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Holy Taxation, Batman! Remembering Batman's Tax Villain

“Holy Taxation, Batman!”

Yes, even Batman was aware of his civic duty. Robin uttered those words in Batman (Season 2, episode 4, The Cat and the Fiddle) in response to Batman’s request for money for the parking meter.

But that wasn’t Batman’s most famous brush with taxation. Believe it or not, one of Gotham City’s villainest villains was the taxman, of sorts: Egghead. Egghead tackled Gotham City’s tax coffers not once, but twice.

Egghead, played by the delightfully campy Vincent Price, made his debut as a Batman villain in the 1960s television show. The show, of course, didn’t mark the advent of Batman. Batman had literally swooped onto the pages of National Publications (now DC Comics) years before in The Case of the Chemical Syndicate, published in Detective Comics #27 (May 1939).

In 1966, ABC developed the characters from the comics into a live action television show. The show, starring Adam West as Batman and Burt Ward as Robin, ran for just three seasons – but left a mark on American pop culture. A number of popular actors shared the screen with the dynamic duo, including Burgess Meredith, Cesar Romero, Julie Newmar, Eartha Kitt and Milton Berle. Even Joan Collins, Dick Clark and Ethel Merman stopped by. Also notably hamming it up with West and Ward? The iconic Vincent Price.

Vincent Price (known best to my generation as the voice from Michael Jackson’s Thriller) made his mark in the horror and science fiction world beginning with theTower of London in 1939. He went on to build a reputation in the horror genre with such flicks as House of Wax, House of Wax and The Fly. With the popularity of television on the rise, Price secured guest appearances on The Man from U.N.C.L.E.and F Troop before landing the roll as Egghead on Batman.

Egghead was a villain created for the Batman television series. Egghead looked exactly as you’d imagine: he had a shiny, bald head and wore a white and yellow suit. Egghead considered himself “the world’s smartest criminal” and Batman seemed to agree, telling Robin, “He’s assuredly the smartest villain we’ve ever faced.” Egghead used eggs in his crimes and egg-shaped weapons, includingthe laughing gas egg (worth the watch, I promise). Near and dear to my heart, Egghead loved puns and would pepper his speech with such witticisms as egg-sactly, egg-squisite and egg-stinct. He cracked me up.

Don’t let the camp fool you: Egghead really was one of the most clever villains on the show. He was only one of two of the villains on the show to make the connection that Batman was also Bruce Wayne (Victor Buono’s King Tut was the other). In Gotham, he was referred to by authorities as “the rottenest egg of them all.”

Egghead made his entrance in the second season of the series in “An Egg Grows in Gotham.” In the plot, Egghead schemed with Chief Screaming Chicken (yes) to return Gotham City to the Mohican Indians. As part of the deal, Egghead would be placed in charge of Gotham City. What Egghead really wanted, however, was the $29 million dollars ($205,457,820.85 in today’s money – apparently Gotham City was quite fiscally sound) in collected taxes in the Gotham Treasury. Batman and Robin, of course, saved the day.

That didn’t stop Egghead from returning in the third season in “The Ogg and I.” This time, he had a new love interest, Olga, Queen of the Cossacks, played by Anne Baxter. As part of the story arc, Egghead kidnapped Gotham City’s Commissioner Gordon and held him for ransom: a ten cent tax on every egg eaten in Gotham City – an eggs-ise tax if you will (sorry, couldn’t resist). Of course, such a tax isn’t effective unless there’s enforcement. Egghead thought of that: Gotham City police officers were charged with counting the eggs and collecting the tax. Again, Batman and Robin saved the day.

It was, of course, not surprising that one of the most popular of the Batman television series villains was fixated on taxation. Income tax rates were on the minds of many Americans. Tax rates remained remarkably high, with federal income tax rates reaching a whopping 70% for those at the top (remarkably, that was a decline from rates as high as 92% just ten years earlier). Worse, it didn’t appear that the tax burden would drop any time soon since the country was in the middle of the Cold War and was heavily involved in Vietnam. It turned out that taxpayers were right: tax rates wouldn’t dip significantly until the first set of Reagan tax reforms in 1982.

Against the backdrop of war and high taxes, it was clear that America wanted some levity. And they got it from Batman: it was, for a short while, one of the most popular series on television. Price enjoyed the show, too. At the end of a take one day, he began hurling eggs at West and Ward. When the crew asked him to stop, he remarked, “With a full artillery? Not a chance!” A full on egg fight ensued. (article downloads as a pdf).

While the show has been off the air since 1968 (you can still catch it in repeats), the comics live on. They’ve been around since 1939, making this year the 75th anniversary. In celebration of Batman’s 75th anniversary, DC Entertainment has deemed today, Wednesday, July 23, “Batman Day.” So, take a moment to engage in a little Bat-mania today… And don’t forget your free stuff: in honor of Batman Day, fans who visit participating retailers (including all Barnes & Noble , Hastings and Books A Million locations) will receive a free, special edition of DETECTIVE COMICS #27, featuring a reimagining of Batman’s 1939 comic book debut, designed by Chip Kidd with a script by The New York Times #1 bestselling author Brad Meltzer. If you don’t feel like leaving the house, you can download the special edition of DETECTIVE COMICS #27 for free and all digital platforms (Kindle, iBookstore, Nook,Google Play and

Kelly Phillips Erb


Tax Myths: Part I: Introduction

Misperceptions about taxes abound. I’m not referring to the parade of rationalizations from the tax protest movement, though the terrible consequences of being led astray by its misinformation, as I described in For Would-Be Travelers on the Noncompliant Federal Income Tax Protester Path can afflict those who fall prey to tax myths that find traction for reasons other than tax protest.

There are numerous tax myths. Though not infinite, there are more than enough to warrant a short blog series calling attention to the more common myths, and those that are most likely to create problems for significant numbers of taxpayers. They are discussed in no particular order, because alphabetizing them isn’t particularly useful and there is no good way to determine which ones are the most prevalent.

How do tax myths get started? Sometimes a person does not understand what someone else is explaining, orally or in writing. Sometimes someone tries to help someone else but makes a mess of the explanation. Sometimes the myth arises from a well-intentioned attempt to put a complicated concept into simple sentences.

No matter how they start, tax myths, like other misinformation, are difficult to squelch. Once they take root, they spread like poison ivy or bamboo. Cut down in one place, they show up somewhere else. Hopefully, those who read the upcoming posts will dismiss any tax myths to which they subscribe, and find something useful to help them free others of their unfortunate attachment to one or more of these myths.

Used with permission of James Maule Professor at Villanova see his blog at



Tax Myths: Part II: The IRS Enacted the Internal Revenue Code

It is not uncommon to discover someone’s assertion that the IRS has enacted a particular Internal Revenue Code section or even the entire Code. For example, in this presentation, readers are told that in 1996, “IRS enacts IRC Section 4598” but that simply isn’t true. Congress enacted section 4598. In this commentary, we are told, quite incorrectly, that “Every year, the IRS enacts certain changes to the tax code.” A merchant servicing company claims that “In January 2011, the IRS enacted section 6050W.” It is unquestionable that this myth has multiple variants.

As I explained in The Precision of Tax Language:

The IRS DOES NOT ENACT INTERNAL REVENUE CODE SECTIONS. It is the CONGRESS that enacts Internal Revenue Code sections. That’s very basic stuff. Extremely basic stuff. Understandably, many of the propaganda ministries have a not-so-hidden agenda of trying to persuade people that it’s the IRS that generates the tax laws, as part of the effort to discredit the IRS and taxes generally. But tax professionals know, or at least should know, better.

An interesting twist to this myth is that it’s not so much a tax myth as it is a civics myth. As I also wrote in The Precision of Tax Language, “For some reason, although all Americans over the age of, say, fourteen, should understand that statutes are enacted by legislatures, the teaching of what was once the ubiquitous Civics course has been shelved in most school districts.”

Because I no longer teach the basic federal income tax course, I no longer have the opportunity to evaluate how deeply imbedded this myth is in the minds of law students. Early in the semester I reminded them, or perhaps explained to some of them for the first time, that Congress enacts provisions of the Internal Revenue Code. Shortly thereafter, when administering the first out-of-class graded exercise, I presented to them a situation in which they needed to react to some variant of the “IRS enacts Code sections” myth. The internet was a treasure trove of possibilities to work into the facts of the exercise.

I wonder how many tax law professors use this simple technique, dealing with a rather uncomplicated legal principle, to disconnect their students from myths, to identify which students have been paying attention, and to give students the opportunity to engage in remedial education.

But it’s not just law students who need remedial education. There are tax professionals, members of Congress, entrepreneurs, journalists, and all sorts of other people who need to pause and unburden themselves of their mistaken notion of who gives us tax laws.

Used with permission of James Maule Professor at Villanova see his blog at



Tax Myths: Part III: If It’s Not Cash, It’s Not Income

From time to time, someone asserts that because they have been paid with property and not cash, the payment is not subject to the income tax. Not only have I heard this from people generally, I’ve also heard it occasionally from students in the tax course. Fortunately, it’s usually early enough in the course for a correction to be made in how they understand the definition of gross income.

The “it’s not cash, so it’s not taxed” myth flourished in the early days of the barter boom. Some barter exchanges at the time listed “tax free” as one of the advantages of bartering. Eventually, the IRS engaged in an education effort that eliminated almost all of the barter under-reporting, at least among the commercial barter exchanges. There surely are barter transactions taking place in settings that are informal and occasional, with participants thinking that the absence of cash makes the transaction nontaxable.

What fuels the “it’s not cash, so it’s not taxed” myth are several perceptions. One arises from a notion that things usually taxed, such as wages and interest, are almost always paid in cash, a concept that some people translate into a conclusion that to be taxed, it needs to be in cash. Another arises from the rationalization that the lack of liquidity arising from the receipt of property rather than cash permits dispensation from taxation because of the lack of cash with which to pay tax.

This particular myth doesn’t circulate as often and as widely as the “IRS enacts Code provisions” myth. Whether it disappears entirely remains to be seen.

Used with permission of James Maule Professor at Villanova see his blog at




Tax Myths: Part IV: It’s Not Income If It’s Not on a W-2 or 1099

Most taxpayers understand that income reported on a Form W-2 or Form 1099 must be reported on their tax return. Whether they understand why those amounts are gross income, they usually understand that “the IRS knows about it, so I had best report it.” Many taxpayers take a leap, and conclude that if the IRS doesn’t know about it, there’s no need to report it. Coupled with that misperception is the proposition that if it’s not on a Form W-2 or Form 1099, the IRS doesn’t know about it. Thus, we find this advice: “If she has no w2 or 1099, no income then she does NOT have to file.”

This myth gets people in trouble. For example, one commentator suggested, “First of all, work in the underground economy: No w2’s or 1099’s.” 

The reality is simple. Items that are gross income must be reported on tax returns whether or not a Form W-2 or Form 1099 is issued to the recipient of the income. Some types of income cannot be reported on such a form because there is no one to issue the form. For example, a taxpayer who finds a $100 bill on the street and keeps it has gross income, but will never receive a Form W-2 or Form 1099. In some instances, payors are not required to issue Forms 1099 if the amount in question is less than a specified amount, usually $600. That rule, designed to reduce reporting burdens on payors, does not mean that amounts of less than $600 are not gross income.

Used with permission of James Maule Professor at Villanova see his blog at



Tax Myths: Part V: “I’m Getting a Refund and Not Paying Tax”

Though I haven’t kept a count, I know that there have been dozens of times when someone would tell me that because they were getting a tax refund they weren’t paying tax. More than a few students entered my basic federal income tax course thinking the same thing, as evidenced by conversations in and out of the classroom, and as indicated on responses to semester exercises.

Whether a person has a tax liability cannot be determined simply from the existence of a refund. Though a person who is not getting a refund because additional tax is due surely is paying taxes, a person who receives a refund can fall into one of two categories. Some taxpayers receive a refund because they have a zero tax liability, and had taxes withheld, paid estimated taxes, or qualify for a refundable credit. But many taxpayers receive a refund and yet have a tax liability. The refund arises because they had taxes withheld and paid estimated taxes in amounts exceeding the tax liability.

When people want to know whether or not they are paying income tax, they need to look at the line on the return that shows “tax liability.” The lines for refund and for additional payment simply reflect the extent to which the amounts that have been paid match with the tax liability. A taxpayer who has $10,000 of federal income taxes withheld from wages and who has a tax liability of $7,500 rejoices at the prospect of a $2,500 refund, but ought not declare, “I’m not paying taxes.” That taxpayer has paid $7,500 in federal income taxes. Worse, they have made an interest-free loan of $2,500 to the applicable federal or state government.

Used with permission of James Maule Professor at Villanova see his blog at



Tax Myths: Part VI: “The IRS Gave Me a Refund”

Sometimes, people say to me, quite excitedly, “The IRS Gave Me a Refund,” or “The IRS Is Giving Me a Refund.” Closely related to the “I’m Getting a Refund and Not Paying Tax” myth, this myth reflects two misperceptions. 

In some instances a refund, or a portion of a refund, arises from a refundable credit. In these situations, the money paid to the taxpayer is coming from the United States Treasury courtesy of the United States Congress, or from a state treasury courtesy of a state legislature. 

In many instances, the refund is nothing more than the IRS returning to the taxpayer some, or in some rare cases all, of what the taxpayer has paid in through withholding and estimated tax payments. I suppose that those who are concerned that the federal government or a state government might run out of money before the refund is paid are overjoyed when the refund arrives, but as a realistic, practical matter, simply getting one’s money back isn’t a joyous occasion. Actually, it’s a bit sad, because the money that is being refunded hasn’t earned interest.

Used with permission of James Maule Professor at Villanova see his blog at



Tax Myths: Part VII: Tips Aren’t Taxed Because They Are Gifts

Though there are rare instances in which a tip can be characterized as a gift excluded from gross income, as a general proposition tips are included in gross income. It takes a very unique set of facts to pull a tip out of gross income by demonstrating that it is a gift, as I described some years ago in Should a Tip Be Excluded from Taxation as a Gift?. Thus, claims that, as a general proposition, tips are gifts and not taxed, are wrong. As the court in Cracchiola v. Comr., 643 F.2d 1383 (9th Cir. 1981), stated, “Petitioners’ first argument, that tops are not income is wholly without merit.”

It is understandable why this myth circulates and has traction. Most people who collect tips are paid very little, rely on the tips to make a living, and are unhappy to learn that tips are included in gross income. Worse, certain employers are required to report tip income on Forms W-2 issued to employees based on formulas, so that occasionally an employee might end up paying taxes on an amount of tips slightly higher than what the employee actually received. These situations also are very rare.

Another reason for this myth’s endurance is confusion generated by discussion of sales taxes. In most states, sales tax is computed with respect to the cost of goods and services exclusive of tips unless the tip is built into the stated price. Explanations of this principle often includes the words “tips are not taxable,” which people take out of context. The context provides the modifier “for sales tax purposes,” which should preclude treating the statement as applicable “for income tax purposes.”

Retailers operating in states that do not have sales taxes entice out-of-state purchasers to cross the border to make purchases by emphasizing the notion of “tax-free” purchases. An article about a particular incident of this approach triggered A Peek at the Production of Tax Ignorance, in which I repeated an earlier explanation about the use tax, the tax imposed by the purchaser’s state of residence on out-of-state purchases of items brought back into the state of residence.

What sustains this myth is a combination of ignorance, experience, and revenue department inefficiency. Most taxpayers do not understand that a use tax exists, the conditions under which it applies, and their legal obligation to pay it. Most taxpayers who cross the border to make purchases in states without sales taxes and return home with their purchases do so without any adverse effect, aside from the classic situations involving vehicles, boats, and a few other “big ticket” items. Revenue departments have insufficient resources and mechanisms to collect use taxes aside from “big ticket” items, and because the cost of collecting use taxes is a much higher percentage of the tax when compared to the cost of collecting in-state sales taxes, use tax collection is inefficient and spotty, as I explained in Collecting the Use Tax: An Ever-Present Issue.

Many states are making efforts to educate the public with respect to use taxes. Some are trying to incorporate some sort of flag in state income tax forms. The effectiveness of those efforts is low. Until people become accustomed to paying use taxes, the myth will persist because the non-compliance persists. At some point, states might decide to bring tax education into their K-12 systems, and some have, to some limited extent, but until it is pervasive, this myth will endure.

Used with permission of James Maule Professor at Villanova see his blog at



Tax Myths: Part IX: The Tax Rate Confusion

Most people do not understand income tax rates. Some law students enrolled in the basic income tax course struggle to understand tax rates. What confuses people is the difference between marginal tax rate and average tax rate. It is not unusual for someone to look at a federal tax rate schedule, find the bracket that fits their income, and conclude that they pay that percentage of their income in federal income tax. This generates all sorts of inaccurate claims to the effect that people with a certain income pay tax at a particular rate. For example, this writer claims that “Americans who take home over $400,000 are mandated by law to pay 39.6 percent in income tax.” Aside from the fact that tax brackets are based on taxable income and not take-home pay, in 2013, the year the article was published, a single person with, for example, $410,000 of taxable income does not pay an income tax of 39.6 percent. That person’s tax liability of $120,064 is 29.3 percent of taxable income.

Aside from the erroneous use of gross income rather than taxable income in selecting a tax bracket, the principal problem with the misuse of the tax rate schedules is the treatment of what is a marginal tax rate as though it were an average rate. For example, if taxable income of up to $50,000 is taxed at 20 percent, and taxable income above $50,000 is taxed at 30 percent, a person with taxable income of $60,000 would be subject to a tax liability of $13,000 ($50,000 x .20, plus $10,000 x .30). It is easy for someone in that situation to claim that they are taxed at 30 percent, but in fact, their tax liability of $13,000 is 21.7 percent of $60,000. Failure to understand the difference generates exaggeration, which in turn triggers more resentment than is warranted.3

What makes this myth even more insidious is that when phase-outs are taken into account, and tax liability is divided by taxable income, the average rates are highest not for those with the highest taxable incomes, but for those in the middle brackets, and in some instances, for some taxpayers in lower brackets. I explained this tax quirk in A Foolish Tax Idea Resurfaces.

Americans’ confusion with average and marginal tax rates provides fertile ground for the growth of misleading claims and absurd hyperbole. The myth that people are taxed at the highest nominal marginal rate on all of their income is a myth that needs to die.

Used with permission of James Maule Professor at Villanova see his blog at



Tax Myths: Part X: The Flat Tax is Simple

One of the most persistent, widespread, and enticing tax myths is the unfounded claim that the flat tax is simple. Three years ago, the Heritage Foundation claimed that the flat tax “is simple.” Sixteen years ago, Dick Armey characterized the flat tax as “simple.” For the past several decades, advocates of the flat tax have argued its simplicity by focusing on rate structures and ignoring everything else.

In 2011, I explained, in The Flat Tax Myth Won’t Die that the flat tax “does absolutely nothing to address the question of timing. It does not simplify, for example, installment sale rules, or the dozens of nonrecognition provisions that pepper the Code.” I also pointed out:

A flat tax does not resolve the continuing debate with respect to international taxation. The question of how nonresident aliens and foreign corporations should be taxed, and the question of how American taxpayers should be taxed with respect to overseas operations, is not one that goes away if section 1 is reduced to one tax rate.

Repealing nonrecognition provisions would generate cash flow burdens that would stifle the economy, and retaining those provisions to sustain the economy amounts to retention of tax complexity requiring multiple volumes to explain.

The flat tax, of course, is a sound bite, a nice-sounding phrase that suggests a magic solution to a complex set of problems. It is yet another indication of a theory struggling to survive when it meets reality. It’s a myth, one that falls flat.

