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Don’t Fall for New Tax Scam Tricks by IRS Posers

Though the tax season is over, tax scammers work year-round. The IRS advises you to stay alert to protect yourself against new ways criminals pose as the IRS to trick you out of your money or personal information. These scams first tried to sting older Americans, newly arrived immigrants and those who speak English as a second language. The crooks have expanded their net, and now try to swindle virtually anyone. Here are several tips from the IRS to help you avoid being a victim of these scams:


  • Scams use scare tactics.  These aggressive and sophisticated scams try to scare people into making a false tax payment that ends up with the criminal. Many phone scams use threats to try to intimidate you so you will pay them your money. They often threaten arrest or deportation, or that they will revoke your license if you don’t pay. They may also leave “urgent” callback requests, sometimes through “robo-calls,” via phone or email. The emails will often contain a fake IRS document with a phone number or an email address for you to reply.


  • Scams use caller ID spoofing.  Scammers often alter caller ID to make it look like the IRS or another agency is calling. The callers use IRS titles and fake badge numbers to appear legit. They may use online resources to get your name, address and other details about your life to make the call sound official.


  • Scams use phishing email and regular mail.  Scammers copy official IRS letterhead to use in email or regular mail they send to victims. In another new variation, schemers provide an actual IRS address where they tell the victim to mail a receipt for the payment they make. All in an attempt to make the scheme look official.


  • Scams cost victims over $20 million.  The Treasury Inspector General for Tax Administration, or TIGTA, has received reports of about 600,000 contacts since October 2013. TIGTA is also aware of nearly 4,000 victims who have collectively reported over $20 million in financial losses as a result of tax scams.


The real IRS will not:

  • Call you to demand immediate payment. The IRS will not call you if you owe taxes without first sending you a bill in the mail.


  • Demand that you pay taxes and not allow you to question or appeal the amount that you owe.


  • Require that you pay your taxes a certain way. For instance, require that you pay with a prepaid debit card.


  • Ask for credit or debit card numbers over the phone.


  • Threaten to bring in police or other agencies to arrest you for not paying.


If you don’t owe taxes or have no reason to think that you do:

  • Do not provide any information to the caller. Hang up immediately.


  • Contact the Treasury Inspector General for Tax Administration. Use TIGTA’s “IRS Impersonation Scam Reporting” web page to report the incident.


  • You should also report it to the Federal Trade Commission. Use the “FTC Complaint Assistant” on Please add "IRS Telephone Scam" in the notes.


If you know you owe, or think you may owe taxes:

  • Call the IRS at 800-829-1040. IRS workers can help you if you do owe taxes.


Stay alert to scams that use the IRS as a lure. For more, visit “Tax Scams and Consumer Alerts” on




IRS Tax Tips for Starting a Business

When you start a business, a key to your success is to know your tax obligations. You may not only need to know about income tax rules, but also about payroll tax rules. Here are five IRS tax tips that can help you get your business off to a good start.


1. Business Structure.  An early choice you need to make is to decide on the type of structure for your business. The most common types are sole proprietor, partnership and corporation. The type of business you choose will determine which tax forms you will file.


2. Business Taxes.  There are four general types of business taxes. They are income tax, self-employment tax, employment tax and excise tax. In most cases, the types of tax your business pays depends on the type of business structure you set up. You may need to make estimated tax payments. If you do, use IRS Direct Pay to pay them. It’s the fast, easy and secure way to pay from your checking or savings account.


3. Employer Identification Number.  You may need to get an EIN for federal tax purposes. Search “do you need an EIN” on to find out if you need this number. If you do need one, you can apply for it online.


4. Accounting Method.  An accounting method is a set of rules that you use to determine when to report income and expenses. You must use a consistent method. The two that are most common are the cash and accrual methods. Under the cash method, you normally report income and deduct expenses in the year that you receive or pay them. Under the accrual method, you generally report income and deduct expenses in the year that you earn or incur them. This is true even if you get the income or pay the expense in a later year.


5. Employee Health Care.  The Small Business Health Care Tax Credit helps small businesses and tax-exempt organizations pay for health care coverage they offer their employees. A small employer is eligible for the credit if it has fewer than 25 employees who work full-time, or a combination of full-time and part-time. The maximum credit is 50 percent of premiums paid for small business employers and 35 percent of premiums paid for small tax-exempt employers, such as charities.


The employer shared responsibility provisions of the Affordable Care Act affect employers employing at least a certain number of employees (generally 50 full-time employees or a combination of full-time and part-time employees). These employers’ are called applicable large employers. ALEs must either offer minimum essential coverage that is “affordable” and that provides “minimum value” to their full-time employees (and their dependents), or potentially make an employer shared responsibility payment to the IRS. The vast majority of employers will fall below the ALE threshold number of employees and, therefore, will not be subject to the employer shared responsibility provisions.


Employers also have information reporting responsibilities regarding minimum essential coverage they offer or provide to their fulltime employees.  Employers must send reports to employees and to the IRS on new forms the IRS created for this purpose.

Get all the tax basics of starting a business on at the Small Business and Self-Employed Tax Center.


Additional IRS Resources:




What Employers Need to Know about the Affordable Care Act

The health care law contains tax provisions that affect employers. The size and structure of a workforce – small or large – helps determine which parts of the law apply to which employers. Calculating the number of employees is especially important for employers that have close to 50 employees or whose work force fluctuates during the year


The number of employees an employer has during the current year determines whether it is an applicable large employer for the following year. Applicable large employers are generally those with 50 or more full-time employees or full-time equivalent employees. Under the employer shared responsibility provision, ALEs are required to offer their full-time employees and dependents affordable coverage that provides minimum value. Employers with fewer than 50 full-time or full-time equivalent employees are not applicable large employers.


