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April

File on Time Even if You Can’t Pay

Do you owe more tax than you can afford to pay when you file? If so, don’t fail to take action. Make sure to file on time. That way you won’t have a penalty for filing late. Here is what to do if you can’t pay all your taxes by the due date.

 

•           File on time and pay as much as you can.  You should file on time to avoid a late filing penalty. Pay as much as you can with your tax return. The more you can pay on time, the less interest and late payment penalty charges you will owe.

 

•           Pay online with IRS Direct Pay.  IRS Direct Pay is the latest electronic payment option available from the IRS. It allows you to schedule payments online from your checking or savings account with no additional fee and with an immediate payment confirmation. It’s, secure, easy, and much quicker than mailing in a check or money order. To make a payment or to find out about your other options to pay, visit IRS.gov/payments.

 

•           Pay the rest of your tax as soon as you can.  If it is possible, get a loan or use a credit card to pay the balance. The interest and fees charged by a bank or credit card company may be less than the interest and penalties charged for late payment of tax. For debit or credit card options, visit IRS.gov.

 

•           Use the Online Payment Agreement tool.  You don’t need to wait for IRS to send you a bill to ask for an installment agreement. The best way is to use the Online Payment Agreement tool on IRS.gov. You can even set up a direct debit installment agreement. When you pay with a direct debit plan, you won’t have to write a check and mail it on time each month. And you won’t miss any payments that could mean more penalties. If you can’t use the IRS.gov tool, you can file Form 9465, Installment Agreement Request instead. You can view, download and print the form on IRS.gov/forms anytime. 

 

•           Don’t ignore a tax bill.  If you get a bill, don’t ignore it. The IRS may take collection action if you ignore the bill. Contact the IRS right away to talk about your options. If you face a financial hardship, the IRS will work with you.

In short, remember to file on time. Pay as much as you can by the tax deadline. Pay the rest as soon as you can.

 

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Secret Swiss Bank Codes Exposed in Landmark U.S. Tax Accord

BY DAVID VOREACOS AND TOM SCHOENBERG

BSI SA, a Swiss private bank, admitted helping customers duck taxes by using coded language, nameless debit cards and fake identities as part of a landmark $211 million accord to avoid U.S. prosecution.

Clients moving cash from secret accounts at the firm on Lake Lugano to their cards would tell BSI’s bankers the “gas tank is running empty” or ask “can you download some tunes for us?” the Justice Department said Monday in announcing the non-prosecution agreement. It’s the first case from a program letting Swiss banks escape charges by describing dealings with Americans. Dozens of firms seeking leniency watched it closely.

In some instances, BSI helped U.S. clients create sham corporations and trusts, opened numbered accounts that shielded identities even from its own employees and issued debit and credit cards with no name visible, the Justice Department said. Investigators credited the firm with providing “substantial assistance” in identifying the clients, and said it’s helping track money “well beyond Switzerland” to new tax-evasion schemes.

“We are using the information that we have learned from BSI and other Swiss banks in the program to pursue additional investigations into both banks and individuals,” Stuart F. Delery, the Justice Department’s acting associate attorney general, told reporters.

Non-prosecution Accords

Banks that entered the program are seeking non-prosecution agreements, which aren’t available to the dozen Swiss banks under criminal investigation. Credit Suisse Group AG’s main bank subsidiary pleaded guilty last year and paid a $2.6 billion fine. BSI pledged to help the Justice Department root out tax evasion.

“It’s certainly fundamentally positive that finally one of the bigger ones has settled,” said Andreas Brun, a Zurich-based analyst at Zuercher Kantonalbank, said of BSI. “This means a solution is coming closer for all banks in the program.”

Swiss banks are also dealing with tax investigations by France and Germany and may face other probes into offshore structures across the globe after providing the Justice Department with details of money transfers. Many Swiss banks have operations in locations such as the Caribbean, the Channel Islands, Dubai and Hong Kong.

U.S. authorities “intend to follow that money to uncover additional tax evasion schemes,” the Justice Department said in a statement.

3,500 Accounts

BSI managed about 3,500 U.S. accounts with a peak value of $2.78 billion in 2008, according to a statement of facts it admitted. At least 32 clients had prepaid debit cards known as “travel cash cards,” issued without a name, according to the statement of facts. Bankers let clients “withdraw funds remotely or pay for goods and services without a paper trail back to their undeclared assets in Switzerland,” BSI said.

Before 2009, clients could transfer $10,000 at a time to cards, as much as $30,000 a month and $100,000 a year. After 2009, at least 11 clients got a second type of debit card that allowed higher maximum amounts, BSI said.

For decades until 2013, “BSI conducted a U.S. cross-border banking business that aided and assisted thousands of U.S. clients in opening and maintaining undeclared accounts in Switzerland,” the bank admitted.

Assicurazioni Generali SpA last year agreed to sell BSI to Grupo BTG Pactual of Brazil. The sale is still subject to regulatory approvals.

Drop Outs

“We have resolved our legacy tax issue with the DOJ and can now focus on our business and on the implementation of our growth strategy,” BSI said in a statement.

While 106 Swiss banks signed up for the program, some have dropped out. Acting Assistant U.S. Attorney General Caroline Ciraolo declined to say Monday how many banks remain in the program. She said the department hopes to conclude the cases by the end of the year.

Ciraolo also wouldn’t say how many of the 3,500 accounts weren’t declared to the IRS. She said the bank has turned over “some names when they were authorized” by Swiss authorities, but she wouldn’t say how many.

Fighting offshore tax evasion remains a “top priority” of the Internal Revenue Service Criminal Investigation Division, Chief Richard Weber said in a statement.

—With assistance from Jeffrey Vögeli in Zurich and Giles Broom in Geneva.

 

 

 

Swiss Asset Manager Admits He Helped Americans Evade Taxes

BY PATRICIA HURTADO

A former Swiss asset manager pleaded guilty to helping U.S. clients hide millions of dollars in offshore accounts and avoid paying federal income taxes.

Peter Amrein, 53, a Swiss citizen, told U.S. District Judge Sidney Stein in Manhattan Tuesday that from 1998 to 2012 he helped Americans evade taxes by concealing funds at various Swiss banks, including Wegelin & Co. He did so while working at an unidentified Swiss bank and later as an asset manager at a Swiss asset management firm.

He agreed to cooperate with U.S. authorities and testify before a federal grand jury and at other court proceedings, according to his plea agreement filed with the court.

Amrein was accused in an indictment last year of conspiring with a Swiss lawyer, Edgar Paltzer, to set up undeclared Swiss accounts at Wegelin, which pleaded guilty in New York to tax charges, and four other Swiss banks. None of the banks were identified.

Paltzer pleaded guilty in New York in 2013 and is cooperating in a crackdown on offshore tax evasion that has led to charges against more than 100 people, including about 70 U.S. taxpayers and more than 30 bankers, lawyers and advisers. Fourteen banks are under criminal investigation, including Credit Suisse Group AG, Switzerland’s second-largest bank, U.S. authorities have said.

“Mr. Amrein voluntarily surrendered on his own to the authorities in New York,” his lawyer, Tom Zehnle, said in an e-mailed statement. “He accepts full responsibility for the past actions he took on behalf of some of his U.S. clients, and he is confident in the fairness of the US justice system and will accept the court’s sentence, whatever that may be.”

Possible Sentence

Amrein pleaded guilty to one count of conspiracy to defraud the Internal Revenue Service, evade federal income taxes and file a false income tax return. He faces as long as five years in prison when he’s sentenced. He could seek a lesser sentence based upon the degree of his assistance to U.S. authorities, according to his plea agreement.

In 2008, it became public that U.S. authorities were investigating UBS AG for helping its American customers maintain undeclared accounts in Switzerland, said Manhattan U.S. Attorney Preet Bharara. After one Swiss bank told Amrein it was going to close undeclared accounts belonging to his U.S. taxpayer clients, Amrein searched for other Swiss banks willing to maintain them.

Sham Foundations

Amrein later helped nine clients hide assets, including aiding them in opening undeclared accounts at a Swiss bank in the name of sham foundations, according to prosecutors. As late as June 2011, the U.S. said he was still attempting to help American clients evade taxes and searching for Swiss banks willing to help open undeclared accounts.

Amrein worked at the Zurich-based bank from 1998 to 2006, and from 2006 to 2012 at the Zurich-based asset management firm, according to the indictment, which didn’t identify his employers. He provided wealth management services and advice on how to hide assets from the IRS, according to the indictment.

The case is U.S. v. Amrein, 13-cr-00972, U.S. District Court, Southern District of New York (Manhattan).

 

 

 

Bartering Income: The Value of Property or Services You Receive

Bartering is the trading of one product or service for another. Often there is no exchange of cash. Some businesses barter to get products or services they need. For example, a gardener might trade landscape work with a plumber for plumbing work.

If you barter, you should know that the value of products or services from bartering is taxable income. This is true even if you are not in business.

Here are a few facts about bartering:

  • Bartering income.  Both parties must report the fair market value of the product or service they get as income on their tax return.
  • Barter exchanges.  A barter exchange is an organized marketplace where members barter products or services. Some operate out of an office and others over the Internet. All barter exchanges are required to issue Form 1099-B, Proceeds from Broker and Barter Exchange Transactions. Exchanges must give a copy of the form to its members who barter each year. They must also file a copy with the IRS.
  • Trade Dollars.  Exchanges trade barter or trade dollars as their unit of exchange in most cases. Barter and trade dollars are the same as U.S. currency for tax purposes.  If you earn trade and barter dollars, you must report the amount you earn on your tax return.
  • Tax implications.  Bartering is taxable in the year it occurs. The tax rules may vary based on the type of bartering that takes place. Barterers may owe income taxes, self-employment taxes, employment taxes or excise taxes on their bartering income.
  • Reporting rules.  How you report bartering on a tax return varies. If you are in a trade or business, you normally report it on Form 1040, Schedule C, Profit or Loss from Business.

 

 

Top Eight Tax Tips about Deducting Charitable Contributions

When you give a gift to charity that helps the lives of others in need. It may also help you at tax time. You may be able to claim the gift as a deduction that may lower your tax. Here are eight tax tips you should know about deducting your gifts to charity:

1. Qualified Charities.  You must donate to a qualified charity if you want to deduct the gift. You can’t deduct gifts to individuals, political organizations or candidates. To check the status of a charity, use the IRS Select Check tool.

2. Itemized Deduction.  To deduct your contributions, you must file Form 1040 and itemize deductions. File Schedule A, Itemized Deductions, with your federal tax return.

3. Benefit in Return.  If you get something in return for your donation, your deduction is limited. You can only deduct the amount of your gift that is more than the value of what you got in return. Examples of benefits include merchandise, meals, tickets to an event or other goods and services.

4. Donated Property.  If you gave property instead of cash, the deduction is usually that item’s fair market value. Fair market value is generally the price you would get if you sold the property on the open market.

5. Clothing and Household Items.  Used clothing and household items must be in at least good condition to be deductible in most cases. Special rules apply to cars, boats and other types of property donations. See Publication 526, Charitable Contributions, for more on these rules.

6. Form 8283.  You must file Form 8283, Noncash Charitable Contributions, if your deduction for all noncash gifts is more than $500 for the year.

7. Records to Keep.  You must keep records to prove the amount of the contributions you made during the year. The kind of records you must keep depends on the amount and type of your donation. For example, you must have a written record of any cash you donate, regardless of the amount, in order to claim a deduction. For more about what records to keep refer to Publication 526.

8. Donations of $250 or More.  To claim a deduction for donated cash or goods of $250 or more, you must have a written statement from the charity. It must show the amount of the donation and a description of any property given. It must also say whether the organization provided any goods or services in exchange for the gift.

Also refer to Publication 561, Determining the Value of Donated Property. You can get IRS tax forms and publications on IRS.gov/forms anytime.

 

 

 

FiveTips You Should Know about Employee Business Expenses

If you paid for work-related expenses out of your own pocket, you may be able to deduct those costs. In most cases, you claim allowable expenses on Schedule A, Itemized Deductions. Here are six tax tips that you should know about this deduction.

1. Ordinary and Necessary.  You can only deduct unreimbursed expenses that are ordinary and necessary to your work as an employee. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is appropriate and helpful to your business.

2. Expense Examples.  Some costs that you may be able to deduct include:    

  • Required work clothes or uniforms that are not appropriate for everyday use.
  • Supplies and tools you use on the job.
  • Business use of your car.
  • Business meals and entertainment. 
  • Business travel away from home. 
  • Business use of your home.
  • Work-related education.

This list is not all-inclusive. Special rules apply if your employer reimbursed you for your expenses. To learn more, check out Publication 529, Miscellaneous Deductions. You should also refer to Publication 463, Travel, Entertainment, Gift, and Car Expenses.

3. Forms to Use.  In most cases you report your expenses on Form 2106 or Form 2106-EZ. After you figure your allowable expenses, you then list the total on Schedule A as a miscellaneous deduction. You can deduct the amount that is more than two percent of your adjusted gross income.

4. Educator Expenses.  If you are a K through 12 teacher or educator, you may be able to deduct up to $250 of certain expenses you paid for in 2014. These may include books, supplies, equipment, and other materials used in the classroom. You claim this deduction as an adjustment on your tax return, rather than as an itemized deduction. This deduction had expired at the end of 2013. A recent tax law extended it for one year, through Dec. 31, 2014. For more on this topic see Publication 529.

5. Keep Records.  You must keep records to prove the expenses you deduct. For what records to keep, see Publication 17, Your Federal Income Tax.

 

 

 

IRS to Refund Penalties to Marijuana Dispensary

BY MICHAEL COHN

The Internal Revenue Service has settled a legal dispute with a medical marijuana dispensary by agreeing to refund approximately $25,000 in fines and abate future penalties.