Used with permission of James Maule Professor at Villanova see his blog at



Tax Myths: Part XI: Alimony Always Is Taxable

Perhaps in the rush to be succinct, people present general rules as absolutes. For example, a responder in this threadadvised that “And yes, alimony is always taxable to the recipient, regardless of the form in which it is paid.” Similar advice, tainted by yet another error confusing gross income with taxable income, shows up in this commentary, which claims that “Alimony is always taxable income to the recipient.”

However, those statements are incorrect. They need to be qualified. For example, section 71 provides that if the divorce or separation instrument specifies that the alimony payments are not includible in the payee’s gross income and not deductible by the payor, they are not includible in gross income and not deductible. As another example, alimony paid while the spouses are members of the same household do not qualify as “alimony or separate maintenance payments” that are includible in the payee’s gross income and deductible by the payor. The use of the term “Generally,” or the phrase, “Unless an exception applies,” would change the statements from incorrect absolutes to accurate representations.

Used with permission of James Maule Professor at Villanova see his blog at



Tax Myths: Part XII: The Internal Revenue Code Fills 70,000 Pages

The assertion that the Internal Revenue Code consists of 70,000 pages is one of my favorite tax myths because it is so silly, so easily debunked, and so indicative of America’s tax ignorance. As I’ve explained in a series of posts, starting with Bush Pages Through the Tax Code?, and continuing with Anyone Want to Count the Words in the Internal Revenue Code?Tax Commercial’s False Facts Perpetuates FalsehoodHow Tax Falsehoods Get FertilizedHow Difficult Is It to Count Tax WordsA Slight Improvement in the Code Length Articulation Problem, and Tax Ignorance Gone ViralWeighing the Size of the Internal Revenue CodeReader Weighs In on Weighing the Code, and Code-Size Ignorance Knows No Boundaries, I have explained why the Code is nowhere near 70,000 pages, how the misinformation was developed and spread, and why the Code is no more than two thousand pages long.

This myth persists because some people want it to persist. There is political advantage in convincing people that the Internal Revenue Code is a behemoth. It makes it easier to eliminate the Code, the income tax, the Internal Revenue Service, and, eventually, government. If the campaign succeeds, it would not be the first time a group of politicians had their way by fueling misinformation and spreading myths.

Used with permission of James Maule Professor at Villanova see his blog at



Tax Myths: Part XIII: Children Do Not Pay Tax

It isn’t difficult to find web sites that contain statements claiming that children do not pay tax. For example, an answer to the question How many taxpayers are there in the U.S.? was tagged as “wrong” because “Children do not pay tax.” The statement was followed by another erroneous assertion. A similar reaction appeared in response to the question Is it really true half the country doesn’t pay income tax?, from someone who not only claimed that “children do not pay income tax,” but also delivered several other questionable assertions.

Though there are some exceptions to certain state taxes based on a person’s status as, for example, unemployed or elderly, the federal income tax does not contain any blanket exemptions based on age, physical condition, or occupation. A tax liability exists if taxable income exceeds zero, or if a taxpayer has positive taxable income but qualifies for a credits that reduce tax liability. Those credits, however, are not sufficient to exempt all children from having federal income tax liability. A child of any age, with gross income exceeding whatever standard deduction is available, has federal income tax liability.

Used with permission of James Maule Professor at Villanova see his blog at



Tax Myths: Part XIV: Retired People Do Not Pay Income Tax

I must admit I was surprised to discover someone asserting that “Obviously retired people do not pay INCOME TAX.” I had not previously encountered this myth. In another post, a commentator provides some of the flawed reasoning behind this sort of assertion, explaining “there are some small percentage who retire before age 65 and these retired people do not pay taxes (due to no income, except that they are well-off to live on past earnings.” Someone who is retired and living off of accumulated savings surely has investment income, which is taxed. Retired individuals, no matter the age at which they retire, are taxed on their pensions, their retirement income, and in some instances, on a portion of social security benefits. To claim that retired people do not pay income tax is just one more unfortunate tax myth.

Used with permission of James Maule Professor at Villanova see his blog at


Collecting An Existing Tax is Not a Tax Increase 

recent commentary from The Institute for Policy Innovation bemoans the possible derailment of the Permanent Internet Tax Freedom Act by the addition of unrelated provisions to the legislation. Since its inception, the movement of legislation through the Congress has been hampered by extraneous amendments, a snag in the process that ought to be eliminated. On that point, I agree with the commentary.

The commentary points out that if the legislation does not pass, the existing moratorium on certain internet taxation will expire. The current moratorium prevents internet access taxation, and also prevents states from requiring use tax collection by out-of-state retailers with no connection with the state. The commentary carries the headline, “The Senate’s Plan to Increase Your Taxes,” and projects tax increase amounts that include both internet access taxes and use tax collections.

When it comes to internet access taxation, expiration of the moratorium, which in all fairness cannot be considered a plan of the Senate or even a plan of those who are using the legislation for other purposes with no avowed intention of derailing it despite their inability to see that outcome as a consequence, the commentary is correct. Letting the moratorium expire would permit states and localities to impose access taxes, and those taxes would qualify as tax increases.

But when it comes to the use tax, it is wrong to classify the tax as an increase. The use tax is an existing tax. People who are not paying the tax and thus violating the law are not facing a tax increase when they are obliged to comply with the law. The tax obligation exists and is not being increased when it is being collected. The use tax issue presents a different concern. States struggle to collect the use tax, as I have explained in posts such as Collecting the Use Tax: An Ever-Present Issue, a person who purchases taxable items in another state is required to pay the use tax, but does so only if avoidance is pretty much impossible because the purchase is a big-ticket item that needs to be registered, such as a vehicle or boat. Thus, for example, a resident of Pennsylvania who goes to Delaware, a state without a sales tax, to make a purchase owes a use tax to Pennsylvania. Pennsylvania cannot compel the Delaware merchant to collect the Pennsylvania tax. Nor should Pennsylvania be permitted to require the Delaware merchant to collect the tax if the purchase is made when the resident goes to the Delaware merchant’s web site, unless the Delaware merchant otherwise has enough activity in, or connection with, Pennsylvania to be subject to Pennsylvania jurisdiction. Letting the moratorium expire would open the door to states trying to compel out-of-state merchants to do tax collections, but it would not increase the use tax that already is owed. What would increase is the administrative burden and expense faced by out-of-state merchants.

One solution that ought to be considered is a simple one. If state 1 wants to collect an existing – not increased – tax from its residents’ purchases from out-of-state merchants, it ought to offer those out-of-state merchants a financial incentive to do the collection. Surely whatever cost there is in re-programming web sites and in-store point-of-sale terminals to collect the sales tax – something already done by the national retail businesses – can be more than offset with a payment equal to a percentage of the use tax being collected. Though the state would not necessarily receive as much as it would if the residents paid the existing tax, the state would be getting something, which is more than the nothing that that states usually receive.

The commentary’s main point, though not articulated as precisely as it could or should be, is important. Legislation addressing an issue ought not be sidetracked with unrelated matters. But that is not enough. Legislators ought to be focusing on ways of collecting an existing tax using sensible processes, and commentators ought to be encouraging productive efforts by legislatures.

Used with permission of James Maule Professor at Villanova see his blog at



Job Hunting Expenses

Many people change their job in the summer. If you look for a new job in the same line of work, you may be able to deduct some of your job hunting costs.

Here are some key tax facts you should know about if you search for a new job:

  • Same Occupation.  Your expenses must be for a job search in your current line of work. You can’t deduct expenses for a job search in a new occupation.
  • Résumé Costs.  You can deduct the cost of preparing and mailing your résumé.
  • Travel Expenses.  If you travel to look for a new job, you may be able to deduct the cost of the trip. To deduct the cost of the travel to and from the area, the trip must be mainly to look for a new job. You may still be able to deduct some costs if looking for a job is not the main purpose of the trip.
  • Placement Agency. You can deduct some job placement agency fees you pay to look for a job.
  • First Job.  You can’t deduct job search expenses if you’re looking for a job for the first time.
  • Work-Search Break.  You can’t deduct job search expenses if there was a long break between the end of your last job and the time you began looking for a new one.
  • Reimbursed Costs.  Reimbursed expenses are not deductible.
  • Schedule A.  You usually deduct your job search expenses on Schedule A, Itemized Deductions. You’ll claim them as a miscellaneous deduction. You can deduct the total miscellaneous deductions that are more than two percent of your adjusted gross income.
  • Premium Tax Credit.  If you receive advance payment of the premium tax credit in 2014 it is important that you report changes in circumstances, such as changes in your income or family size, to your Health Insurance Marketplace. Advance payments of the premium tax credit provide financial assistance to help you pay for the insurance you buy through the Health Insurance Marketplace. Reporting changes will help you get the proper type and amount of financial assistance so you can avoid getting too much or too little in advance.




Vacation Home Rentals

If you rent a home to others, you usually must report the rental income on your tax return. But you may not have to report the income if the rental period is short and you also use the property as your home. In most cases, you can deduct the costs of renting your property. However, your deduction may be limited if you also use the property as your home. Here is some basic tax information that you should know if you rent out a vacation home:

  • Vacation Home.  A vacation home can be a house, apartment, condominium, mobile home, boat or similar property.
  • Schedule E.  You usually report rental income and rental expenses on Schedule E, Supplemental Income and Loss. Your rental income may also be subject to Net Investment Income Tax.
  • Used as a Home.  If the property is “used as a home,” your rental expense deduction is limited. This means your deduction for rental expenses can’t be more than the rent you received. For more about these rules, see Publication 527, Residential Rental Property (Including Rental of Vacation Homes).
  • Divide Expenses.  If you personally use your property and also rent it to others, special rules apply. You must divide your expenses between the rental use and the personal use. To figure how to divide your costs, you must compare the number of days for each type of use with the total days of use.
  • Personal Use.  Personal use may include use by your family. It may also include use by any other property owners or their family. Use by anyone who pays less than a fair rental price is also personal use.
  • Schedule A.  Report deductible expenses for personal use on Schedule A, Itemized Deductions. These may include costs such as mortgage interest, property taxes and casualty losses.
  • Rented Less than 15 Days.  If the property is “used as a home” and you rent it out fewer than 15 days per year, you do not have to report the rental income.


Conservative Group Petitions Supreme Court for Review of IRS Rule on Federal Health Insurance Exchange



The Competitive Enterprise Institute, a public policy group that advocates for free markets and limited government, said Thursday its attorneys have petitioned  the Supreme Court to review an appeals court ruling last week that upheld an Internal Revenue Service regulation allowing premium tax credits for health insurance purchased on a federal exchange.

The ruling last week came only hours after another federal appeals court said the IRS lacked the authority under the Affordable Care Act to provide tax credits to subsidize health insurance purchased through a federal exchange such as, but only for coverage acquired on state-run exchanges (see Obamacare Suffers Blow as Court Bars Federal Exchange U.S. Aid andEmployers Won’t Feel Immediate Sting from Federal Court ACA Subsidy Ruling).

On Thursday, CEI attorneys said they have requested the Supreme Court to review the ruling by the U.S. Court of Appeals for the Fourth Circuit in the case it brought there, King v. Burwell. The group had also coordinated and funded the other case, Halbig v. Burwell, in which the U.S. Court of Appeals for the D.C. Circuit struck down the IRS rules. The Justice Department is expected to appeal the Halbig decision but has not yet done so. Michael A. Carvin of Jones Day is the lead counsel for the plaintiffs in both cases, who consist of individuals and small business owners. The Competitive Enterprise Institute (CEI) is coordinating and funding both cases.

“From the time these cases were first filed, we’ve tried to get this issue resolved as quickly as possible for the plaintiffs and the millions of individuals like them,” said CEI general counsel Sam Kazman in a statement. “A fast resolution is also vitally important to the states that chose not to set up exchanges, to the employers in those states who face either major compliance costs or huge penalties, and to employees who face possible layoffs or reductions in their work hours as a result of this illegal IRS rule. Our petition today to the Supreme Court represents the next step in that process.”

The plaintiffs in the King case argued that the Affordable Care Act drew a distinction between state-established exchanges and those set up by the federal government in nonparticipating states. They contended Congress permitted subsidies only for states with their own exchanges, as a way of encouraging state participation. However, 36 states, mostly led by Republican governors, are not participating in setting up state-based exchanges and taxpayers must instead turn to the federal exchange for coverage.

“On Obamacare, last week started with a circuit split and ended with a Jonathan Gruber split. Our hope is the Supreme Court will at least resolve the former,” said Kazman.

Two days after the rulings, CEI said it brought to light a 2012 videotape in which Massachusetts Institute of Technology professor Jonathan Gruber, who helped craft the Affordable Care Act, said that nonparticipating states would not receive subsidies. CEI said this contradicts the current claim by the government that Congress never intended to withhold subsidies.

Proponents of the Affordable Care Act point to a record of legislative debate and hearings in which tax credits for the federal exchange were discussed and contend that the federal statute clearly supports the need for tax credits for insurance purchased on the federal exchange.



Over a Third of Americans Have a Debt in Collections



Thirty-five percent of adults in the U.S. have a debt in collections reported in their credit files, a new study shows.

The study, by the Urban Institute, a think tank in Washington, D.C. found that Nevada tops the list of states, with 47 percent of people who have a credit file have reported debt in collections. The state, which was hit hard by the mortgage crisis, also has the highest average collections debt. The state also has the highest average collections debt, at $7,198.

Twelve other states (11 in the South) and the District of Columbia also top the 40 percent figure for the percentage of people who have a credit file that reports a debt in collections. They include Alabama, Arkansas, Florida, Georgia, Kentucky, Louisiana, Mississippi, New Mexico, North Carolina, South Carolina, Texas and West Virginia.

On the low end, Minnesota, North Dakota and South Dakota have about 20 percent of residents with reported debt in collections.

The study, conducted with Encore Capital Group's Consumer Credit Research Institute, found that 77 million Americans owed an average of $5,200 in September 2013.

Debt in collections involves a nonmortgage bill—such as a credit card balance, child support obligation, medical or utility bill, parking ticket or membership fee—that has been reported so far past due that the account has been closed and placed in collections, often with a third-party debt collection agency. The debt can remain in a person's credit file for seven years. Some consumers become aware of collections debt only when they review their credit report.

The researchers analyzed a random sample of 7 million people with 2013 credit files. The roughly 9 percent of adults (22 million) with no credit file, who are generally low-income consumers, were not represented in the study.

Of the 100 largest metropolitan areas, five have at least 45 percent of people with collections debt: McAllen, Texas (51.7 percent); Las Vegas, Nev. (49.2 percent); Lakeland, Fla. (47.3 percent); Columbia, S.C. (45.2 percent); and Jacksonville, Fla. (45.0 percent).

Only six metro areas, none in the South, have less than a quarter of people with collections debt: Minneapolis—St. Paul, Minn. (20.1 percent); Honolulu, Hawaii (21.0 percent); Boston, Mass. (22.4 percent); Madison, Wis. (22.6 percent); San Jose, Calif. (23.0 percent); and Bridgeport, Conn. (24.5 percent).

Approximately 790 of the 72,000 census tracts studied for the report have at least 75 percent of adults with collections debt. Fewer than 10 have no one with such debt. Census tracts average about 4,000 residents.

"Most people wouldn't blink if told that the majority of Americans carry some debt,” said Caroline Ratcliffe, a senior fellow at the Urban Institute, in a statement. “But they would be shocked to learn that reported debt in collections is pervasive and threads through nearly all communities. Delinquent debt can harm credit scores, which can tip employers' hiring decisions, restrict access to mortgages, and even increase insurance costs."


Past Due 

Some 5.3 percent of people with a credit file (roughly 10 million adults) are at least 30 days late on a credit card, auto loan, student loan, or other nonmortgage payment. The average amount needed to pay to become current on that debt is $2,258.

Debt past due is most pronounced in the South, led by Louisiana (8.7 percent), Texas (7.6 percent) and Mississippi (7.2 percent). Only three states have less than 4 percent of their credit file population with debt past due: Utah, Washington and New Jersey.

Across the largest 100 metropolitan areas, Salt Lake City, Utah, has just 3.2 percent of people with debt past due, followed by San Jose, Calif., and Seattle, Wash., each at 3.5 percent. At the other end of the spectrum are McAllen, Texas, at 10.1 percent, followed at about 9 percent by Texas's El Paso and San Antonio and Louisiana's Baton Rouge and New Orleans.

Of the nearly 1,000 census tracts with at least 15 percent of people with debt past due, nearly 40 percent are in Louisiana or Texas. Almost 4,600 of the nation's census tracts—scattered throughout the United States—have no one with past due debt.


Distribution of Debt

Average total debt in America stood at $53,850 in September 2013, among people with credit files, a second report indicates. Average debt among people with mortgages was $209,768, while it was $11,592 for those without mortgages.

In contrast to the situations involving debt past due and collections debt, five southern states—Mississippi, West Virginia, Arkansas, Louisiana, and Oklahoma—have the lowest levels of debt and tend to have low levels of debt relative to income. In general, low-debt areas tend to be low-income and less-populous locales.

Total debt, largely driven by mortgages, is high along the Pacific Coast in California, Oregon, and Washington and along the East Coast from Washington, DC, through Boston, Massachusetts. People in these areas may have higher debt because they have higher incomes or more assets, providing them with greater access to credit. Hawaii has the highest average mortgage debt ($67,300) and Mississippi has the lowest ($16,864).

The San Jose, Calif., metro area has the highest average debt in the country at $97,150. California is home to 4 of the 10 most-indebted areas. McAllen, Texas, at $23,546, has the lowest average debt.

The analysis shows that the size of mortgage and nonmortgage debt is often unrelated. Although the South has low levels of mortgage debt relative to income, it has high nonmortgage debt relative to income. California has high mortgage debt relative to income, but very low nonmortgage debt relative to income.

“Although household debt is a significant challenge for tens of millions of Americans, it has received surprisingly little attention compared to other financial matters,” said Christopher Trepel, chief scientific officer at Encore Capital Group and managing director of the Consumer Credit Research Institute. “This study establishes a new fact base from which to ask important questions related to consumer financial distress, and it advances our understanding of household balance sheets and the spatial patterns of debt holding in the United States.”

The research was conducted by Caroline Ratcliffe, Signe-Mary McKernan, Brett Theodos, and Emma Kalish from the Urban Institute and John Chalekian, Peifang Guo, and Christopher Trepel from Encore Capital Group's Consumer Credit Research Institute.



Art of Accounting: Ask Stupid Questions Early



One time I was working for about a month at a client that was a stock broker. Throughout the office were signs that said P&S with arrows.

When I got started on the account, I did not pay much attention to the signs. Instead I concentrated on learning what to do and then doing it. After a couple of weeks I looked at one of the signs and had no idea what it meant, never coming across anything referring to it.

After about a month, my boss met me at the client and wanted to discuss my work and go through the work papers. I had kept him informed of my daily and then weekly progress and he felt I was on track, but now he wanted to do a thorough review.

While he was with me, I asked if I could ask him a question and he said OK. I asked, “What does P&S mean?” He replied, “Purchases and Sales.” At that point I felt really stupid and told him so. He told me, “You shouldn’t feel so bad. It could have been much worse. I just asked the client that question!”

This taught me that early on you can ask as many questions about the business and operations as you want, and it won’t reflect poorly on you. It might even enhance your reputation for thoroughness. However, when you ask a question about something you should know, after you have been working on their records for a period of time, you look foolish, amateurish and/or stupid.

The takeaway is to ask about everything you can possibly think about when you first get the client and ask right away whenever something new arises.

