Real Housewives of New Jersey’ Stars Face Real Tax and Fraud Charges
Newark, N.J. (July 31, 2013)
By Michael Cohn
Two stars of the reality TV series “The Real Housewives of New Jersey” have been charged with fraud and tax evasion in a conspiracy to defraud lenders and illegally obtain mortgages and other loans as well as allegedly hiding their assets and income during a bankruptcy case.
Teresa Giudice, 41, and her husband, Giuseppe “Joe” Giudice, 43, both of Towaco, N.J., were charged Monday with conspiracy to commit mail and wire fraud, bank fraud, making false statements on loan applications and bankruptcy fraud in a 39-count indictment returned Monday by a federal grand jury.
The indictment also charges Giuseppe Giudice with failure to file tax returns for tax years 2004 through 2008, during which time he allegedly earned nearly $1 million.
They appeared in a federal court Tuesday and were each released on $500,000 bond, but were required to surrender their passports, with the judge ordering them not to travel outside New Jersey and New York.
“The privilege of living well in the United States carries certain real responsibilities, including filing tax returns when required and paying the correct amount of tax,” Shantelle P. Kitchen, special agent in charge of IRS-Criminal Investigation’s Newark Field Office, said in a statement. “Today’s indictment alleges the Giudices did not live up to their responsibilities by failing to file tax returns, falsifying loan applications and concealing assets in their bankruptcy petition. The reality is that this type of criminal conduct will not go undetected and individuals who engage in this type of financial fraud should know they will be held accountable.”
From September 2001 through September 2008, Giuseppe and Teresa Giudice allegedly engaged in a mail and wire fraud conspiracy in which they submitted to lenders fraudulent applications for mortgages and other loan, along with supporting documents. The Giudices falsely represented on the loan applications and supporting documents that they were employed and receiving substantial salaries when, in fact, they were either unemployed or not receiving such salaries, according to prosecutors.
For example, in September 2001, Teresa Giudice applied for a mortgage loan of $121,500 for which she submitted a loan application falsely claiming she was employed as an executive assistant. She also submitted fake W-2 forms and fake paystubs purportedly issued by her employer. The indictment also charges specific instances in which the Giudices committed bank fraud and loan application fraud in the course of obtaining loans from several banks.
On Oct. 29, 2009, the Giudices filed a petition for individual Chapter 7 bankruptcy protection in U.S. Bankruptcy Court in Newark. Over the next few months, they filed several amendments to the bankruptcy petition. As part of the bankruptcy filings, the Giudices were required to disclose to the United States Trustee, among other things, assets, liabilities, income and any anticipated increase in income. The indictment alleges that the Giudices intentionally concealed businesses they owned, income they received from a rental property, and Teresa Giudice’s true income from the television show “The Real Housewives of New Jersey,” Web site sales, and personal and magazine appearances. The Giudices concealed their anticipated increase in income from the then-upcoming Season Two of the Bravo reality TV series.
“The indictment returned today alleges the Guidices lied to the bankruptcy court, to the IRS and to a number of banks,” U.S. Attorney Paul J. Fishman said in a statement. “Everyone has an obligation to tell the truth when dealing with the courts, paying their taxes and applying for loans or mortgages. That’s reality.”
The Giudices are charged with multiple counts of bankruptcy fraud for concealing and making false oaths and declarations about the assets and income during their bankruptcy case.
The indictment also alleges that during tax years 2004 through 2008, Giuseppe Giudice received income totaling $996,459, but did not file tax returns for those years.
The conspiracy to commit mail and wire fraud count carries up to 20 years of in prison and a $250,000 fine. The bank fraud and loan application fraud counts each carry a maximum potential penalty of 30 years in prison and a $1 million fine. The bankruptcy fraud counts each carry up to five years in prison and a $250,000 fine. The failure to file a tax return counts each carry a maximum penalty of one year in prison and a $100,000 fine. Giuseppi Giudice also faces possible deportation to Italy as he is not a U.S. citizen.
Fishman credited special agents of the Federal Deposit Insurance Corporation, Office of Inspector General, New York Region, under the direction of Special Agent in Charge A. Derek Evans; special agents of IRS-Criminal Investigation, under the direction of special agent in charge Shantelle P. Kitchen; and Region 3 U.S. Trustee Roberta DeAngelis and the Newark office of the U.S. Trustee, with the investigation which led to today’s indictment.
The government is represented by Assistant U.S. Attorneys Jonathan W. Romankow and Rachael Honig of the U.S. Attorney’s Office, Criminal Division in Newark.
They noted that the charges and allegations contained in the indictment are merely accusations, and the defendants are considered innocent unless and until proven guilty.
The Affordable Care Act
The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (together, the Affordable Care Act), was landmark legislation that dramatically affects how health care is delivered in the United States. Provisions of the legislation affect not only those directly involved in providing health care, but also most individuals and employers.
The health care reform legislation is extremely complex, and many items in the legislation change rules and regulations that were already in place. The IRS, Department of Labor (DOL), Department of Health and Human Services (HHS), and other agencies have the monumental task of interpreting the legislation and providing guidance. Many temporary and proposed regulations, as well as some final regulations, have been issued.
The purpose of this legislation was to provide affordable minimum health care benefits to all individuals. With that in mind, the legislation provides for the establishment of qualified health plans that must provide essential health benefits consisting of minimum essential coverage.
Caution: Some of the rules originally enacted have already been repealed and the effective date of other rules has been modified. It is possible that more changes will occur as these rules are implemented. This information is current as of July 11, 2013.
Beginning in 2015, certain applicable large employers (i.e., generally those who had an average of at least 50 full-time employees in the previous calendar year) that do not offer health insurance coverage to their full-time employees (and their dependents), or employers that offer health insurance coverage that is unaffordable or does not provide a certain minimum value, must pay a penalty if the employer is notified that any full-time employee receives a premium assistance credit to purchase health insurance in the individual market through a state insurance exchange or a cost-sharing-reduction subsidy to help with out-of-pocket expenses. Any penalty paid under this provision is not deductible as a business expense for federal income tax purposes.
To determine if an employer is an applicable large employer, the full-time equivalent value of the hours worked by part-time employees must be calculated and added to the employer's number of full-time employees. This calculation can be challenging. Although part-time employees must be considered when determining applicable large employer status, applicable large employers only need to offer full-time employees (and their dependents) adequate health insurance coverage to avoid paying a penalty. However, the rules for determining full-time status can be complicated for certain variable-hour employees.
Employers will be subject to many new notice and reporting requirements.
Individual Mandate for Health Coverage
The health care reform legislation requires most U.S. citizens and legal residents (i.e., applicable individuals) to have minimum essential health insurance coverage every month beginning on or after January 1, 2014. Those who do not have such health insurance will be subject to a penalty for each month they do not have minimum essential coverage. The penalty will be the greater of a flat fee amount (for each individual not covered by health insurance) or a percentage of household income over a threshold amount. For applicable individuals who are at least age 18, the maximum applicable annual dollar amount is $95 for 2014, $325 for 2015, and $695 for 2016 and later years. An inflation adjustment will be applied in calendar years beginning after 2016. For individuals under age 18, the maximum applicable penalty is 50% of these amounts.
Individuals who meet certain financial or hardship criteria are exempt from the mandate. In addition, members of an Indian tribe and individuals who are members of certain religious sects or members of certain health care sharing ministries are exempt from the mandate.
Premium Assistance Credits and Cost-sharing-reduction Subsidies
To assist individuals in meeting the mandate for having minimum essential health insurance coverage, the legislation also provides for premium assistance credits and cost-sharing-reduction subsidies. Beginning in 2014, some individuals will qualify for a premium assistance credit to help them pay the premiums on health insurance purchased in the individual market through the state insurance exchanges that will be operational beginning October 1, 2013. Individuals can elect to have this credit payable in advance directly to the insurer.
The premium assistance credit will be available (on a sliding scale basis) for individuals and families with incomes up to 400% of the federal poverty level ($45,960 for an individual or $94,200 for a family of four, using 2013 poverty level figures) who are not eligible for Medicaid, CHIP, a state or local public health program, employer-sponsored insurance that is both affordable and provides a certain minimum value, or other acceptable coverage.
Excise Tax on High-cost Employer-sponsored Health Coverage (Cadillac Plans)
Beginning in 2018 under the current law, a nondeductible 40% excise tax will be levied on so-called Cadillac plans. These plans are employer-sponsored health plans with annual premiums (i.e., excess benefits) exceeding $10,200 for self-only coverage and $27,500 for any other coverage. Slightly higher premium thresholds apply for retired individuals age 55 and older who are not eligible for enrollment in Medicare or entitled to Medicare benefits, and for plans that cover employees engaged in high-risk professions. For coverage under a group health plan, the 40% excise tax will be imposed on insurance companies, but it is expected that employers (and their employees) will ultimately bear this tax in the form of higher premiums passed on by insurers. Employers will be responsible for the tax if coverage is provided by employer contributions to HSAs or Archer MSAs.
Employers will be responsible for calculating the excess benefit amounts and reporting those amounts to the applicable insurer. Employers that currently offer generous health benefits (especially if the benefits are to the owners and related persons) should carefully analyze their plans to see if changes are needed to avoid having plans that will be subject to this tax. Additional guidance will be issued on this excise tax (additional legislation may change some of these provisions).
Employing a Business Owner’s Children
One unique aspect of owning your business is the ability to hire your children. Whether doing so makes sense for you and your business is more than a business decision. For your children, the answer depends a great deal on your intentions for passing the business to future generations, the child’s interest and aptitude, and your feelings about how much a parent should “help” a child and how much they should “make it on their own.” However, some real benefits are available when you employ your children.
Usually, children (especially minors) are subject to lower tax rates than their parents. In this case, shifting taxable income away from the parents and to their children is an effective way to lower the family’s tax burden. Although the "kiddie tax" potentially taxes the unearned income of children under age 24 at their parent’s marginal rate, wages are earned income, so they are not subject to the kiddie tax. Also, dependents usually are limited to a standard deduction of $1,000 (for 2013). However, the standard deduction for a dependent with earned income equals his or her earned income plus $350 (up to $6,100 for 2013). Thus, up to $6,100 of earned income can be completely sheltered from tax. The next $8,925 of wages will be taxed at only 10%.
Paying a child wages also means an IRA can be funded for that child (the funds can actually come from you as a gift). Thus, paying your child wages of $5,500 this year will allow the maximum amount to be contributed to your child’s traditional or Roth IRA. A Roth IRA, which potentially allows all earnings and distributions to be tax-free, may be the best option if your child has a low current tax rate, a long horizon for saving, and will likely be in a higher tax bracket when distributions are made. It may also be a good way to fund some college costs since Roth distributions are tax-free up to the amount of contributions that have been made to it. In any case, the ability to compound income either tax-deferred or tax-free for many years is a powerful way to build wealth.
If your business is operated as a sole proprietorship (or partnership where you and your spouse are the only partners), employing your children under age 21 can reduce payroll taxes. This is because wages paid to a child under age 21 are exempt from the FUTA tax. They are also exempt from FICA tax if the child is under age 18. Furthermore, the wages reduce your self-employment (SE) income, and thus reduce SE tax. (This exemption does not apply if your business is operated as a C or S corporation, or as a partnership with partners other than your spouse.)
It’s never too early to start planning to transition ownership of your business to the next generation. The business’s continued success depends on the existence of a capable and experienced successor to the owner. Furthermore, it’s important for your key employees to be confident in the abilities of your successor. Thus, if your children are your intended successors, it is critical that they become involved in the business several years before the ownership transition is made.
Employing your family members can have many benefits other than those we’ve described. Often, working together in the family business strengthens the family bond. Of course, aspects such as wanting children to learn to work for an unrelated employer and the reality of spending a great deal of time together also come into play. In many situations, employing family members makes good tax and business sense.
Wages paid to your child should be comparable to what would be paid to a nonfamily member for the same work; otherwise, the IRS is likely to question them. Also, the tasks performed should be reasonable for your child’s age and skill level. While 12-year-olds can likely work a few hours a week, it’s probably not realistic to pay them more than minimum wage. Older children could likely be expected to work more hours and command a higher wage. However, fair labor laws must be considered.
2014 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-sized 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 to HSA accounts. Funds in the account may be invested (somewhat like an IRA), so there is 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 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 that 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.
The 2014 inflation-adjusted deduction for individual self-only coverage under a high-deductible plan is limited to $3,300, while the comparable amount for family coverage is $6,550. This is an increase of 1.5% and 1.6%, respectively, from 2013. For 2014, a high-deductible health plan is defined as a health plan with an annual deductible that is not less than $1,250 for self-only coverage and $2,500 for family coverage, and the annual out-of-pocket expenses (including deductibles and copayments, but not premiums) must not exceed $6,350 for self-only coverage or $12,700 for family coverage.
Tax Reform School: How Low Can You Go?
August 2, 2013
Tax reform talk is heating up. Support is growing for bipartisan efforts to rewrite the tax code, with committee chairmen and ranking members in both the House and the Senate jumping aboard the effort.
In a bipartisan national tour, Sen. Max Baucus, D-Mont., and Rep. Dave Camp, R-Mich., chairmen of the Senate Finance Committee and the House Committee on Ways and Means, respectively, have been seeking to drum up support for reform. And Tuesday, President Obama offered his own plan for corporate tax reform.
The commonality in the various proposals is to broaden the base and lower the rates. The major hurdle facing legislators is the question of whether reform should be revenue neutral or a revenue raiser. The parties are divided, with Democrats generally supporting raising additional revenue, and Republicans aiming for revenue neutrality. There seems to be an actual impasse, since a reform that doesn’t raise revenue has been labeled a “non-starter” by Sen. Harry Reid, D-Nev., while Sen. Mitch McConnell, R-Ky., takes the opposite position.
Even the President’s plan, which lowers the top corporate tax rate, is seen by opponents as a frivolous suggestion because it includes revenue raisers that the President said would be used to fund a new federal jobs program. And since it applies only to corporations, it leaves unchanged the rates paid by most small businesses.