The IRS had imposed the penalties on Allgreens because the unbanked business had been paying its taxes in cash. IRS rules require businesses to remit employee withholding payments electronically or face a 10 percent penalty. However, Allgreens argued that since it did not have a bank account, it had to make the payments in cash, according to the Denver Post.

Many banks refuse to do business with marijuana dispensaries because the substance is still illegal under federal law, even though an increasing number of states allow medical and in some cases recreational use, including Colorado.

Allgreens filed a petition in U.S. Tax Court, arguing that it should not be penalized since it was complying with the law by making its tax payments on time. The IRS argued that Allgreens could use a third-party service to make the payments electronically, but Allgreens countered that this could subject the other party to money-laundering charges.

The IRS eventually agreed to settle the case and refund about $25,000 in penalties. It is not clear whether the case could apply to other medical marijuana dispensaries, although Allgreens’ attorney believes it might.

 

 

 

 

Seven Tax Tips about Reporting Foreign Income

Are you a U.S. citizen or resident who worked abroad last year? Did you receive income from a foreign source in 2014? If you answered ‘yes’ to either of those questions here are seven tax tips you should know about foreign income:

1. Report Worldwide Income.  By law, U.S. citizens and residents must report their worldwide income. This includes income from foreign trusts, and foreign bank and securities accounts.

2. File Required Tax Forms.  You may need to file Schedule B, Interest and Ordinary Dividends, with your U.S. tax return. You may also need to file Form 8938, Statement of Specified Foreign Financial Assets. In some cases, you may need to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts. See IRS.gov for more information.

3. Review the Foreign Earned Income Exclusion.  If you live and work abroad, you may be able to claim the foreign earned income exclusion. If you qualify, you won’t pay tax on up to $99,200 of your wages and other foreign earned income in 2014. See Form 2555, Foreign Earned Income, or Form 2555-EZ, Foreign Earned Income Exclusion, for more details.

4. Don’t Overlook Credits and Deductions.  You may be able to take a tax credit or a deduction for income taxes you paid to a foreign country. These benefits can reduce your taxes if both countries tax the same income.

5. Use IRS Free File.  Almost everyone can prepare and e-file their U.S. federal tax returns for free by using IRS Free File. If you make $60,000 or less, you can use brand-name tax software. If you earn more, you can use Free File Fillable Forms, an electronic version of IRS paper forms. Some Free File software products and fillable forms also support foreign addresses for those who live abroad. Free File is available only through the IRS.gov website.

6. Tax Filing Extension is Available.  If you live outside the U.S. and can’t file your tax return by April 15, you may qualify for an automatic two-month extension of time to file. That will give you until June 16, 2015, to file your U.S. tax return. This extension also applies to those serving in the military outside the U.S. You will need to attach a statement to your return explaining why you qualify for the extension.

7. Get IRS Tax Help.  Check the international services Web page for the types of help the IRS provides. For all free IRS tax tools and products, visit IRS.gov at any time.

 

 

 

Contemporaneous recordkeeping key to avoiding loss limitations

Taxpayers who run up tax losses in a business must be prepared to prove that one of the material participation tests was passed to avoid having the losses characterized as a passive activity loss (PAL) that cannot be currently deducted. Adequatecontemporaneous records that detail the taxpayer’s tasks and time spent in the activity are crucial in attempting to sidestep the PAL rules. Records created after-the-fact are better than nothing, but they are much less believable than contemporaneous records. If losses are disallowed by the IRS, interest and penalties may be added to the unpaid taxes.

In general, an individual taxpayer can meet the material participation standard by passing one of the following seven tests outlined in the regulations:

·      More-than-500 hoursThis test is passed if the taxpayer spends more than 500 hours in the activity during the tax year in question.

·      More-than-100 hours and more-hours-than-anyone-else. This test is passed if the taxpayer participates in the activity for more than 100 hours during the tax year and no other taxpayer participates more, including taxpayers who are not owners.

·      Substantially all. This test is passed if the individual’s participation in the activity for the year constitutes substantially all of the participation in the activity for all individuals (including nonowners).

·      Significant participation activity. This test is met if the individual’s aggregate participation in all activities in which he or she participated for more than 100 hours during the year (significant participation activities) exceeds 500 hours for the year.

·      Material participation in the last five years. This test is passed if the individual materially participated in the activity for any five tax years during the 10 immediately preceding years.

·      Personal service activity. This test is passed if the individual materially participated for any three preceding tax years by performing services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting. 

·      Facts and circumstances. This test is passed if, based on all facts and circumstances, the taxpayer is found to have participated in the activity on a regular, continuous, and substantial basis during the year in question.

In attempting to pass the material participation tests, taxpayers can prove their participation levels by any reasonable means. This can include identifying the types of work performed and the approximate number of hours spent performing such work with contemporaneous appointment books, calendars, narrative summaries, and the like. Several court decisions have said that, while the regulations permit flexibility regarding what it takes to prove material participation, courts are not required to accept after-the-fact “ballpark guesstimates” or a taxpayer’s unverified, undocumented, and presumably self-serving testimony.

 

 

 

Special rules for inherited IRAs

Normally, retirement plan distributions made to a nonspouse beneficiary after the account owner’s death are taxable at the time they are received and cannot be rolled over to the beneficiary’s own IRA. However, employer-sponsored retirement plans are required to offer nonspouse beneficiaries the option to roll over inherited amounts tax-free in a direct (trustee-to-trustee) rollover to an inherited IRA. No taxes will be due on the inherited IRA rollover until the beneficiary receives a distribution from the inherited IRA. An inherited IRA is an IRA that has been acquired by a beneficiary on the death of someone other than a spouse.

The following special rules apply to an inherited IRA:

·      The IRA must be a brand-new IRA set up for the specific purpose of receiving the inherited account.

·      The IRA must be specially titled in the deceased account owner’s name.

·      No other contributions may be made to the IRA.

·      No other amounts may generally be rolled into or out of the IRA.

·      Minimum required distributions will need to be made over the beneficiary’s life expectancy starting the year after the IRA owner’s death.

 

 

 

 

 

Avoid gift treatment by paying expenses directly

The annual exclusion for gifts remains at $14,000 for 2015. (Married couples can gift up to $28,000 combined.) This limit applies to the total of all gifts, including birthday and holiday gifts, made to the same individual during the year. However, any payment made directly to the medical care provider (for example, doctor, hospital, etc.) or educational organization for tuition is not subject to the gift tax and, therefore, is not included in the $14,000 limit.

So, when paying tuition or large medical bills for parents, grandchildren, or any other person who is not your dependent minor child, be sure to make the payment directly to the organization or service provider. Don’t give the funds to the parent or other individual first and have them pay the school, doctor, or hospital. By doing so, you have made a gift to that person, subject to the $14,000 limit. In summary, make direct payments to schools or medical providers and avoid taxable gifts that could be subject to the gift tax or reduce the payer’s unified credit.

Caution: Direct payments of tuition reduce the student’s eligibility for financial aid on a dollar-for-dollar basis. However, if the gift were made directly to the student, only 20% of the gifted assets would be counted as assets of the student for financial aid purposes. Accordingly, careful analysis of the trade-offs between the gift tax exclusion and impairment of financial aid eligibility should be considered.

 

 

 

 

 

What landlords should know about rental income and expenses

Rental income is any payment received for the use or occupation of property. Rental income is generally included in gross income when actually or constructively received. Cash basis taxpayers report income in the year received, regardless of when it was earned. Expenses of renting property can be deducted from gross rental income. Rental expenses are generally deducted by cash basis taxpayers in the year paid.

Advance rent is any amount received before the period that it covers. Include advance rent in rental income in the year received, regardless of the period covered or the accounting method used.

Do not include a security deposit in income when received if it is to be returned to the tenant at the end of the lease. If part or all of the security deposit is retained during any year because the tenant does not live up to the terms of the lease, include the amount retained in income for that year. If an amount called a security deposit is to be used as a final payment of rent, it is advance rent. Include it in income when received.

If the tenant pays any expenses that are the landlord’s obligations, the payments are rental income and must be included in income. These expenses may be deducted if they are otherwise deductible rental expenses. Property or services received in lieu of rent are reportable income. Include the fair market value of the property or services in rental income. Services at an agreed upon or specified price are assumed to be at fair market value unless there is evidence to the contrary.

Personal use of a vacation home or other rental property requires that the expenses be allocated between the personal and rental use. If the rental expenses exceed rental income, the rental expenses will be limited.

 

 

Best States to Be Rich or Poor from a Tax Perspective

By Michael Cohn 

The consumer finance site WalletHub has produced an analysis of 2015’s Best States to Be Rich or Poor from a Tax Perspective.

 

To identify the best states where people in different income brackets spend the most and least on taxes, WalletHub calculated the share of one’s income that is contributed toward sales and excise taxes, property taxes and income taxes.

 

Best States to Be Rich from a Tax Perspective     
1. Alaska     
2. Wyoming     
3. Nevada     
4. Tennessee     
5. South Dakota

Worst States to Be Rich from a Tax Perspective
47. Minnesota
48. New Jersey
49. Maryland
50. Connecticut
51. New York

 

Best States to Be Poor from a Tax Perspective
1. Alaska
2. Delaware
3. Montana
4. Nevada
5. South Carolina

 

Worst States to Be Poor from a Tax Perspective
47. Ohio
48. Arizona
49. Illinois
50. Hawaii
51. Washington

 

Key Statistics 
• The overall tax burden for low-income earners is two times higher in Washington than in Alaska.
• The sales and excise tax burden for low-income earners is six times higher in Washington than in Oregon.
• The property tax burden for low-income earners is five times higher in New Jersey than in Louisiana.
• The overall tax burden for middle-income earners is three times higher in New York than in Alaska.
• The property tax burden for middle-income earners is six times higher in New Hampshire than in Louisiana.
• The overall tax burden for high-income earners is four times higher in New York than in Alaska.

For the full report and to see where different states rank, click here.

 

 

 

 

IRS Sending Letters to Verify Taxpayer Identities

BY MICHAEL COHN

The Internal Revenue Service is sending letters to verify the identity of taxpayers as part of its effort this tax season to combat the growing problem of identity theft.

The IRS said taxpayers should use a special Identity Verification Service website,idverify.irs.gov, which will provide the fastest, easiest way to complete the task.

In the letter, known as Letter 5071C, the IRS asks taxpayers to verify their identity in order to complete processing of their return if the taxpayer did file it or reject the return if the taxpayer did not file it.

The IRS emphasized that it does not request such information via email, nor will the IRS call a taxpayer directly to ask this information unless the taxpayer receives a letter first. The letter number can be found in the upper corner of the page.

The IRS has been dealing with an increasing wave of tax scams this year in which fraudsters have been leaving messages on taxpayers' phones claiming to be  from the IRS demanding payment, and have been sending phishing emails to taxpayers purporting to come from the IRS ( see Senate Probes Rise in Tax Scams). On Thursday, IRS Commissioner John Koskinen met with leaders of several of the major tax software companies, tax preparation chains, state tax commissioners and other officials to coordinate an approach for dealing with identity theft (see IRS Meets with Tax Community to Address Identity Theft). Koskinen noted that the IRS is sending out more letters to taxpayers this year asking for additional verification when it suspects a filing may be fraudulent.

The letter gives taxpayers two options to contact the IRS and confirm whether or not they filed the return. Taxpayers can use the idverify.irs.gov site or call a toll-free number on the letter. Because of the high-volume on the toll-free numbers, the IRS noted that the IRS-sponsored website, idverify.irs.gov, is the safest, fastest option for taxpayers with web access. Only those taxpayers receiving Letter 5071C should access idverify.irs.gov.

The website will ask a series of questions that only the real taxpayer can answer. Taxpayers should have available their prior year tax return and their current year tax return, if they filed one, including supporting documents, such as Forms W-2 and 1099 and Schedules A and C.

Once the identity is verified, the taxpayers can confirm whether or not they filed the return in question. If they did not file the return, the IRS can take steps at that time to assist them. If they did file the return, it will take approximately six weeks to process it and issue a refund.

Taxpayers also can access idverify.irs.gov through www.IRS.gov by going to the Understanding Your 5071C Letter or the Understanding Your IRS Notice or Letter page. The tool is also available in Spanish. Taxpayers should always be aware of tax scams, efforts to solicit personally identifiable information and IRS impersonations. However, idverify.irs.gov is a secure, IRS-supported site that allows taxpayers to verify their identities quickly and safely.

The IRS noted that IRS.gov is the official IRS website, and taxpayers should always look for a URL ending with “.gov” – not “.com,” “.org,” “.net,” or other nongovernmental URLs.

 

 

 

Reality Check on Ted Cruz’s Proposal to Abolish the IRS

By Michael Cohn 

Senator Ted Cruz threw his hat into the ring to launch his candidacy for the Republican nomination this week, promising among other things to get rid of the Internal Revenue Service.

During a speech to kick off his campaign Monday at Liberty University in Lynchburg, Va., the Texas senator echoed John Lennon’s song, “Imagine,” proclaiming, “Instead of a tax code that crushes innovation, that imposes burdens on families struggling to make ends meet, imagine a simple flat tax that lets every American fill out his or her taxes on a postcard. Imagine abolishing the IRS.”

That statement quickly got people wondering what would replace the IRS if the agency were ever abolished. Bill Smith, managing director in CBIZ MHM’s National Tax Office, is among those who have their doubts it could ever happen. Even though Republicans in Congress have voted to reduce the IRS’s funding for the past five years, and on Wednesday, lawmakers debated a series of measures that would effectively put limits on the IRS, he does not believe Cruz or his colleagues would be able to eliminate the agency or its functions.