Edward Mendlowitz, CPA, is a partner in WithumSmith+Brown, PC, CPAs. He has authored 20 books and has written hundreds of articles for business and professional journals and newsletters plus a Tax Loophole article for every issue of TaxHotline for 27 years. Ed also writes a blog twice a week that addresses issues his clients have He is the winner of the Lawler Award for the best article published during 2001 in the Journal of Accountancy. He has also taught in the MBA graduate program at Fairleigh Dickinson University, and is admitted to practice before the U.S. Tax Court. Ed welcomes practice management questions and he can be reached at WithumSmith+Brown, One Spring Street, New Brunswick, NJ 08901, (732) 964-9329,




Most Unusual Things Employees Were Caught Doing When They Should Have Been Working

Productivity can be a big problem, even at major accounting and tax firms and other types of businesses. Employers recently shared some real-life examples with the staffing company CareerBuilders of some of the more unusual things they've seen employees doing when they should have been busy working:

Tiny Bubbles

Employee was blowing bubbles in sub-zero weather to see if the bubbles would freeze and break. 

A Major Flap

Employee was caring for her pet bird that she smuggled into work. 

Nair Do Well

Employee was shaving her legs in the women's restroom. 

This End Up

Employee was laying under boxes to scare people. 

Cage Match

Employees were having a wrestling match. 

Sleep Pray Love

Employee was sleeping, but claimed he was praying. 


Employee was taking selfies in the bathroom. 

Ready to Wear

Employee was changing clothes in a cubicle. 

Print on Demand

Employee was printing a book from the Internet. 


Employee was warming her bare feet under the bathroom hand dryer. 





Nine mid-year tax tips

Don't wait until the end of the year to see what your taxes may look like next April 15.


Many people only pay attention to taxes twice a year: in the run-up to April 15 and in late December. But a quick mid-year tax check-in can make a difference in how much tax you will owe for the year.

“Getting a handle on your tax situation gives you time to make changes, implement strategies, and help prepare for significant tax events,” says Mark Luscombe, principal federal tax analyst for accounting research and software provider Wolters Kluwer, CCH. “It’s also a good time to look for a tax adviser—well before the year-end tax crunch.”

Here’s a list of items for your mid-year checkup:


1. Assess any impact of major life changes.

Getting married or divorced? Having children or emptying the nest? Getting a job or losing one? These can have a significant impact on your tax situation. If you’ve already had a big change this year, or if you anticipate one before the end of the year, now is the time to see whether it will affect your tax picture.

If you’re getting married, for example, you’ll want to estimate your combined income and what your tax bill may be as a couple. Similarly, if you had an addition to the family, you should evaluate the tax impact of having another dependent. When you’ve determined what the effect of the change will be, you can consider adjusting your tax withholding accordingly.


2. Check and adjust your tax withholding rate.

If you received a large refund on your 2013 taxes, or had to pay a large amount to the IRS, you may want to consider adjusting your withholding rate. Ideally, you should fine-tune your withholding to pay just as much as necessary to avoid giving the IRS a free loan (which is really what overwithholding amounts to) or owing a penalty for underpayment.

Barring any of the aforementioned life events or significant income changes, a quick way to evaluate where you stand is to look at your tax liability from 2013 and compare it with what you’re on track to have withheld in 2014 (based on the year-to-date figure on your most recent pay stub). If the two numbers aren’t close, consider making changes to the Form W-4Opens in a new window. you have on file with your employer. For a more complete explanation of how to adjust your withholding, read Viewpoints “Are you giving the IRS an interest-free loan?


3. Evaluate the impact of capital gains—especially if you have a large gain.

If you have—or plan to have—significant capital gains from selling stocks or another type of asset this year, you’ll need to consider how you’ll pay the taxes. In addition to making sure you put aside enough money to pay the tax on your gain, you’ll want to avoid the possibility of a penalty for underpayment. The IRS requires you to make quarterly estimated payments if you expect to owe at least $1,000 in tax for the year and you expect your withholding and refundable credits to be less than 90% of your estimated tax for this year or 100% of the tax you owed last year.

The rules are a bit different for high-income taxpayers. If your adjusted gross income in 2013 was more than $150,000 (married couple filing jointly and single taxpayers) or $75,000 (married taxpayers filing separately), you have to withhold at least 110% of last year’s tax liability to avoid an underpayment penalty.

See whether you have gains or losses in your Fidelity accounts by reviewing your year-to-date tax information on your nonretirement accounts. Go to, "Accounts & Trade"; then, log on to "Portfolio," and select “Tax Info (Year-to-Date)” from the “Select Action” drop-down menu for the desired Fidelity account.


4. Determine whether you should sell losing investments.

By selling losing investments to offset some of the winners, known as tax-loss harvesting, you may be able to help manage your tax bill. Many people wait until late in the year to sell their losing stock or mutual fund, but there are good reasons to consider doing it sooner.

One reason is that the flurry of late selling by tax-loss harvesters tends to push stock prices lower toward the end of the year. Another reason is that selling early would allow you to wait the required 30 days before buying back the stock (to avoid the wash-sale rule) and then time your repurchase to coincide with a favorable market. Identify opportunities with our Tax Loss Harvesting Tool.


5. Start planning optional deductions.

If you itemize your deductions, you may be in much better shape to maximize their value if you do some planning before the end of the year. For example, you could look into taking a more organized and tax-effective approach to your charitable giving with a donor-advised fund.

You might also start planning now to bunch two years’ worth of certain deductions such as unreimbursed employment expenses and sales tax on large purchases, so they can have a bigger impact on your tax bill. For unreimbursed employment expenses, it may help you get over the 2% adjusted gross income (AGI) threshold for miscellaneous itemized deductions. For sales tax, you might want to claim the state income tax deduction in a different year from when you claim your bunched sales tax deductions.


6. Contribute more to certain tax-advantaged retirement accounts.

Was this going to be the year you maximized your contributions to your 401(k), IRA, or another tax-advantaged retirement plan? Many people start the year with that intention, or resolve to do it when they see their tax bill for the previous year—but it somehow gets put off.

Now is the time to make good on your intention. The longer you wait, the more difficult it will be to contribute the maximum amount and get the maximum tax benefit. For 2014, you can contribute up to $17,500 in pretax dollars to a 401(k) or similar plan ($23,000 if you’re 50 or older), up to $5,500 to an IRA ($6,500 if you’re 50 or older), and the lessor of $52,000 or 25% of income for a Simplified Employee Pension (SEP) plan. For 2014, individuals can contribute up to $3,300 to a health savings account (HSA), and families up to $6,550. Plus, there is a $1,000 catch-up provision for those age 55 or older.


7. See whether you’ll benefit from a Roth IRA or 401(k) conversion.

This is another item that often falls victim to procrastination. Many taxpayers believe they could benefit from diversifying their retirement tax situation with a Roth IRA or 401(k) conversion (if their plan permits one), which can provide tax-free retirement income. But converting a portion of your traditional pretax IRA or 401(k) savings means having to pay tax on the amount you convert in the current year.

If you wait until the end of the year to do the conversion, you don’t have much time to put aside money for the tax bill. On the other hand, if you convert now, you could put aside something every month until the tax is due. There are some potential advantages to converting late in the year, too, so you’ll want to consider your options carefully. Start by reading Viewpoints: “Answers to common Roth conversion questions.”


8. Check your tax rate and bracket for changes.

For people with large incomes, a new top tax bracket, a higher capital gains tax, and a new net investment income tax all went into effect in 2013. If you fell below the thresholds last year but expect your 2014 earnings to increase significantly, you might want to bump up your withholding or estimated payments to be prepared for the higher rates. For 2014:

  • The top tax bracket is 39.6% on taxable income above $406,750 for single taxpayers and $457,600 for married couples filing jointly.
  • The top rate on qualified dividends and long-term capital gains is 20% for taxpayers in the top tax bracket.
  • A 3.8% net investment income tax is applied to the lesser of net investment income or modified AGI above $200,000 (singles) and $250,000 (couples).
  • An additional Medicare surtax of 0.9% is due on earned income above $200,000 (singles) and $250,000 (couples).

See 2013 and 2014 tax brackets and rates.


9. Look for a tax adviser.

If your tax situation is becoming too complex to handle yourself, now is the time to look for a tax professional. By interviewing potential candidates when they’re not up to their elbows in other clients’ tax returns—and you’re not scrambling to file your own taxes on time—your search can be much more relaxed and productive.

Everybody’s tax situation is unique, but one piece of advice that applies to everyone is that the sooner you plan and implement your tax strategies, the more likely you will be to have a lower tax bill come next April.






Eight tax-smart savings tips

Consider our tax-smart strategies to help build your savings.


Have you decided to save more this year? If so, you're not alone. Fifty-four percent of Americans listed "saving more money" as their top financial resolution for 2014, versus 52% last year, according to Fidelity's Financial Resolutions Study.

But are you saving enough—and saving smart enough?

In general, Fidelity believes that to reach your long-term retirement savings goals, you may need to save at least 10%–15% of your earnings each year.1 That isn't easy, given the rising price of health care, education, and the general cost of living—all the more reason to maximize the tax advantages available to help Americans save.

We suggest setting aside three to six months of expenses in an emergency fund. But after that, we believe saving for retirement should be most Americans’ top priority. After all, you can probably get loans to pay for children’s education, a house, a car, or other financial goals. But beyond Social Security, you’ll likely need to fund your own retirement paycheck.

Here are eight tips, not necessarily in order, to help you save more and smarter this year. Depending on your situation, you might consider some or all of these.


Take full advantage of any company match.

If you have a 401(k), 403(b), or governmental 457(b) plan and your employer offers a matching retirement contribution, take full advantage of it. In addition to receiving the company match, you get the added potential benefits of any tax-deferred growth and compounding returns.

Let's say, hypothetically, your company offers a match of 50¢ on every $1 you contribute, up to 3% of your salary. If you make $60,000 a year and contribute 3%, or $1,800, and your company kicks in another $900, your annual contribution could add up to $2,700. Assuming a hypothetical compound annual growth rate of 7%, your savings could grow to more than $37,000 in ten years.2

Contribute the maximum to your workplace savings plan.

Saving just 3% a year is probably not enough to generate the savings you will need to retire, which could be hundreds of thousands of dollars or more for even basic expenses. So, try to contribute the maximum to your workplace savings plan each year. For 2014, the maximum is $17,500; $23,000 if you are age 50 or older. If you’re not quite saving to the max yet, consider increasing your savings rate by 1% per year until you reach a total savings rate of 15%. (Read Viewpoints: “Saving just 1% more can go a long way.”)

If you think your tax rate will be higher in retirement, consider opting for a Roth workplace savings plan, if your employer offers one. With a Roth, you contribute after-tax dollars, but any earnings and dividends grow tax free, and withdrawals are also tax free if taken in retirement. (To learn more, read Viewpoints: "Roth or traditional IRA or 401(k)?") Also, new legislation has made in-plan conversions easier.

Pay down high interest debt.

If you are paying more than 8% to 10% on credit card or other debt, consider using any extra savings to pay down the balance. If you have multiple accounts, you should work on the one with the highest interest rate first. Continue to make the minimum required payments on other debts (so you don't get hit with any penalties). When that first debt is paid off, consider putting your extra money toward paying off the next.

As you pay off your debts, it should become easier to pay off the remaining debts, because you have lower interest payments and therefore more money to work with. Continue the process until you're out from under all your high interest debt. For debt you cannot pay off, consider consolidating it into a low-interest single credit card or home equity loan at whichever institution offers you the lowest rate, making sure the payment schedule matches your own goals and financial situation.

Contribute to an IRA.

Individual retirement accounts (IRAs) offer another tax-smart way to save for retirement. There are two basic options:

  • Traditional IRAs, where you can get a tax deduction up front if you meet certain income eligibility requirements. Any earnings grow tax deferred, but you pay income taxes on withdrawals. In 2014, full deductibility begins to phase out at annual incomes of $60,000 for singles and $96,000 for married couples. The maximum contribution is $5,500 per person ($6,500 if you are age 50 or older) or 100% of employment compensation, whichever is less.
  • Roth IRAs, where you can contribute after-tax dollars if you meet certain income eligibility requirements. Any earnings grow tax free, and qualified withdrawals are tax free. In 2014, the maximum contribution for Roths is the same as for traditional IRAs. But there are income requirements: Eligibility begins to phase out at annual incomes of $114,000 for singles and $181,000 for married couples.
  • In general, if you think your income tax rate will be higher in retirement, you may want to consider opting for a Roth IRA. To learn more about Roth IRAs, read Viewpoints: "Nine compelling reasons to consider a Roth IRA." To determine whether a Roth is right for you, use our calculator.

Consider a health savings account.

If your employer offers a health savings account (HSA) along with a high-deductible health care plan, consider opening one. Our research shows that it can be a tax-efficient way to save and pay for both current medical expenses and qualified medical expenses in retirement. Although your out-of-pocket health care costs may be higher depending on your health care needs, your premiums may be lower. Also, many companies contribute to an employees' HSA, and employee contributions are made pretax, which means your net after-tax costs can be lower. Contributions can also be made after tax. And what you don’t spend in your HSA in one year can be carried over from year to year to cover future qualified medical expenses, including those in retirement.

HSAs have a unique triple tax advantage3 that can make them a powerful savings vehicle for qualified medical expenses in current and future years: Contributions, earnings, and withdrawals are all free of federal income taxes. To make the most of your HSA (if you have access to one and you can afford it), consider paying for current-year qualified medical expenses out of pocket and letting your HSA contributions remain invested for future qualified medical expenses, including those in retirement.

For 2014, individuals can contribute up to $3,300 to an HSA, and families up to $6,550. Plus, there is a $1,000 catch-up provision for those age 55 or older. In 2015, the contribution limits are going up to $3,350 for individuals and $6,650 for families. To learn more, read Viewpoints: “Three healthy habits for Health Savings Accounts.”

Consider deferring compensation.

If your company offers a nonqualified deferred compensation plan—and you have maxed out on other workplace savings options and still have the means—consider allocating some of your paycheck there as well. You can decide how much to defer each year from your salary, bonuses, or other forms of compensation. Deferring this income provides two tax advantages: You don't pay income tax on that portion of your compensation in the year you defer it (you pay only Social Security and Medicare taxes), and you can invest the money, so it has the potential to grow tax deferred until you receive it. But a deferred compensation plan is not for everyone—and the rules are complex—so you'll want to weigh the pros and cons carefully before signing up. To learn more, read Viewpoints: "Nonqualified deferred compensation trilogy."


Consider deferred variable annuities.

If you've taken advantage of your tax-advantaged workplace savings options and contributed to an IRA but still want to save more, you might want to consider deferred variable annuities. They typically allow you to invest in funds that hold stocks and bonds—and any earnings grow tax deferred. Unlike some of the options mentioned above, there are no IRS limits on how much you can invest in an annuity.

  • To maximize your savings potential in an annuity, it is important to choose one that is low cost, as investments in annuities are subject to insurance charges in addition to fund charges. When you're ready to withdraw from an annuity, any earnings (in addition to any pretax contributions) are taxed at ordinary income tax rates (plus any Medicare surtax, state, and local taxes). Also, keep in mind that any taxable amounts withdrawn before age 59½ may be subject to a 10% IRS penalty. To learn more, read Viewpoints: “Create future retirement income” and “A shopper’s guide to annuity fees.”

Remember other savings goals.

  • It's also important not to overlook saving for your other goals, such as college and graduate school for yourself, children, or grandchildren. Among the best ways to save for a college goal is a 529 college savings accout, which is a tax-advantaged account designed to pay for qualified higher education expenses, and a Coverdell education savings account. For both types of accounts, qualified distributions are federal income tax free. To learn more, read Viewpoints: “The ABC's of 529 college savings plans.” To explore saving for an education goal, use ourcollege saving tool.

One last tip: To make it easier to stay on track with your savings goals, consider using direct deposit from your paycheck to your chosen savings vehicles, be they workplace savings plans, HSAs, IRAs, annuities, or even taxable accounts. Then give yourself a pat on the back—you're a smart saver.





Rollovers as Business Startup - What's the Risk?

In the last 6 months I have attempted to dissuade at least 3 people from engaging in Rollovers as Business Startup (ROBS) transactions. While technically allowable, the potential path is filled with unseen perils which can result in total revocation of all related tax benefits and accrual of interest and penalties, including an additional 20% for accuracy related penalties. Over my career in public accounting I have had very few clients I believe could adequately address all of the known risks, yet there is no anticipating court decisions which may change the definition of key terms so I cannot recommend this for even those clients I believe may be up to the challenges.

Perhaps it is a function of our economy shifting to an outsourced service model, perhaps it is the entry of new more aggressive market participants, and perhaps it is just wider dissemination of information but the frequency of these inquiries appears to be accelerating. The websites and advisers who recommend these plans either do not understand the litany of compliance risks and/or have so thoroughly disclaimed responsibility there is no recourse when problems arise. They are compensated upfront for establishing the plan and during operations as custodian but incur no liability since they're not tax or legal counsel.

The Usual Suspects

The plans normally take one of two forms: a subchapter C corporation with an Employee Stock Ownership Plan (ESOP), or a self-directed IRA with a checkbook feature which then forms an LLC. While the ESOP method has been available for 40 years, this method is more cumbersome and requires allowing subsequent employees meeting the minimum terms of service to participate, if they choose. The only real caveat with this plan is to make sure the owner/beneficiary is never granted access to plan funds, thereby avoiding fiduciary duty to the plan and the resulting disqualified person status.

The self-directed IRA owning an LLC (SDIRA/LLC) is a more recent evolution of the same lines, just without the strictures of a corporation or potential ERISA violations since the business is owned by the individual's IRA instead of an ESOP. While this may mean more freedom to operate, it also means more opportunities to be penalized or taxed. In addition to the disqualified person issues discussed below, the limitations on Unrelated Business Taxable Income (UBTI) and and Unrelated Debt Financed Income (UDFI) can severely curtail returns even if the plan stays within the law.

Retirement plans are technically tax-exempt entities (§408) and §512 imposes income tax on UBTI and UDFI at the compressed trust tax rates. A retirement plan doesn't truly have an "exempt function" under §512, so any income derived from a trade or business is unrelated (Note - this also includes master limited partnerships). The trust rate schedules hit the top marginal bracket of 39.6% at only $11,950 in income for 2013; for a single individual this rate was not reached until $400,001 in taxable income. Even if the taxpayer manages to avoid the disqualified person issues (below) failure to file Form 990-T reporting UBTI or UDFI will result in an unlimited statute of limitations.

Disqualified Persons and Prohibited Transactions, the Achilles Heel for ROBS

Disqualified person is defined in §4975(e)(2). Since the self-directed IRA owner is allowed discretionary control over the plan, they are fiduciaries of the plan and are considered disqualified persons. Attribution rules (§4975(e)(2)(E), (F), (G), (H), and (I)) will further cause certain natural persons and entities, including any controlled business entities, to become disqualified as well.

The main problem is a recent decision, Ellis v. Commissioner T.C. Memo 2013-245, where wages paid to the plan trustee/beneficiary were seen as engaging in prohibited transactions with a disqualified person. The Tax Court held that §4975(d)(10) allowed for fiduciary fees for managing investment portfolios, but not wages in managing operations of a business. This case basically removes any reason for most people to consider starting a business with retirement funds. Most people intend to be compensated for their time whether they're working in or working on their businesses.

The list of prohibited transactions (§4975(c)(1)):

  1. The sale or exchange, or leasing, of any property between them;
  2. The lending of money or other extension of credit between them;
  3.  The furnishing of goods, services, or facilities between them;
  4.  A transfer to, or use by or for the benefit of, a disqualified person of the 
    income or assets of a SDIRA or SDIRA/LLC;
  5.  An act by a disqualified person who is a fiduciary, whereby he deals with 
    the income or assets of a SDIRA or SDIRA/LLC in his own interests or 
    for his own account; or
  6.  Receipt of any consideration from any party dealing with a SDIRA or 
    SDIRA/LLC, in connection with a transaction involving the income or 
    assets of that plan, for the personal account of any disqualified person 
    who is a fiduciary.

