Few Small Businesses Claiming Obamacare Tax Credit
BY MICHAEL COHN
Relatively few employers are claiming the Small Business Health Care Tax Credit under the Affordable Care Act, according to a new government report.
The report, from the Government Accountability Office, found that claims for the small employer health tax credit have continued to be lower than thought eligible by government agency and small business group estimates, limiting the effect of the credit on expanding health insurance coverage through small employers. In 2014, approximately 181,000 employers claimed the credit, down somewhat from 2010. These numbers are relatively low compared to the number of employers eligible for the credit. The GAO issued the report as part of testimony by James R. McTigue Jr., director of strategic issues, during a hearing Tuesday before the House Committee on Small Business’s Subcommittee on Economic Growth, Tax and Capital Access.
In 2012, the GAO reported that selected estimates of the number of employers eligible ranged from about 1.4 million to 4 million. In 2010, claims totaled $468 million compared to initial estimates of $2 billion by the Congressional Budget Office and the Joint Committee on Taxation. Actual claims for the credit in 2013 and 2014 increased slightly to about $511 million and $541 million, respectively.
The small employer health tax credit has not been widely claimed for a variety of reasons, as the GAO reported in May 2012. The maximum amount of the credit does not appear to be a large enough incentive for employers to offer or maintain insurance. In addition, few small employers qualify for the maximum credit amount. For those employers that do claim the credit, the credit amount “phases out” to zero as employers employ up to 25 full-time equivalent employees at higher wages.
The amount of the credit is also limited if premiums paid by an employer are more than the average premiums for the small group market in the employer's state. Furthermore, the credit can only be claimed for two consecutive years after 2013. The GAO also found that the cost and complexity involved in claiming the tax credit was significant, deterring small employers from claiming it. Many small businesses have also reported that they were unaware of the credit. Even so, the Internal Revenue Service had been taking steps since April 2010 to raise awareness about the credit and reduce the burden on taxpayers by offering tools to help taxpayers determine eligibility for the credit.
Congress and the administration have proposed a number of changes to the credit, the GAO pointed out. These include expanding the size of eligible employers, altering the phase-out rules, and allowing the credit to be claimed in more than two consecutive years. Amending the eligibility requirements or increasing the amount of the credit may allow more businesses to claim the credit. However, these changes would increase its cost to the federal government.
Many small employers still do not offer health insurance. The Small Employer Health Insurance Tax Credit was established as part of the Patient Protection and Affordable Care Act to help eligible small employers—businesses or tax-exempt entities—provide health insurance for employees. The base of the credit is premiums paid or the average premium for an employer's state if premiums paid were higher. In 2016, for small businesses, the credit is 50 percent of the base unless the business had more than 10 full-time equivalent employees or paid average annual wages over $25,900.
Number of Employers That Claimed Small Employer Health Tax Credit
Trump Foundation Says It Made Error in 2013 Donation
BY BILL ALLISON
The Donald J. Trump Foundation, the charitable organization of the front-runner for the Republican presidential nomination, said it had made an error in making and failing to disclose a $25,000 donation to a political group in 2013.
The statement comes a day after Citizens for Responsibility and Ethics in Washington, or CREW, raised questions about the donation in a complaint sent to the Internal Revenue Service. Tax law bars charitable foundations like Trump's foundation from engaging in political activities, including contributing money to candidates and PACs. CREW also noted that the donation was not properly disclosed on the foundation's tax return.
"My understanding is the foundation has been in touch with the IRS and proper adjustments are being made," Hope Hicks, spokeswoman for the Trump campaign, said in an e-mail.
According to Hicks, a clerk at Trump's foundation confused And Justice For All, a Florida political committee controlled by attorney general Pam Bondi, with a Salt Lake City, Utah-based charitable organization with the same name. As a result, the employee paid the donation from an account for the charitable institution.
An outside accounting firm that prepares tax forms for the foundation then confused And Justice For All with a Wichita, Kansas-based nonprofit called Justice For All, Hicks said. The firm then erroneously reported that the donation had gone to the wrong group
Money Received by Adult Entertainer Was Taxable Compensation, Not Gift
Most taxpayers have at least a vague understanding of the principle that gifts do not constitute taxable income, while payments for services are taxable. Unfortunately for exotic dancer and professional adult entertainer Veronica Fairchild, there is no middle ground which would allow her to include in income some of the money she received from a client as payment for her services, while she characterized the bulk of what she received as gifts.
In 2010, Fairchild filed joint returns with her husband for the years 2005 to 2008, reporting income of approximately $120,000 for the first three years, and $150,000 for 2008. The total income reported, $513,670, was significantly less than the $1,153,647 she received from two clients during that time period.
At trial, she testified that she considered the money she received from one of the clients, a Mr. Karlen, to be a gift, but that she had reported some of it as income to take some of the tax burden off of him. She also maintained that her meetings outside of the club were simply for private dances and did not involve sex. However, Karlen testified at the trial. He said all of their meetings outside of the club were for sex.
When asked whether the 37 payments were all for sexual services, Karlen replied, “every one of those.” He later confirmed that “the whole $1.1 million was for sex.”
The jury found her guilty on four counts of making and subscribing a false tax return. The district court sentenced her to 33 months in prison on each count, to run concurrently. The Eighth Circuit affirmed the decision in U.S. v. Fairchild (March 17, 2016).
Bartering Produces Taxable Income and Reporting Requirements
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 normally taxable income. This is true even if you are not in business.
A few facts about bartering:
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.
The Inevitable: Death, Taxes and Breaches
BY LAUREN WILLIAMS
Benjamin Franklin was a smart guy when he said back in 1789, “In this world nothing can be said to be certain, except death and taxes.” He hit the nail right on the head.
A new year is upon us, and what does that mean? Another tax season! Taxes have definitely changed over the years as have the ways they are paid. According to efile.com, over 90 percent of 2014 returns were e-filed, an increase of roughly 5 percent from 2013 returns. In fact, the percentage of individuals who e-file returns has steadily increased since 2001. With the increasing reliance on technology for filing returns, is the federal government taking the necessary measures to protect personal information?
Breaches at the IRS
Unfortunately, data breaches and cyber-attacks at the IRS are not a new thing. In 2014, the U.S. Government Accountability Office published a report, IRS Needs to Address Control Weaknesses that Place Financial and Taxpayer Data at Risk. The report found that while the IRS had made progress in addressing known control weaknesses, “weaknesses remain that could affect the confidentiality, integrity, and availability of financial and sensitive taxpayer data.” Although protecting taxpayer data and securing computer systems remains a top priority for the IRS, they continue to face challenges and continuous breach attempts.
In early 2015, hackers used the IRS’s “Get Transcript” application to access approximately 334,000 accounts and retrieve millions of taxpayer transcripts from prior years. Although the information used to access the system was not stolen from the IRS, hackers were still able to utilize stolen information from other sources to answer various personal identity and security verification questions to access the application. According to The New York Times, the hackers in the 2015 breach were able to profit $50 million from filing fraudulent returns.
A more recent attack earlier this year involved attackers using personal data and malware to generate e-filing PIN numbers. According to the IRS, “We identified unauthorized attempts involving approximately 464,000 unique SSNs, of which 101,000 SSNs were used to successfully access an E-file PIN.”
An e-file PIN is a required step in finalizing and submitting online tax returns. What does this mean for these 100,000 taxpayers? The earliest that 2015 tax returns could be filed was January 19. Since the tax deadline isn’t until April 18, many people haven’t even begun to think about filing their returns. This is great news for fraudsters. This gives them plenty of time to file a fraudulent return using the names of the 100,000 taxpayers impacted and reap the rewards of their refund before they even notice.
Why the IRS?
Why does the IRS find itself continuously under the threat of attack? The IRS, like all departments of the federal government, is susceptible for a couple of reasons. First, government agencies store financial and personal information on hundreds of millions of individuals. If attackers can get in, it’s a one-stop shop. They can either utilize the information for their own personal gain, such as filing fraudulent tax returns in order to collect the refunds, or sell the information to anyone who might be interested, such as criminal organizations either in the U.S. or other countries.
Second, the government’s security measures and cyber defenses that are currently in place are not robust enough to thwart attacks such as the attacks at the IRS. Due to the increased risks that the government faces, more stringent security measures are needed that are currently not in place.
What Could Have Been Done
Is there anything that could have prevented the most recent cyber-attack at the IRS, or any cyber-attacks in government agencies? There are a couple of things that could have been done that might help prevent attacks, or at least made them more challenging for attackers. President Obama’s 2017 budget proposal, along with the administration's Cybersecurity National Action Plan, or CNAP, are steps towards reducing the overall risk faced by government agencies.
Increase Cybersecurity Funding
It is clear that in order to reduce the number of attacks targeting the federal government, more funding will need to be dedicated to cybersecurity. According to the Federal Times, Obama’s 2017 budget gives cybersecurity programs a 35 percent funding increase over 2016 funding, bringing the total funding to $19 billion. Although this is a step in the right direction, more funding is still needed. According to US News and World Report, the FBI’s cyber budget in 2015 was $470 million, which was only 5.7 percent of the agency’s requested budget.