 “I don’t know how they would collect the taxes,” said Smith. “Even if you switch to a flat tax, which is what he’s advocating, you still have to have someone to collect it. You can’t just hope people are going to send their money in. We already know that even with an agency that does collect it, there’s a tremendous amount of noncompliance. That’s why they calculate the tax gap. They have an agency in place that has a great deal of weapons at its disposal for making people do the right thing, and it’s difficult even with that.”

According to various estimates, the IRS collects more dollars than each dollar in its budget. For example, according to the IRS, every dollar invested in IRS enforcement programs generates $7 in return. In fiscal year 2012, when the IRS budget was $11.8 billion, the agency collected $2.52 trillion, or roughly $214 for every dollar it spent.

Going to a flat tax, as Cruz has proposed, would not necessarily make the annual filing much simpler, even if it could be done on a postcard.

“He has proposed going to the flat tax, and he says you ought to be able to file your taxes on a postcard,” said Smith. “All you do is put down what you earn and send it in. When asked about charitable contributions and mortgage interest deductions, he suggests you just put down what you earn, take out your mortgage interest deduction and charitable contributions, and then send it in.”

Smith points out that approach would ignore many of the tax breaks, for example for capital gains and dividends. Even Cruz’s approach to charitable contributions has its contradictions, given the controversy over how the IRS reviews applications for tax-exempt status.

“He’s going to allow charitable contributions, but you don’t have an agency that says which organizations are exempt,” Smith pointed out.

Smith also sees a contradiction in eliminating the IRS while running for the presidency. “It’s the sole collector of revenues for the federal government,” he observed. “If you don’t have money coming into the federal government, you abolish the federal government and then there’s no need to run for president. None of it makes any sense.”

If Cruz wins support for the idea of eliminating the IRS, it might actually come from the opposing party. “I think he’s probably got a lot of Democrats who are interested in the presidential campaign who are going to back him very strongly because they’d love to have a Republican candidate who’s taking the position that we abolish the IRS because it’s not going to do very well in a debate,” said Smith.

Speaking of debates, Cruz might find himself facing off against a former IRS commissioner, Mark Everson, who is also running for the Republican nomination (see Former IRS Commissioner Everson Running for President). “I have a feeling Mr. Everson probably knows a little bit more about the IRS and the tax system than Mr. Cruz,” said Smith.

Bill Smith of CBIZ MHM has an answer to Ted Cruz's proposal, "Imagine abolishing the IRS," as he poses in front of the John Lennon Wall in Prague on New Year's 2015.

 

 

 

 

Best and Worst States Where Taxpayers Can Get Help from Accountants

BY MICHAEL COHN

The consumer finance site Wallethub has ranked the best and worst states across the country where taxpayers can find accountants to help prepare their taxes.

To identify the sweetest spots for tax assistance, WalletHub compared the 50 states and the District of Columbia in terms of six key metrics—ranging from the number of accountants per 1,000 people to their average workload and hourly compensation. In some cases, there were ties, indicated by a T followed by the ranking.

 

Best States for Tax Help
1 North Dakota
2 Massachusetts
3 District of Columbia
4 Minnesota
T-5 Colorado
T-5 Connecticut
7 Oklahoma
8 Washington
9 New York
10 Maryland

 

Worst States for Tax Help
T-42 Texas
T-42 West Virginia
T-42 Wisconsin
T-45 Florida
T-45 Indiana
47 Louisiana
48 North Carolina
49 Mississippi
50 Arkansas
51 Idaho

WalletHub’s research found that 57 percent of people pay someone to prepare and file their return. There is an average of four accountants per capita in the U.S., with each handling roughly 225 returns. The number of accountants per 1,000 people is 10 times higher in D.C. than in Mississippi. The percentage of filers paying for tax help is 2 times higher in New York than in Washington. The number of returns filed per accountant is seven times higher in Mississippi than in D.C.

The number of accounting job openings per 1,000 people is also 66 times higher in D.C. relative to the Magnolia State. The number of filers who made “math errors” in 2013 was 2.3 million.

For the full report and state rankings, click here.

 

 

 

Some Tax Pros Fine Procrastinating Taxpayers

BY SUZANNE WOOLLEY

On March 31, anyone who hasn't filed their taxes yet might reassure themselves that two whole weeks remain. Some tax professionals see it differently and act accordingly: To encourage people to file early, some accountants and tax preparers are offering discounts for early filers, raising fees for latecomers, and even employing a few scare tactics.

Anil Melwani, a CPA and founder of 212 Tax & Accounting Services, starts with a carrot—a 10 percent discount to clients who hand in their documents or come in before the end of February. About 25 percent of clients take advantage of the discount, he says. He also sets an early deadline for clients who want returns filed by April 15. This year, they had to turn in their forms by March 21, 10 days sooner than the March 31 date he used in prior years—after too many clients were showing up in April.

Some accountants set deadlines even earlier. Marilyn Niwao, a CPA and president of the National Society of Accountants, tells clients that if all their tax information isn't in by March 15, their returns may require an extension, which means a more costly return because she'll have to estimate the tax due.

Melwani's goal is to encourage clients to file early. Still, if someone comes in around now and he can't help, he may enable some procrastination. "I generally don't like to advertise it, but if you're owed a refund, you can wait to file for three years from April 15, 2015, and there's no penalty," he says.  There's no need to file an extension—you're basically penalizing yourself by not getting the money due you in a timely manner.

Taking that option can backfire, though. One wealthy client of CPA Mark Albaum didn't file returns for several years, though he made quarterly estimated payments all along. "He just couldn't get his paperwork together, or had a fear of getting his paperwork together," says Albaum. When the client finally filed, he found he'd been paying too much in his estimated payments, but it was too late to collect a $1 million refund. "He wasn't happy, but he understood it was something he did, and it was the price he paid," says Albaum.

In addition to that good, if unlikely, cautionary tale, Albaum also uses the stick approach, letting clients know that the later their information comes in, the higher his fee. Procrastinators who come in around now could pay as much as 20 percent more. He also makes sure that clients know about the severe penalties for filing late if they owe money. The late return penalty is 5 percent of what's owed, plus interest, if a filing is one month late; 10 percent for two months; 15 percent for three months, and so on—up to 25 percent in the fifth month. After that, the rate of increase drops and by the seventh month, the rate is 26 percent, he says.

In extreme circumstances, some CPAs resort to pleading. One year, Barry Kleiman, principal at Untracht Early, was expecting his first child, and his wife's due date was Oct. 9. He had one client who always filed for an extension and then procrastinated further until October 15 to file. Kleiman appealed to his client's sense of family, asking him to send in any outstanding tax information promptly—and he did. Kleiman's daughter was born on Oct. 15. "We joke that she waited for me to finish tax season before arriving," he says.

 

 

Taxpayers Gone Wrong

Tax pros share their clients’ worst ideas about taxes

Overflowing shoeboxes and a lack of basic documents aren’t the only things taxpayers bring into their tax preparers this time of year: They also bring along some pretty ridiculous ideas about the tax system.

We interviewed a number of tax pros about strange client misconceptions they’ve encountered; you can read the full story here; in the meantime, we’ve collected some of our favorites here, as well as some suggested by readers in response to our original story.

Income taxes are unconstitutional

Many taxpayers are either unaware of -- or simply don’t believe in -- the 16th Amendment.

Getting a refund means they didn’t pay taxes

Some taxpayers believe that a refund is an indication that they didn’t pay any taxes; more often, it means that they had too much deducted from their paycheck.

‘Cash’ is not income

Oh, but it is – it really is.

If you’re older than 70, you don’t have to pay taxes

The actual age cited may vary, but a disturbing number of taxpayers believe that there is some magic age after which you are exempt from taxes. There isn’t – not even death is a bar to some taxes.

Social Security cancels taxes

On a closely related note, some taxpayers think that once they start drawing Social Security, they no longer have to pay taxes or file a return – but they’re only safe from taxes if they have no other income besides the Social Security benefit.

Pets are dependents

Many taxpayers want to deduct their dog or cat, but they’re not dependents – just mooches.

Tax preparers work for the government

While some clients want their tax pro to cheat on their behalf, others go to the opposite extreme, believing that their preparer works for the government or on the government’s behalf. While some of the due diligence requirements forced on tax pros recently don’t help this impression, the fact remains that a tax pro can be a taxpayer’s best friend, and their best advocate with the tax authorities.

The Jan. 31 deadline

Some tax pros report having clients who think that if they didn’t receive a W-2 or 1099 form by Jan. 31, they don’t need to include it in their return.

Notary publics are tax professionals

This one was brand-new to us – but it speaks volumes about the public’s understanding (or lack thereof) of who tax professionals are and what they do.

No refund, no fee

This is probably the most pernicious taxpayer misconception: the idea that if you don’t get a refund, you don’t have to pay you

 

 

Tips for Filing an Amended Return

Have you found that you made an error on your federal tax return? If so, you may need to file an amended return. Here are ten tips that can help you file.

1.    Tax form to amend your return.  Use Form 1040X, Amended U.S. Individual Income Tax Return, to correct your tax return. You must file a paper Form 1040X; it can’t be e-filed. You can get the form on IRS.gov/forms at any time. See the Form 1040X instructions for the address where you should mail your form.

2.    Amend to correct errors.  You should file an amended tax return to correct errors or make changes to your original tax return. For example, you should amend to change your filing status, or to correct your income, deductions or credits.

3.    Don’t amend for math errors, missing forms.  You normally don’t need to file an amended return to correct math errors. The IRS will automatically correct those for you. Also, do not file an amended return if you forgot to attach tax forms, such as a Form W-2 or a schedule. The IRS will mail you a request for them in most cases.

4.    Most taxpayers don’t need to amend to correct Form 1095-A, Health Insurance Marketplace Statement, errors.  Eligible taxpayers who filed a 2014 tax return and claimed a premium tax credit using incorrect information from either the federally-facilitated or a state-based Health Insurance Marketplace, generally do not have to file an amended return regardless of the nature of the error, even if additional taxes would be owed. The IRS may contact you to ask for a copy of your corrected Form 1095-A to verify the information.

5.    Time limit to claim a refund.  You usually have three years from the date you filed your original tax return to file Form 1040X to claim a refund. You can file it within two years from the date you paid the tax, if that date is later. That means the last day for most people to file a 2011 claim for a refund is April 15, 2015. See the Form 1040X instructions for special rules that apply to some claims.  

6.    Separate forms for each year.  If you are amending more than one tax return, prepare a 1040X for each year. You should mail each year in separate envelopes. Note the tax year of the return you are amending at the top of Form 1040X. Check the form’s instructions for where to mail your return.

7.    Attach other forms with changes.  If you use other IRS forms or schedules to make changes, make sure to attach them to your Form 1040X.

8.    When to file for second refund.  If you are due a refund from your original return, wait to get that refund before filing Form 1040X to claim an additional refund. Amended returns take up to 16 weeks to process. You may spend your original refund while you wait for any additional refund.

9.    Pay added tax as soon as you can.  If you owe more tax, file your Form 1040X and pay the tax as soon as you can. This will stop added interest and penalties. Use IRS Direct Pay to pay your tax directly from your checking or savings account.

10.    Track your amended return.  You can track the status of your amended tax return three weeks after you file with ‘Where’s My Amended Return?’ This tool is on IRS.gov or by phone at 866-464-2050. It is available in English and in Spanish. The tool can track the status of an amended return for the current year and up to three years back. To use ‘Where’s My Amended Return?’ enter your taxpayer identification number, which is usually your Social Security number. You will also enter your date of birth and zip code. If you have filed amended returns for multiple years, you can check each year one at a time.

 

 

What to Know about Late Filing and Late Paying Penalties

April 15 was the tax day deadline for most people. If you are due a refund there is no penalty if you file a late tax return. But if you owe tax, and you failed to file and pay on time, you will usually owe interest and penalties on the tax you pay late. You should file your tax return and pay the tax as soon as possible to stop them. Here are eight facts that you should know about these penalties.  

1.    Two penalties may apply.  If you file your federal tax return late and owe tax with the return, two penalties may apply. The first is a failure-to-file penalty for late filing. The second is a failure-to-pay penalty for paying late.

2.    Penalty for late filing.  The failure-to-file penalty is normally 5 percent of the unpaid taxes for each month or part of a month that a tax return is late. It will not exceed 25 percent of your unpaid taxes.

3.    Minimum late filing penalty.  If you file your return more than 60 days after the due date or extended due date, the minimum penalty for late filing is the smaller of $135 or 100 percent of the unpaid tax.

4.    Penalty for late payment.  The failure-to-pay penalty is generally 0.5 percent per month of your unpaid taxes. It applies for each month or part of a month your taxes remain unpaid and starts accruing the day after taxes are due. It can build up to as much as 25 percent of your unpaid taxes.

5.    Combined penalty per month.  If the failure-to-file penalty and the failure-to-pay penalty both apply in any month, the maximum amount charged for those two penalties that month is 5 percent.

6.    File even if you can’t pay.  In most cases, the failure-to-file penalty is 10 times more than the failure-to-pay penalty. So if you can’t pay in full, you should file your tax return and pay as much as you can. Use IRS Direct Pay to pay your tax directly from your checking or savings account. You should try other options to pay, such as getting a loan or paying by debit or credit card. The IRS will work with you to help you resolve your tax debt. Most people can set up an installment agreement with the IRS using the Online Payment Agreement tool on IRS.gov.

