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Supreme Court and IRS Rulings

Welcome back from our summer break. This year has been very slow in terms of new tax legislation. However, we do have some new items that have come from the IRS and the Supreme Court.

No Bankruptcy Exemption for Inherited IRAs

A unanimous Supreme Court has held that inherited IRAs do not qualify for a bankruptcy exemption, i.e., they are not protected from creditors in bankruptcy. Under the Bankruptcy Code, a debtor may exempt amounts that are both:

1. “Retirement funds”

2. Exempt from income tax under one of several Internal Revenue Code provisions, including the one that provides a tax exemption for IRAs.

Resolving a conflict between the Circuit Courts of Appeal, the Supreme Court has held that this exemption does not extend to inherited IRAs because funds held in them are not retirement funds. For this purpose, the term “inherited IRA” doesn't include amounts inherited by the spouse of the decedent. This decision should be taken into account when selecting IRA beneficiaries. If a potential beneficiary is under financial distress, the IRA owner should consider naming a trust as beneficiary instead. The individual could be named as beneficiary of the trust without jeopardizing the full IRA funds if he or she personally goes bankrupt.

Taxpayer Bill of Rights

The IRS recently adopted a “Taxpayer Bill of Rights” to help taxpayers better understand their rights. While taxpayers already had these rights, they were scattered in various provisions of the Internal Revenue Code and were unknown to many taxpayers. They are now prominently displayed on the IRS's website and fall into these 10 broad categories. Taxpayers have the right to:

1. Be informed

2. Quality service

3. Pay no more than the correct amount of tax

4. Challenge the IRS's position and be heard

5. Appeal an IRS decision in an independent forum

6. Finality

7. Privacy

8. Confidentiality

9. Retain representation

10. A fair and just tax system

Next week we will further discuss these 10 defined taxpayer bill of rights.

Disclaimer: The items included in the Tax Tip Tuesday Video Blog are informational only and are not meant as tax advice. Consult with your tax advisor to determine how any item applies to your situation. IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advise contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein

Previous Editions of Tax Tip Tuesday
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