The Risks

Engaging in prohibited transactions causes the IRA to no longer qualify as exempt, retroactively applied to the earliest failure, resulting in income tax and early distribution penalties with the accuracy related penalty in addition to other "regular" penalties and interest.

If a taxpayer owns a subsequently revoked SDIRA/LLC which had been filing Form 990-T and paying tax, they will only be allowed to recover the most recent 3 years. Anything beyond the statutory limitations for amendment is lost. Since the IRA is a legally distinct entity a claim of right will not be available.

If an SDIRA/LLC is upheld but no 990-T has been filed, there is no statute of limitations on assessment or collections. If the business is successful the tax alone could reduce the return on investment by as much as half but, when interest, penalties, and professional fees are included in ROI analysis, it is possible to effectively eliminate any gains.

Normally earned (not inherited) IRA funds are exempt from bankruptcy proceedings, but engaging in prohibited transactions can cause otherwise exempt assets to be considered an asset of a bankruptcy estate. (Willis v. Menotte, docket no. 09-82303-CIV (S.D. Fla))


While ROBS are technically allowed, they are subject to substantial risks and should not be engaged in unless fully aware of, and prepared to address, the known compliance issues while keeping abreast of any potential changes. Anyone engaging in these transactions should retain qualified tax and legal counsel, along with a third-party trustee, to ensure they never directly access the underlying funds, and a custodian who does not prohibit the investment (Dabney v. Commissioner, T.C. Memo 2014-108).

There are multiple other methods of accessing these funds, though they all have drawbacks. One of the most brilliant I've been party to resulted in a family law judge issuing a Qualified Domestic Relations Order (QDRO), normally issued to divide retirement assets in divorce proceedings, to a still married couple. Though the taxpayer had to recognize income on the distribution, the majority was subsequently offset by first year losses in their startup, they were able to avoid the 10% early distribution penalty legally to the extent of the QDRO and faced no further risks from compliance, penalties or interest.

Lawrence (Larry) Tucker, CPA, CGMA helps individuals businesses succeed through tax planning and compliance, risk mitigation and management, asset protection, and consulting.Contact me for further information.







Six Tips for People Who Owe Taxes

While most people get a refund from the IRS when they file their taxes, some do not. If you owe federal taxes, the IRS has several ways for you to pay. Here are six tips for people who owe taxes:

1. Pay your tax bill.  If you get a bill from the IRS, you’ll save money by paying it as soon as you can. If you can’t pay it in full, you should pay as much as you can. That will reduce the interest and penalties charged for late payment. You should think about using a credit card or getting a loan to pay the amount you owe. 

2. Use IRS Direct Pay.  The best way to pay your taxes is with the IRS Direct Pay tool. It’s the safe, easy and free way to pay from your checking or savings account. The tool walks you through five simple steps to pay your tax in one online session. Just click on the ‘Pay Your Tax Bill’ icon on the IRS home page.

3. Get a short-term extension to pay.  You may qualify for extra time to pay your taxes if you can pay in full in 120 days or less. You can apply online at If you received a bill from the IRS you can also call the phone number listed on it. If you don’t have a bill, call 800-829-1040 for help. There is usually no set-up fee for a short-term extension.

4. Apply for a monthly payment plan.  If you owe $50,000 or less and need more time to pay, you can apply for an Online Payment Agreement on A direct debit payment plan is your best option. This plan is the lower-cost, hassle-free way to pay. The set-up fee is less than other plans. There are no reminders, no missed payments and no checks to write and mail. You can also use Form 9465, Installment Agreement Request, to apply. For more about payment plan options visit

5. Consider an Offer in Compromise.  An Offer in Compromise lets you settle your tax debt for less than the full amount that you owe. An OIC may be an option if you can’t pay your tax in full. It may also apply if full payment will cause a financial hardship. You can use the OIC Pre-Qualifier tool to see if you qualify. It will also tell you what a reasonable offer might be.

6. Change your withholding or estimated tax.  You may be able to avoid owing the IRS in the future by having more taxes withheld from your pay. Do this by filing a new Form W-4, Employee’s Withholding Allowance Certificate, with your employer. The IRS Withholding Calculator on can help you fill out a new W-4. If you have income that’s not subject to withholding you may need to make estimated tax payments. See Form 1040-ES, Estimated Tax for Individuals for more on this topic.




2015 HSA amounts

Health Savings Accounts (HSAs) were created as a tax-favored framework to provide health care benefits mainly for small business owners, the self-employed, and employees of small to medium-size companies who do not have access to health insurance.

The tax benefits of HSAs are quite substantial. Eligible individuals can make tax-deductible (as an adjustment to AGI) contributions into HSA accounts. The funds in the account may be invested (somewhat like an IRA), so there is an opportunity for growth. The earnings inside the HSA are free from federal income tax, and funds withdrawn to pay eligible health care costs are tax-free.

An HSA is a tax-exempt trust or custodial account established exclusively for the purpose of paying qualified medical expenses of the participant who, for the months for which contributions are made to an HSA, is covered under a high-deductible health plan. Consequently, an HSA is not insurance; it is an account, which must be opened with a bank, brokerage firm, or other provider (i.e., insurance company). It is therefore different from a Flexible Spending Account in that it involves an outside provider serving as a custodian or trustee. Corporate annual meetings are important

Generally, one of the requirements for maintaining a corporation’s existence (and the liability protection that it affords) is that the shareholders and Board of Directors must meet at least annually. Although most people view this requirement as a necessary evil, it doesn’t have to be a waste of time. For example, in addition to being a first step in making sure the corporation is respected as a separate legal entity, an annual meeting can be used as an important tool to support your company’s tax positions.

Besides the election of officers and directors, other actions that should be considered at the annual meeting include the directors approving the accrual of any bonuses and retirement plan contributions, and ratifying key actions taken by corporate officers during the year. It is common for the IRS to attack the compensation level of closely held C corporation shareholder/officers as unreasonably high and, thereby, avoiding taxation at the corporate level. A well-drafted set of minutes outlining the officers’ responsibilities, skills, and experience levels can significantly reduce the risk of an IRS challenge. If the shareholder/employees are underpaid in the start-up years because of a lack of funds, it is also important to document this situation in the minutes for future reference when higher payments are made.

The directors should also specifically approve all loans to shareholders. Any time a corporation loans funds to a shareholder, there is a risk that the IRS will attempt to characterize all or part of the distribution as a taxable dividend. The primary documentation that a distribution is intended to be a loan rather than a dividend should be in the written loan documents, and both parties should follow through in observing the terms of the loan. However, it is also helpful if the corporate minutes document the need for the borrowing (how the funds will be used), the corporate officers’ authorization of the loan, and a summary of the loan terms (interest rate, repayment schedule, loan rollover provisions, etc.).

A frequently contested issue regarding a shareholder/employee’s use of employer-provided automobiles is the treatment of that use as compensation (which is deductible by the corporation) vs. treatment as constructive dividends (which is not deductible by the corporation). Clearly documenting in the corporate minutes that the personal use of the company-owned automobile is intended to be part of the owner’s compensation may go a long way in ensuring the corporation will get to keep the deduction.

If the corporation is accumulating a significant amount of earnings, the minutes of the meeting should generally spell out the reasons for the accumulation to help prevent an IRS attempt to assess the accumulated earnings tax. Also, transactions intended to be taxable sales between the corporation and its shareholders are sometimes recharacterized by the IRS and the courts as tax-free contributions to capital. Corporate minutes detailing the transaction are helpful in supporting a bona fide sale.

As you can see, many of the issues raised by the IRS involve the payment of dividends by the corporation. (The IRS likes them — the corporation doesn’t.) To help support the corporation’s stance that payments to shareholders are deductible and that earnings held in the corporation are reasonable, corporate minutes should document that dividend payments were considered and how the amount paid, if any, was determined. Dividends (even if minimal) should generally be paid each year, unless there’s a specific reason not to pay them — in which case, these reasons should be clearly documented.

These are just a few examples of why well-documented annual meetings can be an important part of a corporation’s tax records. As the time for your annual meeting draws near, please call us if you have questions or concerns.


The recently released 2015 inflation-adjusted contribution limit for individual self-only coverage under a high-deductible plan is $3,350, while the comparable amount for family coverage is $6,650. For 2015, a high-deductible health plan is defined as a health plan with an annual deductible that is not less than $1,300 for self-only coverage and $2,600 for family coverage, and the annual out-of-pocket expenses (including deductibles and copayments, but not premiums) must not exceed $6,450 for self-only coverage or $12,900 for family coverage.






Dividing IRAs tax-free in divorce

Generally, the division of property, including cash, between divorcing spouses has no immediate federal income or gift tax consequences. Such transfers are considered tax-free gifts between the spouses. However, the tax-free transfer rule does not apply to transfers of balances in IRAs. If an IRA owner withdraws funds from his or her IRA and gives it to his or her spouse (or anyone else for that matter), the withdrawal is taxable to the IRA owner and tax-free to the receiving spouse (or whoever receives the distribution).

Fortunately, there is an important exception to this rule — transferring an individual’s interest in an IRA to a spouse or former spouse pursuant to a divorce decree or separate maintenance agreement is not taxable to either spouse. This spousal exception applies to Roth IRAs, SEP accounts, and SIMPLE IRAs because they are all considered IRAs for this purpose.

The exception applies to spouses only. A distribution or transfer to anyone other than a spouse or former spouse, even if pursuant to a divorce, generally is taxable to the IRA owner.

The IRA transfer is tax-free to both spouses only if it is specifically required by a decree of divorce or separate maintenance agreement (or a written instrument incident to such a decree). Thus, the couple must eventually divorce or legally separate. Transferring an IRA under any other type of order, such as a temporary alimony or support order, is not tax-free.

Example: Transferring an interest in an IRA. In connection with his pending divorce, Ted has agreed to transfer his IRA to his spouse, Amy. The transfer to Amy must be made pursuant to their divorce decree (or a written instrument incident to the divorce); otherwise, it will be taxed to Ted. Also, a transfer made to anyone other than Amy, such as to their children, will be taxable to Ted.

If the transfer is taxable to Ted, he must include that amount in taxable income. Furthermore, if Ted is under age 59½, the 10% penalty tax on premature distributions may apply.

An IRA interest transferred under a decree of divorce or separate maintenance agreement is thereafter treated as the recipient spouse’s IRA for all purposes. Therefore, the recipient spouse can manage the transferred money as he or she sees fit and continue deferring taxes until withdrawals are taken from the IRA. At that point, the recipient spouse will owe any federal income tax on the withdrawals; plus, the 10% penalty tax on premature distributions may apply if he or she is under age 59½ at the time of the withdrawal.

The safest way to accomplish a divorce-related IRA transfer is through a trustee-to-trustee transfer. If the IRA trustee will not make a payment to the spouse’s or ex-spouse’s IRA, the transferor spouse can roll over the funds to a new IRA in his or her name and then assign ownership (and change the name) of the new IRA to the receiving spouse.



Keep your records safe in case disaster strikes

Some natural disasters are more common in certain seasons. But major events like hurricanes, tornadoes and fires can strike at any time. It’s a good idea to plan for what to do in case of a disaster. You can help make your recovery easier by keeping your tax and financial records safe. The IRS suggests that taxpayers take some basic steps to prepare.

Back up records electronically. You should keep a set of backup records in a safe place away from the original set. This is more easily accomplished now that many financial institutions provide statements electronically and other financial information is readily available on the Internet. Even if the original records are on paper, they can be scanned into an electronic format. The electronic files should be backed up on an external hard drive, USB flash drive, CD, DVD, or to the cloud for safekeeping.

Document valuables. Take photos or videos of the contents of your home or business. These visual records can help you prove the value of your lost items. They may help with insurance claims or casualty loss deductions on your tax return. You should store them with a friend or relative who lives out of the area.

Update emergency plans. Emergency plans should be reviewed and updated, because personal and business situations change over time, as do preparedness needs.



Social Security statements available online

Your Social Security statement provides useful information, such as your earnings history and an estimate of your retirement, disability, and survivor’s benefits. Getting a copy of this statement is quick and easy for anyone with Internet access. First go to, where you’ll first need to create an account by providing your Social Security number, e-mail address, mailing address and answers to some simple questions. You can then sign in to see your statement.




What you need to know about required health insurance coverage for 2014

Beginning in 2014, the individual shared responsibility provision of the Affordable Care Act (ACA) requires you and each member of your family to have qualifying health insurance (called minimum essential coverage), have an exemption, or pay a shared responsibility penalty with your 2014 individual income tax return, Form 1040. Many people already have minimum essential coverage and don’t need to do anything more than maintain that coverage.

Do I have minimum essential coverage? You have minimum essential coverage if you have employer-sponsored coverage, coverage obtained through a Health Insurance Marketplace, or coverage through a government-sponsored program. Coverage under certain other plans will qualify as well. You must maintain this coverage for each month of the calendar year.

Am I eligible for an exemption? You may be exempt from the requirement to maintain minimum essential coverage if you’re a member of certain religious sects, a federally recognized Indian tribe, or a health care sharing ministry. You may also be eligible if you are suffering a hardship, meet certain income criteria, or are uninsured for less than three consecutive months of the year.

Will I have to pay a penalty? If you or any of your dependents don’t have minimum essential coverage or an exemption, you will have to pay an individual shared responsibility penalty with your tax return.

For 2014, the annual shared responsibility penalty is the greater of:

      1% of your household income that is above your tax return filing threshold, or

      Your family’s flat dollar amount, which is $95 per adult and $47.50 per child, limited to a family maximum of $285 for 2014.

However, the maximum amount cannot be more than the cost of the national average premium for a bronze level health plan available through the Marketplace in 2014.




Get Your Whistles Ready - IRS Issues Final Regs. on How To Get Your Reward!

IRS has issued final regs that provide comprehensive guidance for IRS' Code Sec. 7623 award program (i.e., whistle blower awards).

SummaryThese regulations provide comprehensive guidance for the award program authorized under Internal Revenue Code (Code) section 7623. The regulations provide guidance on:

  1. Submitting information regarding underpayments of tax or violations of the internal revenue laws and filing claims for award,
  2. The administrative proceedings applicable to claims for award under section 7623.
  3. The regulations also provide guidance on the determination and payment of awards, and provide definitions of key terms used in section 7623.
  4. Finally, the regulations confirm that the Director, officers, and employees of the Whistle blower Office are authorized to disclose return information to the extent necessary to conduct whistle blower administrative proceedings.

The regulations provide needed guidance to the general public as well as officers and employees of the IRS who review claims under section 7623.

Background.  Under Code Sec. 7623(a), IRS has discretionary authority to pay awards to informants (i.e., whistle blowers) in the sums it considers necessary for the detection of tax underpayments, or for the detection, trial, and punishment of tax law violators, payable from amounts collected by reason of the information provided. Under Code Sec. 7623(b), individuals, in certain cases, are entitled to receive an award of 15% to 30% of the “collected proceeds” resulting from an action based on information provided by the whistle blower. IRS has established a Whistle blower Office to administer the program.

Under Code Sec. 7623(b)(3), IRS may appropriately reduce aCode Sec. 7623(b) whistle blower award where the claim for the award is brought by an individual who planned and initiated the actions that led to the underpayment of tax or the violation of the tax laws.

In December of 2012, IRS issued comprehensive proposed regs on the whistleblower program . IRS has now finalized those regs, with minor changes.  (See our post IRS Proposes Regulations and Guidance for Whistle blowers!).

Filing a claim.  In large part, the final regs track the previously issued guidance in the existing regs, Notice 2008-4, 2008-1 CB 253, and the Internal Revenue Manual, including the general information that individuals should submit to claim awards and the descriptions of the type of specific and credible information on taxpayers that should be submitted.

An individual submitting a claim should identify a person and describe and document the facts supporting the claimant's belief that the person owes taxes or violated the tax laws. The regs also reaffirm IRS's practice of safeguarding the identity of individuals who submit information under Code Sec. 7623 whenever possible. (Reg. § 301.7623-1)

The final regs include eligibility requirements for filing claims for awards and a list of ineligible claimants. In finalizing the regs, IRS has removed State and local government employees and members of a Federal or State body or commission from the categories of ineligible whistle blowers.

The final regs require individuals to file a formal claim for award, Form 211, Application for Award for Original Information. The regs allow IRS to specify an alternative submission method (such as electronic claim filing) pursuant to additional guidance

Under the final regs, in cases in which the Whistleblower Office recommends payment of an award under Code Sec. 7623(a), the whistleblower administrative proceeding begins when the Whistleblower Office send a preliminary award recommendation letter to the claimant. The claimant has 30 days to respond with comments. This period may be extended at the sole discretion of the Whistleblower Office. (Reg. § 301.7623-3(b)(1)).

Disclosure.  The final regs also confirm that the Director, officers, and employees of theReg. § 301.6103(h)(4)-1(b)).
Whistleblower Office are authorized to disclose return information to the extent necessary to conduct whistle blower administrative proceedings. 

Effective date.  Reg. § 301.7623-1Reg. § 301.7623-2Reg. § 301.7623-3, and Reg. § 301.6103(h)(4)-1 apply to information submitted on or after Aug. 12, 2014, and to claims for award under Code Sec. 7623(a) and Code Sec. 7623(b) that are open as of Aug. 12, 2014. Reg. § 301.7623-4 applies to information submitted on or after Aug. 12, 2014, and to claims for award under Code Sec. 7623(b) that are open as of Aug. 12, 2014.




Banks Claim Millions in Tax Credits Intended for Poor Communities


Big banks and wealthy investors are accused of benefiting from a tax credit program that is supposed to help poor communities, according to a new Senate report.

The report, from Sen. Tom Coburn, R-Okla., describes how millions of dollars in New Markets Tax Credits are being diverted to benefit billionaires, major banks, Hollywood producers and fast food chains.

The program is supposed to spur new markets in struggling communities, but Coburn said it is instead subsidizing companies and corporations that have little need of taxpayer assistance, providing financing for projects such as a sculpture in the desert, a vintage car museum, and pet care centers. In at least one case, a project supported with a New Markets Tax Credit is threatening to bankrupt an entire town and eliminate jobs, including the entire police department.

 “The New Market Tax Credit is a reverse Robin Hood scheme paid for with the taxes collected from working Americans to provide payouts to big banks and corporations in the hope that those it took the money from might benefit,” Coburn said in a statement Monday. “When government picks winners and losers, the losers usually end up being taxpayers. Washington should reduce federal taxes on working Americans and all business owners who create jobs by eliminating tax earmarks, loopholes and giveaways like the New Markets Tax Credit.”

The New Markets Tax Credit program was expected to steer private financing into low-income communities to help create jobs. Yet, virtually every neighborhood, from Beverly Hills to the Hamptons, could qualify for the program, Coburn noted.

“As a result of the definition of qualified low-income communities, virtually all of the country’s census tracts [neighborhoods and communities] are potentially eligible for the NMTC,” according to a report from the nonpartisan Congressional Research Service.

While some of the projects are well intended, such as health clinics, Coburn acknowledged, it is difficult to measure if the tax credits are helping those who are seeking a hand up or simply subsidizing banks, corporations and others companies that are already succeeding.

The tax credit is intended to benefit the poor but is instead benefiting big banks and other private investors that claim more than $1 billion in NMTC annually. These include JP Morgan Chase, Bank of America, Goldman Sachs and Wells Fargo, among others.

