:23 +0000 ffaadmin http://ffaadmin.wordpress.com/2011/11/04/enrolled-agent-jobs-showing-taxpayers-how-to-exercise-their-rights-2/ Continue reading →]]> Most people are easily alarmed upon receiving a letter from the IRS. They seek the services of tax experts with enrolled agent certification because these professionals can represent taxpayers before the IRS in addition to preparing various types of tax forms.

Another aspect of enrolled agent jobs is explaining to taxpayers that the IRS doesn’t have unlimited power. In fact, reports of abusive IRS practices in the 1990s led Congress to pass two Taxpayer Bill of Rights measures. As enrolled agents explain these rights to prospective clients, they should emphasize that EA training provides a deeper understanding about dealing with the IRS.

An especially important right is that taxpayers are entitled to not meet with the IRS. The stress of a face-to-face meeting with an IRS agent is easily avoidable. Taxpayers simply ask for a correspondence audit. This permits them to obtain expertise from someone on an enrolled agent list, who can assure that written details are clearly conveyed to the IRS.

Every taxpayer who receives an IRS notice has the right to challenge it. Although most notices demand payment, recipients are not required to automatically remit the money. Swift challenge to incorrect notices is imperative. Responses prepared by enrolled agents convey accurate information with supporting documentation.

A well-kept secret is that taxpayers have the right to eliminate penalties. An IRS agent can cancel any tax penalty. Professionals from an enrolled agent program know how to show that penalty abatement is warranted because taxpayers acted in good faith without an effort to deceive the IRS. Taxpayers also have a right to appeal any IRS decision. Appellate authority exists for any IRS judgment – even one resulting in a tax lien or tax levy. But taxpayers should conduct an immediate enrolled agent search for professional representation because only 30 days are provided to exercise a right of appeal.

The IRS sometimes makes obvious errors in applying tax rules to certain cases. The right to use the Taxpayer Advocate Service is therefore an important means of resolving some IRS disputes.

A taxpayer who is unable to pay a tax debt has the right to an installment agreement with the IRS. Automatic approval for reasonable installment terms is obtained when the balance due is less than $25,000. For larger amounts, taxpayers must negotiate with the IRS and demonstrate that installments are the only payment avenue. This requires submitting financial information to the IRS about income, expenses, assets and liabilities.

IRS Circular 230 Disclosure

Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.

Another aspect of enrolled agent jobs is explaining to taxpayers that the IRS doesn’t have unlimited power. In fact, reports of abusive IRS practices in the 1990s led Congress to pass two Taxpayer Bill of Rights measures. As enrolled agents explain these rights to prospective clients, they should emphasize that EA training provides a deeper understanding about
dealing with the IRS.

An especially important right is that taxpayers are entitled to not meet with the IRS. The stress of a face-to-face meeting with an IRS agent is easily avoidable. Taxpayers simply ask for a correspondence audit. This permits them to obtain expertise from someone on an enrolled agent list, who can assure that written details are clearly conveyed to the IRS.

Every taxpayer who receives an IRS notice has the right to challenge it. Although most notices demand payment, recipients are not required to automatically remit the money. Swift challenge to incorrect notices is imperative. Responses prepared by enrolled agents convey accurate information with supporting documentation.

A well-kept secret is that taxpayers have the right to eliminate penalties. An IRS agent can cancel any tax penalty. Professionals from an enrolled agent program know how to show that penalty abatement is warranted because taxpayers acted in good faith without an effort to deceive the IRS.
Taxpayers also have a right to appeal any IRS decision. Appellate authority exists for any IRS  judgment — even one resulting in a tax lien or tax levy. But taxpayers should conduct an immediate enrolled agent search for professional representation because only 30 days are provided to exercise a right of appeal.

The IRS sometimes makes obvious errors in applying tax rules to certain cases. The right to use the Taxpayer Advocate Service is therefore an important means of resolving some IRS disputes.

A taxpayer who is unable to pay a tax debt has the right to an installment agreement with the IRS. Automatic approval for reasonable installment terms is obtained when the balance due is less than $25,000. For larger amounts, taxpayers must negotiate with the IRS and demonstrate that installments are the only payment avenue. This requires submitting financial information to the IRS about income, expenses, assets and liabilities.

IRS Circular 230 Disclosure

Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.
]]> http://ffaadmin.wordpress.com/2011/11/04/enrolled-agent-jobs-showing-taxpayers-how-to-exercise-their-rights/feed/ 0 ffaadmin http://ffaadmin.wordpress.com/2011/11/04/advice-from-enrolled-agent-school-graduates-averts-big-tax-mistakes-2/ http://ffaadmin.wordpress.com/2011/11/04/advice-from-enrolled-agent-school-graduates-averts-big-tax-mistakes-2/#comments Fri, 04 Nov 2011 14:22:56 +0000 ffaadmin http://ffaadmin.wordpress.com/2011/11/04/advice-from-enrolled-agent-school-graduates-averts-big-tax-mistakes-2/ Continue reading →]]> Advice from a high quality tax expert helps people avoid mistakes they can make with limited information. A top source of assistance on tax matters is enrolled agents. Graduates of enrolled agent school learn about only tax subjects for their professional examination. By contrast, the CPA exam covers other topics.