Update Legacy Systems and Increase Security Measures
There are no ifs, ands or buts about it—many government systems are outdated. In fact, much of the increase in the cybersecurity budget aims to replace antiquated systems. The Office of Personnel Management hack in 2015 that exposed the personal information of 22 million federal employees was primarily due to the OPM utilizing databases that were decades old. US News and World Report states that the last time the OPM’s databases were updated was to fix the Y2K bug! The issue with outdated systems is that several of them cannot accommodate the updated security measures required in today’s world. For example, multi-factor authentication and encryption were not integrated into any of OPM’s 47 major applications.
In the case of the IRS breach, the e-file PIN that is required to file tax returns is an attempt at two-factor authentication. However, all that is required to obtain an e-file PIN is personal information that could be readily obtained by anyone (as evidenced by the attack). In order to prevent attacks like this from happening in the future, the IRS should consider strengthening their two-factor authentication and providing something such as the Identity Protection PIN (IP PIN) to anyone who is interested, not only those taxpayers who have already experienced some sort of identity breach. However, the IP PIN has also proven to be vulnerable to criminals (see IRS Suspends IP PIN Service for Identity Theft Victims).
Continue to Hire Security Personnel
The first step in combatting security issues is to hire personnel who understand them. The CNAP has called for the creation of a Federal Chief Information Security Officer, or CISO, position. The Federal CISO would be responsible for driving IT changes across the government—primarily focusing efforts on modernizing the government’s legacy IT systems that are still in use.
A Federal CISO is a good start, but several other security personnel are needed throughout various government agencies. Fortune magazine estimated there were 30,000 open cybersecurity positions in the federal government in 2014. Nationwide, the Cisco 2014 Annual Security Report found that the shortfall of cybersecurity personnel is roughly 1 million and expected to increase to 1.5 million by 2019.
Increase Security Awareness
Filling those empty positions requires an increase of security awareness throughout the country. Obama’s 2017 budget proposal also includes $62 million to stimulate the development of cybersecurity curriculums. These programs would range from grade schools to universities and assist in developing IT awareness at a young age.
It is also important that all individuals understand security threats facing them and their employers. Employers should ensure they have the appropriate information security policies and procedures in place and that employees are made aware of the company’s information security policies through company-wide security awareness trainings.
How to Safeguard Personal Information
When it comes to personal information, it’s not possible to be too overprotective. Be careful who you share this information with, and how. Be sure if you are sharing personally identifiable information (PII) online that you are using a secure internet connection and that the website or application is secure.
Also, be sure not to leave PII out in plain sight where anyone could see (and steal) this information. Be diligent about checking your mail if your mailbox doesn’t lock. With 1099s, W-2s, K-1s and a plethora of other tax information being mailed to millions of taxpayers this time of year, it would be easy for someone to simply swipe these forms from the mailbox and obtain your PII. Once you are done with forms containing your PII, be sure to store them in a secure place or shred them to prevent someone from obtaining this information.
Don’t Put Off Until Tomorrow What You Can Do Today
I get it. Taxes aren’t fun and there is still nearly a month left before the filing deadline, so what’s the rush? The earlier you file, the safer you are. With the recent attack on the IRS involving the theft of e-file PINs, the first to file is the first to get the refund. Don’t allow a hacker time to file a fraudulent return in your client’s name and collect the refund!
According to Symantec, spear-phishing activities, in which an email fraud targets a particular organization and pretends to come from a trusted source, reached a 12-month high. In November 2015 with 102 attacks per day. With the advances in technology, phishing emails are beginning to look more and more like legitimate emails, appearing to come from your bank or some other legitimate source. If you see something online that you aren’t sure about, chances are it is a scam. If you or a client gets an email from a bank requesting that you confirm a Social Security Number or other personal information, call the bank or stop by to see if this is a genuine request.
Pull and Monitor Credit Reports
Be diligent about monitoring credit reports for unusual activity. There are several online services that offer free credit reports and several credit card agencies also provide credit monitoring services. Take advantage of this! If you are checking your credit reports on a regular basis, you will probably know if you have fallen victim to identity theft long before you are alerted by the hacked organization.
Is My Information Protected?
While the federal government is taking steps to increase security measures and limit the risk of future attacks, the threat of a breach cannot be entirely eliminated. With the reliance on technology increasing each year (especially when it comes to filing tax returns), it is imperative for individuals to understand the issues and how they can best protect their personal information. It is important for everyone to stay abreast of security issues and be leery of sharing personal information.
Lauren Williams is a senior associate with Schellman & Company, Inc. Lauren has five years of public accounting experience, which includes international tax consulting/structuring, financial services risk and regulatory consulting, extensive experience in mortgage servicing, and, most recently, SSAE 16/SOC attestations. Lauren specializes in controls assurance, with primary focus on SOC 1, SOC 2 and SOC 3 engagements for a variety of clients. She is a licensed CPA in the state of Georgia and received both her Bachelor of Accountancy and Master of Taxation from the University of Mississippi.
Six Facts You Should Know Before Deducting a Charitable Donation
If you gave money or goods to a charity in 2015, you may be able to claim a deduction on your federal tax return. Here are six important facts you should know about charitable donations.
1. Qualified Charities. You must donate to a qualified charity. Gifts to individuals, political organizations or candidates are not deductible. An exception to this rule is contributions under the Slain Officer Family Support Act of 2015. To check the status of a charity, use the IRS Select Check tool.
2. Itemize Deductions. 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, you may have to reduce your deduction. 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. Type of Donation. If you give property instead of cash, your deduction amount is normally limited to the item’s fair market value. Fair market value is generally the price you would get if you sold the property on the open market. If you donate used clothing and household items, they generally must be in good condition, or better, to be deductible. Special rules apply to cars, boats and other types of property donations.
5. Form to File and Records to Keep. You must file Form 8283, Noncash Charitable Contributions, for all noncash gifts totaling more than $500 for the year. If you need to prepare a Form 8283, you can prepare and e-file your tax return for free using IRS Free File. The type of records you must keep depends on the amount and type of your donation. To learn more about what records to keep see Publication 526.
6. Donations of $250 or More. If you 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 you received any goods or services in exchange for the gift.
Can’t Pay Taxes On Time? Here Are Five Tips
The IRS urges you to file on time even if you can’t pay what you owe. This saves you from potentially paying a penalty for a late filed return.
Here is what to do if you can’t pay all your taxes by the due date.
1. File on time and pay as much as you can. You can pay online, by phone, or by check or money order. Visit IRS.gov for electronic payment options.
2. Get a loan or use a credit card to pay your tax. The interest and fees charged by a bank or credit card company may be less than IRS interest and penalties. For credit card options, see IRS.gov.
3. Use the Online Payment Agreement tool. You don’t need to wait for IRS to send you a bill before you ask for a payment plan. The best way is to use the Online Payment Agreement tool on IRS.gov. You can also file Form 9465, Installment Agreement Request, with your tax return. You can even set up a direct debit agreement. With this type of payment plan, you won’t have to write a check and mail it on time each month.
4. 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 are suffering financial hardship, the IRS will work with you.
5. File to reconcile Advance Payments of the Premium Tax Credit. You must file a tax return and submit Form 8962 to reconcile advance payments of the premium tax credit with the actual premium tax credit to which you are entitled. You will need Form 1095-A from the Marketplace to complete Form 8962. Failure to reconcile your advance payments of the premium tax credit on Form 8962 may make you ineligible to receive future advance payments.
Remember to file on time. Pay as much as you can by the tax deadline and pay the rest as soon as you can. Find out more about the IRS collection process on IRS.gov. Also check out
Art of Accounting: A Tale of Two Clients – One Rich and One Poor
BY EDWARD MENDLOWITZ
Some time ago I had breakfast with a client who was not able to make ends meet but was fortunate to have his brother-in-law send him monthly checks so he and his wife could get by without any pressure.
I had a very pleasant time talking with him and he was a truly happy and content man. It was a pleasure to be with him.
Later that day I had lunch with one of my largest and wealthiest clients. He was not in a good mood and spent time complaining about neighbors who belonged to a country club where the dues were “astronomically” high, and he questioned me about how rich do you have to be to be able to spend that kind of money each year. FYI the amount he was talking about was about 4 percent of his annual income and about triple what he was presently paying for his “not as nice” country club. He did not feel rich and actually felt he did not have enough and was not a happy man. I did not have a good time at that lunch.
By my way of thinking the breakfast client was a rich man and the lunch client a poor man. I learned that day that wealth is a state of mind. It is not necessarily how much you have, but how you feel about what you have.
As John Milton said in Paradise Lost: “The mind is its own place and in itself can make a heaven of hell or a hell of heaven.”
Edward Mendlowitz, CPA, is partner atWithumSmith+Brown, PC, CPAs. He is on the Accounting Today Top 100 Influential People List. He is the author of 24 books, including “How to Review Tax Returns,” co-written with Andrew D. Mendlowitz, published by www.CPATrendlines.com and “Managing Your Tax Season, Third Edition,” published by the AICPA. Ed also writes a twice-a-week blog addressing issues that clients have at www.partners-network.com. Art of Accounting is a continuing series where Ed shares autobiographical experiences with tips that he hopes can be adopted by his colleagues. Ed welcomes practice management questions and can be reached at (732) 964-9329 or email@example.com.