7.    Late payment penalty may not apply.  If you requested an extension of time to file your income tax return by the tax due date and paid at least 90 percent of the taxes you owe, you may not face a failure-to-pay penalty. However, you must pay the remaining balance by the extended due date. You will owe interest on any taxes you pay after the April 15 due date.

8.    No penalty if reasonable cause.  You will not have to pay a failure-to-file or failure-to-pay penalty if you can show reasonable cause for not filing or paying on time. There is also penalty relief available for repayment of excess advance payments of the premium tax credit for 2014.

 

 

 

 

10 tools new college grads need to land a job

BY SEAN MCCABE

With graduation right around the corner for the nation's college seniors, landing that ever-important first job should be the first order of business off-campus. However, a résumé shouldn't be the only weapon at a job-seeker's disposal.

Ford Myers, a career coach, speaker and author of Get The Job You Want, Even When No One's Hiring, says the résumé is just one of many "tools" a job seeker should have in his or her "Job Seekers' Tool Kit."

"Unfortunately, most people don't know what these other tools are or how to use them. By integrating other elements into the job search - and not relying solely on your résumé - you can add power, professionalism and flexibility to your efforts," states Myers.

To stand out from the crowd, Myers suggests the following 10 items every new college graduate should have in their "Job Seekers' Tool Kit:"

  • 1. Accomplishment Stories: Write five or six compelling stories about school or work-related tasks about which you feel proud.
  • 2. Positioning Statement: Prepare and practice a "15-second commercial" about who you are, what you've done in the past (academically and professionally), and the particular strengths you can contribute to an employer. 
  • 3. Professional Biography: Write an impressive, one-page narrative of your career in the "third person" - as though someone else wrote it about you. 
  • 4. Target Company List: Make a "wish list" of adjectives that would describe your ideal employer, such as size, location, industry, culture, environment, etc. Then research specific organizations that meet those criteria, and put them on a list of 35 to 50 "target companies."
  • 5. Contact List: Compile a list of all the people you know personally and professionally. Remember that approximately 80% of new opportunities are secured through networking - so this list will be critical.
  • 6. Professional/Academic References: List colleagues or professors who would "sing your praises" if asked about you. Contact each of them, and get approval to use their names on your list of references.
  • 7. Letters of Recommendation: Get letters from four or five respected business colleagues or academic associates, which should be printed on their business or professional letterhead, and signed by the writers. Leave out date and salutation.
  • 8. Networking Agenda: Write-out a full networking agenda so you'll know exactly how to manage the networking discussion - how it flows, subjects to cover, what to expect, how to react to the other person's comments, etc. 
  • 9. Tracking System: Keep a detailed record of your job search activities, including phone calls, meeting notes and correspondence. This is essential to keeping your process organized and productive.
  • 10. Résumé: It's the last on the list, but still indispensable. And, it has to be GREAT. Be sure your final résumé is carefully edited and succinct (no more than two pages) with a layout that is easy for the eye to follow.

Myers adds, "It may take some time to produce these documents and to learn how to use them effectively, but it will be worth it. Building a satisfying career is much easier when you have the right tools!"

For more information on Myers and his book, visit his site here.

 

 

 

Swiss Banks Preach Transparency in U.S. Tax Evasion Endgame

BY GILES BROOM AND DAVID VOREACOS

Swiss banks, for decades the bastions of secrecy, are preaching the virtue of transparency to their U.S. clients as they try to head off billions of dollars in potential fines for helping Americans evade taxes.

Faced with the threat of penalties that could bankrupt some of them, almost 100 of the country’s banks are calling thousands of U.S. clients in an 11th-hour push to get them to disclose any offshore accounts they may be hiding. Customers are being asked to prove they have paid any taxes due, according to a dozen lawyers for banks or their customers. Some have even had their accounts partially blocked to force them to comply, according to the Swiss banking ombudsman.

As the U.S. government’s largest crackdown on offshore tax evasion enters its final stretch, the banks are trying to reduce any fines they face. Under the amnesty program, if banks can’t show clients paid any taxes owed, the government will assume they didn’t —and fines will be larger. U.S. prosecutors have already put one bank out of business over tax evasion: Wegelin & Co., Switzerland’s oldest private bank, closed in 2013 after being indicted.

“Until they have a signed and sealed deal, they’re doing whatever they can to minimize the penalty,” said Jim Mastracchio, a Washington-based lawyer at BakerHostetler serving as an independent examiner to a bank in the program. “Some of the larger banks underestimated the time and energy required to identify and notify clients.”

Fake Identities

On March 30, BSI SA became the first Swiss bank to reach a deal with the U.S. government, agreeing to pay $211 million for 3,500 accounts that held $2.8 billion in 2008. As part of the agreement, BSI, based on the shores of Lake Lugano, admitted to using coded language and fake identities to help customers duck taxes.

The U.S. wants to conclude all cases this year, Acting Assistant U.S. Attorney General Caroline Ciraolo said when she announced the BSI deal. The program, introduced in 2013, has dragged on longer than expected. Investigators had set a September 2014 deadline for banks to give client lists to the Justice Department as they argued for lower penalties.

The U.S. assault on offshore tax evasion has dealt a heavy blow to the bank secrecy that has helped Switzerland become the world’s largest center for offshore deposits. The country manages about $2.3 trillion for clients who don’t reside there, according to estimates from the Boston Consulting Group.

As they prepare to reach a settlement, some banks are pressing American clients to forgo their rights to secrecy under Swiss law, according to draft letters and agreements prepared by the firms and seen by Bloomberg. One such agreement, drawn up by the Royal Bank of Canada’s unit in Geneva, is available online.

Strong-Arming

Swiss law bars banks from revealing client names without their consent. While U.S. authorities can request names through a tax treaty with Switzerland, the Swiss government is obliged to comply only with very targeted requests under terms agreed on by the two governments. The Justice Department program helps the U.S. gather more information to make such demands from the Swiss authorities.

Several banks are using tactics clients consider as strong-arming, such as blocking funds or threatening to reveal names, said Thierry Boitelle, a lawyer with Bonnard Lawson in Geneva. He has advised U.S. taxpayers and Swiss private banks involved in the program.

“We have seen banks making withholdings on U.S. client accounts,” he said. “They’re holding back 25 to 30 percent of the funds to compensate for potential fines.”

Switzerland’s banking ombudsman said it received a “handful” of complaints of accounts being frozen. Banks ascribe such actions to uncertainty over whether a client controlled an account or because he tried to withdraw all holdings in cash instead of making wire transfers, said deputy ombudsman Rolf Wuest.

Still Resisting

As clients aren’t legally required to help, many banks have agreed to pay legal costs that sometimes reach tens of thousands of dollars, lawyers say.

In some cases, customers are still resisting, saying they paid banks high fees for holding money in confidence.

“Some clients felt that they were misled by the bank as far as secrecy was concerned, and that’s left them with no reason to cooperate,” said Leigh Kessler, a former tax prosecutor now at Rosenberg Martin Greenberg LLP, a Baltimore firm advising some Americans who received calls.

Customers who are tax compliant can also be uncooperative, said Larry Campagna, tax attorney for Chamberlain, Hrdlicka, White, Williams & Aughtry. The Houston-based firm has represented about 100 clients in connection with the program.

“They would say, ‘I’m finished with this bank,’” he said. “‘I’m right with my government, I don’t care what happens to the bank. Go jump in the lake and don’t call me again.’”

Fake Identities

Firms in the program, which constitute about one-third of the 280 Swiss banks, include Cie. Lombard, Odier SCA, Geneva’s oldest bank, Rothschild Bank AG of Zurich, and Union Bancaire Privee, which acquired the international arm of U.K. private bank Coutts from Royal Bank of Scotland Group Plc in March.

Deutsche Bank AG and EFG International AG, controlled by Greek billionaire Spiro Latsis and his family, are also included.

Kilian Borter, a spokesman for Rothschild Bank, said the firm has contacted clients urging them to be tax compliant. Officials for Deutsche Bank, EFG, UBP and Lombard Odier declined to comment on specific measures they are taking.

Client 6

The program requires banks to pay 20 percent of the value of undeclared accounts on Aug. 1, 2008, 30 percent for accounts opened between then and February 2009 and 50 percent for those opened later.

Banks are not necessarily aware of an account’s tax status, forcing them to contact clients to find out.

UBS Group AG, Switzerland’s largest lender, avoided prosecution in 2009 by paying $780 million and turning over account data. The main banking subsidiary of Credit Suisse Group AG, the country’s No. 2 bank, pleaded guilty last year, paying $2.6 billion. Another dozen or so banks are under criminal investigation and aren’t eligible for the amnesty.

Client lists are confidential and lawyers declined to reveal names. They include doctors, jewelers, widows and billionaires, court records of more than 100 people convicted of tax crimes in the U.S. since 2008 showed. One client referred to as “Client 6” had nearly $300 million in assets, a November indictment of Swiss banker Martin Dunki said.

After BSI, more settlements could be concluded in the next few weeks, and then recur weekly, allowing companies to put the issue behind them, said Tomasz Grzelak, analyst at MainFirst Bank AG in Zurich.

“They’re ready to sign an agreement so the final big issue is tackling the size of the fine,” said Milan Patel, a lawyer with Anaford AG in Zurich. “The larger banks are going to take a long time to resolve matters as the penalties are going to be huge.”

—With assistance from Jan Schwalbe in Zurich.

 

 

 

 

 

Taxpayers Are the Craziest People

Tax preparers share their clients' strangest misconceptions

BY JEFF STIMPSON

It's amazing what clients can walk in with: overflowing shoeboxes, demands for a refund in cash, insistence that you do their return before all others. Taxpayers try to deduct everything from unborn children and kids' weddings to speeding fines, groceries and massages. Many also walk around with some pretty wacky ideas about filing and taxpaying.

"That they don't have to pay any income taxes," said Becky Neilson of Neilson Bookkeeping in Sheridan, Calif., "as the taxes are unconstitutional."

Enrolled Agent Martha Nest of Westview Tax Services, Bardstown, Ky., also recalled:

  • "If I get a refund, I didn't pay taxes!"
  • "'Cash' is not income."
  • "I don't have to pay taxes if I have an S-Corp," and,
  • "Commuting is using my vehicle for business."

Added San Antonio-based CPA Susana Lozano:

  • Being a notary public is synonymous with being a tax professional;
  • Having a CPA prepare your taxes ensures you a higher return; and,
  • High-income individuals ($1 million of revenue or more) should not pay more than a 20% marginal tax rate.

"That if you're older than 70, you don't have to pay taxes," added New York-based preparer Maurice Trauring, "and 90% of my clients want to deduct their dog or cat."

Another misconception: That a preparer, if things go wrong with tax authorities, can't be the client's best friend.

The favorite taxpayer statement of Donna Sue Henderson of Bristol Tax and Accounting, Bristol, Tenn.: "'I can't pay their taxes 'cause then the government will have all my money.'"

"I find that funny," Henderson said, "because the alternative is to not pay and then have the IRS assess late-payment fees and penalties - and sometimes something worse." Her advice to clients creative and otherwise? "Just pay what you owe before it all snowballs out of control and the IRS starts levying."

 

'Won't come after them'

Certain types of filing sometimes occasion wrong ideas. For example, Jeffrey Schneider, an EA at SFS Tax & Accounting Services in Port St. Lucie, Fla., finds the biggest misconceptions stem from a detail of business filing. "A client on the cash basis wants to write off a bad debt when a customer doesn't pay," he said. "It's foreign to them that since they didn't record into income, they cannot get the write-off. Another is a loan on a business asset: When I don't deduct principal, they have a hard time understanding cash expenditure and cash expense."

"Clients with inventory ask, 'How do I show a profit when I do not have any cash?' After a 10-minute explanation, they get it. They don't like it," Schneider added, "but they get it."

Government benefits are another patch of thick woods. Clients believe "that once you begin to draw Social Security, you no longer have to pay taxes or file a tax return," said Melissa Bowman, an EA with Bradford, Ohio-based Rainbow Accounting Services. "This is only the norm for those who have no other income besides the Social Security benefit. Another is that people tend to think that if they file an extension, they will be safe from an audit."

 

Straightening them out

Speaking of government, clients sometimes feel "that if they don't file their returns that the IRS will never catch up to them," said Kathleen Fitzpatrick, owner of Padgett Business Services, Princeton, N.J. "I have prospects who have gone five or more years without filing and who really think nothing of it or who feel that the government won't come after them because it's likely a small amount of money."

"One of the funniest things new clients think is that if they didn't get a W-2 or 1099 by Jan. 31, they don't need to include the forms with their return," said Douglas Lindgren of Lindgren's Tax Service in Brooklyn Park, Minn. "We straighten them out accordingly."

 

 

 

 

Five Key Tax Tips about Tax Withholding and Estimated Tax

If you are an employee, you usually will have taxes withheld from your pay. If you don’t have taxes withheld, or you don’t have enough tax withheld, then you may need to make estimated tax payments. If you are self-employed you normally have to pay your taxes this way. Here are five tips about making estimated taxes:

  1. When the tax applies.  You should pay estimated taxes in 2015 if you expect to owe $1,000 or more when you file your federal tax return next year. Special rules apply to farmers and fishermen.
  2. How to figure the tax. Estimate the amount of income you expect to receive for the year. Also make sure that you take into account any tax deductions and credits that you will be eligible to claim. Use Form 1040-ES, Estimated Tax for Individuals, to figure and pay your estimated tax.
  3. When to make payments.  You normally make estimated tax payments four times a year. The dates that apply to most people are April 15, June 15 and Sept. 15 in 2015, and Jan. 15, 2016.
  4. When to change tax payments or withholding.  Life changes, such as a change in marital status or the birth of a child can affect your taxes. When these changes happen, you may need to revise your estimated tax payments during the year. If you are an employee, you may need to change the amount of tax withheld from your pay. If so, give your employer a new Form W–4, Employee's Withholding Allowance Certificate. You can use the IRS Withholding Calculator tool help you fill out the form.
  5. How to pay estimated tax.  Pay online using IRS Direct Pay. Direct Pay is a secure service to pay your individual tax bill or to pay your estimated tax directly from your checking or savings account at no cost to you. You have other ways that you can pay online, by phone or by mail. Visit IRS.gov/payments for easy and secure ways to pay your tax. If you pay by mail, use the payment vouchers that come with Form 1040-ES.