For more information on these and other ACA tax provisions, visit

Fewer than 50 Employees

Equal to or More than 50 Employees

Applicable Large Employers


SHOP Marketplace Eligibility

• Employers with fewer than 50 employees can purchase insurance through the Small Business Health Options Program (SHOP) Marketplace.


Information Reporting – Self-Insured Employers

• All employers, regardless of size, that provide self-insured health coverage must file an annual return for individuals they cover, and provide a statement to responsible individuals.


• The first information reporting returns are due to be filed in 2016 for 2015.



• Employers may be eligible for the small business health care tax credit if they:

  1. cover at least 50 percent of employees’ premium costs
  2. have fewer than 25 full-time equivalent employees with average annual wages of less than $50,000
  3. purchase their coverage through the Small Business Health Options Program.


• Employers with fewer than 50 full-time employees or full-time equivalent employees are not subject to the employer shared responsibility provisions.



SHOP Marketplace Eligibility

• Employers with exactly 50 employees can purchase insurance through the Small Business Health Options Program (SHOP) Marketplace.


Information Reporting

• All employers including applicable large employers that provide self-insured health coverage must file an annual return for individuals they cover, and provide a statement to responsible individuals.


• Applicable large employers must file an annual return – and provide a statement to each full-time employee – reporting whether they offered health insurance, and if so, what insurance they offered their employees.


• The first information reporting returns are due to be filed and furnished in 2016 for 2015.



• In general, an applicable large employer will be subject to a payment if the employer does not offer affordable coverage that provides “minimum value to its full-time employees and their dependents, and one or more full-time employees gets a premium tax credit.


• Various forms of transition relief are available for 2015, including for applicable large employers with fewer than 100 full-time employees, including full-time equivalent employees. Full details are available in the transition relief section of the employer shared responsibility questions and answers page





Back-to-School Education Tax Credits

If you, your spouse or a dependent are heading off to college in the fall, some of your costs may save you money at tax time. You may be able to claim a tax credit on your federal tax return. Here are some key IRS tips that you should know about e tax credits:   


• American Opportunity Tax Credit.  The AOTC is worth up to $2,500 per year for an eligible student. You may claim this credit only for the first four years of higher education. Forty percent of the AOTC is refundable. That means if you are eligible, you can get up to $1,000 of the credit as a refund, even if you do not owe any taxes.


• Lifetime Learning Credit.  The LLC is worth up to $2,000 on your tax return. There is no limit on the number of years that you can claim the LLC for an eligible student.


• One credit per student.  You can claim only one type of education credit per student on your tax return each year. If more than one student qualifies for a credit in the same year, you can claim a different credit for each student. For instance, you can claim the AOTC for one student, and claim the LLC for the other.


• Qualified expenses.  You may use qualified expenses to figure your credit. These include the costs you pay for tuition, fees and other related expenses for an eligible student. Refer to for more on the rules that apply to each credit.


•  Eligible educational institutions.  Eligible schools are those that offer education beyond high school. This includes most colleges and universities. Vocational schools or other postsecondary schools may also qualify. If you aren’t sure if your school is eligible:


 Ask your school if it is an eligible educational institution, or


 See if your school is on the U.S. Department of Education’s Accreditation database.


• Form 1098-T.  In most cases, you should receive Form 1098-T, Tuition Statement, from your school by Feb. 1, 2016. This form reports your qualified expenses to the IRS and to you. The amounts shown on the form may be different than the amounts you actually paid. That might happen because some of your related costs may not appear on the form. For instance, the cost of your textbooks may not appear on the form. However, you still may be able to include those costs when you figure your credit. Don’t forget that you can only claim an education credit for the qualified expenses that you paid in that same tax year.


• Nonresident alien.  If you are in the United States on an F-1 Student Visa, the tax rules generally treat you as a nonresident alien for federal tax purposes.  To find out more about your F-1 Student Visa status, visit U.S. Immigration Support. To learn more about resident and nonresident alien status and restrictions on claiming the education credits, refer to Publication 519, U.S. Tax Guide for Aliens.


• Income limits. These credits are subject to income limitations and may be reduced or eliminated, based on your income.




Ten Key Tax Facts about Home Sales

In most cases, gains from sales are taxable. But did you know that if you sell your home, you may not have to pay taxes? Here are ten facts to keep in mind if you sell your home this year.


  1. Exclusion of Gain.  You may be able to exclude part or all of the gain from the sale of your home. This rule may apply if you meet the eligibility test. Parts of the test involve your ownership and use of the home. You must have owned and used it as your main home for at least two out of the five years before the date of sale.


  1. Exceptions May Apply.  There are exceptions to the ownership, use and other rules. One exception applies to persons with a disability. Another applies to certain members of the military. That rule includes certain government and Peace Corps workers. For more on this topic, see Publication 523, Selling Your Home.


  1. Exclusion Limit.  The most gain you can exclude from tax is $250,000. This limit is $500,000 for joint returns. The Net Investment Income Tax will not apply to the excluded gain.


  1. May Not Need to Report Sale.  If the gain is not taxable, you may not need to report the sale to the IRS on your tax return.


  1. When You Must Report the Sale.  You must report the sale on your tax return if you can’t exclude all or part of the gain. You must report the sale if you choose not to claim the exclusion. That’s also true if you get Form 1099-S, Proceeds From Real Estate Transactions. If you report the sale, you should review the Questions and Answers on the Net Investment Income Tax on


  1. Exclusion Frequency Limit.  Generally, you may exclude the gain from the sale of your main home only once every two years. Some exceptions may apply to this rule.


  1. Only a Main Home Qualifies.  If you own more than one home, you may only exclude the gain on the sale of your main home. Your main home usually is the home that you live in most of the time.


  1. First-time Homebuyer Credit.  If you claimed the first-time homebuyer credit when you bought the home, special rules apply to the sale. For more on those rules, see Publication 523.