Five Tips 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 can claim allowable expenses if you itemize on IRS Schedule A, Itemized Deductions. You can deduct the amount that is more than two percent of your adjusted gross income. Here are six other facts you should know:
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:
o Required work clothes or uniforms not appropriate for everyday use.
o Supplies and tools you use on the job.
o Business use of your car.
o Business meals and entertainment.
o Business travel away from home.
o Business use of your home.
o 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.
4. Educator Expenses. If you are a K-12 teacher, you may be able to deduct up to $250 of certain expenses you paid in 2015. These may include books, supplies, equipment and other materials used in the classroom. You claim this deduction as an adjustment on your return, rather than an itemized deduction. For more on this topic see Publication 529.
IRS Improves Phone Call Responsiveness
BY MICHAEL COHN
The Internal Revenue Service has been improving its timeliness in responding to taxpayer calls thanks to some extra money from Congress this year.
“So far this filing season, the level of service on our toll-free help lines is over 70 percent, and the average for the entire filing season will probably be at or above 65 percent, which is a vast improvement over last year,” IRS Commissioner John Koskinen told reporters during a speech last week at the National Press Club in Washington, D.C.
Last December Congress approved $290 million in additional funding for the IRS for fiscal year 2016, earmarking the funds for improving taxpayer service, strengthening cybersecurity and expanding efforts against identity theft. Koskinen noted this was the first time in six years that the IRS has received significant additional funding. The IRS was able to use the money to hire 1,000 temporary employees for tax season.
However, the extra workers aren't going to be around after tax season, and many of the IRS's current full-time employees are retiring. Koskinen warned that service levels are probably going to decline again from the 70 percent this tax season.
“Once the seasonal employees are gone, we can expect that number to drop significantly, and it will probably be around 47 percent for the full year,” he said. “Even that’s much better than last year, but we want everybody to understand that it’s still not where we want it to be. If we received the President’s Fiscal 2017 budget request, our phone level of service would be up to 75 percent next year for the entire year.”
He noted that the IRS's budget for the current fiscal year is still $900 million below what it was in 2010. As a result, the IRS is doing fewer audits and bringing in less revenue for the government.
“The portion of our full-time workforce that has been lost since 2010 includes over 5,000 key enforcement personnel,” said Koskinen. “These are the people who audit returns and perform collection activities, as well as the special agents in our Criminal Investigation division who investigate stolen identity refund fraud and other tax-related crimes. As you might imagine, these staffing losses have translated into a steady decline in the number of individual audits over the past six years. Last year, in fact, we completed the fewest audits in a decade. Plus, our audit coverage rate in 2015 was the lowest since 2004. That trend line of fewer audits will continue this year.”
“I know the IRS is not anyone’s favorite government institution, and we will not win any popularity contests, especially in an election year,” he said. “In fact, a recent poll even showed that 12 percent of taxpayers liked Vladimir Putin better than the IRS. But don’t look for a shot of me on CNN, without a shirt, riding a horse.”
Paying taxes isn't popular either, he admitted.
“Even at the IRS we don’t delude ourselves into thinking that people enjoy paying taxes,” said Koskinen. “In fact, a recent poll showed that 27 percent of people would be willing to get an IRS tattoo to avoid paying taxes. As a public service announcement, I want to tell everyone that my tattoo has been totally ineffective on that score.”
Young, Broke, and Scared of the IRS: The Millennial Tax Trap
BY POLLY MOSENDZ
NOTICE OF INTENT TO LEVY
It wasn't a very nice way to begin a letter, but then, it was from the Internal Revenue Service, and it got Greg's attention.
The Athens, Georgia, veteran said the notice, which arrived earlier this year, cited three months of taxes he had failed to pay two years ago—and was the first he'd heard of it.
After leaving the military, Greg , then 27, had taken a job in information technology. “I guess when I filled out my taxes for 2013 I messed something up, so I didn’t get my private-sector job included into the taxes owed,” he said. Now he was into the Treasury Department for more than $1,700.
The IRS doesn’t keep track of how many millennials incur tax debt, but a survey by personal finance adviser NerdWallet found they are more afraid of filing their taxes than any other generation. Eighty percent of millennials, defined by the survey as 18 to 34 years old, fear they will make a mistake, underpaying or overpaying.
Putting aside outright tax cheats, young workers are financially inexperienced and, increasingly, part of a gig economy—driving for Uber, funding their creative work through Patreon—that requires more care with taxes than some are able, or willing, to take. For example, people who work in contract jobs typically don't have their taxes withheld automatically and need to set up a program of quarterly estimated tax payments on their own.
Digging their tax trap deeper, fewer than 10 percent of millennials go to the IRS when they have a tax question, and only about a quarter seek help from a tax professional, the survey found, compared with 38 percent of all taxpayers who seek help from a tax pro. Instead, most young people turn to friends and family, a largely unreliable if well-meaning group. Millennial taxpayers in particular bemoan the long wait times on the phone with the IRS and the agency's weird penchant for mail (like, mail).
“It took at least five hours of your life just getting somebody on the phone,” said Greg, who said he placed four or five calls to the agency seeking to confirm the letter’s validity before signing up for a payment plan on its website. “There needs to be more notification and communication on their part.”
This month, Greg made his first contribution to an IRS tax debt repayment plan, which he said was easy enough to set up. He'll be making a $150 payment every month until he has repaid the debt. Starting this tax season, he's working with a certified public accountant.
"Someone facing a tax bill they can't pay can usually set up a payment agreement," IRS spokesman Eric Smith said. Indeed, even if the agency isn't so hot on the phone, it will send multiple letters urging debtors to set up plans before threatening them, if necessary, with levies and liens. Resources are available on the IRS website, agents regularly describe payment plans to those who get through on the phone, and accountants work with the agency to devise plans for their clients.
"If you don't contact us, we can take action to collect the taxes," Smith said.
That said, millennials are less likely to own homes than generations before them, so the threat of a property lien doesn't carry the weight it might, and a change of rental address can cut the letters off altogether. Anthony, a 24-year-old based in Washington, D.C., incurred just over $1,000 of tax debt after he tried to claim an education credit on his 2013 taxes that his parents had already claimed. He sent in a correction of the error but then lost his job and couldn't pay the balance.
When he moved in September of 2014, the letters stopped coming.
“It was an out-of-sight, out-of-mind thing,” he said.
In fact, the IRS was nothing compared to the creditors who were after Anthony for his student debt, he said. The following year, what would have been his tax refund was taken to pay off a portion of the outstanding debt. Employed by that time, he was able to pay the balance.
“I still don’t rank them anywhere near as scary as Sallie Mae,” Anthony said of the IRS. “They were very slow to catch on to it. …With Sallie Mae, they immediately start calling you on the phone—and start calling your parents. Sallie Mae is everything the IRS does, but on 'roids.”
While credit card companies collecting student debt can affect a debtor's credit scores immediately, tax debt doesn't begin to influence them unless levies and liens are issued, and enrolling in a repayment plan won't affect the scores either. Yet of the seven millennials facing tax debts interviewed for this article, only two were familiar with these plans, and neither of them knew that signing on to one wouldn't affect their scores.
“I don’t think anyone should be afraid of the IRS, because as long as you’re talking to them, bad things don’t happen,” said Cari Weston, director of taxation for the American Institute of CPAs.
Erik Duemig and his brother Joe, who own a production sound company in Austin, Texas, fell into tax debt when they made what Erik described as a series of clerical errors on a 2014 filing. At 26, the twins had filed taxes only a few times before, and were previously filing as contract employees, not business owners. Eventually, they hired a certified public accountant for $1,200, but only after Joe had been audited.
Few of the Duemigs' millennial friends hold down a traditional job with its W2 tax form, they said, citing a culture that relies heavily on the gig economy.
“For millennials who are making money on the Internet, like YouTube ad sales and things like Patreon, I imagine that kind of income stream gets really weird to deal with the IRS,” Erik said.
Millennials who find themselves in debt to the agency have more constructive options than neglecting debt letters and less expensive ones than hiring a CPA. Tax tutorials are available online, and the Society of Grownups, a Brookline, Massachusetts, financial literacy group, offers two classes, “Quarterly Schmarterly” and “Get Off Your Tax.” Each costs $30. In one class, a third of those in attendance owed money to the IRS, said Jena Palisoul, director of financial planning.
"Some people get so frightened, they take no action whatsoever," she said, "and that’s the worst thing to do.”
Smith of the IRS acknowledged "it can be a while" on the phone but said "it's better than it was last year, as Congress provided us with some increase in funding for the phone operations. We really encourage people to [seek help] online first."
"I think they are trying to speak to everyone in a more technology-friendly way," said Weston. "They're tweeting, they're trying to get representatives out there ... but with all this identity theft they are being very cautious about communicating with taxpayers digitally."
Even so, "it was all very poorly communicated to us by the IRS,” Duemig said.