The program duplicates over 100 other federal economic development efforts. There are at least 23 community development tax expenditures costing taxpayers over $10 billion annually and 80 overlapping discretionary programs costing $6.5 billion annually, 28 of which are specifically designed to spur growth in new markets.  Because of this redundancy, many projects and corporations are double-dipping on taxpayers—receiving multiple federal subsidies through other grant programs and tax giveaways. In addition, it is unclear which of these best meets the overlapping goals, or if any of them spur more economic growth than policies encouraging private investments that do not spend taxpayer money.

A separate Government Accountability Office report that was issued Monday was also critical of the New Markets Tax Credit program, revealing that fees charged by Community Development Entities reduced the amount of assistance provided to low-income community projects by $619 million (7.1 percent) from 2011 to 2012. A majority of NMTC-financed projects used more than one source of public funding, even though the purpose of the tax credit is to leverage private investment.

The GAO found that 62 percent of NMTC projects received other public funding from 2010 to 2010. One-third of NMTC projects received other federal funding, while 21 percent of NMTC projects received funding from multiple other government programs. In many cases, investors were able to claim the tax credit on the equity provided by the other public sources.

The NMTC has subsidized wealthy investors in nearly 4,000 projects, including car washes, bowling allies, parking lots and breweries, according to Coburn’s report. Many of these are not a federal priority—such as an ice skating rink and a car museum—while others help corporations with little need of taxpayer handouts, including food and beverage chains such as Subway, IHOP and Starbucks.

One of the program’s projects is threatening to bankrupt the city of Desert Hot Springs, Calif., where the cost to maintain the wellness center established with NMTC support has prompted across-the-board salary cuts and city officials are even considering elimination of the police department. Tens of thousands of dollars intended for the financially challenged clinic were spent to create a sculpture in the desert.

In another project in an area of Atlanta where condominiums sell for millions of dollars, NMTCs are being used to expand the world’s largest aquarium, according to Coburn’s report. “With ticket prices costing nearly $65 for a 15 minute show, the real beneficiaries are SunTrust Bank, Wells Fargo and the Emmy-award winning producers and Hollywood ensemble hired to develop the show, and of course the dolphins who live in the larger aquarium.”

Defending the NMTC

The spokesman for a business group that lobbies for the credit, the New Markets Tax Credit Coalition, disputed the findings of both Coburn’s report and the GAO report.

“Washington doesn’t pick the winners and losers when it comes to the NMTC,” said Bob Rapoza, spokesperson for the NMTC Coalition. “It is a market driven program based in a philosophy that communities know best, they just need access to capital. Through public-private partnerships, the credit brings community revitalization projects to fruition that likely would not have gone forward if not for NMTC financing.”

He pointed to an earlier report in which the GAO found that 88 percent of investors would not have made their investments, but for the incentive of the credit, along with data from the Treasury Department indicating that the NMTC has delivered more than $60 billion in capital to businesses and revitalization projects nationwide in some of the poorest communities. These investments, Rapoza noted, have generated over 550,000 jobs and of the 74,134 census tracts in America, only 30,099 (41 percent) qualify. In addition, according to the NMTC Coalition’s survey of 2013 NMTC projects, 80 percent of investments went to severely distressed census tracts that far exceed the statutory requirements for investment.  

Rapoza noted that Coburn’s report profiled 19 projects to which it objected, but analysis of the profiles of those communities indicate they are among the poorest in the country, with an average poverty rate of over 32 percent and an unemployment rate of 11.7 percent at the time the project was financed. In these communities, the NMTC delivered $770 million in financing and created over 7,700 jobs.

“The hallmark of the credit is its flexibility, which allows for diversity in projects based on needs and opportunities identified by citizens and local leaders—the vast majority of which include child and health care facilities, grocery stores, and manufacturing facilities,” said Rapoza.

The coalition also took issue with the GAO report, saying it ignores the challenges of investing in low-income communities and the success that the NMTC has in spurring revitalization in urban neighborhoods, small towns and farming communities. The group claimed the GAO did not provide an accurate analysis of the operations of the NMTC. In one such case, the GAO overestimated an investor return by 400 percent through faulty analysis. In this case, according to the NMTC Coalition, the authors of the GAO report used incomplete information based on one example in a second-party report that they could not independently verify. Thus, the GAO report implied that the financial structures used in NMTC transactions allow investors to receive an unduly large return on their investments, claiming a 24 percent annual return to the investor, when actual NMTC investor returns align with market rates of 6 to 7 percent annually, according to the coalition’s figures.

“Unfortunately, some conclusions are based on misinterpreted data and flawed calculations,” said Rapoza. “The Coburn report builds on those errors to cast a sensationalized and inaccurate portrayal of the NMTC.”




Robert Redford Sues New York over $1.6M Tax Tab for Selling Sundance Channel


Actor Robert Redford has filed a lawsuit against the state of New York for billing him $1.6 million in taxes related to the sale of the Sundance Channel, claiming he already paid taxes to the state of Utah.

Redford sold part of his share of the cable TV channel in 2005. New York State’s Department of Taxation and Finance claims he owes a total of $1,568,470 for that tax year, which includes $845,066 in unpaid taxes and $727,404 in interest. However, Redford sued, saying he already paid taxes in Utah, according toCourthouse News Service.

In his lawsuit, Redford is reportedly seeking “a declaratory ruling on a pure question of law concerning the constitutionality of imposing on plaintiff, a nonresident of the State of New York, a personal income tax on the gain derived from the sale of an ownership interest in a limited liability company.”

The lawsuit contends that since Redford’s ownership interest was in an S corporation, which is a pass-through entity, so he paid the taxes on his individual return in Utah and should not be subject to double taxation. The lawsuit argues that the entity operated from Utah and he had no property, payroll or receipts in New York.

Redford and his partners at NBCUniversal and CBS sold the rest of the Sundance Channel in 2008 to Cablevision’s Rainbow Media unit, which later spun off and became AMC Networks, according to the Hollywood Reporter. The channel, which was named after the Sundance Film Festival that Redford founded in Utah and his co-starring role in the 1969 Western, "Butch Cassidy and the Sundance Kid," is now known as SundanceTV.




Senators Express Concern about Accrual Accounting Proposal


Nearly half the members of the U.S. Senate have signed a letter expressing concern about a tax reform proposal to require the use of accrual accounting and are urging the leaders of the Senate Finance Committee to preserve the option of the cash method of accounting for tax purposes.

The American Institute of CPAs and other accounting organizations, such as the National Conference of CPA Practitioners, have been urging Congress to preserve the cash method of accounting, particularly for small businesses, including testifying or submitting written testimony on the benefits of cash accounting at a congressional hearing last month (see House Hearing Considers Cash Accounting for Small Biz and Cash Accounting: A Simpler Method for Small Firms).

The AICPA said an August 6 letter to Senate Finance Committee chairman Ron Wyden, D-Ore., and ranking member Orrin Hatch, R-Utah, was signed by 46 senators from 32 states.

“As the Finance Committee develops its comprehensive tax reform package, we ask that you consider the negative impact that this proposal would have on the professional services sector as well as farming and ranching businesses,” the senators wrote. “We believe that such a change has not been fully vetted and many of the concerns raised by these businesses have not been addressed.”

The AICPA noted that it is a leading opponent of tax reform proposals to mandate the use of accrual accounting for businesses and individuals who exceed $10 million in annual gross receipts. The AICPA has partnered with state CPA societies and CPA firms to voice the profession’s concerns about the accrual accounting requirement.

The letter noted that currently the cash method is generally available to C corporations with less than $5 million in average annual gross receipts, along with individuals, partnerships, S corporations, professional services corporations, and most farming and ranching businesses, regardless of their revenue, unless they have inventory. The Cost Recovery and Accounting Discussion Draft that was released late last year by the former chairman of the Senate Finance Committee, Max Baucus, D-Mont., would require all of these businesses and individuals who exceed $10 million in annual gross receipts to use the accrual method of accounting.

The senators’ letter pointed to the impact of having to convert to the accrual basis for previously exempt businesses, including CPA, medical, dental, architectural, engineering and law firms. “[T]he acceleration of the business’ tax liability combined with the inability to match revenues with expenses would force businesses to borrow money to meet their tax liability. The basic tenet of taxation is ‘ability to pay.’ Forcing businesses to recognize income before they receive payment violates this basic tenet.”

The letter explained that the proposal “would cause numerous adverse unintended consequences and as a result is opposed by many members of both parties. Therefore, we strongly encourage you to maintain the current ability of pass-through entities, personal services corporations, and farming and ranching businesses to use the cash basis for tax purposes irrespective of annual gross receipts.”

The letter argued against the notion that the reform would level the playing field. “While some may believe that subjecting all taxpayers with more than $10 million in annual gross receipts to the same threshold is simpler, we disagree,” said the letter. “Requiring more businesses to use the accrual method of accounting would create unnecessary complexity in the tax law and substantially increase compliance costs.”

The AICPA commended Senators Sherrod Brown, D-Ohio, Pat Roberts, R-Kan., Angus King, I-Maine, and Ron Johnson, R-Wis., for leading the effort to continue the cash method of accounting.



Taxpayers Uncertain How to Protect Themselves from Tax Scams


Nearly 80 percent of Americans feel vulnerable to tax scams, according to a new survey, but nearly 60 percent of the respondents said they do not know how to prevent or protect themselves from falling victim.

The audit defense service released the survey of 2,000 Americans on the subject of tax scams conducted via Toluna QuickSurveys. The findings revealed that 78 percent of the survey respondents feel vulnerable to tax scams, while 57 percent do not know how to prevent or protect themselves from falling victim. In addition, 88 percent of the respondents indicated they believe tax scams are a real problem in the U.S. and 20 percent say they know someone who has fallen victim.

Respondents' biggest concerns include identity theft, followed by telephone scams and phishing for user names and other personal information.

Dave Du Val, vice president of customer advocacy at, offered the following tips for how to identify and protect against tax scams:

• If the caller claims that you need to send money right now or they will call the IRS or another government agency, know it is a scam and hang up.

• If you receive a call or email claiming to be holding your refund until they "verify" some information, such as your bank account number and PIN, it is a scam. Do not respond.

• If the person emailing claims, "I am from the IRS and I am here to help you obtain your refund," they clearly are not either. The IRS does not contact taxpayers via email. Do not respond.

• If you receive a call from IRS asking for information, ask for the agent's ID number, then call the IRS directly to verify it or ask that they send their request in writing.

• Protect your personal identifiable information (PII) from theft. Store W-2s and other sensitive documents in secure locations.

• Check out the credentials of the tax preparer you are using.

• If you do fall victim to a scam, seek guidance from the various resources available at



Employees Less Courteous as They Move up the Ranks


A majority of employees believe workplace etiquette affects their career prospects, but they also think people become less courteous as they rise to the top, according to a new survey by Accountemps, a staffing company for temporary accounting, finance and bookkeeping professionals that’s part of staffing giant Robert Half.

More than eight out of 10 of the workers surveyed for the poll indicated that being courteous to others has an impact on a person’s career prospects. However, 70 percent of the workers polled said they think people become less courteous as they climb the corporate ladder.

When employees were asked to name the biggest breach of workplace etiquette in an open office space, using a speakerphone or talking loudly on the phone topped the list, at 36 percent. Loitering or talking around a colleague’s desk ranked second, at 23 percent. Eating foods that have strong odors was in third place, cited by 15 percent of the survey respondents, while keeping a messy or cluttered workspace was in fourth place, at 14 percent. Leaving the phone ringer on loud was in fifth place, cited by 8 percent of the respondents.

“Workplace etiquette is about being aware of how your actions affect those around you,” said Accountemps chairman Max Messmer in a statement. “Time constraints and external pressures aren’t excuses for bad behavior. While it takes more than just good manners to rise through the ranks, displaying professional courtesy will only help your career. Open office spaces foster better collaboration, but employees should make sure their actions aren't keeping others from doing their jobs.”

The survey includes responses from more than 450 employees 18 years of age and older who work in an office environment in the U.S. The sample was of all types of workers, not just accounting and finance professionals.

The full survey results and an infographic are available here and here.




Four Play: Quarterly Filers’ Biggest Mistakes


Weeks ahead of the next quarterly deadline for filing estimated taxes (September 15) marks a good moment to look at what these filers often do wrong.

These clients, possibly a growing segment of your practice, given business startups and recent groundswells in employment structures, sometimes need a lot of help to keep up on taxes. “Poor planning is their biggest problem,” said Cheryl Morse, an EA with Emerging Business Partners in Wellesley, Mass. “Anything from letting their bookkeeping get behind to not having the money to pay their estimated tax.”

“Not making estimates at all and not anticipating what they’re going to earn by the end of the year,” said Jeffrey Schneider, an EA with Florida-based SFS Tax and Accounting Services.

Errors vary by type of returns, whether for a business requiring quarterly payroll returns or for individuals requiring quarterly estimates, said EA Roy Frick of Ocean City, Md.-based Fairway Services Ltd. and Frick Accountants Ltd.

“We call all our business clients each quarter as a reminder that they have payroll tax returns due,” Frick said. “Individual estimates are another situation. We provide them vouchers and envelopes with their returns and advise them that if situations change to contact us. In all cases, we try to prepare safe harbor estimates. If they had a large capital gain in the prior year, that can be a problem, so we need to make sure they are adjusted during the year.”

‘Just laziness?’

Misconceptions about estimated quarterly taxes run rampant among taxpayers – if newly self-employed taxpayers realize such taxes exist at all. “Every year, my tax return instruction letter to all my clients states that they need to call me once it is determined that their tax situation may have changed. Very few do,” Schneider said. “Is it because of potential fees? Because they don’t want to deal with taxes until April? Or is it just laziness? I’m sure it’s a combination. Whatever their reason, it can be a big dilemma if the client owes more than they anticipated come April 15.”

Self-employment taxes, a common feature of quarterly filing, are minefields for potential audits and penalties little understood by most affected taxpayers. “The failure-to-pay penalty is really interest on the monies the IRS did not receive by a certain date. In most cases, it is not a huge number,” Schneider added.

“For my business clients, their income tax withholdings (via wages) are enough to cover their W-2 wages. The pass-through number can cause the issue. When a client has a large K-1 income amount, they may owe tax with the return. Many of [my clients] believe that they can make better use of their money than the amount they have to pay in the penalty. It is when they underestimate that ultimate number that causes the highest anxiety,” he said. “That’s when they kill the messenger.”

Schedule and remind

“I emphasize the bookkeeping aspect, and make sure they have a clear understanding that knowing their financial condition at any moment in time affects pricing and hiring, not just taxes, and can’t be put on the back burner,” Morse said. “I really drive home that letting this get out of control kills many good businesses.”

“When April 15th comes around and they do not have the cash to pay, ‘File an extension.’ they say,” Schneider reported. “I explain that an extension is an extension to file, not to pay and that monies have to be paid with the extension. I have to explain that the IRS can void the extension and that late-paying penalties will be assessed on any outstanding balance, plus interest. Many clients file zero extensions and will deal with the aftermath later.”

“I advise clients to open another account at their bank and transfer 25 percent with every deposit,” said Mike Habib, an EA in Whittier, Calif. “This way, the account is funded when payment is due.”

Massachusetts EA Morse makes sure to schedule appointments for such clients two weeks before estimates come due and reminds them of those appointments – “often twice” – in the weeks just before the appointment.

“We also schedule the next appointment while they’re with me,” she added. “Scheduling the year in advance always seemed to lead to conflicts for one of us.” 

Miscellaneous Deductions Can Cut Taxes

You may be able to deduct certain miscellaneous costs you pay during the year. Examples include employee expenses and fees you pay for tax advice. If you itemize, these deductions could lower your tax bill. 

Here are some things the IRS wants you to know about miscellaneous deductions:

Deductions Subject to the Two Percent Limit.  You can deduct most miscellaneous costs only if their total is more than two percent of your adjusted gross income. These include expenses such as:

  • Unreimbursed employee expenses.
  • Expenses related to searching for a new job in the same line of work.
  • Certain work clothes and uniforms.
  • Tools needed for your job.
  • Union dues.
  • Work-related travel and transportation.

Deductions Not Subject to the Two Percent Limit.

Some deductions are not subject to the two percent limit. They include:

  • Certain casualty and theft losses. Generally, this applies to damaged or stolen property that you held for investment. This includes items such as stocks, bonds and works of art.
  • Gambling losses up to the amount of your gambling winnings.
  • Losses from Ponzi-type investment schemes.

There are many expenses that you can’t deduct. For example, you can’t deduct personal living or family expenses. You claim allowable miscellaneous deductions on Schedule A, Itemized Deductions.




Tax Planning for 2015


This year's tax planning is going to be heavily focused on accelerating deductions and maximizing tax credits, according to Evan Stephens, a tax manager at the business consulting and accounting firm Sensiba San Filippo.

“However, taxpayers should be advised that a number of tax benefits available in 2013 are not yet available in 2014, as Congress has let some very popular provisions lapse for 2014 and has yet to reinstate them into law for 2014,” he said. “These include bonus deprecation, larger Section 179 deductions, and a number of tax credits, such as the Research and Development Credit.”

Stephens recommends practitioners consider the following tips for their clients:

• Pay your real estate taxes, personal property taxes and state income taxes before year end in order to push down your taxable income by increasing you itemized deductions. However, be aware that these deductions can phase out and/or be limited by alternative minimum tax.

• Reduce income by taking advantage of other tax-exempt investment vehicles, such as muni bonds, which are tax-free for federal purposes, and, in most states, home-state bonds are also state tax-exempt for state purposes. However, be wary that investing in municipal bonds that have a private activity element (bonds funding new sports stadiums, etc.), as they are still taxable for Alternative Minimum Tax purposes.

• Congress has not yet committed to reinstating the added benefits of bonus depreciation on fixed asset purchases for 2014. However, there is still a much smaller benefit through a Section 179 deduction of up to $25,000.

• A small blip in the code allows for a much larger, $500,000 Section 179 benefit, for non-calendar year taxpayers whose tax years begin in 2013, but end in 2014. This may benefit some taxpayers who do not carry a calendar year end.

• Congress has not yet reinstated the Research and Development credits or nonbusiness energy credits, but given these programs’ popularity will likely do so before year end. Taxpayers should be sure to keep up with the latest legislation, as some believe these will likely be extended into 2014 at some point in the coming year.

• The business energy credits remain. These credits are for taxpayers that install solar, geothermal, combined heat and power (CHP), geothermal heat pump, fuel cell, microturbine or transition energy property for use in their business. The credit can be as much as 30 percent of the cost of the property.

“Long-term capital gains still maintain their preferential rates, but are subject to the additional 3.8 percent Medicare investment tax,” Stephens said. “Short-term capital gains are subject to ordinary income rates and the 3.8 percent Medicare investment tax.”

He recommends considering tax deferral mechanisms for significant tax gains, such as Section 1031 like-kind exchanges for real property sales or structuring the sale as an installment sale. “An installment sale will spread the gain over several tax periods in order to minimize or entirely avoid the Medicare tax on investment income,” he noted.

“Taxpayers should also consider realizing losses on existing stock holdings while maintaining the investment position by selling at a loss and repurchasing at least 31 days later or swapping it out for a similar but not identical investment. This is often referred to as loss harvesting,” said Stephens. “However, if the 31-day repurchase is not adhered to, the sales are considered a wash sales transaction and the losses are disallowed.”

Finally, Stephens urges his clients to maximize contributions to their tax savings and retirement vehicles such as 401K, 403(b), 457 plans, 529 plans, Health Savings Accounts, SEPs, and Keogh plans.