  1. Home Sold at a Loss.  If you sell your main home at a loss, you can’t deduct the loss on your tax return.


  1. Report Your Address Change.  After you sell your home and move, update your address with the IRS. To do this, file Form 8822, Change of Address. You can find the address to send it to in the form’s instructions on page two. If you purchase health insurance through the Health Insurance Marketplace, you should also notify the Marketplace when you move out of the area covered by your current Marketplace plan.




Overview of the Employer Shared Responsibility Provisions


The Affordable Care Act contains specific responsibilities for employers. The size and structure of your workforce – small, large, or part of a group – helps determine what applies to you. Employers with 50 or more full-time equivalent employees will need to file an annual information return reporting whether and what health insurance they offered employees. In addition, they are subject to the Employer Shared Responsibility provisions. All employers that are applicable large employers are subject to the Employer Shared Responsibility provisions, including federal, state, local, and Indian tribal government employers.


An employer’s size is determined by the number of its employees. Generally, if your organization has 50 or more full-time or full-time equivalent employees, you will be considered a large employer. For purposes of this provision, a full-time employee is an individual employed on average at least 30 hours of service per week. 


Under the Employer Shared Responsibility provisions, if an applicable large employer does not offer affordable health coverage that provides a minimum level of coverage to their full-time employees and their dependents, the employer may be subject to an Employer Shared Responsibility payment. They must make this payment if at least one of its full-time employees receives a premium tax credit for purchasing individual coverage through the Health Insurance Marketplace.


The Employer Shared Responsibility provisions generally are effective at the beginning of this year. Employers will use information about the number of employees they have and those employees’ hours of service during 2014 to determine if they are an applicable large employer for 2015. 


If you are a self-insured employer – that is, an employer who sponsors self-insured group health plans – you are subject to the information reporting requirements for providers of minimum essential coverage whether or not you are an applicable large employer under the employer shared responsibility provisions.


For more information, visit the employer shared responsibility page. For information about transition relief available for employers related to the shared responsibility provision, visit




IRS Warns of Impact of Failing to File Taxes on Obamacare Tax Credit Eligibility



The Internal Revenue Service is warning tax preparers that clients who fail to file their tax returns for last year run the risk of missing out next year on advance payments of the premium tax credit for health insurance under the Affordable Care Act.


In an email to tax professionals Friday, the IRS urged tax practitioners to remind their clients who received advance payments of the premium tax credit in 2014 that they should file their 2014 tax return as soon as possible this summer, even if they have an extension, to protect their eligibility for advance payments from their health insurance marketplace in 2016.


“Depending on the situation the IRS is currently sending Letter 5591, Letter 5591A or Letter 5596 to taxpayers who received 2014 advance payments, but have not yet filed their tax return,” said the IRS. “The letters remind taxpayers of the importance of filing their 2014 federal tax return along with Form 8962, Premium Tax Credit, as soon as possible.”




Charging $476K For Strippers On Company Card? No Tax Deduction, Jail Instead

Forbes – Robert W. Wood Contributor


Sensibly, says you shouldn’t use your credit card for purchases you want to remain secret. Using your company credit card to buy something embarrassing–that you know your company won’t cover–is even worse. Sure, if the company really likes you and you fess up right away, maybe you can cover the charge yourself. But trying to sneak it through or faking your expense report is likely to mean getting fired. Or even prosecution.


A Gilbert, Arizona man, John David Berrett, allegedlycharged $476K for strippers on his company credit card. His employer turned him in for trying to cover it up with fake expense reports for work costs. Thus, “training materials” were actually sex toys, and $10,800 for training services was really for stripping. According to the indictment, Mr. Berrett faces five counts of wire fraud.


Even celebs like Justin Bieber know cash is better. Last year, he allegedly dropped $75,000 in the King of Diamonds strip club. TMZ reported that Mr. Bieber “got $75k in 1 dollar bills and went wild.” Maybe Mr. Bieber was out entertaining his record producers or recording execs? That kind of thing does show up on expense report and even on tax returns. After all, isn’t a big bar tab or restaurant bill deductible?


It depends. Entertaining business associates has limits. Taxpayers can deductreasonable business expenses, but not lavish or extravagant ones. If entertainment is business entertainment, it might be OK if it wasn’t lavish or extravagant. What’s lavish or extravagant? The IRS doesn’t provide much guidance. An expense isn’t lavish or extravagant if it is reasonable considering the facts and circumstances.


Expenses will not be disallowed just because they are more than a certain amount or take place at deluxe restaurants, hotels, nightclubs, or resorts. Lavish is sometimes defined as a business expense that is significantly higher than what is considered reasonable. Say a company pays triple the market rate for something. That amount may be a lavish or extravagant expense. The portion deemed lavish by the IRS is not tax deductible.


Of course, the mere fact that you might conduct business entertainment at a high-end restaurants or hotels–or even strip clubs–doesn’t mean it’s lavish. Consider some of the World’s Most Extravagant Meals. Yet even if you can legitimately deduct it, that doesn’t mean such spending is smart. Besides, if you are spending in the stratosphere, you might expect the IRS to claim it’s personal.


For a creative attempt to claim business expenses, take Ralph Louis Vitale, Jr., who took on the IRS in Tax Court in 1999. He claimed he was in the business of writing about prostitution. How did he begin his research? You guessed it. He paid prostitutes in cash, apparently a kind of industry standard. Still, he kept a detailed journal of his numerous research visits.


Vitale submitted his manuscript to a vanity publisher, paying $4,375 to publish it. After he received $2,600 in royalties, the publisher went bankrupt. The IRS said this was a hobby and disallowed Vitale’s deductions. Vitale went to Tax Court which ruled he did have a profit motive. Still, he had no receipts, so he got no deduction. Even so, at least the court didn’t impose penalties, ruling that Vitale made a reasonable attempt to comply with the tax laws.