He added: "Tax law, it almost feels, like, intentionally complicated. It just tires you out so you just pay more than you need to.”
Tax Time Guide: Good Records Key to Claiming Gifts to Charity
WASHINGTON ― The Internal Revenue Service today reminded taxpayers planning to claim charitable donations to make sure they have the records they need before filing their 2015 tax returns.
This is the fifth in a series of 10 IRS tips called the Tax Time Guide. These tips are designed to help taxpayers navigate common tax issues as this year’s April 18 deadline approaches.
For any taxpayer, keeping good records is key to qualifying for the full charitable contribution deduction allowed by law. In particular, this includes insuring that they have received required statements for two contribution categories—each gift of at least $250 and donations of vehicles.
First, to claim a charitable contribution deduction, donors must get a written acknowledgement from the charity for all contributions of $250 or more. This includes gifts of both cash and property. For donations of property, the acknowledgement must include, among other things, a description of the items contributed.
In addition, the law requires that taxpayers have all acknowledgements in hand before filing their tax return. These acknowledgements are not filed with the return but must be retained by the taxpayer along with other tax records.
Second, special reporting requirements generally apply to vehicle donations, and taxpayers wishing to claim these donations must attach any required documents to their tax return. The deduction for a car, boat or airplane donated to charity is usually limited to the gross proceeds from its sale. This rule applies if the claimed value is more than $500. Form 1098-C or a similar statement, must be provided to the donor by the organization and attached to the donor’s tax return.
The IRS also reminded taxpayers to be sure any charity they are giving to is a qualified organization. Only donations to eligible organizations are tax-deductible. Select Check, a searchable online tool available on IRS.gov, lists most organizations that are eligible to receive deductible contributions. In addition, churches, synagogues, temples, mosques and government agencies are eligible even if they are not listed in the tool’s database.
Only taxpayers who itemize their deductions on Form 1040 Schedule A can claim gifts to charity. Thus, taxpayers who choose the standard deduction cannot deduct their charitable contributions. This includes anyone who files a short form (Form 1040A or 1040EZ).
A taxpayer will have a tax savings only if the total itemized deductions (mortgage interest, charitable contributions, state and local taxes, etc.) exceed the standard deduction. Use the 2015 Form 1040, Schedule A to determine whether itemizing is better than claiming the standard deduction.
Besides Schedule A, taxpayers who give property to charity usually must attach a special form for reporting these noncash contributions. If the amount of the deduction for all noncash contributions is over $500, a properly-completed Form 8283 is required.
The IRS provided these additional reminders about the special rules that apply to charitable contributions of used clothing and household items, monetary donations and year-end gifts.
Rules for Charitable Contributions of Clothing and Household Items
Guidelines for Monetary Donations
Owe Back Taxes? Lose Your Passport
BY BEN STEVERMAN
The roughly 8 million Americans who live abroad automatically get a couple additional months each year to file their taxes. Don’t expect them to be grateful.
Filing to the Internal Revenue Service from overseas is more confusing, complicated and expensive than it is for Americans at home (and that's saying something). Unlike almost every other country in the world, the U.S. demands its citizens pay taxes on all foreign income. They must file even if they have lived and worked abroad for decades, and even if they’re already paying hefty taxes to the countries where they reside.
Now it's getting worse. In an effort to fight tax evasion, the IRS recently began forcing expatriates to report not just their income, but additional information on savings and investments—rules that have made it harder to open bank and brokerage accounts overseas.
More ominously, the IRS and the State Department are also implementing a provision approved by Congress in December that could revoke the passports of Americans who owe too much–raising the prospect of being stranded abroad on account of poor arithmetic.
“A lot of people are very, very angry about the whole situation,” said David McKeegan, co-founder of Greenback Expat Tax Services, which specializes in U.S. international tax preparation. For Americans abroad, he said, “It’s very easy to feel like you’re a criminal [for] doing normal things.”
Here are several of the biggest problems U.S. citizens face:
Lynn Milburn spends months worrying about her U.S. taxes each year, even though she never owes anything in the end. To be fair, the IRS often excludes the first $100,000 in foreign earnings, along with some housing expenses. It also lets Americans deduct some of the taxes they pay to local governments, which usually levy at higher rates than the U.S. does, especially in such places as Western Europe, where most expatriate Americans live. After that, however, it's open season.
Milburn, 57, has lived overseas most of her adult life. Originally from Seattle, she recently moved from Australia to France. “Every time my situation changes, I’m not sure where I stand,” she said. Milburn said she is “petrified” of being fined; although she keeps her financial life very simple, filling out the forms correctly can be a challenge. For example, while the IRS asks about income from January to December, Australia’s tax year runs from July to June. Let the migraine begin.
A typical U.S. tax return for Americans living in the U.K. is 40 to 50 pages long, even though they often end up owing nothing, according to Robyn Limmer, head of tax at Frank Hirth, an accounting firm based in New York and London that specializes in cross-Atlantic tax issues.
And before you can say H&R Block, it bears noting that hiring a tax preparer who understands how to file from abroad isn’t cheap. “Many people have to pay thousands of dollars just to show they owe no money to the IRS,” said Keith Redmond, 51, an American who has lived in Paris for 16 years.
Lost in Translation
How do you say “tax-deferred retirement account” in Turkish or Thai?
Every country has its own way of taxing income, savings, investments and pensions, sometimes making it impossible to explain to the IRS what’s going on. Tax treaties can help specialists navigate some of these issues, but these agreements can be enormously complicated and maddeningly vague. Limmer said that even in the U.K.—where “at least we share a common language”—accountants can disagree with each other on how to sort things out, especially in the “particularly tricky” area of pensions.
Milburn isn't an accountant or lawyer, but she has noticed the same thing: “I actually don’t think that the IRS or tax professionals necessarily know 100 percent what to do. I think it’s always a bit of a gray area. Because how can you convert something in another country to a U.S. equivalent?”
IRS agents stationed at U.S. embassies used to be able to help, but budget cuts forced the agency to close the last of those offices (in London, Paris, and Frankfurt) last year.
Because the rules are so confusing, some say they often end up being taxed unfairly, paying the IRS and their home country on the same income. Brian Krahmer, 40, a Minnesota native who moved to Germany in 2014, must pay U.S. self-employment tax on his freelance income–even though the work, mostly software development, is for German companies. “If I’m already filing a German income tax return on the money earned, I don’t see any fairness from also having to file in the U.S.,” he said.
The rules can feel unfair, even when they don’t technically result in double taxation. For example, the IRS demands that Americans pay capital gains taxes on sales of homes in the U.K.—gains that can be greatly inflated by currency swings. The U.K. doesn’t have the same tax, but it does impose a tax on home purchases. An American in London who wants to move has the pleasure of paying both.
Treated Like a Criminal
The IRS’s fight against tax evasion has had its successes. Many hidden Swiss bank accounts are no longer so secret, for example. But provisions that catch millionaires hiding money overseas can also ensnare middle-income Americans working and living abroad. As a result, banks and investment companies, forced by the IRS to keep close track of their American clients, are becoming reluctant to take them on.
“We, as Americans overseas, cannot live normal lives,” said Redmond, originally from Washington, D.C. “We’re seriously limited in being able to save like stateside Americans.”
Most living outside the U.S. simply want to know how much they owe the IRS vs. the local tax collector. “These are not people who are hiding money,” Limmer said. Nine times out of 10, she estimated, an American living in London is paying more tax than a comparably compensated British citizen.
The new passport-revocation rule, slipped into a transportation funding bill signed by President Barack Obama, raises the stakes. It allows the U.S. to revoke the passport of any American whose tax debt exceeds $50,000.
It’s not hard to see how expatriate taxpayers could get to this level, especially if they’re late in realizing they needed to file in the first place. The fines for failing to report bank accounts are high; the IRS can impose a penalty of $10,000 for each violation of the rules. “If the government enforces this in the most stringent way possible, this could be hugely horrible for people who live overseas,” McKeegan said.
Last month, members of Congress urged the State Department to “consider the unique circumstances of overseas Americans” before revoking anyone’s passport. An IRS spokesperson declined to comment on the passport rule or other specific taxpayer concerns. In October, the agency said its “offshore voluntary disclosure program,” a process for taxpayers to catch up on filing obligations, had collected more than $8 billion since 2009.
Many Americans who live abroad simply don’t know they need to file, and the IRS lacks an efficient way to notify them. “Nobody sends you a memo when you go overseas,” McKeegan said.
An unknown number of Americans don't even realize they’re U.S. citizens. Because the U.S. grants citizenship for, among other things, being born in the States, babies delivered in the U.S. to non-American parents are sometimes brought back home in diapers and learn only decades later that they need to file to the IRS every year.
Increasingly, these “accidental Americans” are discovering their citizenship the hard way, as the IRS tightens tax evasion rules regarding banks. “’Am I going to get arrested at the airport?’” McKeegan said they often ask him. “You spend the first 10 minutes talking them off the ledge.”