“If self-employed, set up a self-employed retirement plan,” he said. “Revisit decisions to contribute to a traditional versus a Roth retirement plan. Distributions from Roth IRAs and 401(K)s are not subject to regular tax or the Medicare investment tax and, therefore, are a more attractive retirement savings vehicle for high net worth individuals. On the contrary, if a taxpayer is hovering around the threshold for the new Medicare tax, he or she should consider moving Roth contributions to a traditional retirement plan. Maximizing contributions to a traditional plan could reduce taxable income below the threshold and, therefore, avoid an additional 3.8 percent tax on investment income.”




Jobs Gained Since Recession Pay Less


Jobs gained during the economic recovery following the Great Recession pay an average of 23 percent less than the jobs lost during the recession, according to anew report from the U.S. Conference of Mayors. 

The annual wage in sectors where jobs were lost during the downturn was $61,637, but new jobs gained through the second quarter of 2014 showed average wages of only $47,171. The wage gap represents $93 billion in lost wages. 

Under a similar analysis conducted by the Conference of Mayors during the 2001-2002 recession, the wage gap was only 12 percent compared to the current 23 percent, meaning the wage gap has nearly doubled from one recession to the next.

The report, which was prepared for the Conference of Mayors by IHS, was released in conjunction with the inaugural meeting of the USCM Cities of Opportunity Task Force at Gracie Mansion in New York City. The Task Force is led by New York City Mayor Bill de Blasio and Boston Mayor Martin Walsh and was established at the Conference’s Annual Meeting in June to identify strategies for addressing income inequality, promoting economic mobility and creating jobs in America’s cities.

“While the economy is picking up steam, income inequality and wage gaps are an alarming trend that must be addressed,” said U.S. Conference of Mayors president Kevin Johnson, who is mayor of Sacramento. “This Task Force, led by New York City Mayor Bill de Blasio, will recommend both national and local policies that will help to give everyone opportunity.  We cannot put our heads in the sand on these issues. The nation’s mayors have an obligation to do what we can to address issues of inequality in this country while Washington languishes in dysfunction.”

The report also shows the gap between low- and higher income-households is growing and will continue into the foreseeable future. In 2012, the latest year for which figures are available, 261 out of 357 metropolitan areas (73 percent) had a larger share of poorer households (those making less than $35,000 per year), than upper income households of above $75,000.

The report forecasts that middle-income households will continue to fall behind as higher income levels capture a greater share of income gains.  In 2014 median household income is projected to increase by 2.5 percent in nominal dollars, and then by 3.8 percent per year from 2015 through 2017. But average (mean) income is expected to rise faster, 2.7 percent in 2014 and by 4.1 percent through 2017. Faster growth in mean income compared to median income demonstrates growing income inequality. 

Adjusted for inflation, average household income fell 3.0 percent, while median income fell 5.5 percent from 2005-2012, according to the report.

“The inequality crisis facing our cities is a threat to our fundamental American values,” De Blasio said in a statement. “Reducing income inequality and ensuring opportunity for all is nothing less than the challenge of our times. As mayors, we are on the front lines and we must act now. The Cities of Opportunity Task Force is bringing mayors from all corners of the country together to work together and leverage the power of municipal governments to advance a national, common equity agenda, and to also encourage action on a federal level.” 

Boston mayor and vice chair of the Mayors’ Task Force Martin Walsh added, “Recognizing that each city has both universal and unique challenges, we identified three areas in which many of us believe there can be short-term, meaningful impact. In addition to this work we are committing to do together, we will all continue to work in our respective cities on disparity across all policy areas. In our conversations to date, we have identified additional factors related to housing, transportation, financial empowerment and a whole host of other issues that we plan to address moving forward. This is a long-term commitment for all of us, to effect lasting change in the lives of real people in our cities.”

The report also found that since 1975, the increasing share of income earned by the highest quintile—the 20 percent of households with the highest incomes—rose from 43.6 percent in 1975 to 51.0 percent in 2012. Most of that gain occurred in the highest 5 percent of incomes, which rose from 16.5 percent in 1975 to 22.3 percent in 2012, a gain of $490 billion in 2012 income. 

The lowest two quintiles, or 40 percent of households, received just 6.6 percent of all U.S. income gains since 2005, while the share of total income gains from the top 20 percent was 60.6 percent and the top 5 percent received 27.6 percent.

The report concludes that according to IHS economic models, the drift toward income inequality will persist in the coming years as it is a structural feature of the 21st Century economy. 

“Unless policies are developed to mitigate these trends, income inequality will only grow larger in the future,” said Jim Diffley, director of U.S. Regional Economics at IHS and author of the report.
More than 30 mayors from cities across the country attended the first meeting of the USCM Cities of Opportunity Task Force.  




Tax Relief Company Agrees to Turn over $16 Million to Bilked Consumers


The Federal Trade Commission said it is mailing more than $16 million in refund checks to 18,571 consumers who had paid money to American Tax Relief, a company that allegedly bilked financially distressed consumers by falsely claiming it could reduce their tax debts.

Under a settlement that the FTC reached last year, American Tax Relief turned over millions of dollars in assets the court had frozen, including bank accounts, jewelry and a Ferrari. The parents of one of the defendants also turned over bank accounts, jewelry, a Beverly Hills residence and a Los Angeles condominium.

The FTC said last week that affected consumers would receive, on average, 16 percent of the amount they lost. Those who receive checks from the FTC’s refund administrator should cash them within 60 days of the mailing date. The FTC never requires consumers to pay money or to provide information before refund checks can be cashed. Those with questions should call the refund administrator, Gilardi & Co., LLC, at 1-(877) 430-3699, or visit for more general information.

Under last year’s settlement order, American Tax Relief LLC and its leader, Alexander Seung Hahn, were banned from telemarketing, and they and Hahn’s wife, Joo Hyun Park, were permanently prohibited from selling debt relief services. As part of the FTC’s ongoing efforts to protect consumers in financial distress, this was the agency’s first action against a tax relief company.

A number of other tax relief companies have also run afoul of regulators and state attorney generals in recent years after advertising their IRS tax resolution services to consumers and been forced to shut down, including TaxMasters, JK Harris and “Tax Lady” Roni Deutch (see TaxMasters Goes BankruptJK Harris Goes Out of Business and ‘Tax Lady’ Roni Deutch Pleads Guilty).

The FTC originally filed charges against American Tax Relief, Hahn, and Park in September 2010.  A court subsequently halted the allegedly illegal practices, froze the defendants’ assets, and appointed a receiver to manage the company pending resolution of the case.

In August 2012, the court entered partial summary judgment in favor of the FTC, finding that the defendants falsely claimed they already had significantly reduced the tax debts of thousands of people and falsely told individual consumers they qualified for tax relief programs that would significantly reduce their tax debts.  The court found Hahn personally liable for the challenged practices.

The 2013 settlement order imposed a $103.3 million judgment against ATR, Hahn, and Joo Hyun Park.  It also imposed judgments of $18 million and $595,000, respectively, against relief defendants Young Soon Park and Il Kon Park, Joo Park’s parents, who were not charged with participating in the scheme but were found by the court to have received significant sums. At the time, the FTC said the judgments would be suspended once the defendants and relief defendants have surrendered assets that total more than $15 million, including cash, a home in Beverly Hills and a condo in Los Angeles, jewelry and gold items, and a 2005 Ferrari. The order also prohibited ATR, Hahn, and Park from misrepresenting material facts about any products or services, collecting payments from the scheme’s customers, selling or otherwise benefitting from customers’ personal information, and failing to properly dispose of customer information.

The FTC vote to approve the proposed stipulated final judgment was 5-0.  The stipulated final judgment was entered by the U.S. District Court for the Central District of California on Jan 29, 2013.




Indiana Challenge to Obamacare Tax-Credit Rule Can Go Forward


Indiana can challenge an Internal Revenue Service rule making people who sign up for health-care coverage under the Affordable Care Act through federal government-created insurance exchanges eligible for a tax credit.

U.S. District Judge William T. Lawrence in Indianapolis denied Tuesday an IRS bid to dismiss that portion of the state’s 2013 lawsuit, in which it claimed the rule illegally conflicts with a provision of the federal law limiting those tax credits to enrollees in state-created exchanges.

Lawrence’s ruling comes three weeks after U.S. appeals courts in Washington and in Richmond, Virginia, reached conflicting conclusions about availability of the subsidy for which about 4.5 million people have qualified. Indiana was one of the states that opted to not create an exchange.

In a 2-1 ruling in which the majority’s judges were appointed by Republican presidents, the Washington court deemed the IRS provision invalid, saying Congress authorized the subsidies only for state-exchange enrollees.

A three-judge panel comprising Democratic nominees in Richmond later that day said while the law’s language is ambiguous, the IRS had discretion in writing rules that implemented President Barack Obama’s 2010 health care reform legislation.

Neither decision has direct bearing on Indiana, which falls under the jurisdiction of the U.S. Court of Appeals in Chicago.

Schools Districts
Lawrence, in his ruling, rejected U.S. contentions that Indiana and the 39 state public schools systems that joined it in the suit would suffer no harm from the rule.

Still, the 2008 nominee of Republican President George W. Bush threw out the state’s claim it may be compelled to comply with the coverage mandate even as Obama delayed that requirement to 2015.

The judge also rejected Indiana’s contention the mandate violated its sovereignty, ruling it—and 25 other states—lost that argument in the early stages of a 2010 Obamacare challenge that ended with the U.S. Supreme Court upholding the legislation as a valid exercise of Congress’s taxing authority.

Lawrence didn’t reach a final conclusion on whether the school districts could pursue such a claim.

In the most recent edition of its complaint, filed in December, Indiana claimed that if the law stands, it would be compelled to comply with its minimum coverage requirements and recognize as full-time employees workers it now classifies as less than full-time or pay a tax penalty.

Provision Triggered
That provision, the judge said, is triggered for employers when at least one of its full-time employees acquires insurance from an exchange and qualifies for the tax credit.

“If no federal subsidies are available in a state because the state has not established its own exchange, then employers in that state may offer their employees non-compliant insurance, or no insurance at all, without being exposed to any assessable payments under the ACA,” according to the state’s complaint.

Bryan Corbin, a spokesman for Indiana Attorney General Greg Zoeller, said in an e-mail that he couldn’t immediately comment on Lawrence’s decision. The U.S. Justice Department press office didn’t immediately respond to a phone message after regular business hours seeking comment on it.

The case is State of Indiana v. Internal Revenue Service, 13-cv-1612, U.S. District Court, Southern District of Indiana (Indianapolis).






Tax-Exempt Nonprofits Owe Millions in Payroll Taxes

IRS doesn’t appear too eager to go after them, Treasury inspector general says

About 1,200 tax-exempt organizations owe more than $100,000 each.

Some tax-exempt organizations are seriously delinquent in remitting payroll taxes, but the IRS doesn’t appear too eager to go after them, according to a recent report.

Tax-exempt organizations are generally not required to pay income taxes, but they are required to pay other taxes, such as payroll taxes.


from The Advisor's Professional Library

·                     Annuities: Variable AnnuitiesAnnuities are hot. The tax rules vary with the circumstances. Advisors must be aware of these intricacies when discussing annuities with clients.

·                     Regulatory Oversight of Investment AdvisorsAlthough the regulatory environment is in a state of flux, it is imperative that RIAs adhere to their compliance obligations. To ensure compliance, RIAs and IARs must fully understand what those obligations are.

Not doing so results in millions of dollars in lost tax revenue.

In a study released last week, the Treasury Inspector General for Tax Administration (TIGTA) determined that some 64,200 tax-exempt organizations — 3.8% of them — owed nearly $875 million of federal tax as of June 16, 2012.

Some organizations had small tax debts, but approximately 1,200 tax-exempt organizations owed more than $100,000 each.

Unpaid taxes were often associated with multiple tax periods. TIGTA identified nine organizations that each had federal tax debt spanning a decade or more, collectively totaling more than $5.5 million.

“Tax-exempt organizations have a responsibility to remit to the IRS taxes that have been withheld from employees as well as other applicable Federal taxes,” J. Russell George, treasury inspector general, said in a statement. “Failure to remit these taxes is a very serious matter.”

TIGTA was established in 1998 to provide independent oversight of IRS activities. It said its review aimed to determine whether, and to what extent, tax-exempt organizations had federal tax debt, and to identify actions the IRS’ exempt organizations function had taken to address known noncompliance.

The inspector general reviewed 25 tax-exempt organizations that appeared to be among the worst examples involving unpaid federal tax. These, it said, were not representative of the population of all tax-exempt organizations with unpaid tax.

Tigta determined that the 25 organizations — all falling under Internal Revenue Code 501(c)(3) — generally had received $148 million in government payments over a three-year period, including Medicare, Medicaid and government grants; had annual revenue of some $167 million; and owned assets of more than $97 million.

All 25 groups continued not to remit payroll and other taxes, including penalties and interest, totaling upward of $25 million.

Passing the — uh — Buck

The Internal Revenue Code does not authorize the IRS to revoke tax-exempt status based on failure to pay payroll taxes, TIGTA’s statement noted.

As of May 2013, it said, most of the organizations that it had reviewed were still recognized by the IRS as tax exempt.

It said the IRS’ exempt organizations function had completed several examinations, but was generally unaware of the behavior of those organizations because another IRS business unit was responsible for collecting the delinquent tax debt.

TIGTA recommended that the director of exempt organizations do three things:

  • Coordinate with Small Business/Self-Employed Division management to receive relevant collection information
  • Periodically complete analyses to identify for examination (if necessary) organizations that potentially abuse their tax-exempt status
  • Work with the Department of the Treasury to evaluate whether a legislative proposal was warranted to strengthen the IRS’ ability to enforce payroll tax noncompliance by tax-exempt organizations

IRS management’s response was cool, TIGTA said.

It disagreed with the first two recommendations, but agreed to inform Treasury of TIGTA’s third recommendation.

TIGTA said the IRS should follow through on all of the report’s recommendations to ensure these organizations properly remit all payroll taxes.

From ThinkAdvisor



How much college can you really afford?

Planning ahead and knowing your child’s career goals is key.


Given the high cost of college, shrinking financial-aid pools, and a tight job market, choosing the right school can get pretty emotional. But if you can stay objective, it may be smart to think of college as an investment.

Just as you consider your financial goals and needs when you choose your portfolio investments, you may want to use similar criteria when your child begins thinking about which college to attend. After all, says Keith Bernhardt, vice president of college planning at Fidelity, "College is an investment in your child’s future."

Although many parents are willing to sacrifice a lot to send their kids to the best college, Bernhardt says, "You want to make sure your child can expect enough benefit to justify the cost and potential debt that may be present after graduation." Thus, you’ll want to align your child’s college choice with his or her job goals and current job market opportunities. Think realistically about how much you can pay, and get creative in making your choice work for your family.

Make sure the college fits the student—not just in terms of a program that matches your child’s interests, but also with respect to learning environment, location, student population, and the size of the school. In essence, it may pay to do some planning and investigating when shopping for a college. Below are some considerations to explore with your child.

1. Consider job security

In Fidelity’s most recent College Savings Indicator (CSI) study, conducted in August 2013, 80% of parents surveyed considered college a minimum requirement for their child to land a decent job.1 According to the Georgetown Public Policy Institute only one out of seven new four-year college graduates was underemployed in May 2012, versus nearly half of new high school graduates.2

Furthermore, the U.S. Bureau of Labor Statistics (BLS) projects that from 2010 to 2020 more than 11 million jobs will be filled by workers with a bachelor’s degree or higher who are entering an occupation for the first time.3

There’s no question that a college degree can give graduates a leg up when it comes to post-graduate employment opportunities and career options. But the type of degree a child earns can make a difference in his or her quality of life after graduation, too. With that in mind, you’ll want to check whether a more affordable school can offer your child the full spectrum of study he or she desires. Conversely, if your child prefers to attend a more expensive school, you’ll want to be cognizant of the amount of debt he or she may be saddled with upon graduation and may have to pay off for many years to come.

That’s why it’s important to consider the types of jobs that might be available when your child graduates. Although a potential paycheck shouldn’t be the bottom line when choosing a school—or a degree—it does matter. “If you’re going to borrow money to pay big tuition bills, be sure your child can afford to pay back student loans on his or her salary,” says Bernhardt.

In other words, it might be wise to keep the projected job market in mind as you plan your child's education. Where might the job opportunities be when your child graduates? Take a look at the chart to the right for some examples of the faster growing occupations.

What about salaries? Clearly, that depends on your child’s field of study, but the National Association of Colleges and Employers reports that the average starting salary for 2014 was $45,473 per year for college grads, up 1.2% from the previous year.4Typically, graduates who studied math, sciences, or career-tracked courses tend to earn more than those who earn degrees in the humanities. See the chart to the right for some examples of starting salaries, according topayscale.comOpens in a new window..

2. Balance the budget

Once you are equipped with an idea of the salary your child might earn after college, you can put pencil to paper and figure out how much you can really afford to contribute toward tuition and fees. Although some families can pay for college without taking out loans, most families can come up with only 17% (down from 24% in 2007)5 of the total cost of college. Thus, taking loans to pay the bill is more the rule than the exception.

So, how much student loan debt is OK? That depends on your child’s potential salary and how much help—if any—you plan to offer in paying off his or her loans. On average, according to finaid.orgOpens in a new window., student loan debt in 2011–12 for a bachelor’s degree recipient at graduation was $28,720. So, to pay off that loan amount in 10 years, following graduation, would cost the student loan holder a little over $331 a month.

How much will college cost?

  • Average total for tuition, fees, and room and board for a four-year college for the 2013-14 school year: $18,391 for an in-state public college, up 2.9% over the previous year.
  • A private four-year college, up 6.7% over the previous year. 6

To estimate potential loan payments and the salary your child might need to pay them off without hardship, try the student loan calculator at finaid.orgOpens in a new window.. Then, carefully consider your child’s future. If the child has his or her heart set on a lower-paying profession, then choosing a top-tier private university may lead to financial hardship.

Huge amounts of student loan debt shouldn't keep your child from living independently or eventually being able to save for other important financial goals—like buying a first home or contributing to a workplace savings plan. With so many good programs at less-expensive schools, or at a school where your child may receive scholarships or merit-based aid, loading up on student debt may not be necessary.

“The time to assess your college budget and project potential loan payments is long before senior year in high school,” Bernhardt says. He suggests trying some of the college cost/loan calculators (at, for example), running a mock financial-aid calculation, and “putting all your facts on a spreadsheet so you can see the full picture and make decisions rationally, rather than emotionally, at the last minute.”

3. Think creatively

If you’re like the 78%7 of parents surveyed in Fidelity’s College Savings Indicator (CSI) research, you don’t want to burden your kids with college loans. What’s the solution? “Many parents are getting creative about college funding and asking their kids to share more responsibility,” says Bernhardt. According to the CSI, 43% of parents surveyed will ask their kids to pay for some of their college expenses, while 54% of parents will have their kids work part time during their college years.8

For other solutions, 23% of parents surveyed said they may ask their kids to work harder to graduate in fewer semesters, as a way to cut college costs. Also, 50% of parents surveyed said they would think about having their child live at home and commute to school, and 40% encourage them to attend a public college or university.9

Of course, one of the biggest things you can do is start saving early and potentially save more effectively for college. Interestingly, while the economy has put a damper on many types of saving, the CSI indicated that today’s parents are “still taking positive steps toward saving for their child’s education.” In fact, in 2013, an all-time high of 69% of parents surveyed had started saving for college, up from 58% in 2007. And, of those saving, 37% are invested in a dedicated college savings account such as a 529 plan, up from 26% in 2007.10

Still, just as college costs have to fit your family budget, they also need to coexist with your retirement savings plans. “Fidelity’s point of view is that retirement savings should take priority over college saving,” says Bernhardt. “With college, you have some flexibility with financing, but you can’t borrow money for retirement.”