“Corporate-only rate reduction does not amount to business tax reform,” said Associated Builders and Contractors vice president of federal affairs Geoff Burr. “The President’s plan not only widens the existing gap between Main Street and the Fortune 500, but would actually mean billions of dollars in increased taxes for construction contractors.”
National Federation of Independent Business president and chief executive Dan Danner agreed. “Over 75 percent of all small businesses in the United States are taxed at the individual rate,” he said. “By focusing on corporate-only reform, the President will disadvantage the innovators, the job creators, and the leading pillars of local communities. Any discussion of tax reform must include both corporate and individual rates so that there is a level playing field for businesses of all sizes.”
While not necessarily a barrier to reform, Sen. Baucus’s impending retirement from the Senate adds a sense of urgency in his quest for a legacy. He isn’t running for reelection, and will leave the Senate on Jan. 3, 2015.
It looks as though there may some congressional activity on tax reform in the fall, but the likelihood is that nothing will be completed. And with midterm elections looming in 2014, increasing partisanship may act as a further barrier to comprehensive reform.
When the tax reform rewrite process does begin, it will almost certainly start with a “clean” code without the deductions, credits and exemptions that now litter the landscape. As a consequence, competing proposals are surfacing to keep many of the deductions and credits in place. Nearly every group with a K Street address has issued an opinion on what should be included in a new code.
The final look of a rewritten code will depend on how serious Congress is about the two goals of lower rates and a broader base. It will be up to them to weigh competing interests in deciding how low and how broad to make the code.
House Votes to Roll Back Doubled Student-Loan Interest Rate
Washington, D.C. (August 1, 2013)
By James Rowley
Congress gave final approval to legislation that would peg the interest rates on government-sponsored student loans to a market-based rate, ensuring that almost 9 million undergraduates will pay 3.86 percent interest on their next loan.
The Republican-run House voted 392-31 under streamlined procedures requiring a two-thirds supermajority—to accept changes made by the Democratic-controlled Senate to legislation it initially passed in May. That clears the bill, H.R. 1911, for President Barack Obama, who backs the compromise. In his budget proposal this year, Obama called for linking interest rates on Stafford and PLUS loans to the government’s borrowing costs.
Enactment of the legislation will provide certainty to students who rely on government loans and to private lenders such as SLM Corp., popularly known as Sallie Mae, and Wells Fargo & Co.
“Sallie and other private lenders can know where federal loan rates are going to be and therefore plan accordingly,” said Michael Tarkan, who follows private lenders for Washington- based Compass Point Research and Trading. “The competition from the private side will go up against the federal PLUS Loan market.”
The new rates, pegged to the yield on the 10-year Treasury note, will be retroactive to July 1— the day that the interest rate for subsidized Stafford loans doubled from 3.4 percent to 6.8 percent, matching the rate for unsubsidized loans.
The government pays the interest on subsidized loans while students are in school. Those loans are disbursed based on financial need, while unsubsidized loans have no income requirement. Students take out new loans for each academic year.
Senate Democrats had resisted proposals by both House Republicans and Obama to tie rates to fluctuations in the 10-year Treasury yield.
The legislative impasse prevented Congress from averting the previously scheduled July 1 doubling of the interest rate for about 7 million low-income students who take out subsidized Stafford loans.
Republicans had highlighted the division between Obama and Senate Democrats, with House leaders repeatedly calling on the Senate to pass legislation meeting the president’s requirement that interest rates reflect government borrowing costs.
The breakthrough came on July 18, when a bipartisan group of eight senators agreed to a compromise that the Senate passed, 81-18, on July 24. Republican negotiators led by Tennessee Senator Lamar Alexander, a former U.S. education secretary, agreed to a demand by Democrats that rates for undergraduate loans be capped at 8.25 percent.
Loans to about 1.5 million graduate students who take out Stafford loans will be capped at 9.5 percent. The rate cap for PLUS loans to more than 1 million graduate students and parents of undergraduates is 10.5 percent.
Stafford loans limit the amount that can be borrowed, while PLUS loans have no restrictions.
The Senate’s approval of the bipartisan compromise was praised by House Speaker John Boehner, an Ohio Republican, who called the revised legislation “a victory for students and parents” that is “consistent with the House Republican bill passed in May.” House Minority Leader Nancy Pelosi, a California Democrat, called the Senate vote “a concrete step toward restoring the economic security, educational opportunities, and peace of mind of America’s students.”
A leading Democratic opponent of variable rates, Rhode Island Senator Jack Reed, argued during Senate debate that the legislation marked a “fundamental shift” in how Congress dealt with student loans. Under the bill, he said, students in college now will benefit from lower interest financed by higher borrowing costs for students who won’t start college for four or five years.
Variable rates pegged to the 91-day Treasury bill were used to determine subsidized Stafford loans when the direct student loan program began operation in 1992. A decade later, legislation was enacted to begin a four-year transition to a fixed rate of 6.8 percent for Stafford loans starting July 1, 2006.
In 2007, Congress incrementally reduced the interest rate to 3.4 percent for subsidized Stafford loans. That rate was to expire on July 1, 2012, and jump to 6.8 percent. Responding to Obama’s election-year call to keep borrowing costs low for financially needy students—an appeal endorsed by Obama’s Republican opponent in the presidential campaign, Mitt Romney—Congress extended the 3.4 percent rate for another year.
Pressure on Lawmakers
The July 1 doubling of that rate meant that all Stafford loans, subsidized and unsubsidized, were set at a fixed rate of 6.8 percent. The increase put pressure on lawmakers to act before Congress begins its five-week summer recess at the end of this week so that students returning to college next month will not have to pay the higher rates.
House Republicans today took credit for taking timely action and blamed Senate Democrats for the delay.
“The House acted early, long before the deadline,” Majority Whip Kevin McCarthy of California told reporters. “The Senate went through a lot of different movements,” he said. Congress should “never have to go past that deadline.”
Under the legislation passed today, the interest rate for all undergraduate Stafford borrowers will be 2.05 percentage points higher than the yield on the 10-year Treasury note at the last auction before June 1.
That yield was 1.81 percent at the May 15 auction, the last one the Treasury Department conducted before June 1. That puts the rate for undergraduate Stafford loans for the 2013-2014 academic year at 3.86 percent.
Graduate Stafford loans will be set at 3.6 percentage points more than the 10-year Treasury yield, or 5.41 percent for the coming school year.
PLUS loans will be marked up 4.6 percentage points above the 10-year Treasury yield, for an interest rate of 6.41 percent in the coming year.
Unlike the original House measure, students can lock in an interest rate each year that they borrow money. The House plan would have required students to pay a varying interest rate on the rolling total of what they borrow to finance higher education, with an 8.5 percent cap.
“Like the 30-year mortgage, once you take out the loan, you know what your rate is going to be so you can plan on it,” House Minority Whip Steny Hoyer, a Maryland Democrat, told reporters yesterday. He called the measure “a compromise to the extent it reflects market rates’’ sought by Republicans and Obama.
Senate Introduces Bill to Expose Hidden Corporate Owners
Washington, D.C. (August 1, 2013)
By Michael Cohn
A bipartisan group of senators have introduced legislation to combat acts of tax evasion, money laundering, terrorism and other wrongdoing facilitated by U.S. corporations with hidden owners.
Sen. Carl Levin, D-Mich., chairman of the Permanent Subcommittee on Investigations, and Sen. Chuck Grassley, R-Iowa, ranking member of the Senate Judiciary Committee, together with Senators Dianne Feinstein, D-Calif., and Tom Harkin, D-Iowa, introduced the Incorporation Transparency and Law Enforcement Assistance Act on Thursday. The bill would prohibit all 50 states from allowing corporations to be formed by unidentified persons, and instead require states to obtain the identities of the people behind the corporations formed under their laws.
“Today, it takes more information to obtain a driver’s license or open a U.S. bank account than it does to form a U.S. corporation,” Levin said in a statement. “Our states don’t require anyone to name the owners of the corporations being formed under their laws, and the United States is currently one of the world’s biggest offenders in terms of creating corporations with hidden owners. In June, President Obama stood with other international leaders at a G8 summit to condemn corporations with hidden owners who commit crimes, tax evasion, and other wrongdoing. The G8 leaders made a joint commitment to combat that problem. If the United States wants to maintain its leadership and credibility on ending tax avoidance and corporate secrecy in tax havens, we need to get our own house in order. We also need to listen to the law enforcement community that supports this legislation and has been urging us for years to put an end to corporate secrecy used to hide criminal conduct.”
The United States forms almost 2 million corporations and limited liability companies each year—more than the rest of the world combined—and does so without asking for the identity of the owners. The Levin-Grassley-Feinstein-Harkin bill would require the states to add a single question to their existing incorporation forms requesting the names of the natural persons—the beneficial owners—behind the corporations being formed.
States would not be required to verify the information, but penalties would apply to persons who submit false information. Law enforcement would be given access to the information upon presentation of a subpoena or summons. Corporations bidding on federal contracts would have to provide the same beneficial ownership information to the federal government to ensure the United States knows with whom it is doing business. Regulated corporations whose ownership is already known, including publicly traded corporations, banks and securities firms, would be exempt from the disclosure requirement. A summary of the bill is available here.
“Prosecutors of financial crimes follow the money,” said Grassley. “It’s hard for them to do that when the owners of shell corporations are able to hide their identities so easily. Setting consequences for submitting false ownership information would help law enforcement by imposing a hardship on the Ponzi schemers, money launderers and tax cheats who use shell corporations to conceal their fraud.”
The bill is supported by law enforcement groups including the Federal Law Enforcement Officers Association, Fraternal Order of Police, Society of Former Special Agents of the Federal Bureau of Investigation, and National Association of Assistant United States Attorneys, as well as by Manhattan District Attorney Cyrus Vance.
“It is far too easy for criminals and drug traffickers to hide behind anonymous shell corporations,” said Feinstein. “To make a real dent in combating money laundering, it is essential that law enforcement know the identity of the actual owners of corporations. This bill is an important tool in starving criminal organizations of illicit profits.”
In addition, the legislation has been endorsed by business and public interest groups, including the Main Street Alliance, American Sustainable Business Council, National Money Transmitters Association, AFL-CIO, SEIU, Global Financial Integrity, Global Witness, U.S. Public Interest Research Group, Transparency International, Public Citizen, Project on Government Oversight, Jubilee USA Network, Tax Justice Network USA, Human Rights Watch, Friends of the Earth, Open Society Policy Center, Revenue Watch Institute, the FACT Coalition and more.
“This long-overdue requirement will shine the light on who actually owns corporations incorporated in the United States,” said Harkin. “This simple, common-sense legislation will bring much needed transparency into the system so that law enforcement can better prevent tax evasion, money laundering, terrorist financing, and other criminal activities conducted through currently untraceable businesses and bring perpetrators of these activities to justice.”
This is the fourth Congress in which the bill has been introduced. When the bill was introduced the first time in 2008, and President Obama was a member of the U.S. Senate, he was an original cosponsor. The passage of the bill has gained new urgency since the June G8 summit when the G8 leaders made this issue a top priority, and President Obama issued an action plan committing to tackle the problem this year.
The lawmakers cited several examples of how U.S. corporations have been misused, including the following.
• Viktor Bout, an arms trafficker found guilty in 2011 for conspiring to kill U.S. nationals and selling weapons to a terrorist organization, used shell companies around the world in his work, including a dozen formed in Texas, Delaware and Florida.
• Victor Kaganov, a former Russian military officer who ran an illegal money transmitter business from his home in Oregon, pled guilty in 2011 to using Oregon shell companies to wire more than $150 million to other countries on behalf of Russian clients.
• In June 2011, over 2,000 U.S. shell corporations formed for unidentified persons by Wyoming Corporate Services shared the same address at a small house in Cheyenne, Wyoming, including a corporation controlled by a former Ukrainian Prime Minister convicted of money laundering and extortion; a corporation indicted for helping online-poker operators evade a U.S. ban on Internet gambling; and two corporations barred from U.S. federal contracting for selling counterfeit truck parts to the Pentagon. The Wyoming Corporate Services website stated, “A corporation is a legal person created by state statute that can be used as a fall guy, a servant, a good friend or a decoy. A person you control ... yet cannot be held accountable for its actions. Imagine the possibilities!”
• In 2010, Michael Huarte was convicted of health care fraud and received a sentence of 22 years for forming 29 shell companies in such as states as Florida, Georgia, and Louisiana and using them to bilk Medicare out of more than $50 million.
• In 2010, Florida attorney Scott Rothstein pled guilty to fraud and money laundering in a $1.2 billion Ponzi investment scheme, in which he used 85 U.S. limited liability companies to conceal his participation or ownership stake in various business ventures.
• In 2005, the Immigration and Customs Enforcement division of the Department of Homeland Security closed an investigation into 800 U.S. shell corporations in Utah and most of the other 50 states, all of which were associated with a group of companies in Panama and raised concerns about tax fraud and other wrongdoing, due to ICE’s inability to identify any natural person who owned any of the shell corporations.
The bill would not only help law enforcement combat wrongdoing, it would bring the United States into compliance with international standards issued by the Financial Action Task Force on Money Laundering requiring countries to obtain beneficial ownership information for the corporations they form. It would also make U.S. domestic practices consistent with U.S. foreign policy.
“The fact that we have corporate secrecy right here in our backyard contradicts U.S. efforts to end corporate secrecy offshore,” said Levin. “All over the world, people are standing up and speaking out against shell corporations with hidden owners being used to commit wrongdoing. It is time Congress acted to ensure transparency, rather than secrecy, in the formation of U.S. corporations.”
The Financial Accountability and Corporate Transparency (FACT) Coalition, an alliance of civil society organizations, small business groups, investors, and labor unions urged lawmakers, applauded the introduction of the bipartisan legislation Thursday.
