Ward off 2022 Tax Season Flu – File Early and Electronically

My grandfather was very understated, if he said he was “concerned” it meant he was worried sick about it. If he said he was “worried,” he meant, “all hands on-deck, 5 alarm fire, women and children to the life boats.” So, it is with that the Internal Revenue Service kicked off the 2022 tax filing season this week with an urgent reminder to taxpayers to take extra precautions this year to file an accurate tax return electronically to help speed refunds. “Urgent” may be a bit of an understatement. IRS commissioner, Chuck Rettig, recently commented, “In many areas, we are unable to deliver the amount of service and enforcement that our taxpayers and tax system deserves and needs.” He also noted the agency’s inability to respond to a record number of phone calls. 

As of the start of this tax season, the IRS has at least 10 million unprocessed returns from last year. Paper is kryptonite to the IRS, accounting for most of their backlog and workforce requirements during tax season. Certainly, yes, the pandemic and the requirement to work remotely has contributed to the IRS’s woes this year, but it’s not just COVID-19 affecting the IRS, there are systemic issues as well. Since 2010, the number of individual returns has increased nearly 20%, while the agency’s workforce has shrunk 17%. This circumstance has caused the IRS to pivot its workforce at its various Service Centers (offices where the bulk of most of the IRS customer facing functions occur) from their normal functions to simply processing returns and, where possible, requiring overtime by IRS employees. Anecdotally, IRS Service Centers are shutting down their taxpayer service operations for the next 5 or 6 months just to process returns. And, the IRS announced just today, January 28, its’ intention to stop some notices to taxpayers as they increase resources to process backlogged returns. “We decided to suspend notices in situations where we have credited taxpayers for payments but have no record of the tax return being filed,” the IRS said in a statement. “In many situations, the tax return may be part of our current paper tax inventory and simply hasn’t been processed.” This action is designed to ward off additional correspondence with taxpayer that would only add to the paper logjam plaguing the agency.

So, what can you do to avoid or minimize your tax season frustration? Filing early and electronically is a way – perhaps the only way – to avoid frustration. 

Filing electronically and early has the added benefit of receiving your tax refund sooner. Several factors can determine when you may receive your tax refund, including: 

  • How early you file
  • Whether the return is e-filed or sent by mail
  • If you are claiming certain credits (especially EITC and CTC)
  • If you have an existing debt to the federal government
  • The COVID stimulus payments sent out earlier in 2021 will not affect your income tax refund (however, if you were entitled to a stimulus check, but did not receive one, it can be added to your 2022 refund as a credit . . . but it will slow receipt down). 

The chart below shows the 2022 IRS Refund Schedule. Of course, it is not exact – the internal situation at the IRS and your own situation could cause delays. 

IRS Accepts E-Filed Return By: Direct Deposit Sent (Or Paper Check Mailed One Week Later):
January 24January 31 (February 11)**
January 31February 11 (February 18)*
February 7February 18 (February 25)*
February 14February 25 (March 4)*
February 21March 4 (March 11)*
February 28March 11 (March 18)
March 7March 18 (March 25)
March 14March 25 (April 2)
March 21April 1 (April 9)
March 28April 8 (April 15)**
April 4April 15 (April 22)**
April 11April 22 (April 29)**
April 18April 29 (May 6)
April 25May 6 (May 13)
May 2May 13 (May 20)
May 9May 20 (May 27)
May 16May 27 (June 4)
May 23June 4 (June 11)

* = Returns with EITC or CTC may have refunds delayed until March to verify credits.

** = Filing during peak season can result in slightly longer waits.

If you have any questions, please contact your Fraser Trebilcock attorney.

Fraser Trebilcock attorney Paul V. McCord has more than 20 years of tax litigation experience, including serving as a clerk on the U.S. Tax Court and as a judge of the Michigan Tax Tribunal. Paul has represented clients before the IRS, Michigan Department of Treasury, other state revenue departments and local units of government. He can be contacted at 517.377.0861 or pmccord@fraserlawfirm.com.

