JOURNAL 29
BACK IN THE USA
I am just back from my annual visit to the Illinois CPA Society’s Business & Technology Show. I’ve been going for about 14 years. It gives me an opportunity to update myself in US tax. It’s also a good excuse to visit Chicago. I’ve also discovered that the CPA show is only 10 days away from the Chicago Jazz Festival, probably the best free jazz festival in the world; everything in one place spread over three days. I love Chicago, I love jazz and I love the Rock Bottom Brewery, my current favourite Chicago pub (State and Grand for anyone who wants to visit). And of course its my annual visit to Wrigley Field, the home of the Chicago Cubs. Poor Cubbies. This has been a disaster season, played 139, lost 83, but I was lucky enough to see the highlight of the season, an 11.2 win! But this blog is not supposed to be about jazz or beer or baseball. Its supposed to be about tax, so I thought I’d point out how some differences between the UK and US approach to tax.
For a start the Federal Appeals Court has just held that while compensation for a physical injury is not income, compensation for mental injury is (capital gains are taxed as income in the US but at a reduced rate). Contrast that with TCGA 1992, s 51(2), which exempts compensation for both physical and mental injury, suffered by an individual from CGT.
Owe tax? Can’t afford to pay? In the UK HMRC will normally be prepared to accept payment by instalments, but this is wholly at their discretion. Often they will require the production of a list of assets and living expenses to demonstrate that you cannot pay. In the US the system is different. The IRS are required by law to let you pay by instalments over a period of up to three years if the amount you owe (excluding interest and penalties) is $10,000 or less, you have not entered into an instalment arrangement within the previous five years and you agree to fully comply with the tax laws whilst the arrangement persists. A generous IRS in practice allows instalments payments for amounts of up to $25,000 over five years. If you owe less than $10,000 and can pay over two years they do not even require any financial information – and you can get the agreement over the Internet.
For amounts over $25,000, or cases not qualifying for instalment payments, it’s a different story. Firstly you have to satisfy IRS you cannot pay immediately. And “satisfy” means what it says. They expect you to remortgage – or sometimes even sell – your house if you have equity in it that will cover the tax due. If that fails (or you are elderly or there are other special circumstances where forcing you onto the street will give IRS a bad name) they will negotiate an instalment agreement, but on their terms.
They have a simple formula. They want 80% of the forced sale value of all your assets plus the present value of your net income for the next five years. Ideally they would like the 80% figure within three months of agreeing the offer and the rest by monthly instalments. They will be prepared to collect the whole amount by monthly instalments, but if you go that route they may want a lien over your salary and your bank account to make sure you pay up, so your employer will know that you owe the money. Your net income in this formula is not your actual net income. It is your estimated income less what the IRS regard as reasonable expenses. These are published figures (unfortunately based on 2004 expenditure indices) which vary with your income but have no regard to your actual expenses.
So what about the difference between the IRS expense figure and your actual expenses? If you can pay in full within five years they may allow you to take account of this difference (what they call the excessive expenses). If you can’t, they will take account of it for one year only to allow you time to cut back on your expenditure.
What if you can’t pay within the five-year period? The IRS do have power to accept a reduced sum. In 2005 74,000 such “offers in compromise” were made. The IRS accepted 19,000 of them. To put this into perspective, there are roughly 143 million US taxpayers. And instalment payments are when the IRS is being nice. In 2005 they served 2,743,577 notices of levy on third parties, i.e. they went direct to the taxpayer’s employer or bank and told them to hand over to the IRS all monies becoming due to the taxpayer.
This year the IRS has started a private debt collection initiative under which they are handing over some debt collection to professional debt collection firms in return for a fee of 25% of the money collected. These private debt collectors have power to initiate enforcement action such as taking liens and serving levies on third parties. However they cannot agree to instalment arrangements unless the debt can be cleared in three years. They are not allowed to harass taxpayers at work (nor are the IRS under the Fair Debt Collection Practices Act). A taxpayer does have a right to refuse to deal with a private debt collector but it’s anyone’s guess how many will feel able to exercise that right.
Doesn’t that all make HMRC seem a model of reasonableness!