“The tide is turning against corporate secrecy,” said Stefanie Ostfeld, senior policy advisor for Global Witness. “Swift passage of this bill would enable the U.S. to implement its G8 commitment to enhance transparency of the real people who own and control companies, making it harder for the corrupt and other criminals to hide behind American shell companies to move dirty money.”
“The Department of Justice has made it clear that anonymous shell companies are the most-widely used method for laundering the proceeds of crime, corruption, and tax evasion,” said Heather Lowe, legal counsel and director of government affairs at Global Financial Integrity. “They are used to facilitate sex slavery, arms trafficking, and drug dealing. Ending the anonymity behind these phantom firms is just common sense. The Obama administration has endorsed the need for this legislation, and now it's time for Congress to do its part.”
Brandon Rees, acting director of the AFL-CIO Office of Investment, stated, “Criminals should not be permitted to hide from authorities using artificial legal structures. This legislation will shine a light on anonymous shell companies, revealing the human beings that stand to benefit from their operations.”
Nicole Tichon, executive director of Tax Justice Network USA, added, “The United States is currently a very attractive destination for corrupt officials and tax evaders to hide the proceeds of their crimes, and anonymous shell companies provide a prime vehicle to do so. These entities have been implicated in trafficking of drugs, arms, and humans; terrorist financing; government corruption; fraud; tax evasion; and many other illicit activities.”
Many U.S. states rank among the easiest jurisdictions in the world to form a company without revealing the identity of who ultimately owns or controls it, the FACT Coalition pointed out. The increased accountability made possible by the bill would make it much harder for criminals to hide behind American shell companies to perpetrate schemes to defraud investors and other innocent Americans or to steal millions of dollars from Medicare. It would also provide important benefits to small businesses.
“Most real American business owners are proud to have their names on their incorporation papers, if not on the door,” Scott Klinger, tax policy director for the American Sustainable Business Council, said. “Having hundreds of thousands of anonymous shell corporations lurking in the shadow economy creates unnecessary risks and added costs for legitimate businesses and for the economy.”
House Passes Bill to Stop IRS Enforcement of ObamaCare
Washington, D.C. (August 5, 2013)
By Michael Cohn
The House passed a bill to prohibit the Internal Revenue Service from implementing or enforcing the Affordable Care Act before heading home for Congress’s August recess, but the legislation has little chance of advancing in the Senate.
The bill, known as the Keep the IRS Off Your Health Care Act, passed by a vote of 232 to 185 on a mostly party line vote, with four Democrats joining Republicans to approve the measure. It was one of a number of bills introduced by House Republicans in recent weeks penalizing the IRS for recent scandals and the 40th bill aimed at repealing or gutting the Affordable Care Act.
Rep. Tom Price, R-Ga., issued a statement applauding passage of the bill he had introduced. “By voting to prohibit the IRS from implementing or enforcing any part of President Obama’s health care law, the House of Representatives has taken an important step toward protecting the health care of American citizens today,” he said. “The Keep the IRS Off Your Health Care Act has the support of over 140 cosponsors in the House and has been endorsed by numerous organizations and thousands of Americans who share our commitment to preventing any of our fellow citizens from having to answer to the IRS when it comes to their personal health care decisions. The IRS clearly has not been able to prudently and impartially enforce current tax laws. It has abused its authority by targeting individuals and organizations. There’s no reason to trust this massive agency with one of the most personal aspects of our lives – our health care. Instead, we ought to be empowering individuals and families to make their own health care decisions. There are many positive ways to pursue a patient-centered health care system. But to get there, we need the Obama administration and Senate Democrats to stop siding with the Washington bureaucracy and to start standing up for the rights and health care choices of the American people.”
House Speaker John Boehner, R-Ohio, also commended passage of the bill. “The IRS has shown it cannot be trusted to implement the president’s train wreck of a health care law, and Dr. Tom Price’s legislation stops the agency from doing so,” he said in a statement. “This is only right in light of the IRS’s abusive conduct, and I hope President Obama will support it just as he has the seven bills he signed that repeal or defund parts of his health care law. In the meantime, we will continue with a series of targeted votes in the House aimed at ending this law—because patients and doctors should be in charge of health care decisions, not Washington and certainly not the IRS.”
House Minority Leader Nancy Pelosi, D-Calif., criticized House Republicans for their repeated focus on repealing all or part of the Affordable Care Act and urged them to focus instead on creating jobs and growing the economy.
“Forty is a number that is fraught with meaning in the Bible: 40 hours, 40 days, 40 years in the desert,” she said in a speech on the House floor. “But it’s fraught with nothing when it comes to overturning the Affordable Care Act as they are trying to do for the 40th time today. When our Republican colleagues vote for this bill, they will vote to put insurance companies back in charge of people’s health. When they vote for this bill, they will be voting for an initiative that deprives patients of their rights, of ending, of making a preexisting condition a reason for discrimination. That’s what a vote for this does.”
New York to Suspend Driver’s Licenses of Tax Delinquents
Albany, N.Y. (August 5, 2013)
By Michael Cohn
New York Governor Andrew M. Cuomo announced a new initiative Monday to encourage individuals who owe significant back taxes to the state to pay their bills by suspending their New York State driver licenses when their past-due tax liability exceeds $10,000.
The crackdown is the result of legislation introduced as part of the executive budget and signed into law earlier this year.
“Our message is simple: tax scofflaws who don’t abide by the same rules as everyone else are not entitled to the same privileges as everyone else,” Cuomo said in a statement. “These worst offenders are putting an unfair burden on the overwhelming majority of New Yorkers who are hardworking, law-abiding taxpayers. By enacting these additional consequences, we’re providing additional incentives for the state to receive the money it is owed and we’re keeping scofflaws off the very roads they refuse to pay their fair share to maintain.”
The new initiative is estimated to increase collections in the Empire State by $26 million this fiscal year and as much as $6 million annually thereafter.
“It’s in every taxpayer’s best interest to pay all tax bills in full,” said Commissioner of Taxation and Finance Thomas H. Mattox. ”If you can’t pay in full, our staff is available to help you arrange a payment plan that will satisfy your debt.”
The New York State Department of Taxation and Finance will send the first round of 16,000 suspension notices to delinquent taxpayers, who have 60 days from the mailing date to arrange payment with the Department. If the taxpayer fails to do so, the Department of Motor Vehicles will send a second letter providing an additional 15 days to respond. If the taxpayer again fails to arrange payment, their license will be suspended until the debt is paid or a payment plan is established.
A taxpayer who drives while the suspension is in effect is subject to arrest and penalties, Cuomo’s office noted. Those with a suspended license can, however, apply for a restricted license, which allows them to drive to work, and return directly home.
In New York State, 96 percent of taxes are paid by businesses and individuals who voluntarily meet their tax responsibilities, Cuomo’s office noted. The remaining 4 percent is collected through the tax department's audit, collections and criminal investigations programs.
Reduce Your Taxes with Miscellaneous Deductions
If you itemize deductions on your tax return, you may be able to deduct certain miscellaneous expenses. You may benefit from this because a tax deduction normally reduces your federal income tax.
Here are some things you should know about miscellaneous deductions:
Deductions Subject to the Two Percent Limit. You can deduct most miscellaneous expenses only if they exceed two percent of your adjusted gross income. These include expenses such as:
Deductions Not Subject to the Two Percent Limit. Some deductions are not subject to the two percent of AGI limit. Some expenses on this list include:
Many expenses are not deductible. For example, you can’t deduct personal living or family expenses. Report your miscellaneous deductions on Schedule A, Itemized Deductions. Be sure to keep records of your deductions as a reminder when you file your taxes in 2014.
S Corps Pay Highest Effective Tax Rates
WASHINGTON, D.C. (AUGUST 7, 2013)
BY MICHAEL COHN
The National Federation of Independent Business and the S Corporation Association released a new study Wednesday showing that S corporations pay the highest effective rates of any business type.
The study, authored by Quantria Strategies LLC, compares the tax burden that different business entities will shoulder in 2013 and finds that S corporations will pay the highest average effective tax rate (at 31.6 percent of their income), followed by partnerships (29.4 percent), C corporations (17.8 percent) and sole proprietorships (15.1 percent).
The results of this study come at a critical time for tax reform. House Ways and Means Committee chairman Dave Camp, R-Mich., and Senate Finance Committee chairman Max Baucus, D-Mont., are focusing on crafting a comprehensive tax reform plan that they hope to unveil this year. With the release of the study, the lobbying groups hope to provide lawmakers in Congress with their perspective on how much they believe is paid in taxes by various types of business entities.
They also positioned the study in reaction to a speech last week by President Obama highlighting his proposals for business tax reform, which mainly focused on eliminating corporate tax loopholes and increasing investment in jobs to rebuild infrastructure and encourage more manufacturing (see Obama Urges Business Tax Rewrite to Help Finance Jobs Program). However, Obama also included some proposals for small businesses, including simplifying tax filing for small businesses and allowing them to expense up to $1 million in investments.
“While many people think of the statutory tax rate when they consider the effect of federal income taxes, the reality is that the statutory tax rate does not represent the best measure of the effect of taxes on a business,” said the study. “Average effective tax rates are a better measure of whether a particular industry or business form faces greater or lesser federal income taxes relative to other industries or business forms.”
A previous study by Quantria in 2009 examined businesses with under $10 million in receipts and led to similar results. According to the latest study, S corporations making more than $200,000 will pay 35 percent, equal to the marginal tax rate paid by the most successful C corporations.
Moreover, the study indicates that the S corporation tax burden is highly progressive, with the smallest S corporations paying 19 percent in tax, while the largest pay 35 percent.
“The study released today by NFIB and the S Corporation Association makes clear that comprehensive tax reform is the only way to ensure we make the tax code more fair and equitable for all employers,” said Rep. Dave Reichert, R-Wash., a member of the tax-writing Ways and Means Committee, in a statement. “We know Main Street businesses employ most of the workers, and this study shows they pay lots of taxes too. The President’s plan to raise their taxes further in order to cut tax rates for big business is simply a non-starter. Tax reform needs to be comprehensive, and it needs to level out the tax burden paid by businesses of all types.”
The S Corporation Association plans to use the new study, along with a previous study from Ernst & Youngmeasuring employment levels at pass-through entities, to fend off efforts at corporate-only tax reform.
National Federation of Independent Business president and CEO Dan Danner also pointed to the results of the study. “The U.S. tax code is unfair and complex,” he said in a statement. “Today’s study provides valuable data that confirms small businesses currently pay a higher effective tax rate than many large corporations. This study delivers a strong counter argument to the President’s announcement last week that corporate-only tax reform is the best path. Over 75 percent of all small businesses in the United States are taxed at the individual rate—signifying the need for comprehensive reform that addresses both individual and corporate taxes. NFIB will continue to advocate for a level playing field so that small-business owners can create jobs and grow their business.”
DETROIT (AUGUST 7, 2013)
BY MICHAEL COHN
A former school accountant, and her daughter, a schoolteacher, have been found guilty on fraud and money laundering charges.
Sandra Campbell, 57 a former Detroit Public Schools contract accountant and school board candidate, and her daughter, Domonique Campbell, 38, a Detroit Public Schools teacher, were convicted Monday by a federal jury in Detroit on charges of program fraud conspiracy, money laundering conspiracy, and tax charges following a five-week jury trial.
Between 2004 and 2008, according to prosecutors, the Campbells obtained over $530,000 from the Detroit Public Schools through a fraudulent scheme in which orders were placed with a sham company they had set up for books and educational materials that were never provided to the schools. The Campbell also allegedly conspired to launder the fraud proceeds and to defraud the Internal Revenue Service, failing to report the money they fraudulently obtained from the schools as income on their tax returns.
“Those who profit at the expense of our children and steal from our community will be held accountable for their greedy actions,” said IRS special agent in charge Erick Martinez in a statement.
The jury returned its verdict after only one-and-a-half hours of deliberations. The case was investigated by special agents of the FBI, IRS, and Department of Education-Office of Inspector General, with the assistance of Detroit Public Schools-Office of Inspector General. The case was investigated and prosecuted by Assistant U.S. Attorneys J. Michael Buckley and Bruce Judge of the Public Corruption Unit.
“Anyone who considers stealing from our school children should take note that we are scrutinizing records and conduct, and will prosecute wrongdoers,” said U.S. Attorney Barbara L. McQuade.
Problems Predicted if Georgia Shifts from Income to Sales Taxes
ATLANTA (AUGUST 7, 2013)
BY MICHAEL COHN
A proposal to drastically cut or abolish state income taxes in Georgia and replace them with higher sales taxes would raise taxes on up to 80 percent of Georgia taxpayers and spike Georgia's average state and local sales tax to as high as 14.5 percent, according to a new study.
The study, by the Georgia Budget and Policy Institute, predicts that a seismic shift to a sales tax-dependent system would destabilize the state's finances, harm businesses and communities and undermine the state’s economy.
The study analyzes outcomes for other states that cut their income taxes and estimates the potential impact of legislation filed this year to cut or eliminate the source of half of Georgia's revenue, the income tax.
“The surprise here is how extreme the tax shift is from Georgia’s wealthiest taxpayers to its low- and middle-income families,” said GBPI tax policy analyst Wesley Tharpe, who wrote the study.
The study predicted that swapping the income tax for higher sales taxes would require a combined state and local sales tax rate as high as 14.5 percent to recover the lost revenue. In addition, slashing income taxes would probably lead to spending cuts in areas such as transportation, education and public safety.
Shifting to a sales tax would also hurt many Georgia businesses, especially small ones, the study forecast, as drastically higher sales taxes would increase their costs and shrink their customers’ pocketbooks.
A state legislative committee held the first in a series of hearings in July to study the effects of shifting from Georgia’s current tax system to one based almost entirely on the sales tax. Two bills are set to be considered by the Georgia General Assembly when it convenes next January, although the proposals to date lack key details.
“As these plans add specifics we’ll continue to update our estimates,” Tharpe said. “But this impractical idea isn’t new, so chances that we’ll see some wrinkle that mitigates the problems identified in the study are slim to none.”