Tax Sales Proceeds In Excess Of The Tax Owed Must Be Returned To The Taxpayer

On July 17 2020, the Michigan Supreme Court ruled in Rafaeli, LLC v Oakland County (the “County”) that the proceeds for a tax sale in excess of the tax owed must be returned to the taxpayer. The ruling stems from a lawsuit filed in Oakland County Circuit Court (the “Circuit Court”), that challenged one part of Michigan’s tax foreclosure law contained in the Michigan General Property Tax Act (the “GPTA”). That provision, which dates back to 1999, allows county treasurers – who collect delinquent taxes on behalf of communities – to pocket all of the proceeds of auctioned properties, regardless of the amount of the delinquent tax debt. But the Supreme Court unanimously ruled that this aspect of the GPTA was an unconstitutional taking under the Michigan Constitution.

The case originated back in 2011 when Uri Rafaeli’s business — Rafaeli, LLC (“Rafaeli”) purchased a modest rental property in Southfield. Rafaeli inadvertently underpaid its property taxes by $8.41, that over time due to interest and penalties grew to $285.81 in unpaid property taxes. In a companion case, Andre Ohanessian (“Ohanessian”) owed approximately $6,000 in unpaid property taxes, interest, and penalties from 2011. The County, foreclosed on both properties and sold the properties at public auction, Rafaeli’s for $24,500 and Ohanessian’s for $82,000. The properties were sold in accordance with the requirements of the GPTA. The County retained the surplus proceeds and distributed them to various governmental entities.

Rafaeli and Ohanessian sued the County alleging the actions of the County violated the due-process and equal protection clauses of the US and Michigan Constitution, as well as an unconstitutional taking. The Circuit Court ruled in favor of the County reasoning that the property was properly forfeited and did not constitute a “taking” in violation of the US or Michigan Constitution. The Michigan Court of Appeals affirmed, relying on precedent from the US Supreme Court in regard to civil-asset taking resulting from criminal activity. The Michigan Supreme Court (the “Court”), reversed holding “defendants’ [Oakland County] retention of those surplus proceeds is an unconstitutional taking without just compensation..”

The Court noted that upon sale, the foreclosing governmental unit deposited all of the sales proceeds from all foreclosure sales into a unified tax sales proceeds account. The proceeds are used to cover the costs for all foreclosure proceedings for the year of tax delinquency with the excess distributed to appropriate governmental units. Michigan is one of nine states that requires the foreclosing governmental unit to disburse the excess proceeds to someone other than the former owner. The Court distinguished the civil-asset forfeiture of criminal statutes in that the purpose of such statutes was, in part, to punish the owner of the property. Conversely, the purpose of the GPTA is to encourage the timely payment of taxes, not to punish the former property owner.

The Court took an exhaustive review of common law and prior cases revealing that a Taking Clause violation will occur when the surplus is retained by the taxing authority and not returned to the former property owner. Further “(T)he GPTA does not recognize a former property owner’s statutory right to collect the surplus proceeds.” The Court conclude that the common law of the State of Michigan recognized that right. The purpose of the GPTA is not to seize property and retain proceeds in excess of the taxes owed,

Accordingly, when property is taken to satisfy an unpaid tax debt, just compensation requires the foreclosing governmental unit to return any proceeds from the tax-foreclosure sale in excess of delinquent taxes, interest, penalties and fees reasonably related to the foreclosure and sale of the property – no more, no less.

The case is now headed back to the Circuit Court to determine a remedy. However, an appropriate remedy may involve changing the GPTA. Complicating matters further is the possibility that former foreclosed property owners may come back looking for any surplus proceeds that were collected and distributed to the various government units. Some counties make a considerable sum in auction profits that they use to boost their delinquent tax revolving funds, which some counties then use to fill their budget holes.

We have created a response team to the rapidly changing COVID-19 situation and the law and guidance that follows, so we will continue to post any new developments. You can view our COVID-19 Response Page and additional resources by following the link here. In the meantime, if you have any questions, please contact your Fraser Trebilcock attorney.

Fraser Trebilcock Attorney Norbert T. Madison, Jr.Norbert T. Madison, Jr. is a highly regarded corporate and real estate attorney with more than three decades of experience. Primarily focused on real estate matters, Norb represents clients in all facets of the practice, including the purchase, sale, leasing, and financing of various types of real estate, as well as the development of industrial, office, retail, condominium and residential real estate. Contact Norb at 313.965.9026 or nmadison@fraserlawfirm.com.