London Mayor Boris Johnson, who was born in the U.S., had to pay the IRS last year for capital gains on his sale of a house in north London. “I think it’s absolutely outrageous,” he said when he learned of the debt in 2014. “Why should I? I haven’t lived in the U.S. since I was five years old.”
Johnson has previously said he would like to renounce his U.S. citizenship, and he's not the only one. According to Treasury Department data, the number of Americans renouncing their citizenship last year jumped 25 percent, to a record 4,279. How much of this is the fault of the IRS and its get tough campaign may remain as mysterious as the tax code.
What You Should Know about Children with Investment Income
Special tax rules may apply to some children who receive investment income. The rules may affect the amount of tax and how to report the income. Here are five important points to keep in mind if your child has investment income:
1. Investment Income. Investment income generally includes interest, dividends and capital gains. It also includes other unearned income, such as from a trust.
2. Parent’s Tax Rate. If your child's total investment income is more than $2,100 then your tax rate may apply to part of that income instead of your child's tax rate. See the instructions for Form 8615, Tax for Certain Children Who Have Unearned Income.
3. Parent’s Return. You may be able to include your child’s investment income on your tax return if it was less than $10,500 for the year. If you make this choice, then your child will not have to file his or her own return. See Form 8814, Parents' Election to Report Child's Interest and Dividends, for more.
4. Child’s Return. If your child’s investment income was $10,500 or more in 2015 then the child must file their own return. File Form 8615 with the child’s federal tax return.
Must-Know Tips about the Home Office Deduction
If you use your home for business, you may be able to deduct expenses for the business use of your home. If you qualify, you can claim the deduction whether you rent or own your home. You may use either the simplified method or the regular method to claim your deduction. Here are six tips that you should know about the home office deduction:
1. Regular and Exclusive Use. As a general rule, you must use a part of your home regularly and exclusively for business purposes. The part of your home used for business must also be:
2. Simplified Option. If you use the simplified option, multiply the allowable square footage of your office by a rate of $5. The maximum footage allowed is 300 square feet. This option will save you time because it simplifies how you figure and claim the deduction. It will also make it easier for you to keep records. This option does not change the rules for claiming a home office deduction.
3. Regular Method. This method includes certain costs that you paid for your home. For example, if you rent your home, part of the rent you paid may qualify. If you own your home, part of the mortgage interest, taxes and utilities you paid may qualify. The amount you can deduct usually depends on the percentage of your home used for business.
4. Deduction Limit. If your gross income from the business use of your home is less than your expenses, the deduction for some expenses may be limited.
5. Self-Employed. If you are self-employed and choose the regular method, use Form 8829, Expenses for Business Use of Your Home, to figure the amount you can deduct. You can claim your deduction using either method on Schedule C, Profit or Loss From Business. See the Schedule C instructions for how to report your deduction.
6. Employees. You must meet additional rules to claim the deduction if you are an employee. For example, your business use must also be for the convenience of your employer. If you qualify, you claim the deduction on Schedule A, Itemized Deductions.
Many people want to do something, however small, to contribute to a healthier environment. There are many ways to do so and, for some of them, you can even save a few tax dollars for your efforts.
Indeed, with the passage of the Protecting Americans from Tax Hikes Act of 2015 (the PATH Act) late last year, a couple of specific ways to go green and claim a tax break have been made permanent or extended. Let’s take a closer look at each.
Not driving for dollars
Air pollution is a problem in many areas of the country. Among the biggest contributors are vehicle emissions. So it follows that cutting down on the number of vehicles on the road can, in turn, diminish air pollution.
To help accomplish this, many people choose to commute to work via van pools or using public transportation. And, helpfully, the PATH Act is doing its part as well. The law made permanent the requirement that limits on the amounts that can be excluded from an employee’s wages for income and payroll tax purposes be the same for both parking benefits and van pooling / mass transit benefits.
Before the PATH Act’s parity provision, the monthly limit for 2015 was only $130 for van pooling / mass transit benefits. But, because of the new law, the 2015 monthly limit for these benefits was boosted to the $250 parking benefit limit and the 2016 limit is $255.
Sprucing up the homestead
Energy consumption can also have a negative impact on the environment and use up limited natural resources. Many homeowners want to reduce their energy consumption for environmental reasons or simply to cut their utility bills.
The PATH Act lends a helping hand here, too, by extending through 2016 the credit for purchases of residential energy property. This includes items such as:
The provision allows a credit of 10% of eligible costs for energy-efficient insulation, windows and doors. A credit is also available for 100% of eligible costs for energy-efficient heating and cooling equipment and water heaters, up to a lifetime limit of $500 (with no more than $200 from windows and skylights).
Doing it all
Going green and saving some green on your tax bill? Yes, you can do both. Van pooling or taking public transportation and improving your home’s energy efficiency are two prime examples. Please contact us for more information about how to claim these tax breaks or identify other ways to save this year.
Restructuring debt has become a common approach to personal financial management. But many people fail to realize that there’s often a tax impact to debt relief. And if you don’t anticipate it, a winning tax return may turn into a losing one.
Less debt, more income
Income tax applies to all forms of income — including what’s referred to as “cancellation-of-debt” (COD) income. Think of it this way: If a creditor forgives a debt, you avoid the expense of making the payments, which increases your net income.
Debt forgiveness isn’t the only way to generate a tax liability, though. You can have COD income if a creditor reduces the interest rate or gives you more time to pay. Calculating the amount of income can be complex but, essentially, by making it easier for you to repay the debt, the creditor confers a taxable economic benefit.
You can also have COD income in connection with a mortgage foreclosure, including a short sale or deed in lieu of foreclosure. Here, the tax consequences depend on which of the following two categories the mortgage falls into:
1. Nonrecourse. Here the lender’s sole remedy in the event of default is to take possession of the home. In other words, you’re not personally liable if the foreclosure proceeds are less than your outstanding loan balance. Foreclosure on a nonrecourse mortgage doesn’t produce COD income.
2. Recourse. This type of foreclosure can trigger COD tax liability if the lender forgives the portion of the loan that’s not satisfied. In a short sale, the lender permits you to sell the property for less than the amount you owe and accepts the sale proceeds in satisfaction of your mortgage. A deed in lieu of foreclosure means you convey the property to the lender in satisfaction of your debt. In either case, if the lender agrees to cancel the excess debt, the transaction is treated like a foreclosure for tax purposes — that is, a recourse mortgage may generate COD income.
Keep in mind that COD income is taxable as ordinary income, even if the debt is related to long-term capital gains property. And, in some cases, foreclosure can trigger both COD income and a capital gain or loss (depending on your tax basis in the property and the property’s market value).
Exceptions vs. exclusions
Several types of canceled debt are considered nontaxable “exceptions” — for example, debt cancellation that’s considered a gift (such as forgiveness of a family loan). Certain student loans are also considered exceptions — as long as they’re canceled in exchange for the recipient’s commitment to public service.
Other types of canceled debt qualify as “exclusions.” For instance, homeowners can exclude up to $2 million in COD income in connection with qualified principal residence indebtedness. A recent tax law change extended this exclusion through 2016, modifying it to apply to mortgage forgiveness that occurs in 2017 as long as it’s granted pursuant to a written agreement entered into in 2016. Other exclusions include certain canceled debts relating to bankruptcy and insolvency.
The rules applying to COD income are complex. So if you’re planning to restructure your debt this year, let us help you manage the tax impact.
Amending Your Tax Return: Ten Tips
You can fix mistakes or omissions on your tax return by filing an amended tax return. If you need to file one, these tips can help.
1. Must be filed on paper. Use Form 1040X, Amended U.S. Individual Income Tax Return, to correct your tax return. 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. 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 on your original return. 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. Form 1095-A, Health Insurance Marketplace Statement, errors. Some taxpayers may receive a second Form 1095-A because the information on their initial form was incorrect or incomplete. If you filed a 2015 tax return based on the initial Form 1095-A and claimed the premium tax credit using incorrect information from either the federally-facilitated or a state-based Health Insurance Marketplace, you should determine the effect the changes to your form might have on your return. Comparing the two Forms 1095-A can help you assess whether you should file an amended tax return, Form 1040X.
5. Three-year time limit. 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 2012 claim for a refund is April 18, 2016 (April 19 for taxpayers in Maine and Massachusetts). 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 corrected refund. If you are due a refund from your original return, wait to get it before filing Form 1040X to claim an additional refund. Amended returns take up to 16 weeks to process.
9. Pay additional tax. If you owe more tax, file your Form 1040X and pay the tax as soon as you can to avoid possible penalties and interest from being added to your account. 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?’ It is available in English, Spanish, Chinese, Vietnamese and Russian. The tool can track the status of an amended return for the current year and up to three years back. If you have filed amended returns for multiple years, you can check each year, one at a time.
Former Tax Court Judge Indicted for Tax Evasion
BY MICHAEL COHN
A former U.S. Tax Court judge and her husband have been indicted for conspiracy to commit tax evasion and obstruction of an Internal Revenue Service audit.
Diane L. Kroupa, 60, and her husband, Robert E. Fackler, 62, were charged Monday with conspiring to evade assessment of taxes. They are expected to appear later this week in U.S. District Court in Minneapolis.