The 25 US Corporations that pay the highest taxes – According to Forbes Magazine
Company Effective %
The World’s 50 Most Valuable Sports Teams – According to Forbes Magazine
Team Value in Billions
1 Real Madrid $3.3
2 Manchester United 3.165
3 Barcelona 2.6
4 New York Yankees 2.3
5 Dallas Cowboys 2.1
6 New England Patriots 1.635
7 Los Angeles Dodgers 1.615
8 Washington Redskins 1.6
9 New York Giants 1.468
10 Arsenal 1.326
11 Boston Red Sox 1.312
12 Bayern Munich 1.309
13 Houston Texans 1.305
14 New York Jets 1.284
15 Philadelphia Eagles 1.26
16 Chicago Bears 1.19
17 San Francisco 49ers 1.175
18 Green Bay Packers 1.161
19 Baltimore Ravens 1.157
20 Indianapolis Colts 1.154
21 Ferrari 1.15
22 Denver Broncos 1.132
23 New York Nicks 1.1
24 Pittsburg Steelers 1.1
25 Miami Dolphins 1.06
26 Carolina Panthers 1.048
27 Seattle Seahawks 1.04
28 Tampa Bay Buccaneers 1.033
29 Tennessee Titans 1.011
30 Kansas City Chiefs 1.008
31 Chicago Cubs 1.0
32 Los Angeles Lakers 1.0
33 Toronto Maple Leafs 1.0
34 Cleveland Browns 0.987
35 Minnesota Vikings 0.975
36 New Orleans Saints 0.971
37 AC Milan 0.945
38 San Diego Chargers 0.936
39 Arizona Cardinals 0.922
40 Chelsea 0.901
41 Philadelphia Phillies 0.893
42 Cincinnati Bengals 0.871
43 Detroit Lions 0.855
44 Atlanta Falcons 0.837
45 New York Mets 0.811
46 Buffalo Bills 0.805
47 Chicago Bulls 0.800
48 McLaren 0.800
49 San Francisco Giants 0.786
50 Oakland Raiders 0.785
5 Tax Strategies Every Business Owner Should Know
Posted by Peter DeMarco on Wed, Aug 07, 2013 @ 08:48 AM
This was posted on a blog I track by another CPA. However, I find the advise very astute.
The dream of owning your own business is a lot like owning your own home. Once you have done all of your searching, decided on the size, style, color, neighborhood, local amenities and the price, you are ready to make the plunge. Homebuyers who do some up-front planning and seek advice on a myriad of financial and non-financial matters that occur during the homeownership period reap huge benefits down the road.
Likewise, when owning your own business, the tax planning you do up-front pays huge dividends in the future. An age-old axiom among tax professionals is “never let the tax tale wag the dog." In other words, an owner needs to understand his or her business as thoroughly as possible. He needs to know the industry, the market, the customers, the drivers and business strategies for that business before making an investment in it. Once he has done that, it’s time to think about the major tax strategies to help him maximize the return on his investment.
Here are my top 5 tax strategies:
#1: Choice of Entity
A business owner can operate in these structures: a sole proprietorship, regular C corporation, a subchapter S corporation, limited liability company (LLC), a general partnership or limited partnership. Under current tax rules, all of these except a C corporation offer the business owner one level of taxation; that is, the earnings of the business are taxed only once and then the owner is permitted to distribute those earnings to herself without further taxation. In a C corporationsetting, the business profits are taxed at the corporate level (first level of tax) and again when the owner distributes the after-tax earnings to herself (second level of tax).
#2: Selection of a tax year
There is considerable flexibility under the tax code to choose the tax year that best fits the business. With a C corporation, any calendar month end is permissible, so picking a month that coincides with a low point in the business cycle, allows a certain amount of income and tax deferral benefits. The other type of entities listed in #1 offer less flexibility and will generally permit a tax year ending with any month from September through December. While there are some tax deferral savings to be had, it typically will be much less than with a C corporation.
#3: Selection of tax accounting methods
The tax law allows numerous ways to defer income or accelerate deductions which are primary strategies. Anytime a business or its owner can push off into the future paying a dollar of tax, it allows a greater retention of cash in the business to fuel its growth. Common elections include whether to use an overall cash or accrual method of accounting for tax purposes. Heck, a business may even qualify to have its cake and eat it too by keeping its regular books and records on an accrual method, but electing to use the cash method for filing its tax returns.
#4: Keep current with all tax reporting and filing deadlines
Nothing causes a business owner to lose sleep more than to have the IRS “knock on the door” because of missed tax filings, failure to properly report transactions or make tax payments. Especially with payroll deposits involving trust fund taxes, such as employee withholding taxes and Social Security and Medicare taxes, failure to withhold and pay over these taxes can make the owner personally responsible to pay them if the business fails to do so.
#5: Convert “ordinary income” to “capital gain” income
With businesses operating as “flow-through” entities (e.g. sole proprietorship, S corporations, LLC’s or partnerships), there is a 17% to 20% tax savings with having income characterized as long-term capital gains instead of as ordinary income. The tax savings from one transaction where income gets converted to L-T capital gains can be huge.
My final advice is for business owners to seek competent counsel and advice from an attorney and outside CPA on these strategies before the business opens its doors. Like the homeowner who finds it hard to leave his dream house, investing some time and money in good, solid tax planning upfront will make the business ownership experience a memorable one. If you would like more information on the strategies discussed above.
Americans Giving Up Passports Jump Sixfold as Tougher Tax Rules Loom
WASHINGTON, D.C. (AUGUST 9, 2013)
BY DYLAN GRIFFITHS
Americans renouncing U.S. citizenship surged sixfold in the second quarter from a year earlier as the government prepares to introduce tougher asset-disclosure rules.
Expatriates giving up their nationality at U.S. embassies climbed to 1,131 in the three months through June from 189 in the year-earlier period, according to Federal Register figures published today. That brought the first-half total to 1,810 compared with 235 for the whole of 2008.
The U.S., the only nation in the Organization for Economic Cooperation and Development that taxes citizens wherever they reside, is searching for tax cheats in offshore centers, including Switzerland, as the government tries to curb the budget deficit. Shunned by Swiss and German banks and facing tougher asset-disclosure rules under the Foreign Account Tax Compliance Act, more of the estimated 6 million Americans living overseas are weighing the cost of holding a U.S. passport.
“With the looming deadline for FATCA, more and more U.S. citizens are becoming aware that they have U.S. tax reporting obligations,” said Matthew Ledvina, a U.S. tax lawyer at Anaford AG in Zurich. “Once aware, they decide to renounce their U.S. citizenship.”
FATCA requires foreign financial institutions to report to the Internal Revenue Service information about financial accounts held by U.S. taxpayers, or held by foreign entities in which U.S. taxpayers hold a substantial ownership interest. It was estimated to generate $8.7 billion over 10 years, according to the congressional Joint Committee on Taxation.
The 2010 FATCA law requires banks to withhold 30 percent from “certain U.S.-connected payments” to some accounts of American clients who don’t disclose enough information to the IRS. While banks can sign agreements to report to the IRS individually, many are precluded from doing so by privacy laws in their jurisdictions.
The Treasury Department last month announced that the IRS will delay the start of FATCA by six months until July 1, 2014, to give foreign banks time to comply with the law. The extension of the act follows a previous one-year delay announced in 2011.
Financial institutions including Canada’s Toronto-Dominion Bank and Allianz SE of Germany have expressed concerns that FATCA is too complex.
The latest delay comes after the Swiss government agreed in February to simplifications that will help the country’s banks implement FATCA.
“The United States wishes to ensure that all income earned worldwide by U.S. taxpayers on accounts held abroad can be taxed by the United States,” the Swiss government said on April 10.
Since 2011, Americans who disclose their non-U.S. bank accounts to the IRS must file the more expansive 8938 form that asks for all foreign financial assets, including insurance contracts, loans and shareholdings in non-U.S. companies.
Failure to file the 8938 form can result in a fine of as much as $50,000. Clients can also be penalized half the amount in an undeclared foreign bank account under the Banks Secrecy Act of 1970.
UBS, Switzerland’s largest bank, paid a $780 million penalty in 2009 and handed over data on about 4,700 accounts to settle a tax-evasion dispute with the U.S. Whistleblower Bradley Birkenfeld was sentenced to 40 months in a U.S. prison in 2009 after informing the government and Senate about his American clients at the Geneva branch of Zurich-based UBS AG.
The additional compliance costs for companies to ensure that Americans they hire are filing the correct U.S. tax returns and asset-declaration forms are at least $5,000 per person, said Ledvina.
For individuals, the costs are also rising. Getting a mortgage or acquiring life insurance is becoming almost impossible for American citizens living overseas, Ledvina said.
“With increased U.S. tax reporting, U.S. accounting costs alone are around $2,000 per year for a U.S. citizen residing abroad,” the tax lawyer said. “Adding factors, such as difficulty in finding a bank to accept a U.S. citizen as a client, it is difficult to justify keeping the U.S. citizenship for those who reside permanently abroad.”
Anthony Parent posted that tacked into a highway bill that has recently passed the U.S. Senate has a provision that would allow the State Department to deny passports to US taxpayers whoowe delinquent tax debts to the IRS.
If you owe more than $50,000 to the IRS, and if this Bill is signed into law by the president, you could be denied your right to leave the United States.
The Bill, if signed into law, would have dire consequences for those with big unpaid and unresolved tax bills. The law would apply to those who (1) owe more than $50,000 to the IRS, and in addition, have been issued a (2) notice of federal tax lien, or a final notice of intent to levy. Those with smaller tax debts, and those tax debt proposed by an IRS audit and not finalized are not affected.
No. First of all this bill is not law yet. Second, even if it become law, the bill clearly states that if you are in a repayment plan, or installment agreement with the IRS, your passport will not be denied. The same is true even if you settle your back taxes with an Offer in Compromise, you can still get a passport.
If your case is still pending with IRS appeals with a Collection Due Process hearing, and there is no final determination letter, you can still get your Passport renewed.
Also there are exceptions for those attempting to return to the US and those who wish to leave the US for family emergencies. It is unclear who will be in charge of who will be determining what a family emergency is.
But what about those in Currently Non-Collectible status?
There it is a little tricky. Currently Non-Collectible status is when the IRS agrees the taxpayer is in a hardship and agrees not demand any money, aside from holding on to tax refunds (there is an additional requirement is that a taxpayer not run up any new tax debts). But believe it or not, there is actually no statute that authorizes Currently Non-Collectible or “hardship” status.
Known as Code 530 to IRS insiders, “CNC status” is authorized by IRS policy statement 5-71 as referenced in the Internal Revenue Manual 22.214.171.124. This bill makes no reference to those in CNC.
Probably not lose your passport for FBAR penalties?
FBAR penalties are penalties the IRS imposing for failure to properly report foreign bank accounts. So can you lose you passport for unpaid FBAR penalties? Probably not.
First, the bill is written rather vaguely. It says a “tax.” Well, FBAR penalties aren’t really a tax and this is why it makes a difference. The basis for the imposition of taxes comes from Title 26 of the US tax code. The basis for the implementation of FBAR penalties comes from Title 31, and in particular the Bank Secrecy Act. This bill seeks to amend would amend Title 26, and not Title 31. So liabilities from Title 31 would, arguable, be exempt.
Further supporting the argument that this would not apply to outstanding FBAR penalties is the fact that the administrative remedies available to past due tax obligations are not available to FBAR penalty assessments.
This Bill will not impact most people who owe money to the IRS but have come up with a solution to pay or settle back taxes. But rather, only those who have not addressed their tax debts are subject to having their passports revoked. And as far as can be determined, will not impact those who have unpaid FBAR penalties.
Tax History: Abraham Lincoln Paid Income Taxes -- But He Didn't Have To
by Joseph J. Thorndike
By Joseph J. Thorndike -- email@example.com
The history of presidential tax returns is filled with minor curiosities, as one might expect from a basically voyeuristic enterprise. But one of the odder episodes came at the very start. Abraham Lincoln paid income taxes throughout the Civil War, but after his death, Treasury returned all his payments to his estate.
The Civil War prompted Congress to enact the first income tax in U.S. history. (Treasury had floated the notion of taxing income during the War of 1812, but Congress studiously avoided any acknowledgment of the proposal.) After dithering briefly between various alternatives, Congress included a reasonably comprehensive income tax in the Revenue Act of 1862. Among the law's various provisions was a special 3 percent tax on the salaries of every person in the "civil, military, naval, or other employment of the United States."
Lawmakers took pains to include themselves in the new levy, specifying that the tax applied to "senators and representatives and delegates in Congress." Paymasters and other federal disbursing officers were instructed to withhold taxes from the paychecks of these luminaries, as well as various less exalted federal employees. Those same paymasters were further instructed to report amounts withheld to Treasury by means of a "certificate" (presumably a forerunner of the modern Form W-2).
Constituents were apparently happy to see their representatives paying up. "A very handsome sum will be realized to the Government from the tax upon the salaries of members of the House of Representatives," reported The New York Times. All told, members of the House would pay $14,520 a year (about $342,000 in today's dollars), while House staffers would contribute another $7,438 (about $175,000 in today's dollars).1
But if lawmakers were careful to include themselves, they notably declined to include someone else: the president. The omission was obvious and presumably significant, given the law's specific inclusion of legislators. But these same lawmakers did not see fit to explain the omission at any length, leaving interested parties at both ends of Pennsylvania Avenue to ponder the possibilities.