Fraser Trebilcock attorney Paul V. McCord has more than 20 years of tax litigation experience, including serving as a clerk on the U.S. Tax Court and as a judge of the Michigan Tax Tribunal. Paul has represented clients before the IRS, Michigan Department of Treasury, other state revenue departments and local units of government. He can be contacted at 517.377.0861 or pmccord@fraserlawfirm.com.

Michigan Supreme Court Clarifies Eligibility for Charitable Property Tax Exemption

This week the Michigan Supreme Court in Baruch SLS Inc v Township of Tittabawassee (MSC Docket No 152047) clarified how the factors are to be considered in determining whether real property is exempt from taxation. Continue reading Michigan Supreme Court Clarifies Eligibility for Charitable Property Tax Exemption

An Evaluation of Estate & Tax Planning Options

It seems that for the foreseeable future, the federal estate tax will continue to affect only the very wealthy Americans. The currently high federal estate tax exemption, coupled with the portability feature, means that for most Americans, the federal estate tax is no longer the driver that it had been, which required extensive estate planning. For many people, it may be that a basic trust which simply gives all of one’s property to their surviving spouse, and then passes it all on to their descendants at the death of the surviving spouse, may be all that is needed. This all might suggest that “credit shelter trusts” (also called A/B trusts) and other forms of estate tax planning are needless for many clients except for the very wealthy. However, whether or not the estate may conceivably exceed the various federal estate and gift that limits is not the only consideration in estate planning. There might be other reasons to create additional trusts.

To set the table, current law permits spouses to leave any amount of property to their spouses, if the spouses are U.S. citizens, free of federal estate tax. Further, the estate tax applies only to individual estates valued at more than $5.45 million ($10.90 million for couples). The lifetime gift tax exclusion – the amount you can give away without incurring a tax – is also $5.45 million. But you can still give any number of other people $14,000 each per year without the gifts counting against the lifetime limit and gifts to charities are not taxed.

Further “portability” has simplified estate planning for many small and medium size estates. Falling into the category, “if you can take it with you . . . ” the estate tax exemption is “portable” meaning if the first spouse to die does not use all of his or her $5.45 million exemption, the estate of the surviving spouse may use it. In theory, this doubles the available exemption for a couple at the death of the surviving spouse, assuming the estate assets would have passed tax free to the surviving spouse at the death of the decedent spouse, by means of the “marital deduction” (whereby one spouse may make an unlimited transfer to the other with no tax owed). For example, John dies in 2016 and passes on $3 million. He has no taxable estate and his wife, Mary, can pass on $7.90 million (her own $5.45 million exclusion plus her husband’s unused $2.45 million exclusion) free of federal tax. However, to take advantage of portability, the surviving spouse (Mary in our example) must make an “election” on the decedent spouse’s (John’s) estate tax return.

With the high federal estate tax exemption, coupled with the portability, why complicate the small or medium size estate with more than a simple trust? Consider the case where there are children of a former marriage and/or a chance of remarriage by the surviving spouse. A simple trust which gives all the property and control to the surviving spouse would take away from the deceased spouse any control over whether the assets will be distributed as they wanted – to their own heirs. Here, other trusts may be employed to limit the surviving spouse’s control over what happens to the assets.

A Qualified Terminal Interest Trust (“QTIP”) is generally employed for this. Under this arrangement, the surviving spouse does not obtain the assets directly, but they are held for his/her benefit by a Trustee. There are rules and limitations in the trust about how the assets are to be distributed, which the Trustee must follow. Perhaps the biggest limitation is that the surviving spouse does not have the power to leave the assets to anyone other than the beneficiaries named by both spouses in the Trust. Although in many cases the surviving spouse is the Trustee, they cannot deviate from the requirements of the Trust.

Another type of trust which may be useful is the “Bypass Trust”. This actually removes assets from the estate of the surviving spouse, entirely, while still allowing him/her to obtain interest from the assets until death. With this trust, the property is legally transferred to the children, but in trust, and not actually paid out to them until the death of the surviving spouse. While this type of trust has important application in estates which are above (or are anticipated to grow above) the exemption amount, it also has application in smaller estates.