 

 

 

 

Contemporaneous recordkeeping key to avoiding loss limitations

Taxpayers who run up tax losses in a business must be prepared to prove that one of the material participation tests was passed to avoid having the losses characterized as a passive activity loss (PAL) that cannot be currently deducted. Adequatecontemporaneous records that detail the taxpayer’s tasks and time spent in the activity are crucial in attempting to sidestep the PAL rules. Records created after-the-fact are better than nothing, but they are much less believable than contemporaneous records. If losses are disallowed by the IRS, interest and penalties may be added to the unpaid taxes.

In general, an individual taxpayer can meet the material participation standard by passing one of the following seven tests outlined in the regulations:

·      More-than-500 hours. This test is passed if the taxpayer spends more than 500 hours in the activity during the tax year in question.

·      More-than-100 hours and more-hours-than-anyone-else. This test is passed if the taxpayer participates in the activity for more than 100 hours during the tax year and no other taxpayer participates more, including taxpayers who are not owners.

·      Substantially all. This test is passed if the individual’s participation in the activity for the year constitutes substantially all of the participation in the activity for all individuals (including nonowners).

·      Significant participation activity. This test is met if the individual’s aggregate participation in all activities in which he or she participated for more than 100 hours during the year (significant participation activities) exceeds 500 hours for the year.

·      Material participation in the last five years. This test is passed if the individual materially participated in the activity for any five tax years during the 10 immediately preceding years.

·      Personal service activityThis test is passed if the individual materially participated for any three preceding tax years by performing services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting. 

·      Facts and circumstances. This test is passed if, based on all facts and circumstances, the taxpayer is found to have participated in the activity on a regular, continuous, and substantial basis during the year in question.

In attempting to pass the material participation tests, taxpayers can prove their participation levels by any reasonable means. This can include identifying the types of work performed and the approximate number of hours spent performing such work with contemporaneous appointment books, calendars, narrative summaries, and the like. Several court decisions have said that, while the regulations permit flexibility regarding what it takes to prove material participation, courts are not required to accept after-the-fact “ballpark guesstimates” or a taxpayer’s unverified, undocumented, and presumably self-serving testimony.

 

 

 

Special rules for inherited IRAs

Normally, retirement plan distributions made to a nonspouse beneficiary after the account owner’s death are taxable at the time they are received and cannot be rolled over to the beneficiary’s own IRA. However, employer-sponsored retirement plans are required to offer nonspouse beneficiaries the option to roll over inherited amounts tax-free in a direct (trustee-to-trustee) rollover to an inherited IRA. No taxes will be due on the inherited IRA rollover until the beneficiary receives a distribution from the inherited IRA. An inherited IRA is an IRA that has been acquired by a beneficiary on the death of someone other than a spouse.

The following special rules apply to an inherited IRA:

·      The IRA must be a brand-new IRA set up for the specific purpose of receiving the inherited account.

·      The IRA must be specially titled in the deceased account owner’s name.

·      No other contributions may be made to the IRA.

·      No other amounts may generally be rolled into or out of the IRA.

·      Minimum required distributions will need to be made over the beneficiary’s life expectancy starting the year after the IRA owner’s death.

 

 

 

 

 

Avoid gift treatment by paying expenses directly

The annual exclusion for gifts remains at $14,000 for 2015. (Married couples can gift up to $28,000 combined.) This limit applies to the total of all gifts, including birthday and holiday gifts, made to the same individual during the year. However, any payment made directly to the medical care provider (for example, doctor, hospital, etc.) or educational organization for tuition is not subject to the gift tax and, therefore, is not included in the $14,000 limit.

So, when paying tuition or large medical bills for parents, grandchildren, or any other person who is not your dependent minor child, be sure to make the payment directly to the organization or service provider. Don’t give the funds to the parent or other individual first and have them pay the school, doctor, or hospital. By doing so, you have made a gift to that person, subject to the $14,000 limit. In summary, make direct payments to schools or medical providers and avoid taxable gifts that could be subject to the gift tax or reduce the payer’s unified credit.

Caution: Direct payments of tuition reduce the student’s eligibility for financial aid on a dollar-for-dollar basis. However, if the gift were made directly to the student, only 20% of the gifted assets would be counted as assets of the student for financial aid purposes. Accordingly, careful analysis of the trade-offs between the gift tax exclusion and impairment of financial aid eligibility should be considered.

 

 

 

 

 

What landlords should know about rental income and expenses

Rental income is any payment received for the use or occupation of property. Rental income is generally included in gross income when actually or constructively received. Cash basis taxpayers report income in the year received, regardless of when it was earned. Expenses of renting property can be deducted from gross rental income. Rental expenses are generally deducted by cash basis taxpayers in the year paid.

Advance rent is any amount received before the period that it covers. Include advance rent in rental income in the year received, regardless of the period covered or the accounting method used.

Do not include a security deposit in income when received if it is to be returned to the tenant at the end of the lease. If part or all of the security deposit is retained during any year because the tenant does not live up to the terms of the lease, include the amount retained in income for that year. If an amount called a security deposit is to be used as a final payment of rent, it is advance rent. Include it in income when received.

If the tenant pays any expenses that are the landlord’s obligations, the payments are rental income and must be included in income. These expenses may be deducted if they are otherwise deductible rental expenses. Property or services received in lieu of rent are reportable income. Include the fair market value of the property or services in rental income. Services at an agreed upon or specified price are assumed to be at fair market value unless there is evidence to the contrary.

Personal use of a vacation home or other rental property requires that the expenses be allocated between the personal and rental use. If the rental expenses exceed rental income, the rental expenses will be limited.

 

 

 

Top 10 Tips to Know if You Get a Letter from the IRS

The IRS mails millions of notices and letters to taxpayers each year. There are a variety of reasons why we might send you a notice. Here are the top 10 tips to know in case you get one.

1.    Don’t panic. You often can take care of a notice simply by responding to it.

2.    An IRS notice typically will be about your federal tax return or tax account. It will be about a specific issue, such as changes to your account. It may ask you for more information. It could also explain that you owe tax and that you need to pay the amount that is due.

3.    Each notice has specific instructions, so read it carefully. It will tell you what you need to do.

4.    You may get a notice that states the IRS has made a change or correction to your tax return. If you do, review the information and compare it with your original return.

5.    If you agree with the notice, you usually don’t need to reply unless it gives you other instructions or you need to make a payment.

6.    If you do not agree with the notice, it’s important for you to respond. You should write a letter to explain why you disagree. Include any information and documents you want the IRS to consider. Mail your reply with the bottom tear-off portion of the notice. Send it to the address shown in the upper left-hand corner of the notice. Allow at least 30 days for a response.

7.    You won’t need to call the IRS or visit an IRS office for most notices. If you do have questions, call the phone number in the upper right-hand corner of the notice. Have a copy of your tax return and the notice with you when you call. This will help the IRS answer your questions.

8.    Always keep copies of any notices you receive with your other tax records.

9.    Be alert for tax scams. The IRS sends letters and notices by mail. The IRS does not contact people by email or social media to ask for personal or financial information.

10.    For more on this topic visit IRS.gov. Click on the link ‘Responding to a Notice’ at the bottom left of the home page. Also, see Publication 594, The IRS Collection Process. You can get it on IRS.gov/forms at any time.

 

 

Silliest Excuses for Getting to Work Late

Getting to work on time, whether it's at an accounting firm or another type of business, can be hard enough without the added obstacles imposed by car trunk thieves, gas station stick-ups and shower mishaps. Yet, these are exactly the types of incidents some workers claim prevented them from getting to work on time this year, according to a survey from CareerBuilder. When asked about the most outrageous excuses employees have given them for being late, employers shared the following:

Splish Splash

I knocked myself out in the shower. 

Car Search

I was drunk and forgot which Waffle House I parked my car next to. 

I Spy

I discovered my spouse was having an affair, so I followed him this morning to find out who he was having an affair with. 

Running on Empty

Someone robbed the gas station I was at, and I didn’t have enough gas to get to another station.

Justice Delayed

I had to wait for the judge to set my bail. 

Unexpected Passenger

There was a stranger sleeping in my car. 

The Bambi Alibi

A deer herd that was moving through town made me late. 

Thoughtful Driver

I’m not late. I was thinking about work on the way in. 

Bad Dream

I dreamed that I got fired. 

Hoodwinked

I went out to my car to drive to work, and the trunk had been stolen out of it. (In this case, the employee had the photo to prove it.) 

 

 

 

Fees And Expenses; Just Not Adding Up

BY JEFF CUTTER EDITED FOR PHIL PUTNEY

I am accustomed to seeing a variety of emotions from people when they first come to see me; confusion, urgency and fear, to name a few. In fact, over the years, I’ve gotten pretty good at recognizing and identifying how people are feeling before they even start talking to me.

Anyway, last week I had an appointment with a gentleman named John. John’s a good guy. He worked hard his whole life. He is about 68, married, and has two kids and four grandkids. Before he even sat down I could feel John’s confusion and it didn’t take long for him to tell me what was bothering him. He said that he thought his advisor only charges 1 percent in fees for his financial planning services, but recently he looked at the details of his family’s portfolio, and the numbers were “well . . . just not adding up.” John said that it seems like his returns are lower than they should be if there is only a 1 percent fee, and he didn’t understand how that could be.

Hmm . . . John’s suspicions were right on the money (no pun intended).

Understanding the costs associated with an investment strategy is an important part of selecting the right one for your planning goals. Oftentimes, however, only one aspect of those costs is clearly identified, the advisor fee. In John’s situation, however, the advisor fee does not reflect the entire expense of his investment strategy. There are additional, less transparent costs, associated with his current strategy. Let’s take a look.

John has invested his $1 million dollars in approximately 10 “growth” mutual funds consisting largely of stocks. He uses a broker who charges him 1 percent for his services. This is the fee that John was previously aware of. After researching and evaluating his mutual funds, however, John came to understand that his portfolio is subject to additional fees and expenses.

The Wall Street Journal has reported that the average mutual fund has operating costs in the neighborhood of 1.3 percent of assets. These expenses are disclosed in the prospectus. Mutual funds also have transactional costs which, according to Forbes, typically total about 1.4 percent of a fund’s assets. Think about it. These large mutual funds are buying and selling stocks, bonds and securities every single day. Who is paying the cost? Yes, the people who own the mutual fund! Where are those expenses explained? The simple truth is that these expenses rarely show up in a fund’s prospectus. And I have never seen them on any brokerage statement, have you?

Mutual funds also suffer the effects of what is referred to as cash drag. Cash drag results from the portion of the mutual fund that sits in cash at all times to meet a fund’s liquidity needs. Cash drag typically costs about .8 percent. This expense results from investors paying a mutual fund’s operating costs on 100 percent of the fund’s assets, despite the fact that not all of the assets are invested.

The following is a summary of the fees associated with the average mutual fund:


Operating Costs - 1.3 percent
Transactional Costs - 1.4 percent
Cash Drag - .8 percent
Advisor Fee - 1.0 percent
Total Expenses: 4.5 percent
 

We also discussed the importance of analyzing investment behavior during both bull and bear markets. After our analysis, John realized that he does not have a strategy in place to minimize losses during bear markets. John now understands that, as currently structured, his portfolio has significant risk with no downside protection.

With John’s situation, it was easy to see an opportunity to minimize his expenses as well as to lower his overall portfolio risk. Since markets seem to have a correction every five to seven years, John’s future strategy should be tactical in nature. He should seek investment strategies that focus on managing downside risk in tough years such as 2001, 2002 and 2008. You know, it is not always what you earn, but it is always what you keep and John simply cannot afford to lose half of his portfolio if we enter another negative market cycle. John should also seek strategies that charge a flat fee that includes all of the above expenses. Strategies such as these are more transparent, usually about half of the cost, and oftentimes much more efficient.

With the numbers and calculations laid out in front of him, I could feel John’s stress and confusion draining. Was he paying more than the 1 percent? Absolutely! But could he minimize many of those “not so” transparent costs by using a different strategy? Yes, again!

Folks, make sure you do your homework to find out what you are really paying, and decide if what you are getting is worth it.

 

 

 

 

States Extend Tax Grab

Bloomberg BNA releases its annual state tax survey

BY ROGER RUSSELL

States are increasingly taxing corporations’ economic presence, not just their physical presence, according to Bloomberg BNA’s 15th Annual State Tax Survey.

Previously, states used physical presence as the determining factor as to whether or not an out-of-state business is liable for collecting sales or use tax for products sold within the state, indicated Steven Roll, managing editor of Bloomberg BNA State Tax and Accounting. In response to the digital economy, states are increasingly looking at economic presence, and are also adopting new rules aimed at taxing out-of-state companies’ receipts from services and intangibles that are attributable to in-state customers.

Roll and his colleagues at Bloomberg BNA have just completed the 15th Annual Survey of State Tax Departments (available for free here), in which states are asked to clarify their position on gray areas of corporate income tax and sales and use tax administration. All 50 states, the District of Columbia, and New York City participated in the survey.

New portions of the survey address the nexus consequences of registering with state agencies versus actually doing business in the state, drop-shipment transactions, and trailing nexus for sales tax purposes.

