These brief tips explain steps to take to hold on to a passport when one has seriously delinquent tax debt; detail the benefits of a cash balance retirement plan; and discuss why having a formula-funding clause in an estate plan can unintentionally disinherit a spouse.
Hang on to your passport
A 2015 law allows the U.S. State Department to deny your passport application-or revoke or limit your current passport-if the IRS certifies that you have a seriously delinquent tax debt (SDTD). You have an SDTD if 1) you owe more that $52,000 (as indexed for inflation)in back taxes, penalties and interest, 2) the IRS has filed a Notice of Federal Tax Lien, and 3) the period to challenge the lien has expired or the IRS has issued a levy.
If you find yourself in this situation, there are several steps to take to avoid losing your passport, including:
- Paying your tax debt in full,
- Paying your debt on a timely basis according to an approved installment agreement, accepted offer in compromise, or settlement agreement with the Justice Department,
- Requesting a collection due process hearing regarding a levy, or
- Having collection suspended through a request for innocent spouse relief.
- Typically, the IRS won’t notify the State Department of SDTD if there are extenuating circumstances, such as bankruptcy, identity theft, federally declared disasters or other hardships.
Behind on your retirement savings? Consider a cash balance plan
Business owners looking for ways to boost their retirement savings should consider a cash balance plan. One problem with 401(k) and other defined contribution plans is that nondiscrimination rules prevent business owners from favoring themselves over rank-and-file employees when it comes to contributions.
A cash balance plan, although it looks and feels much like a defined contribution plan, is actually a defined benefit plan. Thus, to comply with nondiscrimination rules, benefits paid to highly compensated employees (HCEs) and non-HCEs must be comparable. As long as projected benefits don’t discriminate, contributions may be as high as necessary to fund those benefits. Often, that means dramatically higher contributions for owners approaching retirement than for younger employees.
Have you inadvertently disinherited your spouse?
Now that the federal gift and estate tax exemption has reached $11.40 million ($22.8 million for married couples), review your estate planning documents for provisions that can produce untended results, and amend them if necessary. It’s not unusual, especially in older plans, for a “formula-funding clause” to provide for an amount up to the current exemption to go into a credit shelter trust, with the balance going to a marital trust or directly to one’s surviving spouse.
This approach may have worked well in the past, if the value of your estate exceeded the exemption amount. But if that’s no longer the case, a formula-funding clause can cause all your property to go into the credit shelter trust, effectively disinheriting your spouse.
Ray Thomas, CPA
Ray joined Hancock & Dana in 2014. He specializes in representing individual and business clients with IRS issues including Audits, Notices, Collection, Employment Tax, Appeals, and Offer-In-Compromise. Ray joined Hancock & Dana after a 26-year career with the IRS as a Revenue Agent and manager. This background provides a unique understanding of how to resolve and prevent issues with the IRS.