Using a Bypass Trust can aid in planning for capital gains taxes. Assets allocated to the trust “step-up” in basis upon the death of the first spouse, whereas assets passing to the surviving spouse will only “step up” at the time of her death. This can cut both ways. Where an appreciated asset is to be sold prior to the death of the surviving spouse, it may be advantageous to have a step-up occur at the death of the first spouse, so that the tax hit will be less upon the sale. Conversely, if it is not be sold prior to the survivor’s death, it may be beneficial to wait for the “step up” to occur later, when the asset has appreciated even more (although, the possibility of a “step-down” should not be ignored).

It is often unclear at the time that the estate plan is drafted whether or not a Bypass Trust would be helpful. As a result, many people use a “disclaimer trust”. This basically gives the surviving spouse the ability to decide – at the time her spouse passes away, whether to accept all of the decedent’s property or to “disclaim” (give up) a portion and put it into a Bypass Trust. The advantage is that the status of the estate and need for special planning will be much clearer at the time of the first death, than when the Trust instrument was originally drafted. This flexibility would protect the estate where it has grown more than anticipated, or to determine whether the basis “step up” is more useful than not.

The bottom line is that while changes in the federal estate tax have simplified many aspects of estate planning for most clients, no estate plan should be adopted or continued without a through and specific review of the assets, needs and plans of the individuals involved. Nothing in the law is permanent, nor are the circumstances of our clients’ lives. Clients should be encouraged to review their estate plans every three to five years to ensure that their plans are meeting their needs and ever changing goals.

McCord, Paul

Fraser Trebilcock attorney Paul V. McCord has more than 20 years of tax litigation experience, including serving as a clerk on the U.S. Tax Court and as a judge of the Michigan Tax Tribunal. Paul has represented clients before the IRS, Michigan Department of Treasury, other state revenue departments and local units of government. He can be contacted at 517.377.0861 or pmccord@fraserlawfirm.com.

Give the Gift of Tax Benefits

Gifting opportunity expires at end of 2012.

 Current law allows individuals an equivalent tax exemption of up to $5,120,000 to apply to estates, gifts and generation-skipping transfers.  Unless Congress acts prior to December 31, 2012, that amount will revert to $1,000,000 on January 1, 2013. Further, while this year’s top tax rate is 35%, that rate will rise to 55% on January 1st.

Continue reading Give the Gift of Tax Benefits

Backups at the Tribunal

At a recent luncheon organized by the Real Property Section of the Ingham County Bar Association, Kimball R. Smith, III, Chair of the Michigan Tax Tribunal, gave his “Michigan Tax Tribunal Update.” As we all are aware, real property values in Michigan have significantly decreased in recent years. As one may suspect, the inverse is true of filings with the Michigan Tax Tribunal. For these reasons, I thought I would share some highlights of Mr. Smith’s presentation with our readers.

Continue reading Backups at the Tribunal

Focus Remains on Job Creation

Just as our children return to school to acquire the skills, knowledge and experience to enter the job market, so too does Congress and state legislatures return to work to create the environment to stimulate job growth.

Continue reading Focus Remains on Job Creation

Obama and Death Taxes

President Obama spoke about the future of federal estates tax during his recent bus tour through the Midwest. A family farmer expressed her concern about the pending return of the 2001 federal estate tax exemption in 2013. If Congress and the President fail to act, the federal estate tax exemption per person will drop to $1,000,000, commencing January 1, 2013. The exemption is currently $5,000,000 per person.

Continue reading Obama and Death Taxes

Michigan Tax Law Changes Signed Into Law

On Wednesday, May 25, 2011, Governor Snyder signed a number of new tax Bills to revise Michigan’s tax structure. The new laws include elimination of the Michigan Business Tax (MBT), creation of a Michigan Corporate Income Tax and permanent spending reductions, elimination of tax credits for low-income workers, phase-out of most senior tax breaks and eliminates numerous income tax deductions and credits. The new law is effective January 1, 2012.

Continue reading Michigan Tax Law Changes Signed Into Law