“We asked questions aimed at a state’s position on nexus policies and the sourcing of receipts for income tax purposes,” said Roll.

 

The rules that matter

Nexus is the minimum amount of contact between a taxpayer and a state, which allows the state to tax a business on its activities. It arises from two clauses in the Constitution. The Commerce Clause prohibits a state from unduly burdening interstate commerce, and the Due Process Clause requires a minimum connection between a state and the entity it wishes to tax. Public Law 86-272 further limits the states’ power to impose income tax by prohibiting taxing businesses whose only activity in the state is the solicitation of orders, so long as the orders are accepted at and delivered from a point outside the state.

Although the constitutional and legislative standards exist, states nevertheless vary in determining what particular activities performed within their borders trigger nexus for income taxation, according to Roll.

Part of the reason for this is that a key constitutional question remains undecided by the Supreme Court -- whether the states making corporate income tax nexus determinations must use the physical presence test established by the court in Quill. While the Supreme Court in Quill established a physical presence test for sales tax nexus, it left unanswered the question as to whether the physical presence test must also be used for income tax nexus. Almost from the time of the 1992 decision, the results have been varied and contradictory.

A number of state appellate courts have found that the physical presence standard established by Quill is limited to sales and use tax nexus, applying instead an economic presence test for income taxation.

As states continue to broaden their definition of economic nexus in their drive to increase state revenues, it is more important than ever for American corporations to be aware of these continuing changes, according to findings from the survey.

For corporate income tax purposes, most states have moved away from the traditional physical presence standard for determining whether an entity has nexus with the state. This year, only seven jurisdictions indicated that they apply Quill (i.e., require that a corporation have a physical presence in the state in order to create income tax nexus).

For sales tax purposes, due to the rise of affiliate, or “click-through” nexus, the physical presence standard also appears to be eroding, Roll observed.

“Corporations and businesses need guidance on where they are subject to tax based on evolving business trends,” said George Farrah, editorial director of Bloomberg BNA Tax and Accounting. “The Bloomberg BNA Survey of State Tax Departments is designed to do just that, enabling companies and tax practitioners to evaluate their tax exposure and help ensure they are complying with ever-changing state tax rules.”

“A minority of states (11 for income tax nexus and 10 for sales tax nexus) said they would find nexus if an out-of-state corporation registered to do business with their jurisdiction’s secretary of state,” Roll said. “About the same number of states said they apply their secretary of state’s definition of ‘transacting business’ or ‘doing business’ for purposes of nexus determinations. Typically, the secretary of state’s definition provides a list of activities that will trigger a registration requirement, while the tax definition is vague or merely references the U.S. Constitution.”

Other types of registrations are also likely to trigger nexus, according to Roll: “Sixteen states said they would find sales tax nexus if a corporation registered as a government vendor or contractor.”

State nexus policies also vary significantly with respect to complex multi-party transactions, according to Roll. “Drop shipments involve three parties – a customer, a retailer and a third-party supplier that delivers goods directly to the customer,” he said. “While these arrangements are common, they can raise issues as to whether the out-of-state retailer is required to collect sales tax.”

The number of states that would find nexus for drop shippers varied greatly in the survey, based on the specific facts of each scenario, he indicated. “For example, 17 states said that nexus would be created when a manufacturer ships tangible personal property by a common carrier to in-state customers based on orders received from a distributor where the distributor itself has nexus with the state.”

By contrast, no states would find nexus for the manufacturer if the distributor lacked nexus.

“Where a distributor uses an in-state manufacturer as a fulfillment agent in the state to pack and ship orders by common carrier to in-state customers, 21 states said they would find nexus if the manufacturer holds title to the inventory until the corporation directs the manufacturer to ship the order,” Roll said. “A larger number of states – 33 – said they would find nexus if the corporation itself holds title to the inventory until directing the manufacturer to ship the order.”

 

The new nexus

One of the main areas that was addressed in the survey this year was corporate income tax sourcing, Roll indicated. “This refers to the rules a state uses to determine if it will impose its corporate income tax on an activity that is conducted in more than one jurisdiction.”

 “Sourcing is the new nexus,” he said. “For corporate income tax purposes, nexus is often a foregone conclusion for many types of transactions,” he explained. “The focus now is on determining which states are owed tax on multijurisdictional sales of services or intangibles. Depending on each state’s sourcing rules, a transaction could escape state tax or be taxable in more than one state.”

The survey found increased attention to the sourcing of receipts from sales of intangible property and services. Previously, nearly all of the states’ sourcing rules were based on the location where the majority of the costs of performance were incurred. More recently, there has been a growing minority of states using a market-based approach that focuses on sales made to customers within its borders.

“The sourcing rule that a state applies is driven by how it characterizes a transaction,” said Roll. “The survey found that states are characterizing new or emerging products or business models such as the sale of digital goods or intangibles to fit within the definitions of long-established taxable transactions,” he said. “For example, the characterization of cloud computing varies among states and is often counter-intuitive. While most states characterize cloud computing transactions as the sale of intangibles or services, Utah treats these transactions as the sale, lease or license of tangible personal property.”

“Unlike previous years, most states chose only one approach to characterizing these receipts,” Roll said. Receipts from cloud computing are characterized as services in 12 states; the sale, lease, license or rental of intangible personal property in five states, and the sale of tangible personal property in one state.

“The survey results also indicate that market-based sourcing is the predominant approach to sourcing cloud-based transactions,” he noted.

“There is little uniformity across states from sourcing the income on services, intangibles and cloud computing, resulting in compliance confusion,” Roll observed. “Despite the shift towards a service-based economy decades ago, states are still unable to reach a consensus on how to source these transactions.”

Owning or leasing a Web server located within a state will likely produce both income tax and sales tax nexus with the state, according to the survey. Thhirty-eight states, plus the District of Columbia and New York City would find income tax nexus resulting from a Web server within their jurisdiction. Most of these jurisdictions also would find sales tax nexus based on a Web server in the state, according to the survey.

 

 

 

Start Planning Now for Next Year’s Taxes

You may be tempted to forget all about your taxes once you’ve filed your tax return. Do not give in to that temptation. If you start your tax planning now, you may avoid a tax surprise when you file next year. Now is a good time to set up a system so you can keep your tax records safe and easy to find. Here are some IRS tips to give you a leg up on next year’s taxes:

  • Take action when life changes occur.  Some life events can change the amount of tax you pay. Some examples that can do that include a change in marital status or the birth of a child. When they happen, you may need to change the amount of tax withheld from your pay. To do that, file a new Form W-4, Employee's Withholding Allowance Certificate, with your employer. Use the IRS Withholding Calculator tool on IRS.gov to help you fill out the form.
  • Report changes in circumstances to the Health Insurance Marketplace.  If you enroll in insurance coverage through the Health Insurance Marketplace in 2015, you should report changes in circumstances to the Marketplace when they happen. Report events such as changes in your income or family size. Doing so will help you avoid getting too much or too little financial assistance in advance.
  • Keep records safe.  Put your 2014 tax return and supporting records in a safe place. If you ever need your tax return or records, it will be easy for you to get them. For example, you may need a copy of your tax return if you apply for a home loan or financial aid. You should use your tax return as a guide when you do your taxes next year.
  • Stay organized.  Make tax time easier. Have your family put tax records in the same place during the year. That way you won’t have to search for misplaced records when you file next year.
  • Shop for a tax preparer.  If you want to hire a tax preparer to help you with tax planning, start your search now. Choose your tax preparer wisely. Use the Directory of Tax Return Preparers tool on IRS.gov to find tax preparers in your area with the credentials and qualifications that you prefer.
  • Think about itemizing.  If you claim a standard deduction on your tax return, you may be able to lower your taxes if you itemize deductions instead. A donation to charity could mean some tax savings. See the instructions for Schedule A, Itemized Deductions, for a list of deductions.
  • Stay informed.  Subscribe to IRS Tax Tips to get emails about tax law changes, how to save money and much more. You can also get Tax Tips on IRS.gov or IRS2Go, the IRS mobile app. You’ll receive Tips each weekday in the tax filing season and three days a week in summer. You will also get Special Edition Tax Tips at other times during the year.


Planning now can pay off with savings at tax time next year.

 

 

 

Tax Strategies Scan: 15 Ways to Spend a Refund

Our weekly roundup of tax-related investment strategies and news your clients may be thinking about.

  • 15 wise moves to make with your client's enormous tax refund: The average taxpayer refund for the 2014 filing season was $2,893, slightly higher than the amount recorded in the recent years. Tax refunds can be put into good use by paying down high-interest credit-card debt and making additional mortgage payments, according to Motley Fool. Taxpayers could also consider investing their refunds in the stock market or charitable organizations. -- Motley Fool
  • 4 investments you can make completely tax-free: Setting up a Roth individual retirement account is one of the least complicated ways to make a tax-free investment because it allows most clients to invest their annual contribution of $5,500 complete free of taxes, according to Motley Fool. College savings plans, also known as 529 plans, are also tax-free as long as the money is set aside for educational costs. -- Motley Fool
  • How to owe less tax on your investments: Clients looking to minimize taxes on their portfolio should devote their retirement accounts to tax-inefficient investments and their taxable accounts to diversified stock funds, according to The Wall Street Journal. Use tax-deferred retirement accounts to hold investments that spawn huge taxes such as actively managed stock funds or real-estate investment trusts. Meanwhile, place diversified low-cost stock funds that one would wish to keep for longer terms into taxable accounts. The key strategy is to stick to long-term tax-efficient investments and position tax-devouring funds to tax-deferred accounts.  -- The Wall Street Journal
  • How the mega-rich avoid paying taxes: The wealthiest Americans take advantage of their superior understanding of U.S. tax laws in minimizing their tax bills, according to Fox Business. Most of the mega-rich invest in assets with long-term capital gains that generate lower taxes compared to short-term assets. They pay themselves modest salaries, and get the rest of their compensation as dividends or stock options, which are taxed less. The mega-rich also take the full advantage of tax-deferred retirement accounts and use strategic borrowing tactics where they appear to reduce capital gains and thus minimize taxable assets. -- Fox Business
  • Index, active, or both: 8 questions to help you decide: Investors capitalizing on taxable accounts and who are content in matching market returns may want to favor index funds over actively managed funds, according toMorningstar. People who are focused on tax-efficiency and are primarily into tax-deferred accounts would benefit from moving their portfolio towards active funds. It is also advisable to build an active portfolio if risk control is a major consideration, and to prefer an index-centric portfolio if streamlining is a key goal.  --Morningstar

 

 

 

Tax issues with marijuana

BY GEORGE G. JONES AND MARK A. LUSCOMBE

As more and more states legalize either the recreational use of marijuana or the medical use of marijuana, more tax advisors will be encountering issues with respect to the representation of these businesses and recreational or medical marijuana users. The main issues stem from the fact that, even though states are legalizing these businesses and activities, at the federal level marijuana remains a Schedule I drug under the Controlled Substances Act of 1970. These legal businesses and activities under state law remain illegal businesses and activities under federal law. The Supreme Court has ruled that federal law takes precedence over state law.

 The Justice Department under the current administration is taking a generally hands-off approach to these state law experiments, but the Obama administration has expressed no strong desire to change the legal status of marijuana at the federal level and has warned of possible enforcement activity if the marijuana activities involve criminal elements, sales to minors, sales across state lines, other illegal drugs, or use of public lands or federal property.

The Internal Revenue Service follows the federal law in viewing these businesses as illegal businesses for tax purposes. This creates a number of tax issues for representing these clients, as well as criminal exposure and possible ethical issues with respect to the professional licenses that a particular tax advisor may hold.

 

THE SCOPE OF STATE LEGALIZATION

Currently 27 states and the District of Columbia have legalized some form of marijuana use, from decriminalizing possession to legalizing marijuana sale, production and use for medical purposes, to legalizing marijuana sale, production and use for recreational purposes. Several additional states are looking at the issue.

For most of these states, the changes are relatively new and procedures and rules are still being created, and problems and solutions are still being identified. These states include some of the largest states in terms of population: California, Illinois, Massachusetts, Michigan and New York.

 

BUSINESS EXPENSES

Code Sec. 280E specifically denies tax credits or deductions to businesses trafficking in controlled substances. Marijuana remains a Schedule I controlled substance under federal law. The result is to effectively make the income tax on a marijuana business a tax on gross income rather than net income, a considerable burden to a marijuana business.

There is an exception under the legislative history of Code Sec. 280E for cost of goods sold. Some marijuana businesses could try to allocate as much expense as possible to inventory to preserve their deduction. For example, the expenses related to producing and storing marijuana could be allocated to inventory. Since for most businesses there is an interest in deducting expenses, rather than allocating them to inventory, most of the IRS guidance is focused on restricting expenses. There are relatively few restrictions on voluntarily allocating more expenses to inventory than are required.

The direct costs are relatively easy to allocate to inventory. With respect to indirect costs, the full absorption rules under Code Sec. 471 and the uniform capitalization (UNICAP) rules under Code Sec. 263A come into play. Voluntarily complying with these rules, even if not required to do so, would generally be beneficial for a marijuana business that cannot otherwise claim deductions and credits.

There would still be some limits on the ability to allocate indirect costs to cost of goods sold. There is a general requirement in the regulations that the allocations not result in a material distortion of income. Some costs, such as selling, marketing and advertising costs, would generally not be allocable to cost of goods sold. There are indications that the IRS is taking a fairly strict look at what expenses can be properly allocated to cost of goods sold by marijuana businesses.

There is also litigation in Colorado with respect to the disallowance of deductions that could go to trial in the summer of 2015.