For alerts to future tax articles, email me at This discussion is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.




Death and Taxes



I have a confession to make: I died two years ago.


You wouldn’t know it if you’d met with me, traded e-mails or phone calls with me, or stopped by the New York State Society of CPAs’ office in that time, but according to the federal government, I left the ranks of the living in May  2013. Surprised? I was too. My CPA broke the news to me a few months ago after my income tax return was rejected by the IRS.


According to a study released by the Social Security Administration, the agency has a hard time telling the living from the dead in other ways, too. Thanks to poor internal controls around how the SSA updates its Death Master File, some 6.5 million Americans aged 112 or older — the vast majority believed to be dead — still have active Social Security numbers. Thieves mine these accounts to collect benefits that don’t belong to them or to take out lines of credit.


I signed an affidavit in order to be brought back to life in SSA computers, but resurrections don’t come easily. The correction didn’t immediately show up on the IRS’s side, so I spent several days trying to get hold of an agent and, later, the state’s taxpayer advocate — an exercise in frustration that most taxpayers can sympathize with.




The SSA and IRS often come under attack. However, when they fall short, the question we should be asking isn’t, “How can this happen?” but rather, “How much more of this are we willing to accept?” Chronically underfunded and understaffed, too many government agencies are no longer equipped to meet the public’s needs. Indeed, according to an interim report from the Treasury Inspector General of Tax Administration, budget cuts have left the IRS flailing. As of March 7, 2015, about 45.6 million taxpayers tried to call the IRS for assistance; 4.2 million calls were answered. And in a report released last year, the SSA admitted that while it has built in efficiencies wherever it could, it has been “unable to complete as much program integrity work” as it would like. In their current states, the SSA and IRS are being asked to do a difficult job with one hand tied behind their back.


I was lucky. As the executive director of a CPA society, I had some sense of what I was in for. Many other Americans — for example, those who have fewer resources, those who cannot afford a CPA, or those who don’t speak English well — simply fall through the cracks, which could lead to financial disaster for them down the road.


This may seem like a problem for politicians, but they won’t act unless we do. No matter what your personal political views are on the IRS, the agency performs one of the most critical functions of the federal government. Congress cannot continue to saddle this agency with new responsibilities while simultaneously underfunding its basic obligations, and then accuse the agency of failing to meet them.


Joanne Barry is executive director and CEO of the New York State Society of CPAs. Reach her




The importance of updating beneficiary designations


Most of us have more than enough to do. We're on the go from early in the morning until well into the evening — six or seven days a week. Thus, it's no surprise that we may let some important things slide. We know we need to get to them, but it seems like they can just as easily wait until tomorrow, the next day, or whenever.


A U.S. Supreme Court decision reminds us that sometimes "whenever" never gets here and the results can be tragic. The case involved a $400,000 employer-sponsored retirement account, owned by William, who had named his wife, Liv, as his beneficiary in 1974 shortly after they married. The couple divorced 20 years later. As part of the divorce decree, Liv waived her rights to benefits under William's employer-sponsored retirement plans. However, William never got around to changing his beneficiary designation form with his employer.


When William died, Liv was still listed as his beneficiary. So, the plan paid the $400,000 to Liv. William's estate sued the plan, saying that because of Liv's waiver in the divorce decree, the funds should have been paid to the estate. The Court disagreed, ruling that the plan documents (which called for the beneficiary to be designated and changed in a specific way) trumped the divorce decree. William's designation of Liv as his beneficiary was done in the way the plan required;Liv's waiver was not. Thus, the plan rightfully paid $400,000 to Liv.


The tragic outcome of this case was largely controlled by its unique facts. If the facts had been slightly different (such as the plan allowing a beneficiary to be designated on a document other than the plan's beneficiary form), the outcome could have been quite different and much less tragic. However, it still would have taken a lot of effort and expense to get there. This leads us to a couple of important points.


If you want to change the beneficiary for a life insurance policy, retirement plan, IRA, or other benefit, use the plan's official beneficiary form rather than depending on an indirect method, such as a will or divorce decree.


It's important to keep your beneficiary designations up to date. Whether it is because of divorce or some other life-changing event, beneficiary designations made years ago can easily become outdated.


One final thought regarding beneficiary designations: While you're verifying that all of your beneficiary designations are current, make sure you've also designated secondary beneficiaries where appropriate. This is especially important with assets such as IRAs, where naming both a primary and secondary beneficiary can potentially allow payouts from the account to be stretched out over a longer period and maximize the time available for the tax deferral benefits to accrue.




Selecting the appropriate entity for your business


A principal consideration for any business, whether new or existing, is choosing an appropriate legal entity. Available options in most states include C corporations, S corporations, general and limited partnerships, limited liability companies (LLCs), limited liability partnerships (LLPs), and sole proprietorships.


Each type of entity has various advantages and disadvantages. One issue to consider is tax savings. The proper entity can minimize self-employment and income taxes. Understanding the total tax situation, including income tax, payroll tax, and estate tax exposure is essential in determining the choice of entity.


Personal liability protection is often an owner's main objective in choosing the appropriate entity. Operating as a proprietorship or general partnership offers no owner liability limitation. Limited partnerships, LLCs, LLPs, S corporations, and C corporations provide varying degrees of liability protection for the owners depending on state law. For sole owners, the single-member LLC is a popular liability-limiting alternative to a proprietorship.


If a business is owned by more than one individual, it cannot be run as a proprietorship. If all owners provide management services, a limited partnership is not a viable option because that would jeopardize their status as limited partners. Limited partnerships, LLPs, LLCs, C corporations, and S corporations allow for management by multiple individuals without limitations.


In many cases, a change in entity status is sought to accomplish a transition in ownership. Whether the objective involves moving ownership to a successor via gifts, an installment sale, a stock redemption, a bequest, or a combination of methods, it is often necessary to use a different form of entity to meet these objectives.