Some observers insisted that the president was clearly excluded. The Chicago Tribune, for instance, reported that the president had been "specially exempted by the law." The paper noted, however, that President Lincoln had chosen to make voluntary payments to Treasury equal to the taxes he might otherwise have owed. According to theTribune, these payments would total $1,220 annually.2
Indeed, the paper was correct that Lincoln was making payments to Treasury. But whether he was required to make those payments was unclear. And the paper was certainly wrong about the amount Lincoln was paying. According to the leading scholar of Lincoln's personal finances, the president was paying $61 monthly, or 3 percent of his $25,000 salary, minus a $600 exemption. These payments, moreover, were being directly withheld from Lincoln's pay in the manner prescribed by the 1862 revenue act.3
Lincoln's tax payments -- voluntary or otherwise -- continued throughout the war, and they varied with changes in the tax law. The revenue measure enacted on June 30, 1864, revised the tax on federal employees, retaining the $600 exemption but increasing the rate to 5 percent. Thereafter, Lincoln had $92 per month withheld from his paycheck. Also, he made a lump sum payment of $1,279 on December 15, 1864, consistent with a special 5 percent tax on 1863 incomes imposed by the revenue measure passed on July 4, 1864, to help fund war bounties. (Lincoln's payment reflected taxes on his salary, as well as interest income from Treasury bonds that he owned.)4
Lincoln's payments do not seem to have been entirely voluntary, in the sense of being optional. As the Supreme Court later observed in a 1939 case considering the taxability of judicial salaries, the 1862 legislative language had been "construed by the revenue officers to comprehend the compensation of the President," as well as salaries paid to federal judges.5
Lincoln accepted this prevailing view, but federal judges did not. In 1863 Chief Justice Roger Taney wrote the Treasury secretary in protest: "The act in question, as you interpret it, diminishes the compensation of every judge three percent, and if it can be diminished to that extent by the name of a tax, it may in the same way be reduced from time to time at the pleasure of the legislature."6
The judiciary needed protection from a grasping Congress, which might be inclined to starve judges into submission, insisted Taney. The Founders, in their wisdom, had tried to prevent that mischief, adding to the Constitution a requirement that judges be paid "a compensation, which shall not be diminished during their continuance in office."
The new tax violated this requirement, said Taney.
The judiciary is one of the three great departments of the government, created and established by the Constitution. Its duties and powers are specifically set forth, and are of a character that requires it to be perfectly independent of the two other departments, and, in order to place it beyond the reach and above even the suspicion of any such influence, the power to reduce their compensation is expressly withheld from Congress, and excepted from their powers of legislation.
Language could not be more plain than that used in the Constitution. It is, moreover, one of its most important and essential provisions. For the articles which limit the powers of the legislative and executive branches of the government, and those which provide safeguards for the protection of the citizen in his person and property, would be of little value without a judiciary to uphold and maintain them which was free from every influence, direct or indirect, that might by possibility in times of political excitement warp their judgments.
The facts were indisputable and the policy implications plain for all to see, Taney concluded. "Upon these grounds, I regard an act of Congress retaining in the Treasury a portion of the compensation of the judges as unconstitutional, and void," he told the Treasury secretary.
The secretary chose not to answer Taney's letter, and federal judges continued to see their salaries diminished by tax withholding throughout the 1860s. But in 1869, a new Treasury secretary sought an opinion from the attorney general on the taxation of judicial salaries, as well as compensation paid to the president, which seemed to enjoy a similar constitutional protection. Ebenezer Rockwood Hoar responded with an opinion more or less identical to Taney's argument, and that brought an end to presidential and judicial income taxes -- at least for the time being. Amounts collected to that point were refunded.7
Lincoln, of course, was not alive to claim his refund. But on April 25, 1872, the administrator of his estate filed for a refund of taxes that the president had paid during his years in office, including $2,306 in regular taxes paid on salary income and $1,250 paid under the special tax of July 4, 1864. Treasury agreed with the claim and refunded $3,556 to the estate in 1872.8
1 "News From Washington," The New York Times, Oct. 4, 1862, at 5.
2 "The President a Taxpayer," Chicago Tribune, Oct. 30, 1862, at 2.
3 Henry E. Pratt, Personal Finances of Abraham Lincoln 126 (1943).
5 O'Malley v. Woodrough, 307 U.S. 277 (1939).
6 Quotations from Taney's letter are drawn from the Supreme Court's majority opinion in Evans v. Gore, 253 U.S. 245 (1920).
8 Pratt, supra note 3, at 127.
Married Same-Sex Couples with Kids May See Their Taxes Increase
WASHINGTON, D.C. (AUGUST 13, 2013)
BY LYDIA BEYOUD AND HEIDI PRZYBYLA
Married same-sex couples with children may face higher bills from the IRS as recent Supreme Court rulings start playing out in the tax code.
The increase probably would result from phasing out income tax credits for families, depending on the distribution of income between two working spouses, now that same-sex couples will be required to file joint returns with the Internal Revenue Service, according to a Congressional Research Service report.
“Under the new tax laws, you get the worst of both worlds,” said Jonathan Forster, chairman of the wealth management practice group at Greenberg Traurig LLP. “As you get pushed up into higher income tax brackets you also end up where there are certain exemption phase-outs and deduction limits. You hit the ceiling on all these, you get whipsawed, particularly if both couples are working.”
The Supreme Court ruled June 26 in a 5-4 decision that excluding state-sanctioned, same-sex marriages from the federal definition of marriage is unconstitutional—opening up a flood of tax- and benefits-related changes that in many cases will raise costs for gay married couples.
In most same-sex marriages, both individuals work, Forster said. While some couples have a big disparity in income between partners, that’s the exception rather than the rule, he said.
If each person earns $150,000 in wages and they have $30,000 in itemized deductions, $20,000 in state and local income tax and $10,000 mortgage interest, they will pay $9,400 more as married joint filers than as single separate filers based on current federal laws, Forster said.
“Generally speaking, if there is a wide disparity in the income between the two spouses, they’re more likely to pay less total taxes as a married couple than they would as single people,” said Courtney Joslin, professor at the University of California Davis School of law who specializes in family and sexual-orientation law. “By contrast, if the two incomes are closer together, they’d probably have to pay more as a married couple than they would as single people.”
With children, the picture looks worse, Bloomberg BNA reported. The loss of the Earned Income Tax Credit is one area where same-sex spouses with children stand to see a tax bill, according to the Congressional Research Service.
“Marriage penalties” can occur when the couple’s joint income pushes them into the range where the credit phases out or results in ineligibility, the report said.
Joint filers could also face a phase-out for the Child Tax Credit as their joint income rises above a certain threshold, as the phase-out threshold for married couples is less than twice that for unmarried individuals, CRS said.
“As a result, two unmarried individuals might each qualify for the credit but receive a smaller credit or become ineligible for it if married,” the group said.
Ineligibility for education tax credits probably would double for married filing jointly parents.
Couples in which one same-sex spouse wishes to adopt the other spouse’s child may also lose out on the Adoption Tax Credit, because the credit isn’t available when adopting a spouse’s child, the report said. Families also stand to lose the Child and Dependent Care Credit if one spouse has no income, disqualifying them for the credit, CRS said.
Same-sex married couples who both contribute to dependent care flexible spending accounts also may find themselves in a situation where they over-contributed in the first year in which they file as a married couple, CRS said. This is because under current law, taxpayers with children may contribute only up to $5,000 tax-free to an account, whether married or not.
So some couples may find anything contributed above that amount have become taxable, even though individual incomes makes them eligible for the Child and Dependent Care Credit, CRS said.
Even so, there are also advantages for same-sex couples when it comes to tax season.
“One thing that will be true for everyone, regardless of their tax liability, is that filing their taxes will become much easier,” Joslin said. “Filing taxes has been extremely complicated for married same-sex couples because they had to calculate their taxes twice.”
OUR COMMENT: Welcome to the world of equal treatment under the Internal Revenue Code. Married couples have faced this marriage penalty for decades.
Back-to-School Tax Tips for Students and Parents
Going to college can be a stressful time for students and parents. The IRS offers these tips about education tax benefits that can help offset some college costs and maybe relieve some of that stress.
• American Opportunity Tax Credit. This credit can be up to $2,500 per eligible student. The AOTC is available for the first four years of post secondary education. Forty percent of the credit is refundable. That means that you may be able to receive up to $1,000 of the credit as a refund, even if you don’t owe any taxes. Qualified expenses include tuition and fees, course related books, supplies and equipment. A recent law extended the AOTC through the end of Dec. 2017.
• Lifetime Learning Credit. With the LLC, you may be able to claim up to $2,000 for qualified education expenses on your federal tax return. There is no limit on the number of years you can claim this credit for an eligible student.
You can claim only one type of education credit per student on your federal tax return each year. If you pay college expenses for more than one student in the same year, you can claim credits on a per-student, per-year basis. For example, you can claim the AOTC for one student and the LLC for the other student.
You can use the IRS’s Interactive Tax Assistant tool to help determine if you’re eligible for these credits. The tool is available at IRS.gov.
• Student loan interest deduction. Other than home mortgage interest, you generally can’t deduct the interest you pay. However, you may be able to deduct interest you pay on a qualified student loan. The deduction can reduce your taxable income by up to $2,500. You don’t need to itemize deductions to claim it.
These education benefits are subject to income limitations and may be reduced or eliminated depending on your income.
IRS Sets Rules for Disclosing Tax Return Info under Health Care Law
WASHINGTON, D.C. (AUGUST 14, 2013)
BY MICHAEL COHN
The Internal Revenue Service has released the final regulations for how it will release tax return information to the Department of Health and Human Services to assess a taxpayer’s eligibility for help in buying health insurance coverage under the Affordable Care Act.
In TD 9628, the IRS noted that Section 6103(l)(21) of the Tax Code allows the disclosure of tax return information to assist the upcoming health insurance exchanges, now known as marketplaces, in performing certain functions of the health care reform law for which income verification is required, including determining the eligibility for the insurance affordability programs described in the Affordable Care Act, as well as to assist state agencies that are administering state Medicaid programs, children’s health insurance programs, and basic health programs.
For taxpayers whose income is relevant in determining eligibility for an insurance affordability program, Medicaid, CHIP, or BHP, Section 6103(l)(21) explicitly authorizes the disclosure of the taxpayer identity information, filing status, the number of individuals for whom a deduction is allowed, the taxpayer’s modified adjusted gross income, or MAGI, as defined under Section 36B of the Tax Code, and the taxable year to which the information relates or, alternatively, that the information is not available.
Section 6103(l)(21) also authorizes the disclosure of other information that might indicate whether an individual is eligible for the premium tax credit under Section 36B of the Code, or cost-sharing reductions under Section 1402 of the Affordable Care Act, and the amount of them.
The final regulations mostly adhere to the regulations proposed by the IRS last year, except that it added Social Security benefits to the list of items that can be disclosed to the Department of Health and Human Services in order to help enable the health insurance exchanges determine a taxpayer’s modified adjusted gross income. If the IRS provides HHS with the amount of Social Security benefits included in gross income under Section 86, an exchange or state agency will be generally able to determine the amount of Social Security benefits not included in gross income under Section 86, the IRS noted. This amount is one of the components of an individual’s MAGI. Eligibility for the premium tax credit, and advance payments of the credit, are based on the household income of the applicant, which is the sum of the MAGI of those individuals who comprise the household. As a result, providing the amount of Social Security benefits included in gross income, along with other items contained in the regulations, will help an exchange determine whether a taxpayer is eligible for the premium tax credit under Section 36B or cost-sharing reductions under Section 1402 of the Affordable Care Act, and the amount of the credit or reductions.
The other major change from the regulations proposed last year is to delete the reference to adoption taxpayer information numbers, or ATINs, from the list of identification numbers to be verified, because the Social Security Administration cannot verify them. Subsequent to the publication of the proposed regulations, the IRS recognized that requests relating to ATINs would not be received because individuals’ identification numbers would first be verified against SSA records. But since the SSA has no records of ATINs, the numbers cannot be verified and HHS will not request return information for individuals using ATINs. While the income of an individual with an ATIN may be relevant for determining household income and, therefore, eligibility for a health insurance affordability program, a health insurance exchange or state agency will instead need to use alternate verification procedures
Families Would Get Average of $2,700 in Tax Credits for Buying Health Insurance
MENLO PARK, CALIF. (AUGUST 14, 2013)
BY MICHAEL COHN
Americans who currently buy their own insurance through the individual market would receive tax credits averaging nearly $2,700 next year for coverage purchased through new insurance marketplaces under the Affordable Care Act, according to a new study.
The study, by the Kaiser Family Foundation, a key proponent of the health care reform law, predicted that the tax credits or subsidies would cover 32 percent of the premiums on average for this group of enrollees in a so-called "silver" plan.
The new analysis comes as some states release information predicting what the insurance premiums will be in 2014 when the Affordable Care Act’s market reforms and health insurance marketplaces take effect. The rate announcements forecast “sticker prices” that do not reflect federal subsidies to offset the cost of insurance for many current individual market policy holders, according to the Kaiser researchers.
“Tax subsidies are an essential part of the equation for many people who buy insurance through the new marketplaces next year,” Kaiser Family Foundation president and CEO Drew Altman said in a statement. “They will help make coverage more affordable for low- and middle-income people.”
Tax credits will be available to subsidize premiums for people who buy their insurance in the new marketplaces, do not have access to other affordable coverage, and have incomes between 100 percent and 400 percent of the federal poverty level (between about $11,500 and $46,000 for a single person, and $24,000 and $94,000 for a family of four).
An estimated 48 percent of people who currently have individual market coverage will be eligible for tax credits, the study found. Tax credits among those eligible will average $5,548 per family, and subsidies will average $2,672 across all families now purchasing their own insurance.
Many people who are now uninsured will also become eligible for subsidies once the new marketplaces are set up, and their tax credits will likely be higher on average since they have lower incomes than those who now buy their own coverage, the study predicted.
There are many reasons why premium costs in the individual insurance market will change under the Affordable Care Act before tax credits are applied, the study’s authors noted. For instance, insurance companies will be prohibited from discriminating against people with pre-existing conditions, leading to higher enrollment of people with expensive health conditions. More young, healthy people may also enroll due to the ACA’s individual mandate and premium subsidies.