Another approach might be to try to segregate businesses to isolate the marijuana business from other activities and therefore protect the deduction of expenses related to the other activities. Whether the IRS will recognize the separate businesses will depend on a facts and circumstances analysis. Factors taken into account include whether the businesses had separate origins, whether they are conducted in the same location, to what extent each business supports the other, whether there are shared management and employees, and whether there are shared books and records.

 

ELECTRONIC FILING

The IRS requires certain taxes to be paid electronically. However, because of the federal view of marijuana and money laundering regulations, it is difficult for marijuana businesses to get bank accounts or utilize credit cards. They are usually run on a cash basis. The IRS has sought to impose substantial penalties on marijuana businesses that tried to pay their taxes in cash, the businesses contending that they could not file electronically.

Allgreens LLC had sued the IRS in Tax Court challenging the IRS’s determination that the inability to get a bank account did not excuse the failure to pay employee withholding taxes electronically. In a settlement of the case, the IRS agreed to abate the penalties, but stated that the settlement should not be viewed as precedent for future cases. The settlement may give the IRS an opportunity, however, to come up with a system to resolve the problem.

 

MEDICAL EXPENSE DEDUCTION

For the individual utilizing marijuana for medical purposes, the federal law treatment of marijuana also creates problems for the medical expense deduction. Revenue Ruling 97-9 determined that amounts paid for marijuana for medicinal use are not deductible, even if permitted under state law, since they were not legally procured under federal law. A similar analysis would probably apply to health flexible spending accounts, health savings accounts, health reimbursement accounts, and Archer Medical Savings Accounts.

 

AN ILLEGAL ACTIVITY

Under federal law, a person who aids, abets, counsels, commands, induces or procures the commission of a federal offense is punishable as a principal. The issue is whether rendering tax advice or preparing tax returns qualifies as aiding or abetting an illegal activity. Preparing a tax return may be safer than rendering tax advice since the tax return preparation would be generally focused on past activity, while rendering tax advice would generally be more associated with future activity, and therefore more likely be viewed as contributing to that activity. If the Justice Department is taking a generally hands-off approach to state experiments with marijuana businesses as long as they do not start to interfere with other federal priorities, the Justice Department is also likely to take a similar hands-off approach to anyone who could possibly be viewed as aiding or abetting that activity.

A number of national and state professional organizations have issued guidance with respect to the role that a licensed accountant or lawyer can play with marijuana businesses.

Tax advisors would be well advised to consult with the professional organizations with which they are affiliated or by which they are licensed to review those guidelines on professional conduct or ethics rulings to see how they apply in your particular state. The rulings seem to have relatively little consistency from state to state.


REMEDIES

As more and more states start to adopt marijuana legalization statutes, the conflicts with federal law will continue to expand. Federal legislation has been proposed to remove marijuana from the list of Category I or II controlled substances.

Such a step would go a long way to resolving the issues discussed herein. The administration has not at this point been pushing the legislation, and there is considerable opposition in Congress.

Over time, either through regulatory changes or court decisions, the tax issues involved with representing marijuana businesses and users should eventually start to be resolved. In the meantime, however, tax advisors should tread carefully through the legal minefield in representing marijuana businesses and users.

George G. Jones, JD, LL.M, is managing editor, and Mark A. Luscombe, JD, LL.M, CPA is principal analyst at Wolters Kluwer Tax & Accounting US.

 

 

 

New information reporting requirements under the Affordable Care Act

The Affordable Care Act (ACA) imposes significant information reporting responsibilities on employers starting with the 2015 calendar year. Although reporting for 2014 was not required, the IRS issued 2014 forms and instructions that will be finalized for 2015 later this year.

Information returns

The new information reporting system is similar to the current Form W-2 reporting system in that an information return (Form 1095-B or 1095-C) will be prepared for each applicable employee, and these returns will be filed with the IRS using a single transmittal form (Form 1094-B or 1094-C). Electronic filing is required if the employer files at least 250 returns. Employers must file these returns annually by Feb. 28 (March 31 if filed electronically). Therefore, employers will be filing these forms for the 2015 calendar year by Feb. 28 or March 31, 2016. A copy of the Form 1095, or a substitute statement, must be given to the employee by Jan. 31 and can be provided electronically with the employee's consent. Employers will be subject to penalties of up to $200 per return for failing to timely file the returns or furnish statements to employees.

The filing requirements are based on an employer's health plan and number of employees. Form1095-B (Health Coverage) and Form 1094-B (Transmittal of Health Coverage Information Returns) will be filed by insurance companies to report individuals covered by insured employer-sponsored group health plans. Small employers with self-insured health plans will also use Form 1095-B and Form 1094-B to report the name, address and Social Security number (or date of birth) of employees and their family members who have coverage under the self-insured plan. Employees who are offered coverage, but decline the coverage, are not reported.

Form 1095-C (Employer-Provided Health Insurance Offer and Coverage) and Form 1094-C(Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns) will be filed by applicable large employers. These forms will be required if the employer offers an insured or self-insured health plan, or does not offer any group health plan.

Applicable large employers are those that had, on average, at least 50 full-time employees (including full-time equivalent employees) during the preceding calendar year. Full-time employees are those who work, on average, at least 30 hours per week.

Small employers with fewer than 50 full-time employees (including equivalents) will be required to file Forms 1095-C and 1094-C if they are members of a controlled or affiliated service group that collectively has at least 50 full-time employees (including equivalents). Companies could be in a controlled or affiliated service group if they have common owners, provide services for each other or work together to provide services to third parties.

Example: Smith and Jones each own 50 percent of Company A and Company B. Because of this ownership, A and B are a controlled group, and the filing requirements for A and B are based on the number of employees that they have collectively. If A and B together had at least 50 full-time employees (including equivalents) in the prior calendar year, then A and B are each a member of an "applicable large employer group" for the current year, and both A and B would be required to file the forms. Thus, if A had 35 full-time employees in the prior calendar year and B had 30, A and B would each be a member of an applicable large employer group with 65 employees, and both would have to file Forms 1095-C and 1094-C. If A had 35 full-time employees and B had only 10, then A and B would not be members of an applicable large employer group since, collectively, they only had 45 employees (which is less than the 50-employee threshold). In that case, neither A nor B would file Forms 1095-C and 1094-C.

The following chart summarizes the filing requirements based on the size of the employer and its member status in an applicable large employer group (ALEG). For purposes of this chart, a small employer is one with less than 50 full-time employees (including equivalents) and a large employer is one with at least 50 full-time employees (including equivalents) during the preceding calendar year. The column titled "ALEG Member" denotes whether the employer was in a controlled or affiliated service group that collectively had at least 50 full-time employees (including equivalents) during the preceding calendar year.

 

Employer Size

ALEG 
Member

Employer
 Health Plan

Employer FilesForms 
1095-B/1094-B

Employer FilesForms 
1095-C/1094-C

Small employer 

No

None

No

No 

Small employer

No

Insured

No  (insurer files forms)

No 

Small employer

No

Self-insured

Yes

No 

Small employer treated as large (see ALEG discussion)

Yes

None

No

Yes

Small employer treated as large (see ALEG discussion)

Yes

Insured

No  (insurer files forms)

Yes

Small employer treated as large (see ALEG discussion)

Yes

Self-insured

Generally, no*

Yes

Large employer

N/A

None

No

Yes 

Large employer

N/A

Insured

No  (insurer files forms)

Yes 

Large employer

N/A

Self-insured

Generally, no*

Yes

*Employers with non-employees enrolled in their self-insured health plans, such as directors, retirees and individuals on COBRA, can elect to report these non-employees on Forms 1095-B and 1094-B instead of Forms 1095-C and 1094-C.

Use of Information

The IRS will use the information submitted on the forms to determine whether employees are subject to the new shared responsibility penalty for not having health coverage or are eligible for premium tax credits on insurance purchased through the health insurance marketplace. The information will also allow the IRS to determine if an employer is liable for a shared responsibility penalty.

The employer shared responsibility penalty can be imposed on any applicable large employer group member that does not offer affordable, minimum value health coverage to all of its full-time employees. Health coverage is affordable if the amount that the employer charges an employee for self-only coverage does not exceed 9.5 percent of the employee's Form W-2 wages, rate of pay, or the federal poverty level for the year. A health plan provides minimum value if the plan is designed to pay at least 60 percent of the total cost of medical services for a standard population. In the case of a controlled or affiliated service group, the penalties apply to each member of the group individually.

Form 1095-C and Form 1094-C

Applicable large employer group members must prepare a Form 1095-C for each full-time employee regardless of whether the employee is participating in an employer-sponsored group health plan. In addition, the employer will complete a Form 1095-C for each non-full-time employee who is enrolled in the employer's self-insured health plan. The employer will not prepare Form 1095-C for non-full-time employees who are not enrolled in the plan.

Form 1095-C will report the following information to the IRS:

  • The employee's name, address and Social Security number
  • The employer's name, address and employer identification number
  • Whether the employee and family members were offered health coverage each month that met the minimum value standard
  • The employee's share of the monthly premium for the lowest-cost minimum value health coverage offered
  • Whether the employee was a full-time employee each month
  • The affordability safe harbor applicable for the employee
  • Whether the employee was enrolled in the health plan
  • If the health plan was self-insured, the name and Social Security number (or birth date if the Social Security number is unavailable) of each employee and family member covered by the plan by month

An applicable large employer group member will file Form 1094-C to transmit its Forms 1095-C to the IRS. The Form 1094-C will report the following information:

  • The employer's name, address, employer identification number and contact person
  • The total number of Forms 1095-C filed
  • A certification by month as to whether the employer offered its full-time employees (and their dependents) the opportunity to enroll in minimum essential health coverage
  • The number of full-time employees for each month of the calendar year
  • The total number of employees for each month
  • Whether special rules or transition relief applies to the employer
  • The names and employer identification numbers of other employers that are in a controlled group or affiliated service group with the employer

Members of an applicable large employer group that has fewer than 100 full-time employees (including equivalents) are generally eligible for transition relief from the employer shared responsibility penalty for their 2015 plan year. Nonetheless, these employers are required to file Forms 1095-C and 1094-C for the 2015 calendar year.

As noted above, each applicable large employer group member is required to file Forms 1095-C and 1094-C for its own employees, even if it participates in a health plan with other employers (e.g., when the parent company sponsors a plan in which all subsidies participate). Special rules apply to governmental entities and to multi-employer plans for collectively-bargained employees.

Action required

In light of the complexity of the new information reporting requirements, employers should take the following actions:

  • Learn about the new information reporting requirements by reading IRS Publication 5196
  • Review ownership structures of related companies and perform a controlled/affiliated service group analysis to determine applicable large employer group members
  • Discuss the reporting requirements with the health plan's insurer or third-party administrator and the company's payroll vendor to identify the parties responsible for data collection and form preparation
  • Review the instructions for Forms 1094-C and 1095-C and, if applicable, the instructions for Forms 1094-B and 1095-B, along with the forms
  • Develop procedures for determining and documenting each employee's full-time or non-full-time status by month
  • Develop procedures to collect information about offers of health coverage and health plan enrollment by month
  • Ensure that systems are in place during 2015 to collect the needed data for the forms

This document contains general information, may be based on authorities that are subject to change, and is not a substitute for professional advice or services.  This document does not constitute assurance, tax, consulting, business, financial, investment, legal or other professional advice, and you should consult a qualified professional advisor before taking any action based on the information herein.  McGladrey LLP, its affiliates and related entities are not responsible for any loss resulting from or relating to reliance on this document by any person.

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Delaware Bank Accounts for Asset Protection Not a Silver Bullet

BY ERIC BOUGHMAN AND GARY FORSTER

As the story goes, John D. Rockefeller was getting his shoes shined when the shoeshine boy, not knowing whose shoes he was shining, started offering stock tips.

That was Rockefeller’s cue to turn bearish on the stock market. “Secret” tips lose their efficacy when no longer secret.

While speaking at a recent seminar, we received several questions from CPAs and financial professionals about the use of Delaware bank accounts to protect cash. The questions reflect a national trend to use Delaware accounts for “asset protection.”

Delaware law exempts banks and other financial institutions in Delaware from attachment and garnishment. Attempts by creditors to circumvent the law have been met with resistance in Delaware.

In a 1986 case (Delaware Trust Co. v. Partial), a judgment creditor who apparently understood that garnishment was prohibited against banks tried to freeze a debtor’s Delaware account by seeking a temporary restraining order prohibiting the bank from releasing funds. The court considered the order the functional equivalent of a garnishment and denied the request. The court explained that any order restricting the bank from releasing funds would violate Delaware’s “clear legislative policy exempting banks from garnishment.”

For desperate debtors subject to a collection action, keeping cash in a Delaware account may offer some added protection; however, it should not be considered a substitute for well-conceived personal planning. Although Delaware banks are exempt from garnishment, nothing prevents a motivated and well-funded judgment creditor from issuing a subpoena to discover information regarding a debtor’s deposits (even knowing they can't be garnished).

A judge outside of Delaware, but with the debtor sitting in his court and intending to see a judgment enforced, may enter an order directed toward the debtor that practically eviscerates the effectiveness of the Delaware restriction. This is precisely what happened in one recent case in the Federal District Court in Orlando, Fla., last year.

In Travelers Casualty and Surety Company of America v Design Build Engineers & Contractors Corp. et al., a judge ordered a defendant with a well-funded Delaware bank account (but, presumably, little other exposed assets) to post a cash bond with the court as collateral while a lawsuit was pending over certain indemnity agreements.

