August 19, 2017 630-250-5700rcolombik@colombik.com

INCOME TAX UPDATES

BY

RICHARD M. COLOMBIK, JD., CPA 

RICHARD M. COLOMBIK & ASSOCIATES, P.C. 

DAMAGES AWARDED FOR IRS VIOLATION OF AUTOMATIC STAY

In re Davis, 77 AFTR 2d. Para. 96.884, concerned an IRS levy post petition on a couple?s joint bank account.  The couple incurred bank charges for checks returned for insufficient funds due to the IRS levy.  The levy occurred three month?s after the couple had filed a Chapter 7 Petition.  The couple received Notice of Levy approximately one week after the three-month period subsequent to their filing a Chapter 7 Petition.   They incurred $180.00 of bad check charges.  Mr. & Mrs. Davis sought recovery of $200.00 in bank charges and $2,000.00 for embarrassment and punitive damages.  The court held that the IRS levy violated the automatic stay.  Pursuant to 11 USC Sec. 362(h), the IRS conceded that the bad check charges incurred was, at least, due to a technical violation of the stay, but the issue was whether the violation was willful? 

For violation of the stay to be willful, the only requirement is that the ?entity engaged in a deliberate act to violate the stay with the knowledge that the debtor has filed for bankruptcy?.  In re Flynn, 185 BR 89 (S.D. ALA. 1995), the court ruled that since actual notice of the bankruptcy was received, the violation was willful.  Therefore, the government?s levy did constitute a willful violation of the automatic stay.  As the debtors proceeded pro se, they were not awarded attorney?s fees, but the court did award them monetary damages of 150% of their out-of-pocket costs or $300.00.  The total award was $480.00. 

Not a huge award, but it shows that even an individual pro se litigant can obtain damages for violation of the automatic stay against the IRS.

PENALTY TIP

The taxpayer made an impermissible contribution to their IRA. If such overcontribution was withdrawn by the extended due date of one?s tax return, then no penalty would be due.  The taxpayer, prior to the extended due date, contacted their IRA Trustee and instructed him to transfer the funds out of their IRA.  The Trustee informed the taxpayer that they would, and promised to do so, but did not.  The transfer did not occur for three months after the return?s due date.  The IRS added penalty tax and interest.  The Tax Court ruled that the Trustee?s mistake did not make the taxpayer culpable.  Tax and penalty were eliminated in G. Richard Childs vs. Commissioner,1996 TCM 267.

IS YOUR EXTENSION VALID?

Many taxpayers file an automatic tax extension and either do not pay their tax in full, or unreasonably estimate they owe no tax.  In Patrick W. Healey vs. Commissioner, 1996 TCM 260, the taxpayer, and his spouse, estimated that they owed $4,800.00 in income tax.  When their return was actually filed, they owed $32,000.00.  The tax court held that the extension was retroactively revoked.  The payment of estimated tax is not what is required on an extension, although late payment of interest and penalties will, of course, apply to any balance that remains due.  What is required on the form is that the taxpayer reasonably estimates the amount of tax due.  If the amount estimated is not reasonable, then the extension is invalid.

CASINO LOSSES

In Edward D. Rood vs. Commissioner, 1996 TCM the taxpayer had run up $355,000.00 in casino debts.  Unable to pay the debts, he contacted the casinos and negotiated a settlement.  The taxpayer paid $100,000.00 to settle his debts.  The casino, in essence, forgave $255,000.00 of the $355,000.00 debt by their agreement.  The court held that forgiveness of indebtedness is fully taxable within IRC Sec. 61.  Therefore, the taxpayer?s gain in not paying the $255,000.00 also resulted in income tax on the savings.  

      Richard M. Colombik, JD, CPA, is the principal in the law firm of Richard M. Colombik & Associates, P.C.,  and served as former chairman of the ISBA Federal Taxation Council and also serves as liaison to the IRS district director.   Additionally, he is an officer of the American Association of Attorney-CPAs and of the Northwest Suburban Bar Association.  He can be reached at 847 619-5700.  The firm may be reached on their Internet home page at WWW.COLOMBIK.COM or by Mr. Colombik?s E-Mail at rcolombik@colombik.com.

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