Furthermore, insurance providers will be required to meet a minimum level of coverage that will raise premiums for people buying skimpier coverage today, but also lower their out-of-pocket costs on average when they use those services. Premiums before and after the law goes into effect are not necessarily comparable, as health plans in the new marketplaces will be required to cover a broader range of services than are found in many current individual market policies and the health needs of people who will enroll are likely to be different.
The Kaiser Family Foundation has developed a health reform subsidy calculator that estimates the premiums and tax credits available to people next year through the insurance marketplaces, based on their income levels, family size, ages and tobacco use.
Give Tax Records a Mid-Year Tune-up this Summer
IRS Summertime Tax Tip 2013-23
During the summer, you may not think about doing your taxes, but maybe you should. Some of the expenses you’ve paid over the past few months might qualify for money-saving tax credits or deductions come tax time. If you organize your tax records now, you’ll make tax filing easier and faster when you do them next year. It also helps reduce the chance that you’ll lose a receipt or statement that you need.
Here are some tips from the IRS on tax recordkeeping.
• You should keep copies of your filed tax returns as part of your tax records. They can help you prepare future tax returns. You’ll also need them if you need to file an amended return.
• You must keep records to support items reported on your tax return. You should keep basic records that relate to your federal tax return for at least three years. Basic records are documents that prove your income and expenses. This includes income information such as Forms W-2 and 1099. It also includes information that supports tax credits or deductions you claimed. This might include sales slips, credit card receipts and other proofs of payment, invoices, cancelled checks, bank statements and mileage logs.
• If you own a home or investment property, you should keep records of your purchases and other records related to those items. You should typically keep these records, including home improvements, at least three years after you have sold or disposed of the property.
• If you own a business, you should keep records that show total receipts, proof of purchases of business expenses and assets. These may include cash register tapes, bank deposit slips, receipt books, purchase and sales invoices. Also include credit card receipts, sales slips, canceled checks, account statements and petty cash slips. Electronic records can include databases, saved files, emails, instant messages, faxes and voice messages.
• If you own a business with employees, you should generally keep all employment-related tax records for at least four years after the tax is due, or after the tax is paid, whichever is later.
• The IRS doesn’t require any special method to keep records, but it’s a good idea to keep them organized and in one place. This will make it easier for you to prepare and file a complete and accurate return. You’ll also be better able to respond if there are questions about your tax return after you file.
Ernst & Young Sees More Interest in Sustainability Accounting
BY MICHAEL COHN
AUGUST 22, 2013
Ernst & Young has seen greater interest from clients in incorporating sustainability reporting as part of the services they want from the firm.
Chris Walker, a senior manager of EY’s Climate Change and Sustainability Services practice, said the practice crosses all the boundaries of the work EY is known for, including assurance, tax and accounting, and includes experts in all three areas.
“Companies are being asked by various stakeholders to disclose and report nonfinancial information that potentially is of utility to investors, customers and business partners,” he told me Wednesday.
Walker sees promise in the recent provisional standards issued by the Sustainability Accounting Standards Board for the health care sector, and its plans for releasing standards for other industry sectors including financial services, technology and communications, and non-renewables (see SASB Releases Sustainability Accounting Standards for Health Care Sector).
SASB is joining other groups that have also been working over the years on sustainability accounting issues, such as the Prince of Wales’s Accounting for Sustainability Project, the International Integrated Reporting Council, the Global Reporting Initiative and the Carbon Disclosure Project.
“I’ve seen a lot of groups jump into the mix,” said Walker. “The difference in what SASB is trying to do is they’re taking an approach like FASB in the United States. They pull together experts across a sector like health care to define the most material aspects. By accumulating and vetting the aspects, you could refine them to create a guidebook on what would be the most material issues.”
Walker believes that additional transparency about sustainability issues will be beneficial to the industry over the long term. That way, there won’t be an ad hoc approach to corporate sustainability reporting, where some companies in a given sector will report on greenhouse gas emissions while others report on their recycling efforts. “It’s been very hard from investors’ perspective to benchmark one company against another,” he said. “That’s what SASB is trying to rectify.”
Walker’s background is in the legal profession, including work on asbestos-related lawsuits, and he believes the standards can provide a useful goalpost going forward for the accounting profession and help companies avoid legal entanglements. “Transparency is better than covering up,” he said. “This is about better corporate governance. I’m an old asbestos lawyer by background, and where a lot of companies got into trouble was the many years of denial.”
He admitted that the kind of integrated reporting that the IIRC and SASB are championing is still in its early stages, especially in the U.S., but Ernst & Young is getting a head start by working with a few companies to come up with an approach.
“We help them determine what is material, and do a readiness assessment of the metrics and information they want to report,” he said.
Historically the approach taken by many companies to capturing this kind of information has been non-standard at best, Walker pointed out. “The systems weren’t necessarily there,” he said. “There were a lot of sticky notes and Post-It notes, which wouldn’t necessarily create an auditable trail. There’s a maturation now in the market. You need to go back and make sure it’s verified and assurable. Only when it’s up to that stage will you see the integration into the financial reporting.”
Right now, integrated reporting is being done in an experimental way by several companies. A few U.S. companies have publicly said they would pilot the IIRC’s draft framework for integrated reporting, including Microsoft, Prudential Financial, Clorox, Coca-Cola, Jones Lang LaSalle, Edelman and Cliffs Natural Resources.
Walker recalls that when he first became involved in sustainability reporting about 13 or 14 years ago, he was working for an insurance company and the chief risk officers were very interested in it. He recalls one of them telling him, “You know this is serious when the lawyers and accountants are involved.”
Clients Don’t Tell Financial Advisors Their Secrets
ST. PAUL, MINN. (AUGUST 22, 2013)
BY MICHAEL COHN
Nearly a third of consumers who work with financial advisors confess they have not told their advisors critical information that could affect their finances, according to a new survey.
The survey, by Securian Financial Group, found that 29 percent of the 720 consumers it polled admitted they haven’t told their advisors about everything that could have an impact on their finances.
According to Securian’s report, “Client secrets: What people don’t tell their financial advisors,” 52 percent of those with secrets said the information is too personal to share. Another 45 percent said their secrets are outside of their financial strategies and don’t need to be shared. These responses may suggest a lack of education about the benefits of holistic planning and a need to raise awareness about the financial risks associated with not sharing these matters. One fifth of those polled said their secrets are too embarrassing to reveal.
Some people may hold back because they don’t want to hear what their advisors would say if they had the full picture. About 25 percent of the respondents to the poll said they carry debt their advisors do not know about. When asked what changes their advisors would probably recommend to them, 50 percent of the survey respondents said it would be to increase savings or reduce spending, while 25 percent said their advisors would want them to create new financial plans.
Nearly half (48 percent) of all the respondents said that trust is the most important aspect of their advisor relationships. Forty-three percent said they discuss other personal issues with their advisors. Of the 29 percent who withhold critical information, only 11 percent said it’s because of a lack of trust.
“They may not realize it, but personal matters can profoundly affect a family’s financial stability,” said Michelle Hall, manager of market research at Securian, in a statement. “Health and marital difficulties rank high among the critical subjects clients do not discuss with their advisors.”
A sizable portion of those who withhold critical financial information from their advisors appear—demographically at least—to fall in many advisors’ target markets: Nearly one-third are pre-retirees and retirees. Two-thirds are 40 and older. One-fifth are affluent, with $150,000 or more in annual household income, or mass affluent, with $100,000 to $149,000 in income. Among those who are employed, two-thirds are in professional or managerial careers.
Rich Preuss, an advisor with The Healy Group in South Bend, Ind., said he is not surprised by the 29 percent figure, though he doubts the percentage is that high among his clients because his relationships are strong.
Joel Twedt of Twedt Financial Services in Lake Mills, Iowa., said that when clients withhold information that could affect their financial plans, he doesn’t pry. “Some people are embarrassed to provide information so I don’t ask,” he said. “Once they get comfortable, it’s amazing what they reveal. Quality advisors are counselors. It’s not just about the clients’ money: It’s about their dreams, their fears, their families.”
Nicole Winter Tietel of Winter & Associates in St. Paul, Minn., also feels her client relationships are strong, but she said she worries about people who don’t share important facts with their advisors. “If they keep secrets they likely have duplication in their investment portfolios, are underinsured or carry debt that eats away at their net worth,” said Tietel. “Ultimately, they are taking more risk.”
Stephen J. Dunn, Contributor
Filing a tax return which the taxpayer knows materially underreports his tax is unwise. It can cost the taxpayer far more in assessments of tax and penalties ultimately made, as well as attorney fees, than the amount of tax evaded. It can even result in the taxpayer being prosecuted, convicted, and imprisoned.
The IRS most commonly learns of alleged fraud in a tax return from an insider—a disgruntled former employee, spouse, or romantic interest of the taxpayer. In one case, the taxpayer’s estranged daughter came to the taxpayer and asked him for a job. The taxpayer hired her, and eventually placed her in charge of a business. But the daughter mismanaged the business, and the taxpayer closed it. The prodigal daughter became enraged, and reported her father to the Internal Revenue Service. IRS Criminal Investigation Division then investigated the taxpayer’s tax returns. A pair of undercover IRS special agents began appearing at the taxpayer’s principal business, feigning interest in purchasing business. The taxpayer fell for the ruse, and “puffed” to the purported prospective purchasers, claiming that he actually had substantially more income than reported on this tax returns.
The situation would have been manageable if the IRS did not have the most damning evidence of all—documentary evidence from a third party. The taxpayer had two bank accounts. He used the first account to deposit receipts which he reported to his accountant, and which the accountant reported on his tax return. Receipts deposited into the second account were not reported to the accountant, or on the taxpayer’s tax return. The IRS learned of the second account from the disgruntled daughter, and subpoenaed bank statements of the account.
In divorces, one spouse often attempts to extort a better financial settlement by threatening to report problems in the other spouse’s tax returns to the IRS. But if the tax returns are joint tax returns, the reporting spouse will need a grant of immunity from the IRS.
Here is some advice for a taxpayer who may have filed a tax return materially underreporting his tax:
Retain competent counsel. I am talking about an attorney experienced in representing taxpayers in criminal tax cases. Not a criminal generalist attorney, or a tax generalist. For God sakes not an accountant. Accountants are profoundly ill-equipped to represent taxpayers in criminal tax investigations. Moreover, there is no accountant-client privilege in Federal court. When the IRS investigates a criminal tax case, one of the first things it does is subpoena the taxpayer’s accountant and compel him to tell everything he knows about the case, and produce his documents concerning the taxpayer. Concerned about complicity in the alleged tax fraud, the accountant may be anxious to talk with Federal prosecutors, in return for immunity.
Don’t talk with Federal agents, or with anyone who mysteriously appears at the taxpayer’s business. Tax crimes are specific intent offenses—the IRS must prove beyond a reasonable doubt that the taxpayer knew that his tax return materially understated his tax. One of the best ways for the government to prove is by the taxpayer’s own admissions. IRS agents make detailed notes of an interview of a taxpayer, and often embellish the taxpayer’s statements, or misquote the taxpayer. The taxpayer is better off leaving communication with Federal agents to his counsel.
Don’t panic. The IRS has a heavy burden. The more complicated the facts and the law, the tougher it is to prove that the tax returns materially understated tax, or that the taxpayer knew it. This too shall pass.
Consider a voluntary disclosure. If the facts clearly establish a material underreporting of tax, the taxpayer should consider making a voluntary disclosure. This decision should not be delayed, as the IRS will accept a voluntary disclosure only as long as the IRS has not opened an investigation of the tax returns. The IRS no longer recognizes “quiet” voluntary disclosures. Taxpayer’s counsel makes an initial inquiry of IRS CID as to whether there is a tax fraud investigation afoot at to the taxpayer. If the answer is negative, then taxpayer’s counsel may submit a voluntary disclosure for the taxpayer, under guidelines prescribed by IRS. IRS CID will then send taxpayer’s counsel a letter stating that if the taxpayer does what the IRS requires, including filing appropriate amended tax returns and paying the tax due thereon, the taxpayer will not be prosecuted. The IRS will conduct a civil audit of the amended tax returns.
Don’t ignore the problem, but rationally analyze options with counsel.
Posted by Peter DeMarco on Tue, Aug 20, 2013 @ 07:37 AM
Each year, taxpayers are expected to file their returns and pay their taxes, knowing that if they fail to do so, they could face hefty penalties and fines. Let’s say you are an honest taxpayer and one year you don’t pay your taxes. This could have happened for a variety of reasons such as major disasters or IRS error. You may be surprised to know that a program exists that helps taxpayers who find themselves in one of these unfortunate situations. Enter: First-time Abatement.
First-time Abatement (FTA) is an IRS penalty waiver program that offers the option to receive penalty relief to taxpayers during a single tax period. The taxpayer has either failed to file their returns (FTF), failed to pay (FTP) their taxes due, or failed to make a deposit on an installment program (FTD), and is now being fined (potentially significantly). In order to receive the waiver, the taxpayer must demonstrate full compliance for the past three years, and, according to an April 2013 update, must be current with filing and payment requirements. The program provides a way for well-meaning taxpayers who make a mistake for the first time to avoid penalties.
In a 2012 report from the Treasury Inspector General for Tax Administration (TIGTA), they identified 278,840 taxpayers with FTF penalties and 1,367,750 taxpayers with FTP penalties who qualified for the waiver. The report took a sample of those qualified taxpayers and found that 91.2% of them were never granted waivers for their incurred penalties. Mainly, this is because taxpayers and tax professionals are not aware that the program exists. The IRS does not advertise the opportunity to request an FTA and taxpayers cannot be considered unless they request their penalties to be abated.
In total, the TIGTA report estimated that the unabated penalties totaled more than $181 million. These penalties are not designed to be revenue-producing for the Treasury, but rather to encourage taxpayers to file and pay. It is a way for the IRS to reward taxpayers for past compliance and promote future compliance. If you want to avoid penalties, read our complete Web Tax Guide for tips to prep you for tax season.