Each entity selection situation is unique. The business owner's objectives must be systematically matched with the various entities' attributes. All major tax and nontax issues must be considered and alternatives explored before choosing the appropriate structure for your business.


As with most business decisions, meaningful, up-front planning will have a positive and lasting effect on your business venture. Please call us with questions about the appropriate entity structure for an existing business, a business you intend to purchase, or a contemplated new start-up business.




Tips for deducting losses from a disaster


If you suffer damage to your home or personal property, you may be able to deduct the losses you incur on your federal income tax return. Here are some things you should know about deducting casualty losses:


*Casualty loss. You may be able to deduct losses based on the damage done to your property during a disaster. A casualty is a sudden, unexpected, or unusual event, such as a natural disaster (e.g., a hurricane, tornado, flood, or earthquake), fire, accident, theft, or vandalism.


*Normal wear and tear. A casualty loss does not include losses from normal wear and tear or progressive deterioration from age or termite damage.


*Covered by insurance. If you insured your property, you must file a timely claim for reimbursement of your loss. If you don't, you cannot deduct the loss as a casualty or theft.


*When to deduct. As a general rule, you must deduct a casualty loss in the year it occurred. However, if you have a loss from a federally declared disaster area, you may have a choice of deducting the loss on your return for the year the loss occurred or on an amended return for the immediately preceding tax year.


*Amount of loss. Your loss is generally the lesser of (1) your adjusted basis in the property before the casualty (typically, the amount you paid for it); or (2) the decrease in fair market value of the property as a result of the casualty, reduced by any insurance or other reimbursement you received or expect to receive. 


*$100 rule. After you have figured your casualty loss on personal-use property, you must reduce that loss by $100. This reduction applies to each casualty loss event during the year. It does not matter how many pieces of property are involved in an event.


*10% rule. You must reduce the total of all your casualty or theft losses on personal-use property for the year by 10% of your adjusted gross income.




The many benefits of a Health Savings Account (HSA)


A Health Savings Account (HSA) represents an opportunity for eligible individuals to lower their out-of-pocket health care costs and federal tax bill. Since most of us would like to take advantage of every available tax break, now might be a good time to consider an HSA, if eligible.


An HSA operates somewhat like a Flexible Spending Account (FSA) that employers offer to their eligible employees. An FSA permits eligible employees to defer a portion of their pay, on a pretax basis, which is used later to reimburse out-of-pocket medical expenses. However, unlike an FSA, whatever remains in the HSA at year end can be carried over to the next year and beyond. In addition, there are no income phaseout rules, so HSAs are available to high-earners and low-earners alike.


Naturally, there are a few requirements for obtaining the benefits of an HSA. The most significant requirement is that an HSA is only available to an individual who carries health insurance coverage with a relatively high annual deductible. For 2015, the individual's health insurance coverage must come with at least a $1,300 deductible for single coverage or $2,600 for family coverage. For many self-employed individuals, small business owners, and employees of small and large companies alike, these thresholds won't be a problem. In addition, it's okay if the insurance plan doesn't impose any deductible for preventive care (such as annual checkups).  Other requirements for setting up an HSA are that an individual can't be eligible for Medicare benefits or claimed as a dependent on another person's tax return.


Individuals who meet these requirements can make tax-deductible HSA contributions in 2015 of up to $3,350 for single coverage or $6,650 for family coverage. The contribution for a particular tax year can be made as late as April 15 of the following year. The deduction is claimed in arriving at adjusted gross income (the number at the bottom of page 1 on your return). Thus, eligible individuals can benefit whether they itemize or not. Unfortunately, however, the deduction doesn't reduce a self-employed person's self-employment tax bill.


When an employer contributes to an employee's HSA, the contributions are exempt from federal income, Social Security, Medicare, and unemployment taxes.


An account beneficiary who is age 55 or older by the end of the tax year for which the HSA contribution is made may make a larger deductible (or excludible) contribution. Specifically, the annual tax-deductible contribution limit is increased by $1,000.


An HSA can generally be set up at a bank, insurance company, or other institution the IRS deems suitable. The HSA must be established exclusively for the purpose of paying the account beneficiary's qualified medical expenses. These include uninsured medical costs incurred for the account beneficiary, spouse, and dependents. However, for HSA purposes, health insurance premiums don't qualify.




Double duty giving with charitable gift annuities


If you are charitably inclined, you may wish to consider contributing to a charitable gift annuity, which can combine the benefits of an immediate income tax deduction and a lifetime income stream. Furthermore, your future taxable estate will be reduced for the remainder value of the property transferred to the charity.


charitable gift annuity is an arrangement in which you make a gift of cash or other property to a charity in exchange for a guaranteed income annuity for life. This is similar to buying an annuity in the commercial marketplace, except that you can claim an immediate charitable deduction (subject to a 50% adjusted gross income limitation) for the excess of the value of the property over the value of the annuity, based on IRS tables. The charity must receive at least 10% of the initial net value of the property transferred in order for you to claim a charitable deduction for a portion of the purchase price.


The annuity may be payable to you over your life, or over the joint lives of you and someone you have designated. The rate of return is typically set at the time of the gift based on your age at that time. A portion of each annuity payment is tax-free, because you're entitled to recover your original investment over your life expectancy.


The amount of your charitable deduction depends on a combination of your age and an IRS-prescribed interest rate at the time of your purchase. Of course, your charitable deduction will be less than the total value of your annuity purchase price because your deduction can only be claimed for the present value of the property that the charity will keep after your death, based on your life expectancy at the time of purchasing the annuity.




Wealthy Couple Sentenced To Jail For Obstructing IRS At Audit


“You’re two people who have great talent, who’ve been very successful in life, who I am going to send to prison,” Manhattan Federal Court Judge Denise Cote advised Dr. Jeffrey Stein and his wife, Marla Stein, shortly before handing down their sentence.