“The allegations in this indictment are deeply disturbing,” said U.S. Attorney Andrew Luger in a statement. “The tax laws of this county apply to everyone, and those of us appointed to federal positions must hold ourselves to an even higher standard.”
Kroupa was appointed to the U.S. Tax Court on June 13, 2003 for a term of 15 years, but she retired on June 16, 2014. Fackler was a self-employed lobbyist and political consultant who owned a business known as Grassroots Consulting.
According to prosecutors, Kroupa and Fackler fraudulently claimed personal expenses as Grassroots Consulting business deductions. They also fraudulently claimed a number of personal expenses as deductible business expenses, including rent and utilities for their Maryland home; utilities, upkeep and renovation expenses of their Minnesota home; Pilates classes; spa and massage fees; jewelry and personal clothing; wine club fees; Chinese language tutoring; music lessons; personal computers; and expenses for vacations to Alaska, Australia, the Bahamas, China, England, Greece, Hawaii, Mexico and Thailand.
They allegedly made a series of other false claims on their tax returns, including failing to report approximately $44,520 that Kroupa received from a 2010 land sale in South Dakota. According to prosecutors, they falsely claimed financial insolvency to avoid paying tax on $33,031 on cancellation of indebtedness income.
In 2006, Kroupa and Fackler allegedly concealed documents from their tax preparer and an IRS tax compliance officer during an audit. During a second audit in 2012, Kroupa and Fackler caused misleading documents to be delivered to an IRS employee in order to convince the IRS employee that certain personal expenses were actually business expenses of Grassroots Consulting.
“As a former tax court judge, Kroupa dealt regularly with individuals who cheated on their taxes, which makes these allegations particularly troubling,” said IRS Criminal Investigation chief Richard Weber. “Reporting personal expenses as business expenses on your tax returns is not tolerated, regardless of your job or position. We expect all taxpayers to follow the law—whether you are a business owner, individual, or government official—we all must play by the same rules and pay our fair share.”
Between 2004 and 2010, Kroupa and Fackler allegedly understated their taxable income by approximately $1 million and understated the amount of tax they owed by at least $400,000.
This case is the result of an investigation conducted by the IRS’s Criminal Investigation Division and the U.S. Postal Inspection Service. Assistant U.S. Attorneys Benjamin Langner and Timothy Rank are prosecuting the case
Panama Has Company as Bank-Secrecy Holdout, as U.S. Offers Haven
BY JESSE DRUCKER
Panama and the U.S. have at least one thing in common: Neither has agreed to new international standards to make it harder for tax evaders and money launderers to hide their money.
Over the past several years, amid increased scrutiny by journalists, regulators and law enforcers, the global tax-haven landscape has shifted. In an effort to catch tax dodgers, almost 100 countries and other jurisdictions have agreed since 2014 to impose new disclosure requirements for bank accounts, trusts and some other investments held by international customers—standards issued by the Organization for Economic Cooperation and Development, a government-funded international policy group.
Places like Switzerland and Bermuda are agreeing, at least in principle, to share bank account information with tax authorities in other countries. Only a handful of nations have declined to sign on. The most prominent is the U.S. Another, Panama, is at the center of a storm over tax evasion and global cash flight that broke out over the weekend.
A law firm there helped set up tens of thousands of shell companies, according to a report by the International Consortium of Investigative Journalists. ICIJ and other news organizations published reports they said showed global efforts to hide wealth, undertaken by global politicians and the ultra-rich, with the aid of banks and lawyers. The central tool: shell companies that people used to shield the identity of the owners’ assets. While such structures can be legal, they can also support efforts to avoid taxes.
The latest reporting "underscores the secrecy in Panama," said Stefanie Ostfeld, the acting head of the U.S. office of the anti-corruption group Global Witness. "What’s lesser known, is the U.S. is just as big a secrecy jurisdiction as so many of these Caribbean countries and Panama. We should not want to be the playground for the world’s dirty money, which is what we are right now."
Advisers around the world are increasingly using the U.S. resistance to the OECD’s standards as a marketing tool—attracting overseas money to U.S. state-level tax and secrecy havens like Nevada and South Dakota, potentially keeping it hidden from their home governments.
Last month, members of Congress in both the House and Senate introduced bills to require disclosure of the true owners of U.S. companies, an effort to crack down on money laundering and tax evasion.
In 2010, Congress passed the Foreign Account Tax Compliance Act, or FATCA, as the U.S. Justice Department began prosecuting Swiss banks for enabling tax evasion. FATCA forces certain financial firms to disclose to the Internal Revenue Service any foreign accounts held by U.S. citizens.
FATCA doesn’t, however, bind banks to provide information on foreigners with U.S. accounts to regulators abroad. The U.S. has entered into agreements with some other countries requiring such exchange with foreign regulators, but tax planners say they are considered relatively easy to avoid.
That’s where the OECD came in, with its own international take on FATCA that the U.S. declined to sign.
Panama, for its part, committed to the OECD standard in November. But the country attached a number of conditions, which many advisers viewed as undermining its position.
In a January interview, an official at Trident Trust Co., a big provider of offshore vehicles, said it was seeing a large number of accounts moving into Panama because of its weak commitment to the OECD regulations. "The Panama office was extremely overworked, because a lot of people are re-domiciling to Panama from BVI and Cayman," said Alice Rokahr, a Trident official based in South Dakota.
In late February, OECD officials said publicly that Panama had been "removed from the list of committed jurisdictions" that agreed to share information.
The latest coverage of shell companies created by a Panamanian law firm could give the OECD new ammunition to put pressure on the country to sign onto the information-sharing agreements, some tax experts said.
"The U.S. doesn’t follow a lot of the international standards, and because of its political power, it’s able to continue," said Bruce Zagaris, an attorney at Berliner Corcoran & Rowe LLP who specializes in international tax and money laundering regulations. "It’s basically the only country that can continue to do that. Others like Panama have tried, but Panama can’t punch as high as the U.S."
Indeed, in a statement issued Monday by the OECD, OECD secretary general Angel Gurria said, "Panama is the last major holdout that continues to allow funds to be hidden offshore from tax and law-enforcement authorities."
The statement didn’t mention the U.S., which is the OECD’s largest funder.
Pascal Saint-Amans, the OECD’s tax policy director, said the two countries weren’t comparable, as the U.S. regularly provides information to regulators and law enforcers in other countries, even if it hasn’t signed onto the OECD standard.
"The politics are favorable to the U.S. and unfavorable to Panama," Zagaris said.
Art of Accounting: Parents Fighting with Children
BY EDWARD MENDLOWITZ
I have and had many clients where children work in their parents’ business and have seen a lot of private interactions that shouldn’t have ever occurred, but did.
You might think the time I saw a father and son punching and wrestling with each other would be the worst, but it wasn’t. The worst are the psychological games parents and children play with each other, many times without the arguing or evident disagreements.
In some instances the parents try to relive their lives through their sons or daughters and become jealous of the opportunities their children have that they did not. Then they get extremely upset when those opportunities are not maximized. This manifests itself in a constant nagging and harping, with a lot of nitpicking about how they would have done it better. The child never has a chance to break out and show what they could accomplish.
In other instances the children do not have a clue but are thrust into a situation they would never have gotten into if they had a free choice. These children become nothing more than clock-punching caretakers waiting for their father or mother to pass on so they can sell the business, get a pile of money and then do what they really want—which in my opinion is nothing substantive. They become unhappy people without any ambition or ideas of their own. One reason the children stay is they are making much more than they ever could on their own. In some respects staying is a comfort zone where they do not have to decide what they want to do for themselves. They are relieved of making a decision and can blame their lack of success on Mommy or Daddy.
The wrestling pair also had many yelling matches, but when the fights were over the incidents were forgotten by both. They went forward doing their work, with the son eventually taking the helm and growing the business substantially.
The nitpicking businesses never reach their potential because the bickering never ends, is not forgotten, and is resented by both sides. The bickering spreads throughout the family, causing an even greater resentment by the combatants’ spouses, siblings and sometimes children and grandchildren. Not healthy.
Our job as advisors is to try to steer our clients toward more productive work, but it becomes difficult because there is the lifelong baggage they carry that we could never know about or understand. One thing I learned is to not take sides and to always look for a chance to boost the children, indicating the good things they do. A parent will never get angry when you compliment their son or daughter, but they both will get angry when you admonish their child. Being positive almost always will accomplish more than being negative.
Edward Mendlowitz, CPA, is partner at WithumSmith+Brown, PC, CPAs. He is on the Accounting Today Top 100 Influential People List. He is the author of 24 books, including “How to Review Tax Returns,” co-written with Andrew D. Mendlowitz, published by www.CPATrendlines.com and “Managing Your Tax Season, Third Edition,” published by the AICPA. Ed also writes a twice-a-week blog addressing issues that clients have at www.partners-network.com. Art of Accounting is a continuing series where Ed shares autobiographical experiences with tips that he hopes can be adopted by his colleagues. Ed welcomes practice management questions and can be reached at(732) 964-9329 or firstname.lastname@example.org.