As with any investment, your child’s college choice—to the extent possible—should be a holistic decision based on facts, but one that still reflects emotional considerations. Carefully consider several important factors, including interests, goals, and “fit,” in light of the long-term benefits and costs of any particular college education. College is a significant investment. Do some smart, educated shopping to help your child start his or her career on the right foot.

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Saving just 1% more can go a long way

Increasing your savings by just 1% a year could mean bigger payoffs in retirement.


Would you be willing to take your lunch to work once a week if it meant you could go out to dinner once a week in retirement? Would you forgo a monthly movie night out if the savings could pay your monthly cable bill in retirement?

Putting just 1% more of your salary each month into a qualified retirement plan could make a noticeable difference in your ability to afford the retirement you want. And finding that additional 1% can be as easy as packing a bag lunch, adjusting your home thermostat, or having a stay-at-home date night once a month.

“The retirement savings mountain might appear imposing from a distance, but the reality is that the climb isn't as steep as it looks,” says Beth McHugh, senior vice president, Fidelity Investments. “Thanks to the potential power of compound earnings, the tax advantages of qualified retirement savings accounts, and, for many people, a company match on contributions to workplace savings plans, small steps can turn into big strides.”

How big? Let’s look at two hypothetical 401(k) investors. Both individuals invest just 1% a year more of their salary in their 401(k) until retirement at age 67. For illustrative purposes, we assume that their salaries grow 1.5% a year, adjusted for inflation, boosting monthly contribution amounts along the way. We also assume two long-term compounded annual hypothetical rates of return: 5.5%, which we think aligns roughly with an average long-term return for a conservative-to-balanced asset mix, and 7.0% for a more growth-focused asset mix.1

Meet Bob and Sally

Bob is 25 years old and earns $40,000 a year as a software designer. Eager to save more, Bob increases his salary deferral by 1%, boosting his initial monthly saving by $33 a month, to $133. That amount will grow over time along with his salary at 1.5% per year. He also invests in a growth-oriented portfolio. Assuming a 7.0% annual nominal return over his lifetime, that initial $33 a month in extra savings generates a potential $330 a month in retirement income. That’s almost $4,000 a year, and more than $99,000 over 25 years in retirement. (Results are in today’s pretax dollars.)

Now consider Sally. She’s 35 years old and earning $60,000 as a financial analyst. Like Bob, she too is concerned about her future, so she increases her deferral, from 6% of her salary to 7%. That initially increases her contributions by $50 a month, to $350, and that amount will grow along with her income—which is assumed to grow 1.5% each year. With a balanced asset mix, Sally’s portfolio generates 5.5% annual nominal returns. By the time she retires at 67, her extra monthly savings generates a potential $180 a month more in retirement income, which is $2,160 a year, and $54,000 over 25 years.2

Notice the striking difference between Bob's and Sally’s retirement paychecks, illustrated in the table below. Even though initially Bob put away $17 less a month than Sally, his extra 1% in savings earned him $150 more per month than Sally’s. Over 25 years of retirement, that difference could add up to $45,000. The reason: Bob started saving 10 years earlier than Sally, and earned higher returns (7.0% versus 5.5% nominal returns).

Saving in an individual retirement account (IRA) is another great way to build savings for income in retirement. For example, a 25-year-old who saves a consistent $50 each month in an IRA until age 67, and earns a hypothetical 7% a year compounded, could receive an estimated $390 in additional pretax monthly retirement income.3 But waiting until age 35 reduces that additional monthly income in retirement nearly by half, thus illustrating the benefit of starting to defer from your salary as early as possible.4

 “The key is to defer early, and save tax efficiently,” says John Sweeney, executive vice president at Fidelity Investments. “That means maxing out on your 401(k) and IRA contributions, and then considering other tax-smart savings vehicles, including health savings accounts and, when applicable, variable annuities, deferred compensation, and taxable brokerage accounts, too.”

Are you saving enough?

Retirement saving by the numbers

$91,000  13% from Q2 2013 
Average 401(k) balance, as of Q2 2014 
$88,727  68% from 2008 low 
Average IRA balance, as of 2013 tax year

Americans generally are saving more—but still not enough. According to Fidelity’s analysis of 401(k) data,5the average 401(k) balance rose to $91,000 in the second quarter of 2014, up nearly 13% from $80,600 a year earlier. For employees who were continuously employed and in a 401(k) plan for the last 10 years, the average balance rose to $246,200, up 15% from a year ago.6 Additionally, for the past four years, more employees increased their 401(k) savings rate7 than decreased it.

Meanwhile, the average IRA balance reached a five-year high of $88,727 at the end of 2013,8 a 68% increase from the 2008 low, according to a recent Fidelity analysis. Another positive sign: Total contributions to Fidelity IRAs have increased 11% from tax-year 2009 to tax-year 2013, with the average IRA contribution reaching $4,249 in tax-year 2013.

But are you on track to meet your retirement goals?

Everyone’s situation is unique, of course. So, take the time to assess your own retirement readiness by usingRetirement Quick Check, which has the added benefit of letting you estimate how additional savings can help improve your income in retirement.

If you’re behind, don’t fret. Remember, planning for retirement is a journey. At Fidelity, we recommend saving a total of at least 10% to 15% of your income toward retirement (this includes any amount your employer contributes). But few people get there overnight. The key is to make a plan and ratchet up your saving over time. To find opportunities to save, consider keeping a one-month spending diary to track where your money is going. You may be surprised at what you find.

“The surest way to stay on track toward a financially secure retirement is to start early, save regularly, increase the amount you save as your income increases, and adjust your asset allocation along the way,” says Fidelity’s McHugh. “Then, when you’re enjoying life in retirement, chances are you’re going to look back fondly at those brown-bag lunches you brought with you to work.”

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IRS Recovers $576 Million in Erroneous Tax Refunds from Outside Leads


The Internal Revenue Service recovered $576 million in erroneously issued tax refunds last year thanks to outside tips provided by financial institutions and other sources such as tax preparers, more than double the amount from three years ago.

A new report from the Treasury Inspector General for Tax Administration examined the IRS’s External Leads Program, which receives leads about questionable tax refunds identified by a variety of organizations, including financial institutions, brokerage firms, government and law enforcement agencies, state agencies and tax preparers. The questionable tax refunds include Treasury checks, direct deposits and prepaid debit cards.

The program helps the IRS to recover erroneous tax refunds and save money, but the TIGTA report noted that improvements are needed to ensure that the IRS verifies the leads on a timely basis.

The External Leads Program has grown from 10 partner financial institutions returning $233 million in calendar year 2010 to 258 partner financial institutions and partner organizations returning more than $576 million in calendar year 2013, the report noted.

“The IRS’s External Leads Program has more than doubled the amount of questionable refunds returned over the past three years, thus saving tax dollars,” said TIGTA Inspector General J. Russell George in a statement. “However, opportunities exist to improve the program.”

Since taking over the External Leads Program in January 2010, the IRS’s Wage and Investment Division has performed outreach in an effort to continuously increase the number of organizations participating in this program. Participation and the number of questionable refunds returned and the dollars associated with them have grown significantly.

However, the IRS is not always verifying leads in a timely manner, and the verification time frame goals differ significantly based on the lead type, according to the report. The goals do not take into consideration the burden on legitimate taxpayers whose refunds are being held until verification is completed.

In addition, the IRS inconsistently tracked the leads in multiple inventory systems, and the inventory systems did not provide key information such as how the lead was resolved, that is, whether the refund was confirmed as erroneously issued or legitimate.

TIGTA recommended that the IRS establish more consistent time frames to verify the leads it receives based on an analysis of the current and historical lead verification data and, once established, communicate the verification time frames with its external partners. The report also suggested the IRS develop a process to ensure that leads are verified within established time frames. The IRS should also consolidate the current four lead inventory tracking systems into a single tracking system and ensure that key information is captured as to how each lead is resolved, according to the report.

The IRS agreed with TIGTA’s recommendations. The IRS said it is evaluating the treatment streams and work processes associated with the various types of referrals received in the External Leads Program to identify appropriate time frames. The agency is also completing other systemic and procedural enhancements to improve the effectiveness of existing reporting capabilities in evaluating program quality and timeliness. In addition, the IRS is evaluating the feasibility and potential benefits of consolidating the four independent inventory tracking databases into one system.

“The IRS is committed to the proactive detection of fraudulent refund claims and preventing their payment from occurring,” wrote Debra Holland, commissioner of the IRS’s Wage and Investment Division, in response to the report. “Unfortunately, those individuals who commit fraud against the U.S. taxpayers continually modify their tactics to evade or avoid detection, which sometimes results in the issuance of erroneous refunds. Since 2010, the IRS has reached out to financial institutions, government entities, federal agencies, software providers and other stakeholders to develop processes whereby those partners may alert the IRS to suspected refund fraud, and return those funds to the Treasury when the suspected fraud is confirmed.”



Make A Mistake? Amend Your Tax Return

Don’t worry if you made a mistake on your tax return or forgot to claim a tax credit or deduction. You can fix it by filing an amended return. Here are 10 tips that you should know about amending your federal tax return:

1. When to amend.  You should amend your tax return if you need to correct your filing status, the number of dependents you claimed, or your total income. You should also amend your return to claim tax deductions or tax credits that you did not claim when you filed your original return. The instructions for Form 1040X, Amended U.S. Individual Income Tax Return, list more reasons to amend a return.

2. When NOT to amend.  In some cases, you don’t need to amend your tax return. The IRS usually corrects math errors when processing your original return. If you didn’t include a required form or schedule, the IRS will send you a request for the missing item. 

3. Form to use.  Use Form 1040X to amend a federal income tax return that you previously filed. Make sure you check the box at the top of the form that shows which year you are amending. Since you can’t e-file an amended return, you’ll need to file your Form 1040X on paper and mail it to the IRS.

4. More than one year.  If you file an amended return for more than one year, use a separate 1040X for each tax year. Mail them in separate envelopes to the IRS. See "Where to File" in the instructions for Form 1040X for the correct address to use.

5. Form 1040X.  Form 1040X has three columns. Column A shows amounts from the original return. Column B shows the net increase or decrease for the amounts you are changing. Column C shows the corrected amounts. You should explain what you are changing and the reasons why on the back of the form.

6. Other forms or schedules.  If your changes involve other tax forms or schedules, make sure you attach them to Form 1040X when you file the form. Failure to do this will cause a delay in processing.

7. Amending to claim an additional refund.  If you are waiting for a refund from your original tax return, don’t file your amended return until after you receive the refund. You may cash the refund check from your original return. Amended returns take up to 12 weeks to process. You will receive any additional refund you are owed.

8. Amending to pay additional tax.  If you’re filing an amended tax return because you owe more tax, you should file Form 1040X and pay the tax as soon as possible. This will limit any interest and penalty charges.

9. When to file.  To claim a refund, you generally must file Form 1040X within three years from the date you filed your original tax return. You can also file it within two years from the date you paid the tax, if that date is later than the three-year rule.

10. Track your return.  You can track the status of your amended tax return three weeks after you file with ‘Where’s My Amended Return?’ This tool is available on or by phone at 866-464-2050.



New Minimum Wage for Michigan Employees

Contact: Andrea Miller 517-373-9280
Agency: Licensing and Regulatory Affairs

August 25, 2014 – Beginning September 1, 2014, Michigan workers will see an increase in the minimum wage rate from $7.40 to $8.15. The first rate increase in six years, this new change to state law marks the beginning of a gradual 25 percent increase of the minimum wage resulting in $9.25 per hour by 2018. The State of Michigan makes new online resources available to help workers and employers understand the facts as the new rate takes effect.

On May 27, 2014 the Workforce Opportunity Wage Act, Public Act 138 of 2014 (Act 138), took immediate effect replacing the Michigan Minimum Wage and Overtime Act (Act 154).  Act 138 is enforced by the Wage and Hour Program within the Technical Services Division of the Michigan Occupational Safety and Health Administration (MIOSHA).

Act 138 applies to employers in Michigan that have two or more employees age 16 and older.  A copy of Act 138, along with guidelines and the required poster may be downloaded from theWage and Hour Program website.

Dates of Minimum Wage Rate Increases

The current minimum wage is $7.40.  The rate increases as follows:

  • September 1, 2014 - $8.15
  • January 1, 2016 - $8.50
  • January 1, 2017 - $8.90
  • January 1, 2018 - $9.25

Youth Training Wage

Act 138 allows an employer to pay a newly hired employee age 16 to 19 $4.25 per hour for the first 90 days of employment.

85% Minimum Wage

Act 138 also allows an employer in Michigan to pay 85 percent of the minimum wage to employees aged 16 and 17; however, note that the current Federal Minimum Wage rate is $7.25 per hour.  Employers that are covered by both State and Federal Minimum Wage law should pay the higher applicable rate.   Information on Federal Minimum Wage can be obtained by calling the United States Department of Labor at 866-487-9243.

Effective Date

Minimum Hourly Wage Rate

85% of Minimum Hourly Wage Rate

September 1, 2014



January 1, 2016



January 1, 2017



January 1, 2018



*per Federal Minimum Wage Rate

Tipped Employees

Act 138 allows employers to take a tip credit on minimum wage under certain conditions for those employees who customarily and regularly receive tips. 

The following conditions apply to taking a tip credit on the state minimum wage rate:

  • The employee is in a position which customarily and regularly receives gratuities from a guest, patron, or customer for services rendered to that guest, patron, or customer.
  • If the gratuities plus the minimum hourly wage rate do not equal or exceed the minimum hourly wage otherwise established, the employer pays any shortfall to the employee.
  • The gratuities are proven gratuities as indicated by the employee's declaration for Federal Insurance Contribution Act.
  • The employee was informed by the employer of the provisions of Act 138.
  • If a credit is taken for gratuities received by an employee, then the employment records for each pay period shall contain the credit that was taken along with a written statement of the amount of gratuities received by the employee. The statement shall be signed by the employee and dated before the date the paycheck was received.

The minimum hourly rate of pay for a worker subject to tip credit provisions is:

Effective Date

Minimum Hourly Wage Rate

Tipped Employee Minimum Hourly Wage Rate

Provided Reported Tips Per Hour Average At Least

September 1, 2014




January 1, 2016




January 1, 2017




January 1, 2018




Overtime Requirements

Employees covered by the overtime provisions of the Workforce Opportunity Wage Act must be paid one and a half times their regular rate of pay for hours worked exceeding 40 hours in a workweek.

Some positions are considered exempt from overtime requirements. For a complete list of those positions please visit the program website.

For further questions or information call the Wage and Hour Program toll free at 855-464-9243 or visit the program website at



Getting Married Can Affect Your Premium Tax Credit

The IRS reminds newlyweds to add a health insurance review to their to-do list. This is particularly important if you receive premium assistance through advance payments of the premium tax credit through a Health Insurance Marketplace.

If you, your spouse or a dependent gets health insurance coverage through the Marketplace, you need to let the Marketplace know you got married. Informing the Marketplace about changes in circumstances, such as marriage or divorce, allows the Marketplace to help make sure you have the right coverage for you and your family and adjust the amount of advance credit payments that the government sends to your health insurer.

Reporting the changes will help you avoid having too much or not enough premium assistance paid to reduce your monthly health insurance premiums. Getting too much premium assistance means you may owe additional money or get a smaller refund when you file your taxes. Getting too little could mean missing out on monthly premium assistance that you deserve. You should also check whether getting married affects your, your spouse’s, or your dependents’ eligibility for coverage through your employer or your spouse’s employer, because that will affect your eligibility for the premium tax credit.

Other changes in circumstances that you should report to the Marketplace include:

  • the birth or adoption of a child,
  • divorce,
  • getting or losing a job,
  • moving to a new address, gaining or losing eligibility for employer or government sponsored health care coverage, and
  • any other changes that might affect family composition, family size, income or your enrollment.

In addition, certain life events – like marriage – give you and your spouse the opportunity to sign up for health care during a special enrollment period. That means that if one or both of you is uninsured, you may be able to get coverage now.  In most cases, the special enrollment period for Marketplace coverage is open for 60 days from the date of the life event.




Back-to-School Tax Credits

Are you, your spouse or a dependent heading off to college? If so, here’s a quick tip from the IRS: some of the costs you pay for higher education can save you money at tax time. Here are several important facts you should know about education tax credits:   

  • American Opportunity Tax Credit.  The AOTC can be up to $2,500 annually for an eligible student. This credit applies for the first four years of higher education. Forty percent of the AOTC is refundable. That means that you may be able to get up to $1,000 of the credit as a refund, even if you don’t owe any taxes.
  • Lifetime Learning Credit.  With the LLC, you may be able to claim a tax credit of up to $2,000 on your federal tax return. There is no limit on the number of years you can claim this credit for an eligible student.
  • One credit per student.  You can claim only one type of education credit per student on your federal tax return each year. If more than one student qualifies for a credit in the same year, you can claim a different credit for each student.  For example, you can claim the AOTC for one student and claim the LLC for the other student.
  • Qualified expenses.  You may include qualified expenses to figure your credit.  This may include amounts you pay for tuition, fees and other related expenses for an eligible student. Refer to for more about the additional rules that apply to each credit.
  • Eligible educational institutions.  Eligible schools are those that offer education beyond high school. This includes most colleges and universities. Vocational schools or other postsecondary schools may also qualify.
  • Form 1098-T.  In most cases, you should receive Form 1098-T, Tuition Statement, from your school. This form reports your qualified expenses to the IRS and to you. You may notice that the amount shown on the form is different than the amount you actually paid. That’s because some of your related costs may not appear on Form 1098-T. For example, the cost of your textbooks may not appear on the form, but you still may be able to claim your textbook costs as part of the credit. Remember, you can only claim an education credit for the qualified expenses that you paid in that same tax year.
  • Nonresident alien.  If you are in the U.S. on an F-1 student visa, you usually file your federal tax return as a nonresident alien. You can’t claim an education credit if you were a nonresident alien for any part of the tax year unless you elect to be treated as a resident alien for federal tax purposes. To learn more about these rules see Publication 519, U.S. Tax Guide for Aliens.
  • Income limits. These credits are subject to income limitations and may be reduced or eliminated, based on your income.




Could The IRS Disallow Ice Bucket Challenge Charitable Contributions?

Never let it be said that you can’t reach deep within a seemingly endless stream of indistinguishable Facebook videos and extract a lesson on the tax law. Case in point: the ALS Ice Bucket Challenge, that movement of philanthropy through peer pressure that has likely taken over your various social media feeds.

It works like so—someone challenges you to dump a bucket of ice water over your head within 24 hours. Fail to do so, and you must contribute $100 to the ALS Association.

Because man’s desire to do some good in the world will always be a distant second to his desire to see himself on camera, most people opt to make a video of the dousing process in their own uniquely hilarious manner, and then challenge additional people to either do the same or contribute.

But perhaps you’ve got a heart condition. Or you’re enfeebled. Or you’re just a giant sissy. Rather than risk instant death or, even worse, a brief chill, you opt to skip the shower and write the check to ALS.

While you may come across as a bit of a buzzkill, you can feel proud that your money has gone to a great cause—rather than to those bigwigs at BIG ICE BUCKET, who are surely lighting cigars with crisp hundreds these days—and that come tax time, you’ll get a charitable contribution deduction to boot.

Or will you?

It’s a common fallacy among taxpayers that all that is needed to procure a charitable contribution deduction is to make a donation, in cash or property, to a qualified organization. But as with all things in the tax law, it’s not quite that simple.

