jainen

>>There was no estate. All assets transferred TOD at time of his passing.<< There is ALWAYS an estate. It may be less than the exclusion amount, or qualify for the unlimited marital deduction. It may be exempt from probate under state law, paid to a beneficiary, or retained by a joint tenant. But for federal tax purposes, Pub 559 defines it: "gross estate includes the value of all property you own partially or outright at the time of death." Regardless, in every case the tax liability attaches to the assets. >>She signed both his 2010 and 2010 MFS as "Surviving Spouse."<< Technically a surviving spouse can only sign a joint return. She should have signed as personal representative, if she was in charge of his property and there was no executor or court appointee. I doubt it will be a problem this time, but it further erodes her potential claim to not be liable.

>>Is the wife responsible for the taxes owed on deceased spouse tax returns?<< There should be no doubt about her "joint and several" liability for 2008 and 2009. As for 2010 and 2011, Pub 559 says, "tax liability of an estate attaches to the assets of the estate..... the beneficiary can be liable for tax due and unpaid to the extent of the value of the estate assets received." So yes, since she inherited everything she is legally and I would say morally liable for the balance due for 2010 and 2011. If the IRS does not go after her, she can make up her own mind about that.

>>outrageous (the government can tell you what kind of bank account you can and can’t own?)<< My guess is political rhetoric twisted the facts concerning FDIC coverage for "non-interest bearing transaction accounts." My guess is he wanted government insurance for accounts that didn't qualify. >>is completely clueless as to why the state “burglarized” his account.<< As B. Jani says in another thread, "client should open their mail."

>>She should have had one of her children claim it.<< That would have triggered gift tax (video surveillance at the store, you know). According to this actuarial table http://www.ssa.gov/oact/STATS/table4c6.html she can expect seven more years. That's plenty of time to take advantage of the unlimited spousal exclusion by marrying her high school sweetheart (I mean the one who is high school now....)

>>Why would anyone ever do that?<< I can't answer for "anyone," but the Instructions for Form 5500 have several good reasons why SOMEONE should file the annual report.

>>this would not happen today<< Yeah, back in 2010 the agency was still being run by Bush-appointee Douglas Shulman, the same guy who oversaw that lame pretense at targeting conservative non-profits.

>>John and Jainen have given the best advice<< Thank you. John had several good suggestions, so take your pick. I only had one, but I prefer it. Especially the penultimate word, which doesn't get enough use in this good-hearted forum.

>>no computer could have come up with the figures in the notice<< CP2000 is entirely computerized. The Automated Under Reporter unit, with only a couple thousand employees, sends out more than five million each year. It's just a quick match against three BILLION W-2s and 1099s. There is no way they could look at them, and no reason they should until the taxpayer has a chance to challenge it. After all, most of them (like your client's) are at least partly correct. This is the "lowest" level of IRS correspondence audits. IRS puts almost no effort into them--another example of how IRS is shifting its audit process onto tax professionals. This is why they are usually so easy to resolve with a single phone call or letter. IRS knows that lots of these are wrong, even wildly wrong. But they just don't care because they also know we will deal with the client and assemble the documentation. That's our job. As I said before, I think it's okay. I want IRS to catch people (like your clients) who don't report investment income, And I think a low-cost letter with a month to respond is the right way to do that.

>>a local or state divorce decree certainly can't trump the Federal tax code. The splitting of employment and self-employment income absolutely makes no sense<< It makes sense in community property states, where the court DOES determine how income must be allocated and reported on the federal return. That's in the federal tax code. And even though a divorce decree can not over-ride federal law, it DOES bind the two parties themselves in the way they must apply the law.

>>No it doesn't answer the question!!<< Yeah, you're right! I was just thinking about the parent's plan. The student can join that in any case, but it might be dual coverage if her own plan requires all employees to be included.

>>this does not give an answer to the original question<< Yes it does.

>>how to show this so that the IRS isn't going to send a CP-2000 and assess SE tax<< No CP2000 has ever assessed SE tax, or ever will. It is simply a proposal based on only one side of the story, so you simply tell the other side of the story and it goes away. Of course that assumes there IS another side of the story, which of course we can't assume. If used correctly, Code 7 suggests the "easement" involved services such as security, refueling, cleaning and maintenance. Seems unlikely, but one can't assume the client's position when the client provides documentary evidence of something else. Check it out. P.S. If IRS got interested, they would probably consider this a sub-lease and assign the income to the corporation. So even though you also use Schedule E, a goofy treatment like zero-net Schedule C could conceivably attract attention and come 'round to trigger an audit of the corporation with all its cash receipts.

>>keep your political zealotry to your own threads<< I agree, and offer two more aspects. First, The IRS is inherently political, so even technical issues might bring up legitimate political questions. For example, tax professionals must deal with the new fraud and identity theft initiatives. Tax planning also calls for understanding politcal trends in tax rates, deductions, AMT, etc. But what made me sign off a few weeks ago was the name-calling and other personal attacks. That shouldn't be tolerated, even in a political forum.