Preparing Business Clients for the New Overtime Pay Rule
BY MIKE TRABOLD
In 2015, the Department of Labor proposed a rule that could have a significant impact on the way employers compensate their employees.
This rule proposes changes that would expand the number of workers who are eligible for overtime pay: time and one-half their regular rate of pay for hours worked over 40 in a workweek. Most businesses will be required to comply with the changes once a final rule is released.
Here are five workflow recommendations you can share, that may be critical to your clients’ success and compliance with the new overtime pay regulations:
Certain employees may not be impacted by the changes, but it will be important to review and confirm employees who are currently classified as exempt from the overtime protections of the Fair Labor Standards Act meet the duties test for their exemption. Counsel your business clients to review their payroll and identify exempt employees with current salaries below or very close to the new proposed salary thresholds for executive, professional and administrative white collar exemptions.
Once your business clients have confirmed the exempt status of employees most likely impacted by the proposed rule, they will need to decide, by position, how to proceed. Employers have two options: increase the salary level to maintain exempt status, or transition the position to non-exempt status.
Employers who choose to transition positions to a non-exempt status will need to determine the basis for pay (hourly or salaried) and ensure they meet the minimum wage requirement for the number of hours the employee is expected to work. They should also consider whether overtime will be necessary and permitted. As their financial partner, this is a key opportunity to review their finances and determine the appropriate route to take. Consistency within each position can be crucial to mitigating exposure to discrimination lawsuits.
Updating recordkeeping requirements and procedures can be critical to ensure full compliance with the Fair Labor Standards Act and applicable state wage and hour laws. If your clients have employees who will transition from exempt to non-exempt status, they will need to begin tracking all time worked for these employees, including overtime hours. Encourage your clients to review their time-tracking methods and to evaluate the need for more automation. Should the new rule significantly impact the number of employees who need to track their hours worked, an alternative method of tracking, such as time and attendance software, may better suit your clients’ needs.
Your business clients should also establish clear, written employee policies for recording time worked and overtime. These should include the procedure for recording time, what is considered time worked, how overtime is approved and by whom, and the potential disciplinary action for failing to follow the company’s policy. This information should be distributed to all employees or published in an employee handbook.
Once recordkeeping and overtime policies have been updated, encourage your clients to educate their staff on the company timekeeping and overtime approval procedures. This should be done for supervisors, managers and newly impacted employees, and consider a refresher for current non-exempt employees to ensure the policy is consistently applied. Urge your clients to deliver this training as soon as possible, with supervisors performing regular audits of time records.
The new rule on overtime pay is expected to impact a significant number of businesses this year. To address the questions or concerns that arise, advise your clients to develop a communications plan for announcing the changes internally. The plan should introduce the procedures for reporting hours worked, as well as when and where you will communicate the change to supervisors, managers and employees.
One recommendation you can offer is to speak first with managers and supervisors, and then to impacted employees individually. Or, discussing the changes in job classifications or time-tracking procedures with the entire staff might be more appropriate. You know your clients best—offer the guidance that best fits their business, as long as the overall message is consistent to reduce confusion and potential compliance issues in the future.
While these recommendations are not the traditional financial discussions you may have with your clients, they may be important conversations to have nonetheless. As their trusted partner, sharing this information can help their businesses and employees.
Mike Trabold is director of compliance risk at Paychex, Inc.
Five Charts Show What Americans Really Pay in Taxes
BY BEN STEVERMAN
A lot of Americans feel like they're getting cheated at tax time. In a Pew Research Center poll last year, 61 percent said it bothered them "a lot" that "some wealthy people don't pay their fair share."
Try defining "fair share." But you can learn a lot about the U.S. tax burden by looking at five simple charts.
Certain well-paid people pay out a good chunk of their salaries. This year, a single filer owes the Internal Revenue Service 39.6 percent of any income over $415,050. That's up from 35 percent as recently as 2012, though it's nowhere near the rates the wealthy paid from the 1930s to the 1970s.
Of course, wealthy people don't often pay 39.6 percent. Many of them lower their rate with deductions, including those for charitable donations and mortgage interest. Also, that top rate mostly applies to salary income. Investors pay a top rate of 20 percent on qualified dividends and long-term capital gains, along with a 3.8 percent net investment income tax. That's one reason a well-paid executive, doctor, or lawyer often ends up paying a higher tax rate than a wealthy heir living off investments.
How much do Americans pay in taxes overall?
That doesn't include state income taxes, which can add 10 percentage points or more to your tax burden depending on where you live.
Meanwhile, seven states have no income tax at all: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. Two more, New Hampshire and Tennessee, tax only interest and dividend income. Other states also have relatively low rates:
It can be misleading to measure Americans' tax loads only by their income taxes. U.S. workers also owe payroll taxes to Social Security and Medicare. These fall heaviest on low-income and middle-class workers, because only the first $118,500 in annual wages are subject to the standard payroll tax, 7.65 percent coming from employees and another 7.65 percent from their employers.
So how much does the average American worker end up paying each year, including his or her portion of payroll taxes and federal and state income taxes?
The Organization for Economic Cooperation and Development makes this calculation. For the U.S. in 2014, the most recent data available, the OECD figures the average single worker earned wages of about $50,000 and paid out 25 percent in state and federal income and payroll tax. Parents owed less because of deductions they can take for their children.
The tax burden is lower in the U.S. than in many other developed nations. Of 34 OECD countries, the U.S. tax rate for the average single American with no children ranks 17th. The tax burden on a single person with two kids ranks 27th. Comparing tax rates across countries is difficult, however, without taking into account how much people benefit from their tax payments in college tuition, retirement income, or more intangible rewards such as security and the social safety net.
Focusing only on income taxes also leaves out the many other ways Americans get taxed, including local property and sales taxes and various fees and taxes on travel, tobacco, alcohol and fuel. These can add up, depending on where you live and how you live your life.
In New York City, for example, a pack of cigarettes carries a tax of $6.86. Of that, $1.01 goes to the federal government, $1.50 to the city, and $4.35 to the state—the highest rate in the country. In Missouri, it's just the federal tax and a state levy of 17 cents.
Tax Strategy Scan: The Payoff from Donating IRA Assets
Our weekly roundup of tax-related investment strategies and news your clients may be thinking about.
Popular IRS charity tax break can be valuable—for those who know how to use it: Clients who are retired can maximize their tax savings by making the most of a tax break that allows them to donate some of their IRA assets directly to a qualified charity, according to The Wall Street Journal. A law passed by Congress last year made the tax break permanent and retroactive to January 2015. The provision counts the donation as part of their required minimum distribution and exempts it from taxes. IRA investors need to make sure they are 70 1/2 at the time of transferring the funds to qualify for the tax break. -- The Wall Street Journal
Learn How Annuities Are Taxed for Better Returns: The taxation of annuities is based on whether these investments are held in a traditional IRA or a taxable account, according to Kiplinger. Withdrawals from an annuity held in a traditional IRA will be subject to income tax and a 10% penalty if the investor is below the age of 59 1/2. For first annuity withdrawals, investors will face a tax liability for the portion considered to be the annuity's earnings, while the remaining amount will be treated as a return of principal, which will be tax-free. – Kiplinger
Tax Deductions for Long-term Senior Care: Elderly clients with long-term care expenses may be able to use these strategies for big tax savings. Deductions for long-term care and assisted living expenses can maximize savings, according to Money. In some cases, family caregivers can claim similar expenses as tax deductions on their returns. To claim these tax breaks, clients approaching 65 need to itemize their deductions and deduct medical costs that exceed 10%. The cut-off for clients over 65 is or 7.5%. -- Money
Taxes on Capital gains taxes without a profit? It can happen: Clients may not know that they could face capital gains taxes on their securities, even if there was no yield from the investments, according to Florida Today. Clients can avoid the loss with good tax planning and portfolio management. -- Florida Today
You may be tempted to forget about your taxes once you’ve filed but some tax planning done now may benefit you later. 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:
Security Vulnerabilities Found in Mobile Tax Apps
BY MICHAEL COHN
A number of mobile tax apps could be putting users’ personal information at risk of exposure to hackers, according to security researchers.
Appthority, a San Francisco-based mobile enterprise security company, found that some of the more common tax apps such as MyBlock from H&R Block exhibited risky behaviors, including not encrypting personally identifiable information, also known as PII, and sharing users’ location. Overall, Appthority found that Android apps exhibited more risky behaviors than their iOS counterparts.
Many of the apps also disclose file-paths to the source code, enabling hackers to target the app developer as a way to infiltrate the app rather than the user.
“Overall we looked at three different types of security concerns,” said Appthority president and co-founder Domingo Guerra. “One was security vulnerabilities—not following best practices, not doing things the way the security industry recommends for developers to build apps. Second was privacy-invasive behavior, which we’re starting to see more and more often in apps. When apps offer a service for free, it’s not really for free. The user’s data becomes the product. A lot of apps are collecting PII, personally identifiable information, and then selling that or sharing that with their partners. Third, we were looking for data exfiltration risks, which means when you send something that’s sensitive without properly protecting it, even if you’re sharing it between two trusted parties, an untrusted third party can intercept that data if it’s not properly secured. We were looking at those types of security concerns for almost 30 apps, both iOS and Android.”