Robert W Maas
BACK IN THE USA
I am just back from my annual visit to the Illinois CPA Society’s Business & Technology Show. I’ve been going for about 14 years. It gives me an opportunity to update myself in US tax. It’s also a good excuse to visit Chicago. I’ve also discovered that the CPA show is only 10 days away from the Chicago Jazz Festival, probably the best free jazz festival in the world; everything in one place spread over three days. I love Chicago, I love jazz and I love the Rock Bottom Brewery, my current favourite Chicago pub (State and Grand for anyone who wants to visit). And of course its my annual visit to Wrigley Field, the home of the Chicago Cubs. Poor Cubbies. This has been a disaster season, played 139, lost 83, but I was lucky enough to see the highlight of the season, an 11.2 win! But this blog is not supposed to be about jazz or beer or baseball. Its supposed to be about tax, so I thought I’d point out how some differences between the UK and US approach to tax.
For a start the Federal Appeals Court has just held that while compensation for a physical injury is not income, compensation for mental injury is (capital gains are taxed as income in the US but at a reduced rate). Contrast that with TCGA 1992, s 51(2), which exempts compensation for both physical and mental injury, suffered by an individual from CGT.
Owe tax? Can’t afford to pay? In the UK HMRC will normally be prepared to accept payment by instalments, but this is wholly at their discretion. Often they will require the production of a list of assets and living expenses to demonstrate that you cannot pay. In the US the system is different. The IRS are required by law to let you pay by instalments over a period of up to three years if the amount you owe (excluding interest and penalties) is $10,000 or less, you have not entered into an instalment arrangement within the previous five years and you agree to fully comply with the tax laws whilst the arrangement persists. A generous IRS in practice allows instalments payments for amounts of up to $25,000 over five years. If you owe less than $10,000 and can pay over two years they do not even require any financial information – and you can get the agreement over the Internet.
For amounts over $25,000, or cases not qualifying for instalment payments, it’s a different story. Firstly you have to satisfy IRS you cannot pay immediately. And “satisfy” means what it says. They expect you to remortgage – or sometimes even sell – your house if you have equity in it that will cover the tax due. If that fails (or you are elderly or there are other special circumstances where forcing you onto the street will give IRS a bad name) they will negotiate an instalment agreement, but on their terms.
They have a simple formula. They want 80% of the forced sale value of all your assets plus the present value of your net income for the next five years. Ideally they would like the 80% figure within three months of agreeing the offer and the rest by monthly instalments. They will be prepared to collect the whole amount by monthly instalments, but if you go that route they may want a lien over your salary and your bank account to make sure you pay up, so your employer will know that you owe the money. Your net income in this formula is not your actual net income. It is your estimated income less what the IRS regard as reasonable expenses. These are published figures (unfortunately based on 2004 expenditure indices) which vary with your income but have no regard to your actual expenses.
So what about the difference between the IRS expense figure and your actual expenses? If you can pay in full within five years they may allow you to take account of this difference (what they call the excessive expenses). If you can’t, they will take account of it for one year only to allow you time to cut back on your expenditure.
What if you can’t pay within the five-year period? The IRS do have power to accept a reduced sum. In 2005 74,000 such “offers in compromise” were made. The IRS accepted 19,000 of them. To put this into perspective, there are roughly 143 million US taxpayers. And instalment payments are when the IRS is being nice. In 2005 they served 2,743,577 notices of levy on third parties, i.e. they went direct to the taxpayer’s employer or bank and told them to hand over to the IRS all monies becoming due to the taxpayer.
This year the IRS has started a private debt collection initiative under which they are handing over some debt collection to professional debt collection firms in return for a fee of 25% of the money collected. These private debt collectors have power to initiate enforcement action such as taking liens and serving levies on third parties. However they cannot agree to instalment arrangements unless the debt can be cleared in three years. They are not allowed to harass taxpayers at work (nor are the IRS under the Fair Debt Collection Practices Act). A taxpayer does have a right to refuse to deal with a private debt collector but it’s anyone’s guess how many will feel able to exercise that right.
Doesn’t that all make HMRC seem a model of reasonableness!
Robert W Maas
posted by CBW at 2:56 am
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