>>I'm gravely concerned about the competency of IRS's employees<< Not me! As an honest taxpayer myself I want the IRS to be assertive in collections. To me that means they should make more challenges than they expect to win. Also as a taxpayer I want them to control administrative costs--and what does that mean besides less recruitment, training, supervision, and analysis of results? As a taxpayer representative, I also want them to be, well, not exactly incompetent but certainly at a disadvantage in terms of my representation. In the original post, these clients were unquestionably wrong. They deliberately under-reported investment income, for which there is no de minimus amount. I can't say about the 1099, except there is no particular reason to assume the company handled it correctly. Whatever, it was a simple matter easily addressed by a single phone call or letter. I'd guess the error arose not from an incompetent employee but from poor quality control procedures in computer processing. Could be data entry, programming, or many other vulnerabilities. That's what we get for wanting less administration--less administration! Cutting government means cutting government services.

>>Law abiding citizens do not murder people with guns.<< Ummm, obviously by definition if someone commits murder with a gun they are not a law-abiding citizen! Maybe they don't intend to, but it is still a crime even if it isn't planned ahead of time. The fact is that only about one out of five gun murders are by strangers; mostly it's family members or friends. And that doesn't count accidental or negligent shootings, which exceed the number of actual murders and almost all involve just family and friends. Guns in the hands of civilians create danger for your loved ones, not protection. Except, of course, in a well-regulated militia. Just like it says in the Constitution.

>><<the Mortgage Forgiveness Act expired for 2013<< Well, first of all, that was extended to 12/31/13, so it still applies if the California mortgage was refinanced or was otherwise a recourse loan. (Remember that the amount excluded reduces the basis of the property, so there could still be capital gain even though property values dropped.) It never applied to a non-recourse loan, such as the original purchase mortgage. There can't be any C.O.D. income to exclude because the loan is satisfied in full by the foreclosure (or short sale the lender agrees to). So capital gain is calculated from the mortgage balance, regardless of the actual sale price. In either case the mortgage balance does not include accrued interest for homeowners who decided to stop making payments . If the lender bothers to put that on a 1099-C, it can't be excluded under Mortgage Forgiveness or Section 121.

>>if they elect S-Corp status, that the profits can be kept in the corporation and not pay tax<< That is absolutely true. If the corporation elects S-status, it will pay no tax on its profits. No distribution is required, so the profits can compound tax-free until needed. It is a common business strategy to take advantage of C-status in early years when there is little or no income, and switch to S-status when it starts making money. Apparently, however, your clients do not understand the implications for individual shareholders which will vary according to unrelated factors. As this is a complex issue, I would not advise them on it one way or another without a planning engagement billed separately.

>>kids are not involved at all... << ...except for their equity stake, which just happens to be the only relevant issue here. Read the partnership agreement!

>>Shouldn't he get a bigger share of the loss?<< No, not necessarily, especially if he is already deducting Unreimbursed Partnership Expenses. What does the partnership agreement say? Other partners may not feel such expenses are necessary, or constitute additional equity. Maybe they even resent him wasting money on things that could be fixed in person, or maybe somebody else wants more equity for handling tenant problems. So mas has a big conflict of interest in the original post. Who exactly is the client--the partner, the entity, or the family?

>>Number of Pages<< This has been a popular whine for decades. So it grew three or four percent last year. Big deal! That's the same increase cited this morning in another thread in this forum (More taxpayers file from home) for self-filing electronically. Apparently a bigger tax code isn't harder; it's easier. Because even though we have more data, we have even more capacity for data processing. Computers make number of pages irrelevant. Sure, our world is more complicated. Used to be, when you drove across a bridge you paid the toll. Now, http://www.goldengate.org/tolls/tollpaymentchoices.php , you pre-pay, send it in, run an account, phone or on-line, even at a booth--just not when you actually cross the bridge.

>>an increase of more than 4 percent<< Although another thread in this forum concerns the "growing complexity" of the tax code, apparently more and more taxpayers seem to find the filing process to be rather simple.

>>change the percentage of profit/loss, because he sold another property in 2012 that has a gain<< They can change the partnership agreement, but it has to make economic sense within the partnership, not because of some unrelated tax motivation. Generally one partner wouldn't take more of the loss without being compensated by the other partners in some way.

>>"teach her the tax laws" so that she can understand why she owes money<< That sounds like a perfectly reasonable request to me--I wish all my clients would ask it! An economist understands the role of taxation but not the specific application of law. So now you have a tax planning engagement, in addition to the tax preparation engagement. Stuck like glue? Absolutely--and isn't your goal to have loyal clients like her, hard working professionals who rely on your expertise? You may be able to set it up as a W-4 planner or estimated payments, but you should also discuss the tax implications of 1099s. That may affect how she prices her services. and allow work-related deductions against SE tax. Professional expenses have to be allocated between Schedules A and C, so you could easily fill an hour or three just charging for what you already know.

>>The entire property was sold as a unit.<< Previous use doesn't matter, but it sounds like the trust would still report as two sales. Allocate proceeds and expenses by any reasonable method such as square footage or relative values. Assuming the tenant remained after the death, report the rental part on Form 4797. Report the investment or personal part on Schedule D (nondeductible loss if a beneficiary used it personally).

>>In 1041 Schedule D it does have sale of principal residence but the maximum exclusion does not fill in and has no link.<< I think that applies if the BENEFICIARY uses the property as a primary residence. Otherwise an irrevocable trust is not eligible for Section 121 exclusion, regardless of how the grantor previously used the property.. See Letter Ruling 200104005.