Let's talk taxes: back taxes, 83(b) Elections and divorce.

• Author: Williams, Len
• Position: CATax

It is possible to specify how payments to the Employment Development Department for back taxes will be directed.

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The situation that helped to clarify this involved a taxpayer who owed back EDD taxes, penalties and interest form 2005 and 2006. The EDD had levies on two of the client's sources of revenue, and the EDD was getting around $23,000 per month.

A CPA was representing his client in this matter, and asked the EDD if it was permissible for the client to specify how to apply the payments that the EDD received via the levy. The EDD held that it is possible to do so, irrespective of whether the payment is voluntary or involuntary. In addition, the EDD will accept a letter specifying how to direct all future payments, whether voluntary or not.

This is different from the IRS, which will not allow the taxpayer to specify the application of involuntary payments; and for voluntary payments, a statement specifying how it is to be applied must accompany each payment.

The EDD claims this discretion via Unemployment Insurance Code See. 1110.1.

There are several reasons why a taxpayer may want to exercise this alternative. Assuming for example, a cash-basis taxpayer, such a designation will help produce a tax deduction, since the penalties aren't deductible. On the other hand, if the taxpayer wants to show higher profits, then the choice would be to allocate the payments to penalties first.

83(b) Elections and E-filing

The IRS has received several inquiries about e-file and the 83(b) Election. The current IRS policy on filing the 83(b) Election is as follows: if the election the taxpayer is choosing to make requires a signature and can be filed with the tax return, then that tax return must be filed on paper.

If the election the taxpayer is choosing to make requires that a copy of the original election, which has already been filed with the IRS, be attached to the tax return, even though the original election is signed, the copy does not have to be signed. Therefore, the copy in the latter example can be put into an Election Explanation Record (if software permits) and e-filed.

When Divorcing, When May One File as Single?

A common source of confusion among taxpayers and tax professionals alike is the use of the term "legally separated" when answering the above question.

In addition, the term's use may vary from one state to another.

Within California, legal separation is a judicial proceeding, an alternative status to...