The facts of the case were the type likely to draw ire from the judge. Travelers sold a surety bond to Design Build Engineers and Contractors Corp., which subsequently got into a dispute over performance of two construction contracts insured by the bond. Travelers ultimately paid nearly $1.5 million to settle the two claims. Under certain indemnity agreements executed in connection with the bond, Design Build’s principals, Mr. and Mrs. Thompson, were required to deposit collateral with Travelers to cover the losses. When they failed to do so, Travelers sued. Then it got interesting.

Facing the lawsuit, the Thompsons formed several LLCs into which they transferred certain properties. Transfers of this type are the reason fraudulent transfer laws exist. Once transferred, two of the properties were sold for about $1 million and the proceeds were used to pay down the Thompsons’ Florida home mortgage. The Thompsons kept all the leftover cash in a Delaware bank account. Travelers sought an injunction requiring the Thompsons to post collateral as required by the indemnity agreements.

The Thompsons’ attorney made the right arguments. First, injunction is an extraordinary remedy intended to prevent irreparable harm that cannot be repaired with money damages. Though unpleasant, the mere loss of money can be remedied by a money judgment and is not recognized, in the legal context, as irreparable harm. Indeed, requiring a party to deposit money with the court would appear to be precisely the type of relief not permitted by an injunction. Additionally, the U.S. Supreme Court stated in the 1999 case of Grupo Mexicana d Desarrollo S.A. v. Alliance Bond Fund, Inc.,  that unsecured creditors generally may not freeze assets prior to entry of a judgment. The Thompsons may also have argued that the court had no jurisdiction over the Delaware accounts and could not enter an order with respect to those accounts.

In any event, the court was not persuaded and ordered the Thompsons to post a collateral bond with the court amounting to nearly $1.5 million. In doing so, the court said, “While posting bond may be unpleasant to the Defendants, they will not be harmed by the requirement that they abide by the terms of their agreement.” The ruling stretches the boundaries of applicable law. Although Travelers was entitled to demand collateral under the contract, once the Thompsons failed to comply, the contract remained, on its face, an unsecured contract for money damages. A prejudgment injunction should not be used to magically transform an unsecured contract into one that is collateralized based solely on a claimed breach; otherwise, every contract for money damages may potentially be transformed into one where the posting of cash security is deemed to be fair and equitable relief.

The practical effect of the order places the Thompsons in a precarious position. They can rely on Delaware’s unique garnishment restriction (coupled with Florida’s constitutional homestead protection) to protect their home and cash from being taken directly; however, if they fail to voluntarily make those assets available as collateral, they risk being held in contempt of court. With contempt can come all sorts of horrible effects such as fines and incarceration.

The moral of this story is that reactionary transfers intended to desperately protect assets provide a platform for a court to order extreme remedies. As the Travelers court explained last year, the basis for the order was “supported by Defendant’s efforts to shield assets from Travelers’ lien claims by transferring assets to LLCs controlled by the Defendants.” Clearly, the court was not impressed with the Thompsons’ twelfth-hour transfers.

Would the result have been different had the Thompsons engaged in the same protective transfers two years before the start of the lawsuit, instead of two weeks after? We think so. The effectiveness of asset protection planning is highly dependent upon timing. And, as the Travelers case shows, gambits such as reliance upon Delaware’s now-popular banking statutes or Florida’s ultra-protective homestead laws pale in protective comparison to well-conceived protective planning.

Eric Boughman and Gary Forster are partners at the law firm of Forster Boughman & Lefkowitz, The Wealth Protection Group.

 

 

 

 

Why Republicans Want a Bigger U.S. Estate Tax Repeal Than Ever

BY RICHARD RUBIN

Congressional Republicans have narrowed the estate tax so much that it affects only about 5,500 wealthy American households a year. Now they want to eliminate the tax altogether—with a bonus for heirs.

Under the latest plan, backed by farmers and business groups, estates would pay no taxes.

Furthermore, heirs wouldn’t owe any capital gains taxes on the increased value of assets over the deceased’s life.

That move—simpler and more generous than previous repeal efforts—would let billions of dollars in income and assets escape all U.S. taxes. The plan would cost the U.S. government $269 billion in lost revenue over a decade.

The House of Representatives will vote this week on the latest effort to repeal the tax, which is now paid by only 0.2 percent of U.S. estates. Republicans are drawing attention to what they see as an unjust levy by bringing up the legislation at the annual tax-filing deadline.

They’re also shrugging aside criticism from President Barack Obama, who calls the plan a budget-busting handout to the nation’s wealthiest families at a time when lawmakers should focus on the middle class.

Instead, they’re moving in the opposite direction, making repeal more attractive for business owners and creating an even wider gap between the parties on how to tax inherited wealth.

The new Republican plan is different from past repeal bills in a technical yet important way. If it became law, families would be able to pass assets across generations and avoid capital gains taxes on both real gains and so-called phantom income attributed to inflation.

‘Bad Grade’

“When you look at the bill, it actually doesn’t make sense; it would get a bad grade in a law school final exam,” said Ed McCaffery, a law professor at the University of Southern California who favors repealing the estate tax. “That is telling old people, clutch onto things until they die. That’s not how the American economy works.”

The first full House vote on estate tax repeal in 10 years would reaffirm Republicans’ position to kill what they have long labeled the “death tax.”

It would also let the more than 60 percent of House members who were elected since the last repeal vote take a formal position on the issue.

Campaign Issue

Repeal won’t happen anytime soon, not with Obama proposing higher estate taxes and only one Senate Democrat siding with the chamber’s Republicans during a test vote on the issue last month. Instead, the House measure is a marker for the 2016 campaign and a signal from Republicans to business groups that repealing the estate tax is a priority.

“The death tax is the wrong tax at the wrong time, and it hurts the wrong people,” said Representative Kevin Brady, a Texas Republican and the lead sponsor of the House bill.

He said business owners already pay hefty taxes during their lifetimes and said some families’ holdings have been subject to the estate tax multiple times.

“They are double and triple taxed,” he said.

Republicans and business groups point to the difficulties faced by family businesses, including the expenses of tax planning to minimize or avoid the tax.

Asset Rich

“We are often asset-rich but cash-poor,” said Andy Harig, director of government relations for the Food Marketing Institute, which will bring 200 grocers from across the country to Washington this week. “A lot of our members are sometimes surprised when they do the valuation to find out what their businesses are worth.”

Obama and other Democrats say estate tax repeal—especially now with a $5.43 million per-person exemption—is actually about protecting the very wealthy.

“One of the laws that my friends on the other side of the aisle are trying to pass right now is a new, deficit-busting tax cut for a fraction of the top one-tenth of 1 percent,” the president said on April 2 in Louisville, Kentucky. “That’s fewer than 50 people here in Kentucky who would, on average, get a couple million dollars in tax breaks.”

The new twist this year is the way that Republicans have structured the legislation, breaking with their approach in bills from 2000, 2001 and 2005.

Back then, they paired estate tax repeal with what’s known as modified carry-over basis. Under that system, heirs who choose to sell inherited assets pay capital gains taxes on the full gain since the asset was purchased, minus an exemption to protect families outside the very top of the wealth scale.

2010 Only

In what became the law for 2010 only, heirs could reduce that tax with a capital gains exemption of up to $1.3 million, with an extra allowance for surviving spouses. That approach ensured death wasn’t a taxable event and allowed heirs to defer taxes until they chose to sell.

This year’s bill is different. It retains what’s known as the step up in basis, which lets heirs defer taxes until they sell and avoid taxes entirely on any increases in value that occurred before they inherited the assets.

That bypasses the complexities and legal fights around carryover basis. It can also be a potent combination, extending rules that now apply for people with less than $5.43 million to the entire population.

Consider a married couple who starts a business with $1 million and both die in 2015 when the business is worth $50 million. They leave the business to their daughter, who sells it for $60 million in 2017.

Capital Gains

Under current law, the couple would have a $10.86 million exemption from the estate tax and pay a top rate of 40 percent on the rest. The daughter would then pay a 23.8 percent capital gains tax on a $10 million gain, for a total tax bill of about $18 million.

Under previous Republican plans, the couple would have paid no estate taxes. The daughter, however, would have to pay capital gains taxes on the entire $59 million gain minus the exemptions, for a total tax bill of about $13 million.

Now the parties are moving further apart, because of the Republican approach and Obama’s proposal earlier this year to impose capital gains taxes on appreciated assets at death.

Under the latest Republican plan, the family would pay taxes only on capital gains that occur after the couple’s death—for a total bill of $2.38 million. Obama would charge them about $30 million.

The basis rules are especially important for farmers, who often have assets tied up in land that has appreciated in value, said Pat Wolff, a tax specialist at the American Farm Bureau Federation. Farmers sometimes choose to sell parts of their land, and the basis rules in the Republican measure make that easier and less expensive.

‘Swapping’ Tax

“We asked that the death tax repeal be a straight up repeal bill and not create new taxes for farmers and ranchers,” she said.

Lawmakers should rethink the bill, said Patricia Soldano, a California estate planner who has spent 20 years backing repeal.

“You very possibly would have assets in which the appreciation on those assets is untaxed,” she said. “And I don’t really think people are suggesting that.”

The combination of estate tax repeal and the stepped-up basis rules would be “pretty close” to ending the capital gains tax altogether, said Lawrence Zelenak, a Duke University tax law professor.

“Anybody who can afford not to would never sell an asset during life again,” he said. “It’s just this massive tax favoritism for transfers at death.”

The bill is H.R. 1105.

 

 

 

Museum of Sex Didn't Pay Sales Taxes

By Michael Cohn 

New York City’s Museum of Sex hasn’t paid any sales taxes for four years and is now facing an $82,192 tax lien from state tax authorities.

The problem stems from discounts that the museum offered to group coupon sites such as Groupon and Living Social, according to the New York Post. Those discounts could provide up to 50 percent off the admission charge.

Apparently the discount sites generated much of the business for the museum in recent years, and according to a spokesperson, they were expecting the sites to charge the sales tax once the vouchers were redeemed. However, other museums that use Groupon and Living Social aren’t facing tax liens.

On the other hand, the items for sale in the gift shop for most other museums are reportedly a lot different from the toys available at the Museum of Sex.

A spokesperson for the museum told the Post that it has paid off $17,000 on its tax debts and is making monthly payments on the remaining $65,000.

 

 

 

Special Needs Require Special Deductions

Over the years I have worked with many families with special needs kids. I am amazed at their strength and the resilience of their spirit. The term "Special Needs" now encompasses more than what it used to and rightly so. It is truly phenomenal that studies show that the number of children diagnosed with autism, Asperger's syndrome and many other neurological disorders continue to skyrocket. A recent report by the Centers for Disease Control estimated the rate to be as high as 1 in 50. 

We know how disruptive the lives of families with special needs dependents are, which is only compounded by the fact that the costs of providing care to the dependents are very high. To further complicate things, parents or care-givers are not aware of possible tax deductions that can help alleviate some of these costs and they unknowingly forgo tax deductions or credits. 

In this blog post, let's take a look at the various potential tax benefits that can help parents/ care-givers of special needs individuals: 

The Dependency Exemption:

The dependency exemption under § 152(c)(3) includes the so-called "age test", where an individual must be under the age of 19 at year end, the individual must be a student under the age of 24, or the individual must be totally or permanently disabled at any time during the year. § 152(c)(3) was amended in 2009 to include a rule that the person claiming the dependent must be older than the qualifying child.Age is not relevant in determining the dependency exemption of an individual who is permanently and totally disabled. 

§ 22 (e)(3) states that an individual is permanently and totally disabled if he or she is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or that has lasted or can be expected to last for a continuous period of not less than 12 months. A physician must certify in writing that the individual is permanently & totally disabled. 

Special School Instruction Deductible as Medical Expenses:

According to Regs. Sec 1.213-1(e)(1)(v) the unreimbursed cost of attending a "special school" for a neurologically or physically handicapped individual is deductible as a medical expense if the principal reason for sending the individual to the school is to alleviate the handicap through the school’s resources. 

As long as these expenses exceed the 10%-of-the-adjusted-gross-income floor in 2013 & beyond,expenses paid to a special school are deductible on Schedule A as part of Itemized Deductions.  

Recent IRS Letter Rulings & Revenue Rulings have expanded the definitions of special schooling. 

 

Capital Expenditures: 

To secure a current medical expense deduction for a capital expenditure, the cost must be reasonable in amount and incurred out of medical necessity for primary use by the individual requiring medical care.

Qualifying capital expenditures for medical expense deductions fall into two categories:

  1. Expenditures improving the taxpayer’s residence while also providing medical care                                                              and 
  2. Expenditures removing structural barriers in the home of an individual with physical limitations.

Under either of the above category, costs incurred to operate or maintain the capital expenditure, such as increased utility and maintenance costs, are deductible currently as medical expenses as long as the medical reason for the expenditures continues to exist.

Conferences & Seminars: 

If as a parent or a guardian of special needs children, you have to attend medical conferences and seminars to learn more about their disability, the amounts paid towards registration fees and travel are deductible as medical expenses under Rev. Rul. 2000-24. There should be a physician recommendation, and the seminar should deal directly with the disability. 

State deductions:

Many states provide deduction on the state tax returns which are in addition to the above, please check with your Enrolled Agent about the specific U.S. state you live in. 


Bibliography: Revenue Rulings; Letter Rulings; Pub 502; Journal of Accountancy Articles. 

As always, read my disclaimer here. Please consult a qualified tax professional for your unique tax needs. More of my contact information is on my website, www.mntaxsolutionsllc.com.

Posted by Manasa Nadig 

 

 

 

 

 

Disclaimer: This article is for general information purposes only, and is not intended to provide professional tax, legal, or financial advice. To determine how this or other information in this newsletter might apply to your specific situation, contact us for more details and counsel.

 

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