Differences in the services of an enrolled agent vs. CPA became clear when national accounting firm KPMG marketed a tax shelter to owners of S corporations. As it turns out, the arrangement appears to have destroyed taxpayer S corporation elections.

The tax shelter involved S corporation shareholders donating shares to a tax-exempt entity. When the type of income was interest and dividends, the charity had tax-free income and did not incur tax on “unrelated business income.” During a pre-determined period, the S corporations made no distributions to shareholders. At the end of the period, the charitable organizations donated the shares back to the original owners.

The income that had accumulated tax-free within the corporations was then available for distributions to shareholders. Instructions from enrolled agent exam preparation convey that distributions to S corporation shareholders are not taxed because the shareholders have already paid tax on the corporate income. But the KPMG program sheltered the income from tax. The result was nontaxable distributions on income that was never taxed.

It all seems like a neat way to legally avoid tax. However, enrolled agent classes reveal that nothing is ever neat when applying the tax code. The work is always fraught with difficulty and challenges.

One of the measures KPMG had to implement in the tax shelter was assurance that the stock shares would revert back to an original owner. To protect against a charity’s refusal to return shares, warrants were issued to the original shareholder. These warrants enabled potential purchase of a large number of new shares that could dilute the charity’s holdings into insignificance. In addition, shareholders retained control over their S corporations during the donation periods by only donating non-voting stock. They retained a separate class of all the voting shares.

These facts would have raised an eyebrow of any IRS enrolled agent if only a purchaser of the KPMG tax shelter had consulted with one. The troubling feature of the entire program is the multiple classes of stock. S corporations can only have one class of stock. Distribution and liquidation rights must remain identical for all shares.

The court pointed out that warrants are alternative “instruments, obligations and arrangements” that are prohibited for S corporations. That is, the warrants prevent the charity from future enjoyment of the full rights of distribution and liquidation. This case points out the trouble with S corporations using warrants or options to achieve discriminatory results among shareholders. Adding that information to EA continuing education can allow enrolled agents to save many taxpayers from the agony of losing S corporation status.

IRS Circular 230 Disclosure

Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.

Differences in the services of an enrolled agent vs. CPA became clear when national accounting firm KPMG marketed a tax shelter to owners of S corporations. As it turns out, the arrangement appears to have destroyed taxpayer S corporation elections.

The tax shelter involved S corporation shareholders donating shares to a tax-exempt entity. When the type of income was interest and dividends, the charity had tax-free income and did not incur tax on “unrelated business income.” During a pre-determined period, the S corporations made no distributions to shareholders. At the end of the period, the charitable organizations donated the shares back to the original owners.

The income that had accumulated tax-free within the corporations was then available for distributions to shareholders. Instructions from enrolled agent exam preparation convey that distributions to S corporation shareholders are not taxed because the shareholders have already paid tax on the corporate income. But the KPMG program sheltered the income from tax. The result was nontaxable distributions on income that was never taxed.

It all seems like a neat way to legally avoid tax. However, enrolled agent classes reveal that nothing is ever neat when applying the tax code. The work is always fraught with difficulty and challenges.

One of the measures KPMG had to implement in the tax shelter was assurance that the stock shares would revert back to an original owner. To protect against a charity’s refusal to return shares, warrants were issued to the original shareholder. These warrants enabled potential purchase of a large number of new shares that could dilute the charity’s holdings into insignificance. In addition, shareholders retained control over their S corporations during the donation periods by only donating non-voting stock. They retained a separate class of all the voting shares.

These facts would have raised an eyebrow of any IRS enrolled agent if only a purchaser of the KPMG tax shelter had consulted with one. The troubling feature of the entire program is the multiple classes of stock. S corporations can only have one class of stock. Distribution and liquidation rights must remain identical for all shares.

The court pointed out that warrants are alternative “instruments, obligations and arrangements” that are prohibited for S corporations. That is, the warrants prevent the charity from future enjoyment of the full rights of distribution and liquidation. This case points out the trouble with S corporations using warrants or options to achieve discriminatory results among shareholders. Adding that information to EA continuing education can allow enrolled agents to save many taxpayers from the agony of losing S corporation status.

IRS Circular 230 Disclosure

Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.
]]> http://ffaadmin.wordpress.com/2011/11/04/advice-from-enrolled-agent-school-graduates-averts-big-tax-mistakes/feed/ 0 ffaadmin