As a taxpayer, it may seem unfair that the IRS does not publicize the FTA. From the IRS’s perspective, the tax system is a voluntary self-assessed system and therefore, taxpayers and tax professionals are responsible for paying their taxes on a set date and knowing the rules that apply. At Meaden & Moore we work hard to stay on top of the wide range of tax laws and will do our due diligence to insure that our clients receive the best tax advice possible.
The White House recently released information on why Obamacare can be good news for small-business owners.
AUGUST 16, 2013
So much of the news about federal health care reform’s impact on small business focuses on the bleak—from employers cutting hours to the scaling back of health coverage for dependents. The Obama administration is trying to change that. In a blog post on Wednesday, WhiteHouse.gov outlined five reasons that small-business owners should embrace, not fear, Obamacare:
1. A more-level playing field. Small businesses currently pay 18 percent more on average for health insurance than large businesses, the White House says. The new Small Business Health Options Program (SHOP) will give small-business owners the same group purchasing clout as big business.
2. Greater pricing transparency. The public exchanges, particularly the SHOP exchanges, will make insurance pricing and options far more transparent. Rather than having to wonder whether your business is getting a fair deal on insurance, the SHOP exchanges will make it far easier to compare prices.
3. Better tax breaks. Small-business owners who currently buy health insurance can get a tax credit for up to 35 percent the cost; that is set to rise to 50 percent for qualified small businesses that buy insurance through the SHOP exchanges starting in 2014.
4. Improved risk pooling. Many small businesses have trouble getting affordable insurance because their small employee base is seen as too risky by insurers. One employee with a serious medical condition can make rates soar. Obamacare should make that less of a concern, as the SHOP exchange will spread risk across many employers.
5. Better wellness rewards. Small employers will have access to higher premium reductions for employers that get their workers involved in wellness programs. Currently, they can get up to a 20-percent reduction; starting next year, those rewards will rise to 30 percent. They can even reach 50 percent for companies with workers who commit to stop smoking.
This isn’t the only positive news to emerge in recent days, however. Some states, including New York and Maryland, predict that their small business premiums could drop substantially next year, thanks to Obamacare. (Read a recent piece I wrote on 7 things you should know about health care reform, which lays out some pros and cons.)
The Obama administration along with the group Small Business Majority also recently unveiled a new tool, the Health Care Changes Wizard, on Business.USA.gov to act as a one-stop resource for business owners on Obamacare.
August 20, 2013, 12:01 am
Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author of “The Benefit and the Burden: Tax Reform — Why We Need It and What It Will Take.”
The deduction for charitable contributions is among the oldest and most popular in the tax code. According to the Treasury, it reduces federal revenues by $54 billion, making it the fifth-largest tax expenditure. Whether or not it is curtailed to raise revenue for tax-rate reductions, there are growing concerns about the deduction and also about the mission and operations of some tax-exempt institutions.
Perspectives from expert contributors.
The charitable deduction was added to the tax code in 1917, when taxes were sharply raised to pay for World War I. The concern was that raising the top income tax rate to 67 percent from 15 percent would deprive rich people of the surplus from which they had been making charitable contributions.
The New York Times was among those expressing concern about this. An Aug. 24, 1917, editorial said: “There is a necessary social effect to this taxation of great incomes. It diminishes or dries up the springs of philanthropic eleemosynary and educational life.”
The deduction for charitable contributions allowed the wealthy to continue making contributions from before-tax income.
Although there was wide popular support for giving charitable contributions a tax break, there were those who questioned it. The historian Joseph Thorndike quotes a 1916 report by the Commission of Industrial Relations expressing concern that the wealthy would come to control the nonprofit world as they already controlled the profit-making world. As the report said:
The dominion by the men in whose hands the final control of a large part of American industry rests is not limited to their employees, but is being rapidly extended to control the education and “social service” of the nation.
This control is being extended largely through the creation of enormous privately managed funds for indefinite purposes, hereinafter designated “foundations,” by the endowment of colleges and universities, by the creation of funds for the pensioning of teachers, by contributions to private charities, as well as through controlling or influencing the public press.
This is still a problem today. As one can see in the table from Congress’s Joint Committee on Taxation, the vast bulk of charitable gifts in dollar terms come from the wealthy, those making more than $200,000 a year.
Joint Committee on Taxation
If the priorities of the wealthy were the same as those of the nonwealthy, this probably wouldn’t matter too much. But they are not. As the following chart from a blog post by Catherine Rampell in The New York Times shows, those with moderate incomes are far more likely to contribute to churches and other religious organizations, while the wealthy give relatively little of their total contributions to such groups. Education, health and arts organizations are much more significant recipients of contributions by the wealthy than by the nonwealthy.
Congressional Budget Office based on data from the Center on Philanthropy at Indiana University, Patterns of Household Charitable Giving by Income Group, 2005 (Indianapolis: Indiana University–Purdue University, 2007). Note: Combined purpose funds, such as the United Way, receive contributions and allocate them to many different types of charities.
Although those with low incomes are not less generous than the wealthy, the bulk of them either have no federal income tax liability or use the standard deduction and therefore cannot deduct their contributions.
By contrast, the value of the charitable deduction rises with income because tax rates rise with income. For someone in the top bracket, the federal government provides a de facto subsidy of 40 percent.
As I noted last week, Congressional leaders are committed to reducing the top tax rate, maintaining the same level of revenues and the existing progressivity of the tax code. This means that deductions that largely benefit the wealthy, like the one for charitable contributions, are likely to be on the table. Not surprisingly, charitable groups have been lobbying against any curtailment of their deduction for some time.
It should be kept in mind, however, that if the top tax rate falls to 25 percent from 39.6 percent, as Representative Dave Camp of Michigan, the Republican chairman of the House Ways and Means Committee, says he hopes, this action alone will automatically reduce the value of the deduction by almost half. Instead of saving 40 cents in taxes for each dollar contributed, only 25 cents will be saved.
Scholars are divided on the charitable deduction. Writing in The New York Times, Richard Thaler of the University of Chicago has said it needs to be rethought. He notes the unfairness of giving a large tax reward to the wealthy while giving nothing to those with modest incomes.
Also writing in The Times, Robert J. Shiller of Yale says we shouldn’t undermine the generosity of Americans, who give far more to charity than the citizens of any other country. He suggests expanding the deduction by making it available to those who don’t have enough deductions to be able to itemize.
One obvious compromise would be to convert the charitable deduction to a tax credit: some percentage of contributions could be subtracted directly from one’s tax liability rather than from taxable income. This would equalize the tax reward across incomes and could be done in a way that raised net revenue to pay for rate reductions.
Whether or not the charitable deduction is part of tax reform, Congress should take the opportunity to examine the operations of charitable organizations. Some have been criticized for being excessively political, contrary to law. There are also concerns about abuse by some managers of nonprofits, who pay themselves excessively while spending little on actual charity.
On June 13, the Senate Finance Committee published an options paper for reforming the charitable deduction and abuses by tax-exempt organizations. While complete abolition of the charitable deduction is one option, it is one very unlikely to be adopted. The combined lobbying clout of the churches, universities, hospitals, art museums and other recipients of charitable contributions will see to that.
The deduction for charity is also very popular with the public. A Dec. 11, 2012, McClatchy-Marist poll found 69 percent of voters opposed to ending it, with 28 percent in support.
Top 10 Tax Mistakes Made by Investors
AUGUST 21, 2013
BY JOHN BURKE AND STEVEN CRISCUOLO
Investing is a complex undertaking. The supply of investment alternatives is seemingly endless. Evaluating various alternatives can be quite difficult and very time consuming.
And unless held in check, the actual decision-making process is fraught with human emotions that often lead investors to make counterproductive investment choices. Add to this the myriad tax rules and regulations that impact investments and you have enough to overwhelm many investors.
Trusted financial professionals are in a position to help make sense of it all. Certainly, appropriate portfolios should be structured for investors, and suitable investments should be chosen given the current economic environment and the investor’s unique set of circumstances. But tax consequences must also be carefully considered, and the accountant often plays a role in this. Tax treatment, good or bad, can make or break an investment decision.
Here are the top 10 tax mistakes made by investors as gathered in a recent survey we conducted of investment advisors:
1. Short term vs. long term gains: Realized gains on appreciated securities held for one year or more qualify for favorable tax treatment. Long-term capital gain tax rates are significantly lower than short term rates. Holding a security an extra day, week or month can significantly reduce the tax burden.
2. Foreign stock investments held in a tax-qualified account: Most foreign companies are required to withhold foreign taxes on dividends paid. U.S. investors can claim a tax credit on their tax returns, effectively recouping this lost dividend, but only if the foreign stocks are held in a taxable account.
3. Gold and silver held in a taxable account: Gold and silver are treated as collectibles and therefore are not eligible for capital gains treatment. The federal tax for long-term gains on collectibles is 28 percent.
4. Sale of appreciated securities by elderly investors: The cost basis of appreciated securities is “stepped up” to the current market value upon the death of the owner. Prospective capital gains and related taxes disappear. Conversely, all prospective capital losses will be lost. Elderly investors should consider being quick to sell stocks with losses and slow to sell stocks with gains.
5. Generating excess unrelated business income in a tax-qualified account: Certain investments, such as Master Limited Partnerships, generate unrelated business income. These investments belong in a taxable account. If they are held in an IRA or other qualified plan, and if the Unrelated Business Taxable Income, or UBTI, is greater than $1,000, then the investor must complete and file a rather complex Form 990 and pay additional income tax.
6. Ignoring local tax laws: In some states, investors cannot carry capital losses forward to future years. On a federal return, a capital loss in one year can be used to offset gains in a subsequent year. But capital losses without offsetting gains in a current year are lost for state tax purposes.
7. Failing to consider a Roth IRA conversion: When a traditional IRA is converted to a Roth IRA, tax is due on the converted amount in the year of conversion. If, for whatever reason, an investor will have low income in a year, this is an ideal time to convert and settle the tax bill on this money at a significantly lower rate than is otherwise expected in the future.
8. Failing to realize capital gains: Once again, low income in a given year can provide an opportunity to save taxes. Long-term capital gain tax rates are progressive; rates increase as taxable income increases. For taxable incomes up to $72,500, joint taxpayers pay no tax on long term capital gains.
9. Improperly calculating the cost basis for MLPs: Given their unique tax structure, a large portion of a typical Master Limited Partnership distribution is tax-free. This tax-free distribution is considered a return of principal and should therefore serve to reduce the cost basis. In this case, ignorance may be bliss because the reduction in basis would result in a higher capital gain at sale (unless the IRS comes knocking…).
10. Allowing a pension plan to become non-compliant: While not as common as the others, this mistake can be very costly. There are a number of actions or inactions that can put a plan’s qualified status in jeopardy. Oftentimes, an investor will establish a plan with a brokerage firm, and then assume that the brokerage firm is taking care of the ongoing regulatory requirements, including the filing of IRS Form 5500. Brokerage firms rarely do this even though they may have provided the original plan document template. Failure to meet ongoing regulatory requirements can result in disqualification of the plan and a very large tax bill. Investors should consider hiring a third-party administrator to take care of their ongoing compliance obligations.
Eight Tips for Taxpayers Who Owe Taxes
While most taxpayers get a refund from the IRS when they file their taxes, some do not. The IRS offers several payment options for those who owe taxes.
Here are eight tips for those who owe federal taxes.
1. Tax bill payments. If you get a bill from the IRS this summer, you should pay it as soon as possible to save money. You can pay by check, money order, cashier’s check or cash. If you cannot pay it all, consider getting a loan to pay the bill in full. The interest rate for a loan may be less than the interest and penalties the IRS must charge by law.
2. Electronic Funds Transfer. It’s easy to pay your tax bill by electronic funds transfer. Just visit IRS.gov and use the Electronic Federal Tax Payment System. You may also use EFTPS to pay your taxes by phone at 800-555-4477.
3. Credit or debit card payments. You can also pay your tax bill with a credit or debit card. Even though the card company may charge an extra fee for a tax payment, the costs of using a credit or debit card may be less than the cost of an IRS payment plan. To pay by credit or debit card, contact one of the processing companies listed at IRS.gov.
4. More time to pay. You may qualify for a short-term agreement to pay your taxes. This may apply if you can fully pay your taxes in 120 days or less. You can request it through the Online Payment Agreement application at IRS.gov. You may also call the IRS at the number listed on the last notice you received. If you can’t find the notice, call 800-829-1040 for help. There is generally no set-up fee for a short-term agreement.
5. Installment Agreement. If you can’t pay in full at one time and can’t get a loan, you may want to apply for a monthly payment plan. If you owe $50,000 or less, you can apply using the IRS Online Payment Agreement application. It’s quick and easy. If approved, IRS will notify you immediately. You can arrange to make your payments by direct debit. This type of payment plan helps avoid missed payments and may help avoid a tax lien that would damage your credit.
Taxpayers may also apply using IRS Form 9465, Installment Agreement Request. If you owe more than $50,000, you must also complete Form 433F, Collection Information Statement. For approved payment plans the one-time user fee is $105 for standard and payroll deduction agreements. The direct debit agreement fee is $52. The fee is $43 if your income is below a certain level.
6. Offer in Compromise. The IRS Offer-in-Compromise program allows you to settle your tax debt for less than the full amount you owe. An OIC may be an option if you can't fully pay your taxes through an installment agreement or other payment alternative. The IRS may accept an OIC if the amount offered represents the most IRS can expect to collect within a reasonable time. Use the OIC Pre-Qualifier tool to see if you may be eligible before you apply. The tool will also direct you to other options if an OIC is not right for you.
7. Fresh Start. If you’re struggling to pay your taxes, the IRS Fresh Start initiative may help you. Fresh Start makes it easier for individual and small business taxpayers to pay back taxes and avoid tax liens.
8. Check withholding. You may be able to avoid owing taxes in future years by increasing the taxes your employer withholds from your pay. To do this, file a revised Form W-4, Employee’s Withholding Allowance Certificate, with your employer. The IRS Withholding Calculator tool at IRS.gov can help you fill out a new W-4.
