Intimate Affairs with the IRS: How to Handle Those Delicate Relationship Issues
By Rosen, Charles*
Probably more often than you are aware (or would prefer) your path will cross that of the IRS. This article is intended to help you to identify common situations where IRS concerns should come to mind, and how to address those issues.
Episode One — Should You Make the First
Except in the case of an ‘equity’ receivership — i.e. one in which the receiver has only taken possession of a property, is collecting the rents and paying the operating costs — a receiver should file an IRS Form 56, Notice Concerning Fiduciary Relationship, upon appointment. This notifies the IRS of the appointment, but does not necessarily mean the receiver has an obligation to file tax returns or pay receivership estate taxes.
Episode Two – Must The Relationship Be…Taxing?
The answers to these questions depend upon the nature and extent of the receivership. If a receiver has control of all or substantially all of a taxpayer’s assets, and depending upon the length of the receivership, the receiver may have an obligation to file the appropriate income tax and information returns for the taxpayer, or the receiver may only have an obligation to provide the taxpayer with access to return information so the taxpayer can timely file the tax returns. If the receivership extends beyond the end of a normal tax return reporting period – and especially if it continues for more than a year beyond such date, the receiver likely has the obligation to file all of the appropriate returns. A taxpayer for these purposes is defined to include not only an individual, a husband and wife, a corporation or a multi-party limited liability company, but also includes those entities that are commonly called “passthrough” entities. These are legal entities that do not pay tax directly, but whose income is reported on tax returns of others. For example, a partnership files ‘information’ tax returns, but the income or losses are reported on the income tax returns of the partners. The same is usually true for 1120S corporations and LLCs.
It is especially important that the receiver know his/her tax obligations if employees are being paid, or if one or more of the so-called collected excise taxes are involved. A failure to report or/and pay these taxes (or to pay state payroll taxes) may well result in personal liability for the receiver. There are tax statutes that make a ‘responsible person’ (this means receivers) liable for taxes to be withheld or collected while the responsible person was in sole or shared control of the business. It cannot be stressed strongly enough that a receiver in such a situation must be doubly sure that the appropriate taxes have been withheld or collected, reported to the IRS or state taxing agency, and paid. In the case of a corporation, partnership, LLC or the like, the taxpayer’s Federal Employer Identification Number may be used on the tax returns. In the case of an individual or husband and wife-run business, a new Federal EIN should be obtained.
Episode Three – How Best to “Form” Your
If the receiver is required to file a Fiduciary Income Tax Return (Form 1041), what forms should he/she use to reflect the income and expenses of the business, capital gains and losses, etc.? The receiver should prepare a normal Form 1040 and schedules for the individual or husband and wife. These should be attached to the Form 1041 as attachments or exhibits and be very clearly labeled that they are just that – attachments! IRS service center personnel have a nasty habit of thinking when they receive a form 1040 attached to a 1041 that the Form 1040 is intended as a separate return that was only accidentally stapled to the Form 1041. Don’t let this happen to you.
Episode Four – Dealing with a Recorded IRS
Notice of Federal Tax Lien
Episode Five – How To Keep That Special Tax