Both will spend time in federal prison for their respective roles in cheating the Internal Revenue Service (IRS). Dr. Jeffrey Stein, a vascular surgeon, was sentenced to 18 months while Marla Stein, a personal injury lawyer, was sentenced to a year plus one day (by way of explanation, crimes deemed a felony, by sentencing guidelines, are generally punishable by more than one year in prison and may then be eligible for early release). Both had hoped to avoid jail time with Marla Stein asking to serve her sentence at home in order to take care of her minor son.


Instead, the judge opted to have the couple stagger their jail terms,Giudice-style.


The Steins were also ordered to pay restitution to the IRS in the aggregate amount of $344,989.


The sentencing followed charges and a guilty plea filed earlier this year. The couple pleaded guilty to a scheme to lower their tax burden by providing “false and fictitious information” to their accountant. That information involved generating fake deductions to offset actual business income from their respective practices. When their returns were flagged by IRS for audit, the two became even more creative: they made up documentation to support their lies.


The documentation that the Steins created didn’t simply rely on fake names and identities. Rather, Jeffrey Stein used the names of four disabled military veterans including two former patients whose identities Stein obtained through his work for the V.A. Hospital. Stein created bogus invoices to make it appear that those patients had worked for him in such positions as “ultrasound technologist” and “vascular technologist.” Not only was all of it a lie, one of the vets whose name appeared on the invoice was not even alive in the year Stein submitted the invoice.


Not to be outdone, Marla Stein also used names and tax ID numbers of other people to substantiate fake deductions. Stein created fake invoices to prove that a household employee and a family doctor had actually performed work for her law firm when they did not. Additionally, she altered invoices for photos and videos of family religious celebrations to look like they were attributable to her law practice.


Noting that the couple had doubled down on their fraud after they had been caught, IRS Special Agent-in-Charge Shantelle P. Kitchen said earlier this year that the investigation against the couple, “also reinforces the message that falsifying books and records ‘after the fact,’ in preparation for a tax audit, is also a criminal offense and will be dealt with accordingly.”


In addition to jail time and fines, pursuant to New York Law, Marla Stein will likely lose her license to practice law. Stein had already lost her job as a result of the scheme. Similarly, Jeffrey Stein could face suspension of his medical license; in the meantime, Stein, who was previously identified on the Mt. Sinai Hospital website as an Assistant Clinical Professor of Vascular Surgery is no longer listed as active.


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Boston Bruins Battle IRS Over Meal Deductions



The Boston Bruins hockey team is taking the Internal Revenue Service to court over its habit of deducting 100 percent of the cost of away-game meals.


Employers may generally deduct up to 50 percent of the cost of meals for employees. An exception is if the meals are furnished for the convenience of the employer and on the employer’s business premises, in which case the employer may deduct 100 percent of the cost. 

Boston Bruins owner Jeremy Jacobs filed a petition in the Tax Court on July 27 disputing the 50 percent limitation on the meals provided Bruins players in their away games during the years 2009 and 2010. The Bruins practice of taking 100 percent of deductions for team meals during road trips was similar to the exception for employer-operated eating facilities, the petition maintained, since the hotels at which the team meals were consumed constituted its “base of operations” during away games.


“Use of the away city hotel is extensive, requiring that the hotel provide rooms for each player and staff member, private meeting rooms, eating facilities, and space for physical therapy and medical treatment,” Jacobs contended in the petition filed with the Tax Court.


Moreover, according to the petition, “The away city hotel is the club’s business premises during the club’s travels in the away city.”


It cited the fact that the purpose of the hotel stay “is all business.” For example, players are required to sleep at the designated hotel and abide by a designated curfew, and  the coaches and staff conduct business meetings at the hotel. In fact, the petition said, “The time spent at the away city hotel is substantial, and far greater than the 60 minutes of ice time that each away game requires.”


Naturally, the case will be closely followed by the rest of the National Hockey League and other professional sports teams.





Clinton Proposes Plan to Reduce College Costs by Limiting Tax Deductions



Hillary Clinton has rolled out a plan to make college affordable that her presidential campaign has dubbed the New College Compact, enabling students to pay for higher education without taking out costly student loans.


 “Under the New College Compact, no student should have to borrow to pay tuition at a public college,” said Clinton on her Web site. “Schools will have to control their costs and show more accountability to their students. States will have to meet their obligation to invest in higher education. The federal government will increase its investment in education, and won’t profit off student loans. And millions with student debt will be able to refinance it at lower rates.”


The incentive-based program would give money to states that offer “no-loan” tuition at four-year public universities and community colleges. Those who are already paying off their student loans would be able to refinance at today’s current interest rates. Under her plan, students who qualify for Pell grants would be able to use them for living expenses—and middle-class students would get more help to cover their living expenses. Clinton introduced the plan during a speech Monday at Exeter High School in New Hampshire.


The estimated $350 billion plan would in part be paid for by reinstituting limits on itemized deductions for high-income families that were in effect during the Reagan administration, according to the Washington Post.


At least one group is concerned about limits being placed on charitable deductions. "Hillary Clinton has proposed a plan to reduce the cost of college tuition and alleviate student debt burdens by capping itemized deductions, including charitable deductions, at 28 percent for certain families and individuals,” said Andrew Watt, president of the Association of Fundraising Professionals. “Although the goal of Mrs. Clinton’s plan may be laudable, we are concerned with the proposed funding mechanism that effectively diverts money away from charitable causes.”


Two of Clinton’s opponents for the Democratic nomination, Sen. Bernie Sanders of Vermont and former Maryland Governor Martin O’Malley, have also proposed their own plans for college affordability, according to CNN. Sanders has pledged to make tuition for four-year public colleges and universities free, while O’Malley has proposed a debt-free college tuition program that is similar to Clinton’s, while also expanding Pell grants and freezing college tuition.