IRS Simplifies Late S Corp Elections
WASHINGTON, D.C. (AUGUST 15, 2013)
BY MICHAEL COHN
The Internal Revenue Service has combined parts of several revenue procedures into a new revenue procedure that provides relief to companies that make late elections to become S corporations.
Revenue Procedure 2013-30 facilitates the granting of relief to taxpayers who request relief previously provided in numerous other revenue procedures by consolidating provisions from them into a single revenue procedure and extending relief under certain circumstances.
The revenue procedure provides the exclusive simplified methods for taxpayers to request relief for late S corporation elections, Electing Small Business Trust elections, Qualified Subchapter S Trust elections, Qualified Subchapter S Subsidiary elections and late corporate classification elections that the taxpayer intended to take effect on the same date that the taxpayer intended that an S corporation election for the entity should take effect. The revenue procedure provides relief if the taxpayer satisfies certain requirements.
Accompanying the document is a flowchart designed to help taxpayers apply the revenue procedure. It generally extends the time to ask for a late S corp election until three years and 75 days after the election was planned to take effect. For a simple request under the right conditions, there is no deadline. If taxpayers do not qualify for the simplified relief, they can instead ask for a letter ruling from the IRS.
AICPA Objects to Congress Limiting Use of Cash Method of Accounting
WASHINGTON, D.C. (AUGUST 15, 2013)
BY MICHAEL COHN
The American Institute of CPAs has written to the heads of Congress’s main tax-writing committee expressing its opposition to a proposed limitation on the use of the cash method of accounting for partnerships, S corporations, personal service corporations and farmers.
The proposal is contained in a small business tax reform discussion draft circulated by House Ways and Means Committee Chairman Dave Camp, R-Mich.
The proposal provides that the cash method of accounting is available for natural persons (in other words, individuals) and any other taxpayer who meets the gross receipts test and is otherwise eligible to use the cash method, but effectively eliminates exceptions that currently exist for certain pass-through entities (such as partnerships and S corporations), farmers and personal service corporations.
“We support the expansion of the number of taxpayers that may use the cash method of accounting,” AICPA Tax Executive Committee chair Jeffrey Porter wrote in a letter to Camp and the ranking Democrat on his committee, Sander Levin, R-Mich., while also CC’ing other members of the Ways and Means Committee, along with the leaders of the Senate Finance Committee and officials at the Internal Revenue Service and the Treasury Department. “The cash method of accounting is simpler in application, has fewer compliance costs, and does not require taxpayers to pay tax on income they have not yet received. For these same reasons, we are extremely concerned with and oppose certain limitations included in the proposal. We believe that Congress should not further restrict the use of the long-standing cash method of accounting for the thousands of U.S. businesses that use it.”
The AICPA is urging lawmakers to consider the financial burden that the proposal, if enacted, would place on businesses. “The proposal would require these companies to change to the accrual method, force their owners to pay tax before they have the cash to pay it, and add to complexity and costs,” said the letter. “The AICPA believes tax reform should promote simplicity and economic growth and should not create unnecessary administrative and financial burdens on taxpayers or impede the productive capacity of the economy. Simplicity is important both to improve the compliance process and to enable taxpayers to better understand the tax consequences of transactions in which they engage in or plan to engage.”
IRS Offers Tips on How to Amend Your Tax Return
If you discover an error after you file your tax return, you can correct it by amending your return.
Here are 10 tips from the Internal Revenue Service about amending your federal tax return:
1. When to amend a return. You should file an amended return if you need to correct your filing status, number of dependents, total income, tax deductions or tax credits. The instructions for Form 1040X, Amended U.S. Individual Income Tax Return, list additional reasons to amend a return.
2. When NOT to amend a return. In some cases, you don’t need to amend your tax return. For example, the IRS usually corrects math errors when processing your original return. If you did not include a required form or schedule, the IRS will send you a request for whatever is missing.
3. Form to use. Use Form 1040X to amend a previously filed Form 1040, 1040A, 1040EZ, 1040NR or 1040NR-EZ. Make sure you check the box to show the tax year that you are amending on the Form 1040X. You cannot e-file an amended return. You must file an amended tax return on paper.
4. Multiple amended returns. If you’re filing an amended return for more than one year, prepare a separate 1040X for each return. Mail them in separate envelopes to the appropriate IRS processing center. (See "Where to File" in the instructions for Form 1040X.)
5. Form 1040X. Form 1040X has three columns. Column A shows figures from the original return. Column B shows the changes you are making. Column C shows the corrected figures. There is also an area on the back of the form where you should explain the specific changes and the reasons for the changes.
6. Other forms or schedules. If the changes involve other tax schedules or forms, attach them to the Form 1040X. Failure to do this will cause a delay in processing.
7. Amending to claim an additional refund. If you’re expecting a refund from your original tax return, don’t file your amended return until after you have received that refund. You may cash the refund check from your original return. The IRS will send you any additional refund you are owed.
8. Amending to pay additional tax. If you’re filing an amended tax return because you owe additional tax, you should file Form 1040X and pay the tax as soon as possible to 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 or within two years from the date you paid the tax, whichever is later.
10. Processing time. Normal processing time for amended returns is 8 to 12 weeks.
IRS Considers Tax Protesters ‘Constitutionally Challenged’
WASHINGTON, D.C. (AUGUST 21, 2013)
BY MICHAEL COHN
Some Internal Revenue Service employees continue to use the term “tax protester” to refer to taxpayers despite a 1998 law prohibiting the use of the designation, according to a new report from the Treasury Inspector General for Tax Administration.
TIGTA found that out of approximately 257 million records and cases, there were 54 instances in which 45 employees referred to taxpayers as “Tax Protester,” “Constitutionally Challenged,” or other similar designations in case narratives on the computer systems analyzed for the report.
Section 3707 of the IRS Restructuring and Reform Act of 1998 prohibits the IRS from labeling taxpayers as Illegal Tax Protesters or any similar designations. However, a few IRS employees continue to refer to taxpayers by these designations in case narratives, according to the report.
Using Illegal Tax Protester or other similar designations may stigmatize taxpayers and may cause employee bias in future contacts with these taxpayers, TIGTA noted.
The audit was initiated because TIGTA is required to annually evaluate compliance with the prohibition against using Illegal Tax Protester or similar designations. Prior to enactment of the 1998 law, the IRS used the Illegal Tax Protester Program to identify individuals and businesses that used methods that were not legally valid to protest the tax laws. IRS employees referred taxpayers to the Illegal Tax Protester Program when their tax returns or correspondence contained specific indicators of noncompliance with the tax law, such as the use of arguments that had been repeatedly rejected by the courts.
The purpose of this audit was to determine whether the IRS complied with RRA 98 Section 3707 and internal guidelines that prohibit officers and employees from referring to taxpayers as Illegal Tax Protesters and similar designations. Congress enacted the prohibition against Illegal Tax Protester designations because it was concerned that some taxpayers were being permanently labeled as Illegal Tax Protesters even though they had subsequently become compliant with the tax laws. The label could bias IRS employees and result in unfair treatment, TIGTA noted. The report acknowledged that the IRS has not reintroduced past Illegal Tax Protester codes or similar designations on taxpayer accounts.
TIGTA made no recommendations in this report. IRS officials were provided an opportunity to review the draft report, but IRS management did not provide any comments on the report.
Michael Jackson’s Estate Challenges IRS in Dispute over Tax Bill
LOS ANGELES (AUGUST 21, 2013)
BY ANDREW ZAJAC
Michael Jackson’s estate challenged a tax bill calculated by the U.S. Internal Revenue Service, arguing that it overvalued assets including real estate, a Bentley automobile and the late singer’s “image and likeness.”
The estate filed a petition in response to an IRS “notice of deficiency” issued in May regarding the estate’s tax return. All amounts in the document were redacted.
The valuations in the estate’s return “were accurate and based upon qualified appraisals by qualified appraisers who had extensive experience in valuing entertainment industry assets,” according to the petition. It was filed July 26 in U.S. Tax Court in Washington by attorney John Branca and music executive John McClain, the co-executors of Jackson’s estate.
Paul Hoffman, of Hoffman Sabban & Watenmaker, one of the attorneys filing the suit, declined to discuss the sums in dispute, saying only that “the IRS is wrong.”
Jackson died in June 2009 at age 50. His death was ruled a homicide by the Los Angeles County coroner, who said the singer died of acute propofol intoxication.
Conrad Murray, Jackson’s doctor, was convicted of involuntary manslaughter and sentenced to four years in jail.
In addition to real estate, automobiles and intellectual property, the tax court filing takes issue with IRS valuations of a Lloyds of London “contingency non-appearance and cancellation” policy, Jackson’s share of MJJ Ventures Inc. and two trusts and other personal property.
The case is Estate of Michael J. Jackson v. IRS, 17152-13, U.S. Tax Court (Washington).
IRS Seeks $2 Billion Estate Tax from Former Detroit Pistons Owner’s Family
DETROIT (AUGUST 16, 2013)
BY ROGER RUSSELL
The Internal Revenue Service is going after the estate of Bill Davidson, former owner of the Detroit Pistons and auto industry supplier Guardian Industries, to the tune of more than $2 billion.
In a filing made public in Tax Court on Wednesday, the IRS disputed the estate representatives’ assertions, filed in June, that the estate tax was grossly inflated, according to the Detroit Free Press.
Among the objections that the IRS has with the estate are the valuation Davidson’s accountants placed on stock in his company, for purposes of gifts, trusts and other transfers to family members.
One of the techniques used was Self-Canceling Installment Notes, or SCINs, in which Davidson sold assets with the proviso that the payments would be canceled when he died. The IRS said he didn’t properly calculate his own life expectancy, with the result that family member payments amounted to less than fair market value.
In about six weeks, Americans will have a new kind of open enrollment to consider.
Starting Oct. 1, people without health insurance can sign up for standardized coverage through new health-insurance marketplaces run either by their state, the federal government or a combination of the two—the centerpiece of the Patient Protection and Affordable Care Act.
WSJ peers into the future with this first-person look at how the Affordable Care Act, commonly known as 'Obamacare,' will impact individuals. Visit wsj.com/prescribed for the interactive version of this video.
The coverage will take effect Jan. 1. And people with incomes between 100% and 400% of the federal poverty level—about $23,500 to $94,000 for a family of four—can receive financial help on a sliding scale to offset the costs.
These marketplaces, also known as exchanges, will make shopping for health insurance easier than it is today, says Sarah Dash, a research fellow at Georgetown University who has studied the new marketplaces. "Consumers are going to get a much more transparent, apples-to-apples shopping experience."
Exchange shoppers will fill out a single insurance application, which will be used to "find out if they can get a tax credit on their premium, help with cost-sharing or if they're eligible for Medicaid in their state," Ms. Dash says.
You can calculate your potential premium assistance with an online tool from the Kaiser Family Foundation, which conducts health-care research.
This first open-enrollment period will last six months, from Oct. 1, 2013 to March 31, 2014. It generally takes two weeks for a policy to go into effect after enrolling, so you'll need to sign up by Dec. 15 to get coverage starting Jan. 1.
You can sign up by using the Internet, phone, mail or in person at a designated center. The centers will have people trained to help with the enrollment process, according to the U.S. Department of Health and Human Services. Insurance agents and brokers may be there as well. In many states, people who enroll online can tap into a live chat window for customer-service troubleshooting.
Many state call centers already are running. Visit Healthcare.gov or call 1-800-318-2596 for more information.
The law states that people looking for insurance can't be denied coverage or charged higher premiums because of pre-existing health conditions. However, premiums can vary based on four characteristics: age, tobacco use, geographic area and family size—though there are limits. Older people may be charged up to three times as much as younger people and smokers may be charged up to 50% more than nonsmokers.
The law also requires that health-insurance plans cover a set of 10 essential benefits such as hospitalization, doctors' visits, prescription drugs, maternity care, pediatric care, and substance-abuse and mental-health care.
Before diving into the enrollment process, be sure to have the Social Security numbers of the people you're looking to insure; employment and income information, such as pay stubs, tax return or W-2 form; and policy numbers if you currently have any health insurance. Eligibility for tax credits and subsidies is based on modified adjusted gross income.
The bronze plan generally offers the lowest premium in exchange for the highest out-of-pocket costs. The silver level is the level you must choose if you want to get financial help with out-of-pocket costs such as copayments and deductibles. "I call the silver level a mid-range plan," says Sarah Lueck, senior policy analyst for the Center on Budget and Policy Priorities, a public-policy research organization in Washington. Under the gold and platinum levels, premiums will be higher, but your share of costs when you get health care will be lower.
The fifth level, a catastrophic plan, is available for people younger than 30 and those suffering financial hardship.
Think about how much coverage you can afford and how much care you anticipate needing, says Carter Price, a mathematician with Rand, a nonprofit research group in Arlington, Va. "People will need to decide what level of coverage they want to take, whether it's very bare-bones or very generous."
IRS Website Explains Tax Provisions of the Health Care Law; Provides Guide to Online Resources
The IRS has launched a new Affordable Care Act Tax Provisions website at IRS.gov/aca to educate individuals and businesses on how the health care law may affect them. The new home page has three sections, which explain the tax benefits and responsibilities for individuals and families, employers, and other organizations, with links and information for each group. The site provides information about tax provisions that are in effect now and those that will go into effect in 2014 and beyond.
Topics include premium tax credits for individuals, new benefits and responsibilities for employers, and tax provisions for insurers, tax-exempt organizations and certain other business types.
Visitors to the new site will find information about the law and its provisions, legal guidance, the latest news, frequently asked questions and links to additional resources.
Several other federal agencies have a role in implementing the health care law, including the Department of Health and Human Services, which has primary responsibility. To help locate additional online resources from the Department of Health and Human Services, the Department of Labor and the Small Business Administration, the IRS has issued a new Web-based flyer - Healthcare Law Online Resources (Publication 5093).
Visit IRS.gov/aca for more information regarding the tax provisions of the Affordable Care Act.
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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