You see, the IRS and the courts of this country often look deeper than the form of the donation, zeroing in on the mindset of the donor in making the contribution. It’s a concept called “donative intent,” and its presence is necessary in order for any contribution to rise to the level of a good tax donation.

The Tax Court elucidated the concept of donative intent in Estate of O. J. Wardwell, 35 T.C. 443, when it said of a purported donation, “If a payment proceeds primarily from the incentive of anticipated benefit to the payor beyond the satisfaction which flows from the performance of a generous act, it is not a contribution or gift.”

So let’s say you were challenged via social media to either take the Ice Bucket Challenge or contribute to ALS. Assume further that you are unable or unwilling to get cold and wet, and choose instead to donate to ALS. Do you possess the necessary donative intent if you otherwise wouldn’t have contributed to the cause, and are doing it merely to avoid being publicly chastised by your Facebook friends? Did you make the donation with the anticipation of receiving the benefit of, you know…not having to dump a freezing bucket of water on your head?

OK, rest easy; the IRS isn’t coming after your ALS donation. While the principle of donative intent is very real, in recent years, the courts have tied this principle to a “quid pro quo test,” which states that in order for a donation to lack donative intent, the donor must anticipate receiving a financial benefit from the contribution commensurate with the value the donor transferred to the charity. Because an ice bucket dodger has received no financial benefit, but rather merely a physical one, the contribution is (should be) immune to attack. Plus, I think I’ve read somewhere that the IRS is dealing with a bit of a public perception problem these days, so attacking contributions to a horrible disease is probably not in its best interest.

Nevertheless, in addition to raising over $12 million for ALS over the past six weeks, the Ice Bucket Challenge presents a wonderful opportunity to drive home the point that there is more to garnering a charitable contribution deduction than cutting a check to a charitable organization; you must have intended to make a contribution without the expectation of receiving a financial benefit in return.

The failure to understand that motive plays a role in charitable giving has caused more than a few taxpayers to lose deductions that, on the surface, appeared to have met all of the statutory and regulatory requirements.

The case of DeJong v. Commissioner, 36 TC 896, illustrates a rather common scenario. A father belonged to a church that operated the school his two children attended. The school explained to DeJong that the cost to educate each child throughout the year was $200 (this was 1958, after all) and encouraged him to contribute the full cost of education for his two children to the church. Any amounts contributed to the school were credited to the general operating fund of the school without any designation to a specific child.

DeJong contributed over $1,000 to the church, and claimed the full amount as a charitable contribution deduction. The IRS denied $400 of the deduction—the cost to educate DeJong’s two children—arguing that this represented “tuition” rather than a charitable contribution, and thus was a nondeductible personal expense.

The Tax Court agreed, holding that DeJong lacked donative intent, stating, “payments pledged and made by parents in the circumstances disclosed…were not voluntary and gratuitous contributions motivated merely by the satisfaction which flows from the performance of a generous act; they were induced, at least in substantial part, by the benefits which the parents sought and anticipated from the enrollment of their children as students in the society’s school.”

If you found a bit far-fetched my argument that receiving the benefit of not having to dump cold water on your head could jeopardize your contribution deduction to ALS, consider the case of Singer v. U.S. for proof of just how expansive the “quid pro quo” analysis can be.

In Singer, a corporation that manufactured sewing machines sold the machines at a heavy discount to local schools. The corporation deducted the bargain element as a charitable contribution, but the IRS argued that the corporation received a quid pro quo in exchange for the contribution. What benefit did the corporation receive? The schools used the sewing machines to teach its students how to sew, and thus by contributing the machines to the schools, Singer was potentially expanding future demand for its product.  Believe it or not, the Court of Claims agreed, adding, “…the plaintiff’s predominant reason for granting such discounts was other than charitable. We are convinced, and so hold, that in reference to the discounts granted to the schools, plaintiff expected a return in the nature of future increased sales.”

Lastly, in Grinsdale v. Commissioner, 59 TC 566, a landowner contributed a parcel of land to a city for a minimal price and deducted as a charitable contribution the bargain element. Sounds generous enough, no? Look a little deeper, as the IRS did, however, and it turns out that in exchange for his “contribution,” the landowner received the dismissal of two condemnation suits pending against his other property, and a zoning variance to permit the development of a service station on another piece of land.

The Tax Court denied the deduction, concluding, “Petitioners and the city had reached a compromise advantageous to both—a quid pro quo. The city received land. The petitioners received…dismissal of the two condemnation suits, and the variance in zoning. They entered into the entire transaction with the expectation of financial benefits commensurate with the value of the property conveyed. Accordingly, they are not entitled to a charitable contribution.”

When a donor receives value in return from a charitable organization–a quid pro quo–it doesn’t necessarily mean that the donor isn’t entitled to any contribution deduction. Under Rev. Rul. 67-246, the donor is generally entitled to a deduction for the amount of the contribution less the FMV of any consideration received in exchange for the payment from the charitable organization.

This discussion should illustrate the scope and importance of the concept of donative intent. As mentioned, however, those who forgo the Ice Bucket Challenge and cut a check to ALS instead should not run afoul of this judicial doctrine, so sissies of the world, unite. Skip the cold shower, and donate to  a great cause instead.

From Forbes

follow along on twitter @nittigrittytax




Got competing financial priorities?

How to balance the needs of kids, aging parents, and your own retirement.


As if trying to meet day-to-day expenses while saving for retirement and paying for college isn't enough, now many people find themselves increasingly responsible for the physical, emotional, and even financial challenges of caring for aging or disabled parents. Welcome to the sandwich generation—a growing part of the population feeling a financial tug from kids on one side and parents on the other.

If this sounds familiar, you have plenty of company. According to the Pew Research Center, one-in-seven middle-aged adults (15%) is providing financial support to both an aging parent and a child.1

Why are so many of us feeling financially sandwiched? On one hand, people are living longer, having children later, and continuing to support adult children (“boomerang kids”) who find it too expensive to live on their own. On the other hand, several years of rough economic/financial market conditions have dented the home and investment values of today’s elderly, to the point where they’re having trouble making ends meet in retirement.

Pump up your planning to care for aging parents.

Facing financial obligations from both sides (whether actual or potential), members of the sandwich generation can best cope by “planning, planning, and planning some more,” says Eric Gold, behavioral economist at Fidelity Investments. “Kids and aging parents come with a lot of ambiguity, which can cause paralysis,” he says. “Rather than becoming overwhelmed and doing nothing, ramp up your planning and save more for uncertainties despite the ambiguity.”

If you have two sets of dependents leaning on your financial house, it is important to make sure it’s sturdy. “Fund your emergency cash reserves, avoid or pay down debt, and, above all, do all you can to make your own retirement saving a top priority,” says Ann Dowd, CFP®, a vice president at Fidelity Investments. “Though emotions can sway you to support loved ones first, they’re not responsible for your retirement security—that’s your job.”

Here are some strategies to strengthen your sandwich-generation finances.

Know more.

Even though it can be challenging to talk with your parents and kids about financial realities, it may be best to do so early on. If you wait until a financial or medical crisis forces you to action, you may not have the time or flexibility you would have if you had planned for it.

Dowd says it’s easier to plan for the goals and risks that you know about, so it makes sense to “find out about your parents’ total financial picture, from essential living expenses to sources of income and insurance, so you’ll know whether you need to fill in any gaps.” For expenses, talk with them about their essential living costs (housing, food, transportation, insurance) as well as their discretionary costs (lifestyle choices), to see what they can realistically afford.

In terms of income, find out about reliable sources of income such as pensions, Social Security benefits, or an annuity income, if they have any. Just as you’ll do for yourself someday in retirement, help them match their essential expenses to steady sources of income.

Finally, check into their health care plans. Make sure they have a health care proxy and a living will in place to help manage their care; get the details on their health and long term care insurance to see whether they can cover their medical expenses; and find out whether there are funding resources available if they need nursing home, assisted living, or home health care. According to the latest retiree health care costs estimate calculated by Fidelity Benefits Consulting, a 65-year-old couple retiring this year is estimated to need $220,000 to cover medical expenses throughout retirement.2

Think of it this way, says Gold: “When you’re caring for aging parents, the boundaries between your financial plans and those of your parents start to disintegrate.”

Save more.

Given the financial uncertainties faced by the sandwich generation, it’s even more essential to save as much as possible. This is especially true if you have to take time off work—and miss some income—to care for your parents. Be sure to take advantage of any and all tax-advantaged saving vehicles.

Take care of your retirement first—“Pay yourself first by continuing disciplined saving through your workplace retirement plan,” advises Dowd. Even if you merely contribute up to the company match, at least you’re not leaving “free money” on the table.

If at all possible, don’t use your retirement savings—whether through loans or early withdrawals—to support your kids or parents. Dipping into your nest egg not only sacrifices the potential for tax-deferred growth, it could also leave you inadequately prepared for retirement and force your children to support you financially. That’s a cycle you want to break.

Prep for college costs—If you don’t have one already, consider opening a 529 college savings plan account as soon as possible, and have family and friends contribute to the plan for birthdays and holidays. These plans offer tax-deferred growth and federal income tax free withdrawals for qualified higher education expenses. What’s more, the sooner you start and the longer you stash away college savings, the less you have to worry about a potential conflict between supporting your parents and paying for college.

Also, “Keep an open mind about college choices,” says Dowd. “Many colleges offer competitive programs with a price tag that might fit better with your sandwich finances.” According to the College Board, the average annual cost (tuition, fees, and room and board) for a four-year, in-state public college is $18,391 for the 2013–2014 tuition year, and $40,917 for a four-year private college.3

Look for tax savings on your family expenses—Your employer might offer tax-advantaged programs such as flexible spending accounts that let you pay for eligible out-of-pocket health and dependent-care expenses with pretax dollars.

If you are eligible, a health savings account (HSA) lets you save pretax, and lets you withdraw principal and earnings free from federal taxes. That’s true as long as you’re paying for qualified out-of-pocket medical expenses.

Similarly, your employer may offer access to a dependent care spending account (DCSA) that lets you put away money, pretax, to pay for child or adult dependent care—though for elder care you and your parents have to meet income eligibility and support requirements to qualify. While the tax savings may help, keep in mind that any contributions you don’t use during the current year will be forfeited.

Even if you don’t have access to a DCSA, you may be able to take advantage of the Child and Dependent Care Credit. Learn more about the tax credit from IRS publication 503.

Protect more.

Proper insurance coverage could keep your parents’ care needs from burdening you financially, could keep your care needs from doing the same to your children, and could protect your family in case you are unable to keep supporting everyone. Long term care insurance may be appropriate at this point for you and your parents. In both cases, this depends on many factors, including age, cost of coverage, how long you might need coverage, and the types of benefits you want.

If you or your parents need long-term care, having insurance could cover some of the costs of care and keep from depleting their savings. Consider that the average annual costs for nursing home or assisted living care are $81,030 and $42,600, respectively.4

Finally, with the needs of multiple generations on your shoulders, protecting your family from the risk of yourdisability or death may be more important than ever. Disability and life insurance can help make sure that your loved ones are cared for in the event that you are unable to work.

No doubt, the sandwich generation faces competing financial priorities. To keep your children and aging parents from pulling your finances apart, plan more diligently, save more carefully, and keep your retirement saving a top priority. For all concerned, that may mean adjusting expectations—from when you retire to where your kids go to college to how your aging parents spend their golden years. Then again, you’re all in this “sandwich” together.

Learn more




Former Employees: Gone But (Passwords) Not Forgotten


Security is a buzzword right now—from cyber security to password security, it’s got everyone talking. When it comes to employees and passwords, IT departments try to take all the necessary precautions to ensure the business is secure. But what happens when an employee leaves a company? What security risks should businesses be aware of after an employee leaves (either voluntarily or otherwise)?

Taking action following a change in staff is important for every company, but small and micro businesses may need more help. Many smaller businesses rely heavily on technology but aren’t big enough to support full-time IT employees or departments, so may not know best practices for computer and data security.

While it’s best if your company has security processes in place before an employee leaves, in the event that they aren’t implemented, there are a few steps the company should immediately take.

1. Deactivate the employee’s computer and accounts.Ideally, this should be done immediately upon termination. Change passwords for accounts they had access to, including conference lines and building codes. If you wait too long to do this, the ex-employee may have time to access company information to destroy, compromise or steal from a remote site—even if their computer and other company devices have been confiscated prior to their departure.

2. Collect all company devices, including computers, cellphones, tablets, security cards, credit cards, company manuals, and any other sensitive material or anything that provides access to that information.Preferably, this should be done before the employee leaves the office for the last time. The longer it takes you to deactivate accounts and computers, the more time an employee has to alter information (like file creation dates), completely delete files (evidence of misconduct or theft), or commit fraudulent acts (entering new data, loading new software, moving data). For the safety of your employees, it may also be advisable to change the locks and security access codes.

3. Debrief the employee on confidentiality. If the employee signed a non-disclosure, non-compete or non-solicitation agreement, review the document to make sure the employee is clear on their obligation not to reveal information on the company.

Now that you’ve taken care of the immediate needs of securing your company’s information, you can focus on implementing some security structures that will not only better protect your business, but also make your life easier the next time an employee leaves.

4. You need better control of your passwords. How many passwords do you have between your personal and work life? My guess is that it’s more than you even realize, and ideally each of those accounts should have a strong, unique password. Unfortunately, that is too much for most people to remember and we end up writing our passwords on sticky notes or Word documents saved on the computer. This is a habit you and your employees need to break. Keep your passwords somewhere where you, and only you, know where they are and have access—a password manager, an encrypted file, or a similar system that works for you. Make sure it’s a place you can store unique passwords for each account and keep track of them. Now that all your passwords are in one, safe location, shred those Post-Its or delete the unsecured Word document. Finally, if you haven’t already done so, go through your accounts and make a unique password for each of them.

5. You need better passwords. Speaking of passwords, they should be stronger. Hackers use computer systems that are able to recognize the “tricks” humans are likely to use to try to make better passwords. Use a complex combination of capital and lowercase letters, numbers, symbols and, if possible, stay away from dictionary words. Using a password generator that creates random, long passwords is the ideal solution.

6. Your password isn’t safe if you give it away. Although account sharing can be convenient, it’s not worth the risks. It makes the company more vulnerable to attack since accounts are accessible by multiple employees (who may or may not have clearance to the information they are accessing). In general, it is important to know who has access to what information, when and from where. If something unfortunate happens to the company, like theft or leaked information, there will be no way of telling which employee is responsible. If you give out the password to the wrong person and they cause damage—physical or reputational—you may be liable, which leads me to my next point.

7. Maintain information on employee access and perform frequent audits. Set up a system that requires employees to use unique passwords to gain access to their accounts and information - ones that make it difficult to share password information. Access rights vary because of different security levels, job descriptions and locations across the network. Maintain a secure database that keeps track of each employee’s access level, what they have access to, and passwords associated with that access. When an employee leaves, use this to create a checklist that their supervisor can use to disable their access rights, and limit their error in doing so. Perform audits on accounts and enforce a strong password policy that requires that they are changed frequently. And remember, threats don’t always come from the outside—there can be intentional theft, lost or stolen devices, or accidental exposure. The more you are aware of what information is where and who has access, the more equipped you will be to handle a disaster.

8. Separate personal and financial data. Implement network segmentation to restrict inter-systems access. Set permissions within your network so that employees only have access to information as needed to do their job.

9. Last but not least, educate your employees. Develop an effective educational system that informs employees about the dangers of password and account sharing. Explain why security is important and essential to the functions of the company, and how they can contribute to the security through their everyday actions.

Though there is an upfront investment in taking the time and effort to put better security measures in place, the return on investment is massive when mitigating the likelihood of incidents with departing employees, which can cause untold damage to company assets and reputation.

Joe Siegrist is the founder and CEO of LastPass.




IRS Denies Tax Exemption to Mind Control Group


The Internal Revenue Service has denied tax-exempt status to a group that claimed it was dedicated to protecting the human rights of defenseless victims of involuntary microwave and mind control attacks.

In a private letter ruling that was released last month, the IRS denied an application for tax-exempt status under Section 501(c)3 of the Tax Code, which mainly applies to charitable and religious organizations. The name of the group, its officials and location were all redacted from the publicly released document.

A similar-sounding group,, said on its Web site that it is an IRS-approved nonprofit organization and “donations are tax deductible.” The director of the group, Cheryl Welsh, said the private letter ruling was not for her organization, and it received tax-exempt status in the early 2000s.

According to the ruling, the IRS wrote, “You were formed by E because he and many other people are victims of M attacks. According to our Articles of Incorporation, your purpose is the “… protection of the human rights of defenseless victims from involuntary microwave and M attack, organized stalking, or direct mind control attack of its various forms, and to compensate such targets from [sic] the associated damage or death resulting from such sightings.'”

M attacks are described as “electronic radio or microwave transmissions from governmental agencies and others who are working on projects that manipulate or control human behavior.”

Prior to the organization’s incorporation, the unidentified founder said he had exhausted his personal investments paying expenses for equipment, supplies, consulting services and startup costs. The founder chose to incorporate the business in an unidentified state “due to their advantageous tax strategies for business owners and entrepreneurs and also corporate veil protection for business.”

According to the information submitted to the IRS, the group said the use of M weapons and supporting structures to implement torture on humans, mostly to the brain, have also been used on the heart and genital area. “These acts are perpetrated by intelligence agencies, individuals, defense contractors, mental health agencies, and clandestine crime watch organizations who also work with organized crime syndicates; these weapons are used on unwilling targets based upon surveillance that skips all privacy laws; and involuntary continuous exposure to directed-energy systems, electronic radiation and complex manipulation and scanning of the human mind are damaging, dangerous and a public hazard.”

To combat such M weapons, the group plans to educate the public about involuntary mind control, especially within the area related to M weapons; develop anti-M weapons that "cancel attacks" against human targets by electronic jamming methods; and implement counter M attacks for particular victims on a case-by-case basis.

The group’s Web site, the IRS noted, solicits donations for the purpose of influencing proposed legislation written by the founder. If adopted, the legislation would prohibit or regulate the use of M weapons on the public. Under the provisions of the proposed legislation, violators would be subject to fines and imprisonment; and additional restitution could be ordered for the victims of M attacks. The group wrote a letter to a U.S. Senator advocating consideration of the legislation and plans to resubmit the legislation to members of the House and Senate on a weekly basis until they pass it. The group also plans to operate a trust fund that will provide additional compensation to victims of M attacks. Courts will be able to refer a victim to the group as an adjunct to the law for additional compensation, but the IRS noted that the victim trust fund has not been established or funded since it depends on the legislation becoming law.

“You did not provide a detailed description of the proposed operations of the trust or describe the process by which you will verify claims or insure unbiased selection of eligible victims,” said the IRS. “You have, however, identified E [the founder] as one of the victims of M attacks who would be eligible for additional compensation mandated by J [the name given to the legislation].”

For right now, the group appears to be in debt, however. “Your balance sheet reports more than $40,000 in liabilities,” the IRS noted. “Since these liabilities are expenses paid by E prior to your formation, you plan is to reimburse approximately $35,000 of those expenses to E after F has successfully procured grants for you.”

The IRS noted that Section 501(c)3 organizations can be tax-exempt if they are operated exclusively for religious, charitable, scientific, literary or educational purposes, or to conduct testing for public safety. They can also foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or be dedicated to the prevention of cruelty to children or animals. However, 501(c)3 groups should not be “action” organizations that lobby Congress in an attempt to influence legislation, with some exceptions.

The IRS said its review of the group’s application and additional information led it to conclude that the group does not qualify for a tax exemption because it failed to establish that it operates exclusively for charitable or educational purposes, it operates for the benefit of private interests and is an “action” organization. However, the IRS noted that the group has the right to file a protest if it believes the determination is incorrect.


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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