Survey Ranks Friendliest States, Cities for Small Biz



Texas, New Hampshire and Utah are the friendliest states to small businesses while New York and California rank among the least friendly, according to the fourth annual Small Business Friendliness Survey, which also found that state and city tax burdens rank low in how entrepreneurs gauge this friendliness.


State and city governments that promote local business training and focus on ease of regulatory compliance are viewed as the friendliest to small business, according to the survey, conducted by technology-based marketplace Thumbtack.


More than 17,000 surveyed U.S. small business owners were asked to rate their state and city governments on a range of policy factors that Thumbtack used to evaluate the states and cities against other and along more than a dozen metrics.


 “Small business owners on Thumbtack have consistently told us that they welcome support from their governments but are frequently frustrated by unnecessary bureaucratic obstacles,” stated Jon Lieber, chief economist of Thumbtack. “Given that there is a crisis of entrepreneurship in the United States, seen in the broad collapse of self-employment across industries and states, creating the right environment for business start-ups is more important than ever.”


The three key drivers of business friendliness for state governments, according to the surveyed entrepreneurs, are training experience and tax and labor regulations. In rating city friendliness, respondents also valued training experience, along with licensing regulations and website experience.


Labor rules were 88 percent more important in driving state friendliness scores when compared to tax rates.


According to these factors of friendliness, the top ten states with the best climate for small business are:

  1. Texas
  2. New Hampshire
  3. Utah
  4. Louisiana
  5. Colorado
  6. Idaho
  7. Tennessee
  8. Virginia
  9. Georgia
  10. Kansas


The top ten best ranked cities are:

  1. Manchester, N.H.
  2. Dallas, Texas
  3. Richmond, Va.
  4. Austin, Texas
  5. Knoxville, Tenn.
  6. Nashville, Tenn.
  7. Houston, Texas
  8. Fort Collins, Colo.
  9. Boulder, Colo.
  10. San Antonio, Texas


The worst ranked states and cities are:

1.Rhode Island

2. Illinois

3. Connecticut

4. California

5. New York


  1. Hartford, Conn.
  2. Albuquerque, N.M.
  3. Buffalo, N.Y.
  4. New Haven, Conn.
  5. Providence, R.I.


Thumbtack surveyed 17,633 small businesses across the United States with 36 questions, then evaluated states and cities against each other along more than a dozen metrics. More information on the survey methodology and results can be found here




Extra 220,000 Hit by IRS ‘Get Transcript Breach’



The IRS revealed today that approximately 220,000 more taxpayers than it had previously announced were affected by a breach in its “Get Transcript” Web app.


The breach, which was announced in May (see “IRS Detects Massive Data Breach in ‘Get Transcript’ Application”), was originally thought to have affected approximately 104,000 taxpayers, but the IRS conducted a further review of the 2015 filing season to check for other suspicious activity.


As a result of that review, the IRS will be sending letters to about 220,000 taxpayers where there were instances of possible or potential access to “Get Transcript” taxpayer account information. It will also be mailing letters to a further 170,000 households whose personal information could be a risk. 


In a statement released today, the IRS noted that it was moving “aggressively” to protect those affected, including offering free credit protection and ID protection PINs.


“The IRS takes the security of taxpayer data extremely seriously, and we are working to continue to strengthen security,” the statement said.


The criminals used taxpayer-specific data acquired from non-IRS sources to gain unauthorized access to information on the tax accounts through the Get Transcript application. The data included Social Security information, birth dates and street addresses.


Third parties gained enough information from outside sources before trying to access the IRS site, allowing them to clear a multi-step authentication process, including several personal




FBAR Deadline Moves Up 3 Months to April 15



It’s the beginning of the end of the filing date disconnect between foreign bank account reports and income tax returns.


On July 31, President Obama signed the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 into law, which modified the due date of several key forms for Americans with foreign income and Americans living abroad.


That includes the Report of Foreign Bank and Financial Accounts, or Form 114, colloquially known as the FBAR. Any U.S. person with a financial interest in, or signatory authority over, foreign financial accounts must file the FBAR, if at any time, the aggregate value of their relevant foreign account or accounts exceeds $10,000. An account over which a person has signature authority but no ownership interest is included in this computation.


The FBAR gained notoriety in 2008 when UBS, responding to pressure from the U.S. Department of Justice, disclosed the identities of thousands of U.S. holders of Swiss accounts.


Failure to file an FBAR may result in a civil penalty of up to $10,000 for negligent violations, or up to the greater of $100,000 or 50 percent of the account balance for willful violations. Failure to comply with the e-filing mandate may result in a separate $500 penalty. The new law did not change the requirement that the FBAR be filed electronically with the Bank Secrecy Act form (as opposed to together with a tax return to a service center), nor did it eliminate the requirement to file a Form 8938 with a tax return reporting certain foreign holdings.


New Due Date

The Act states that the Secretary of the Treasury, or the Secretary’s designees, shall modify appropriate regulations to provide that “[t]he due date of FinCEN Report 114 (relating to Report of Foreign Bank and Financial Accounts) shall be April 15 with a maximum extension for a 6-month period ending on October 15 and with provision for an extension under rules similar to the rules in Treas. Reg. section 1.6081–5.”


This is a good first step toward an integrated system. For filers living in the U.S., this change in the law will coordinate the timing of their FBAR submission with the timing of their income tax return. The FBAR will be due April 15, along with their Form 1040. If they apply for an extension of six months until October 15, the FBAR will also be due on October 15.


For Americans living abroad, the reference in the Act to Treas. Reg. section 1.6081–5 will allow for the coordination of the FBAR due date to the June 15 deadline (after automatic extension) for the coordinating income tax return.