In the higher-risk category were the Android version of H&R Block’s MyBlock app, along with the iOS version of another company’s app, TaxBot, and an Android app known as Calculator for U.S. Taxes.
“For MyBlock on Android it landed in the higher-risk [category] because it was sending the device ID and some PII without encryption,” said Guerra. “For iOS, MyBlock landed in the medium risk [category] because it was sharing the location of the user without encryption.”
H&R Block spokesman Gene King defended the app’s security. “H&R Block takes client privacy and data security very seriously,” he told Accounting Today. “We continually monitor and analyze our systems via third party and internal measures. While we did identify and address certain issues prior to and early in tax season, at no time do we believe personally identifiable information was at risk.”
Other apps landed in the low-risk and medium-risk categories, according to Appthority.
“Low risk is where we saw some of the apps maybe sharing more extra information than they should, mainly in their source code, so this doesn’t put the user data at risk, but it can put the developer’s information at risk,” said Guerra. “Here we found some names of apps where sometimes it was their own code, and sometimes it was a third-party library that they used in their app that was exposing source code. The risk there is that an attacker can learn how to defeat an app if they learn about how the app was built, so that’s why we really shouldn’t have information on the source code. Also the developer’s personal information, like their name and email, can be exposed as well to spammers or to hackers. Low risk is just exposing source code information in the app instead of deleting those notes when the app gets compiled.”
Apps in the low-risk category include the iOS version of Evernote, the iOS version of TurboTax, the iOS version of Expensify, the iOS version of Quick Tax References, the iOS version of MyBlock, the iOS version of the IRS’s own mobile app IRS2Go, the iOS version of MyTaxRefund, and the iOS version of TaxCaster.
“TurboTax landed under the low risk,” said Guerra. “It wasn’t their own source code that was exposed, but one of the App.net app libraries that used third-party code. That third-party developer source code was exposed.”
In the medium-risk category were the iOS version of MyBlock, the iOS version of Ask a CPA Tax Answers Free, and the Android version of the IRS’s IRS2Go app.
“In medium risk, it was a combination of behaviors, from accessing privacy invasive information and then not properly securing it,” said Guerra. “For example, some apps need your location if you’re trying to find the nearest H&R Block office. But that information, if it’s collected, should be encrypted because otherwise other apps or other third parties could know where you are at any moment. We saw a few apps that were sending location without encryption. Maybe it’s not a huge concern. That’s why we looked at it as a medium risk, but it’s still privacy invasive. We think the fact that Apple and Google make apps ask you for permission before tracking you means that information is valuable enough that it requires your permission. It should be protected, it should be encrypted.”
Appthority also looked at TaxAct Express and TaxSlayer’s mobile app, but those came back clean.
In general, apps from larger software companies had fewer security vulnerabilities than those that came from individuals.
“What I found is that these are big apps with big developer budgets, so they were generally safer than some of the lesser known apps to have access to our tax information,” said Guerra. “Some of my conclusions were that, although this was high risk, at least it wasn’t exposing a user’s tax return, which would have been catastrophic. When we think about the type of data that’s in it, it has your Social Security number and your date of birth, and a lot of that information that can be used to hijack your identity. From that perspective, all of these apps were relatively safe from a user’s perspective, but I would shy away from maybe some of the lesser known apps that are maybe not built by a corporation, but by an individual person that tries to pass it off as a tax app. And definitely stay away from third-party app stores that offer tax apps because those apps haven’t even been reviewed by Apple or Google.”
Security vulnerabilities in a tax app can be magnified, however, by hackers who are using other apps that are not tax apps.
“With Truecaller, if you have somebody’s device ID, you can look up all of their information, including their last location and information about what they have stored on their device,” said Guerra. “So if a tax app is leaking a UDID [unique device identifier], then a malicious person could use those UDIDs to find users’ information without other app vulnerabilities. That’s a little bit more of a sophisticated attack where you have multiple layers of an attack, but it raises the importance of encrypting all this traffic.”
Appthority only reviewed consumer tax software this year, but next year the company may take a look at tax apps for professional tax preparers.
“The tax preparer is maybe something that we’ll look at for next year’s tax apps,” said Guerra. “Because of the number of tax returns that a tax preparer handles, then it’s probably even more important to have proper security there.”
You Filed Your Taxes. Are You Going to Get Audited?
BY BEN STEVERMAN
Uh-oh. You messed something up on your tax return. What now?
Audits alone found an additional $25 billion in taxes owed last year, half of that from individual returns. Budget cuts at the Internal Revenue Service have made it harder for the agency to spot mistakes and evasions, but worst-case scenarios include a financial penalty and a prison term. Correcting the return yourself could spare you some anxiety and paperwork if the IRS should eventually notice.
The IRS collected about 2.6 billion documents last year, including W-2 and 1099 forms and other filings. These can reveal a lot about taxpayers' financial lives. IRS computers take all this information and compare it to filed tax returns. Did you forget to report some freelance income? Is there a typo in the amount of student loan interest you claimed you paid? When the computers spot these discrepancies, they automatically recalculate your return and send you a bill.
That happens a lot.
The IRS last year assessed $6.3 billion more in taxes owed as a result of under-reporting. Another automated program looks for taxpayers who should have filed returns but didn't. The agency dealt with 614,000 such cases last year and assessed that $2.7 billion in taxes was owed.
Generally, taxpayers hit with these assessments can make the IRS go away simply by paying the bill. No need to talk to an agent or, in most cases, even hire an accountant.
All this is on top of the audits. In an audit, the IRS combs through a taxpayer's finances looking for underreported income and missing tax payments. It's a rare honor. Last year, out of 147 million individual tax returns, IRS agents examined 1.2 million, or 0.8 percent. The majority of these were handled through the mail, with IRS field agents conducting 22 percent of audits last year.
What triggers an audit? Income is a factor.
The wealthy have been audited more frequently in recent years. More than a third of those earning at least $10 million were audited last year, compared to one in ten in 2008.
While some audits are random, the IRS tends to target more complex returns containing unusual income or unusual deductions. Owners of businesses, rental properties, and farms are frequently audited, said Michael Karu of the accounting firm Levine, Jacobs & Co. In those cases, the IRS figures "there is more probability of someone manipulating the numbers," he said.
Overall, the IRS did the fewest audits in a decade last year.
IRS Commissioner John Koskinen complained about budget cuts, imposed by Congress over the last several years, in a speech last month. "The government is forgoing more than $5 billion a year in enforcement revenue, just to achieve budget savings of a few hundred million dollars," he said, adding that weaker enforcement undermines taxpayers' belief "in the essential fairness of the system."
If taxpayers lie to agents, or otherwise cross the line, they can be tried. About 80 percent of those convicted in IRS cases draw a prison sentence. But the IRS rarely threatens a taxpayer with jail time. Just 3,853 people faced IRS criminal investigations last year, and only 1,629 were purely tax investigations. The rest were classified as financial crimes, including drug-related probes.
It's a hassle for the agency to prosecute. Even a taxpayer who commits an egregious mistake may be able to avoid an investigation by coming clean and pulling out a checkbook.
"The real bottom line," said Karu, the accountant, "is they just want the money."
Supreme Court Affirms Nevada Court's Jurisdiction over California Tax Agency
The U.S. Supreme Court has affirmed Nevada’s exercise of jurisdiction over the California Franchise Tax Board, but limited the damages that could be awarded to the amount which Nevada law would permit in a similar suit against its own agencies.
The case, Franchise Tax Board of California v. Hyatt, has been under litigation for years. In its essence, the case was initially whether Gilbert Hyatt, a tech inventor and entrepreneur, moved from California to Nevada in 1991 or 1992. Hyatt claimed he moved in September 1991, while California claimed he didn’t move until April 1992. At stake was $7.4 million in patent royalties earned during that time. Nevada does not tax personal income.
Hyatt filed suit in Nevada state court seeking damages for California’s alleged abusive audit and investigation practices. A Nevada jury verdict awarded Hyatt almost $500 million in damages and fees. California appealed, arguing that the Constitution’s Full Faith and Credit Clause required Nevada to limit damages to $50,000, the maximum that Nevada would permit in a similar suit against its own agencies. The Nevada Supreme Court affirmed $1 million of the award and ordered a retrial on another damages issue.
The U.S. Supreme Court was equally divided Tuesday as to whether the case Nevada relied on for jurisdiction over the California Franchise Tax Board should be overruled, and therefore it affirmed the Nevada courts’ exercise of jurisdiction over the California state agency. However, it put a cap on the amount of damages that could be awarded at $50,000.
The second question decided by the court was “whether the constitution permits Nevada to award damages against California agencies under Nevada law that are greater than it could award against Nevada agencies in similar circumstances. We conclude that it does not.”
The court found that Nevada “has applied a special rule of law that evinces a ‘policy of hostility’ toward California. Doing so violates the Constitution’s requirement that ‘Full Faith and Credit shall be given in each State to the public Acts, Records and judicial Proceedings of every other State.’”
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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