Audit

[unregistered]

I have a client who has been audited for 2003 tax return - I did not do his 2003 return.

This client has parkinson, has been retired, and can not do anything for years. He was working as an agent before. So he has some retirement income coming from insurance company that he worked for.

Past preparer showed income from Insurance company - $42,000 - as other income on page 1 of 1040 (not on sch "c"). IRS thought that it is self employment income and so client should pay SE tax (5,340 Approx.).

I disagree. He can not do anything and there for this his annuity/Pension income. Tax preparer should have shown on pension/annuity line, right?

How can I help client and on what basis?

I will prepare his 2005 tax return. I want to make sure that I do it properly.

Thanks!

[Jesse]

Reason for payment

Why did he receive the $42,000? If it was pension or annuity it should have been reported on a 1099-R. Was it for past commissions subject to SE at the time it was earned? Is it some type of payment that is common in the insurance agency?

[Armando Beaujolais]

Check out TTB page 5-25. There's a description of which payments made to former insurance agents are subject to SE and which are not. In a nutshell, deferred commissions are usually subject to SE tax, unless the payments fall under the category of termination payments, which have a noncompete component.

[Snaggletooth]

Even Death Doesn't Qualify

..to exempt you from Social Security & Medicare Tax, if the stars are aligned against you.

A man was struck on a motorcycle one bleak December 27th, and died on January 3rd. He received a 1099 MISC in the next year for services rendered through December 20th, but not paid until January 10th.

Self-employment tax was due the following year since he was a cash basis taxpayer. Had he not lived until January 3rd, and died on let's say December 27th, then this would have been the income-in-respect-of-a-decendent issue.

[JON]

State Farm

This was a problem for me years ago. The above agents have a prearranged agreement to sell back to State Farm or someone they determine. There was a tax court case that made it exemprt from SE(as I remember) and it was challanged again later. They got paid over 5 years. I did not look at TTB. If you are doing nothing and it is not collection of your old receivables I think you have a good case. If you sell your tax business for 30% a year of the next 3 years volume-would you call it SE as it came in?????????

[Unregistered]

I will get more detail info later from Client and provide more to you.

Thanks for all your input

[dburd52]

Find an EA to work with.

I think part of your question related to how you can help this taxpayer since you didn't prepare the return (which makes you ineligible to represent him since you are not an enrolled agent, CPA, or an attorney).

Find an EA in your area, who can help with the audit, and who will be happy to let the taxpayer remain your client in the future. In fact, there are some EA's who only do representation (audit and collections) work. They don't do tax returns.

You can tell the client that once you do his or her returns, you will be able to represent them in the future. You can find an EA at the web site of the National Association of Enrolled Agents. Also find information on how to become an EA yourself.

[Unregistered]

I am Licensed CPA so I think I can represent this client even though I did not prepare the return.

I found more information about this client:

The person retired. He does not get 1099R or similar form. Insurance company "X" gives him letter stating that it is earned income. He is going to get this retirement income for long time.

Previous preparer reported this on 1040 as other income.

IRS agent is saying that it is not other income but it is self employment income.

Questions:

(1) Should I get Private ruling?

(2) Is there any where I can find court case? Did Insurance company did right thing by reporitng as "earned" income?

(3) He is not currently working and has Parkinson. So it should be considered passive income and not earned income, right?

(4) He did pay tax when he was actively working

Please help.

Thanks!

[Armando Beaujolais]

I am Licensed CPA so I think I can represent this client even though I did not prepare the return.

I found more information about this client:

The person retired. He does not get 1099R or similar form. Insurance company "X" gives him letter stating that it is earned income. He is going to get this retirement income for long time.

Previous preparer reported this on 1040 as other income.

IRS agent is saying that it is not other income but it is self employment income.

Questions:

(1) Should I get Private ruling?

(2) Is there any where I can find court case? Did Insurance company did right thing by reporitng as "earned" income?

(3) He is not currently working and has Parkinson. So it should be considered passive income and not earned income, right?

(4) He did pay tax when he was actively working

Please help.

Thanks!

You don't have to be currently working to have amounts taxed as earned income. The question is what the source of the income is. If the income is a result of services, it's earned income subject to SE tax regardless of when the income's earned.

It depends on whether the income is of a character of residual earnings, or of a character more like sale of a client list or a noncompete agreement. It sounds like the insurance company is saying the payments are earned income. Unless you can come up with some kind of evidence that the payments are for some kind of capital transaction, such as a noncompete, I think you're stuck paying SE.

[JON]

Call the insurance company and google

Call the insurance company and ask why do they refer to it as earned... They will say they do not give tax advice, but you just want them to explain their tax position on it.. "Good Luck"

Is there a tax court link here?

Google - retired insurance agent payments, or something like that... It would be nice if you could get the original agent contract. It seems to me they were explicite on how to buy out for State Farm and Farmers. I do think this was to the tax court in the 80s and the early 90s, sorry do not have any agents currently....

[MPlaks]

As an EA and an insurance agent, I don't have encouraging news for you.

Not knowing the specifics, I have to assume that what your client receives is renewal commissions on life insurance policies he sold in the past. If this is the case, then his payments are essentially compensation, i.e. earned income and subject to SE. A similar situation would be a writer or musician receiving royalties after he retired. Royalties to his heirs will be passive. But as long as he lives, it's Sch C income.

Your arguments are logical but will not help you win the case. Letter ruling is price-prohibitive in your case. My only hope would be to do a legal research - maybe there is some case history that could be used to challenge the IRS position. Otherwise, their position looks solid, unfortunately.

[rosieea]

The person retired. He does not get 1099R or similar form. Insurance company "X" gives him letter stating that it is earned income. He is going to get this retirement income for long time.

I'm puzzled. There is no reporting of this income by the insurance company?? Why are they not issuing a 1099-MISC? I have a client who receives insurance co. termination payments, and they are reported on 1099-MISC as other income. It seems that your guy's payments should have been reported as either other income or as non-employee compensation. Might be worth a call to find out the insurance company's reasoning here.

[Joe Btfsplk]

How does Ins Co identify it as "earned" with no 1099

The insurance company should be reporting it on some kind of letter or form. If it is retirement income it would go on a 1099R and if it it is 'earned' income it should go on a 1099MISC or W-2.

The Ins co must have done more than provide verbal information

[TAX]

New Info - Tax Court case found

Thank you all.

Ins. company does issue 1099 Misc. But it is reported in box 3 and not in box 7.

Also, I found a court case that may help me. Baker (2002) 118 TC 28 and IRS section 1402(k) may help.

Any information on 1402(k) would be appretiated.

Thanks!

[Jiggers]

Insurance payments for retiree!

You need to research "Termination Benefits" for insurance agents. I show these as retirement income on line 16b of the 1040 for one client.