Please note, this extension only comes into effect for the 2016 FBAR (now due April 15, 2017). It does not apply to taxpayers who missed the June 30, 2015 filing deadline for their 2014 FBAR.


New Penalty Waiver Provisions

Of particular interest for individuals who have made a minor foot fault in the first year of filing an FBAR, the Act states that “[f]or any taxpayer required to file such Form for the first time, any penalty for failure to timely request for, or file, an extension, may be waived by the Secretary.” This is a significant deviation and may provide some degree of comfort to those taxpayers who have just learned of filing obligations. Other options exist to correct filing deficiencies, and should be considered in light of all the facts and circumstances with your tax professional.


Shannon Smith Retzke and Aaron D. Schumacher are attorneys and partners at the law firm Withers Bergman LLP in New Haven, Conn.




IRS Removes Automatic W-2 Extensions to Fight Identity Theft



The Internal Revenue Service has issued final and temporary regulationsremoving the automatic 30-day extension of time to file information returns on forms in the W-2 series, with the exception of Form W-2G, in an effort to combat tax-related identity theft, starting in 2017.


The current automatic extension will remain in effect next year. It allows an automatic 30-day extension of time to file information returns on forms in the W-2 series (including Forms W–2, W-2AS, W-2G, W-2GU, and W-2VI), 1095 series, 1098 series, 1099 series, and 5498 series, and on Forms 1042-S and 8027, and allows an additional 30-day non-automatic extension of time to file those information returns in certain cases. Taxpayers need to file a Form 8809 to request the extensions.


The new regulations allow a single 30-day non-automatic extension of time to file these information returns. The IRS said the changes are being implemented to accelerate the filing of forms in the W-2 series (except Form W-2G, for reporting gambling winnings) so they are available earlier in the filing season for use in the IRS’s identity theft and refund fraud detection processes.


In addition, the new regulations update the list of information returns subject to the rules regarding extensions of time to file. The temporary regulations affect taxpayers who are required to file the affected information returns and need an extension of time to file.


The new regulations add information returns on forms in the 1097 series and Forms 1094-C, 3921, and 3922 to the list of information returns with procedures prescribed by regulations for the extension of time to file. They also remove information returns on forms in the W-2 series (except Form W-2G) from the list of information returns eligible for the automatic 30-day extension of time to file, and instead provide a single 30-day non-automatic extension of time to file those information returns; and clarify that the procedures for requesting an extension of time to file in the case of forms in the 1095 series apply to information returns on Forms 1095-B and 1095-C, but not 1095-A.


The due dates for filing information returns in the W-2 series on paper are generally either February 28, or the last day of February of the calendar year following the calendar year for which the information is being reported. The due date for filing these information returns electronically is March 31 of the calendar year following the calendar year for which the information is being reported.


The IRS also proposed additional regulations that would remove the automatic extension of time to file other types of information returns, including the Form W-2G, 1042-S, 1094-C, 1095-B, 1095-C, 1097 series, 1098 series, 1099 series, 3921, 3922, 5498 series, and 8027. Under the proposed regulations, filers and transmitters would be permitted to request only one 30-day extension of time to file these information returns by timely submitting a Form 8809, including an explanation of the reasons for requesting the extension and signed under penalty of perjury.


The IRS has been ramping up its efforts to combat taxpayer identity theft in recent years, although the problem remains all too common. According to a report to Congress from National Taxpayer Advocate Nina Olson last month, the IRS and the Taxpayer Advocate Service she runs continue to see large numbers of these cases. In each of calendar years 2013 and 2014, the IRS received about 730,000 identity theft cases with taxpayer impact, and over the last three fiscal years, the Taxpayer Advocate Service has received an average of about 52,000 identity theft cases a year.




Tax Strategies Scan: Minimizing Taxes on Social Security


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


Top tips for minimizing taxes on Social Security: Most clients who only receive Social Security benefits during their retirement years are likely not going to be taxed unless if they also receive income from other sources like an IRA or 401(k), according to Investopedia. However, if the Social Security benefit hits $25,000 for single individuals or reaches $32,000 for married filing jointly, then the income is subject to tax depending on the amount. To avoid taxes on other sources such as traditional IRAs or 401(k)s, one may consider converting these accounts to Roth IRAs. Some experts also suggest consuming income from taxable accounts first until one is eligible to receive Social Security benefits at age 70. --Investopedia


Clients own appreciated land? This tax move could save them a ton: Taxpayers will face a 39.6% income tax, a 3.8% net investment income tax and possibly a whopping state income tax of 43.4% if they decide to sell highly appreciated land, according to MarketWatch. However, they can reduce the tax burden by establishing an S corporation and selling the property through the corporation, so the proceeds will be subject to long-term capital gains tax, which is only 20%. Using the strategy would mean the effective tax rate could be 23.8%, considerably lower than when the profit is subject to ordinary income tax. -- MarketWatch


What happens if clients over-contribute to their retirement account? Clients need to avoid contributing to their IRAs and 401(k) plans beyond the set limits, as they could face IRS penalties and double taxation on their contributions, according to Money. Those who have over-contributed to their retirement accounts are advised to seek a refund of the excess deferrals, including any returns on the amount on or before the tax-filing deadline. IRA investors who made the mistake may file an amended return by the filing-extension deadline or they may simply leave the money with the account to carry it over towards contribution limit for the following year but pay a 6% penalty. -- Money


Tax court reminds us that you should never toy around with your retirement account: Court rulings show that clients need to avoid tapping their retirement accounts, such as IRA and 401(k) plans and annuities, to finance a business endeavor or personal plan, according to Forbes. Such a move could result in hefty taxes and penalties. --Forbes




The Arms Race in Sales Tax

Technology is crucial in the struggle between states and taxpayers



Though the nation is expressing cautious optimism about the economy, particularly in the second half of 2015 and thereafter, any recovery will follow the traditional pattern of helping some sectors more than others. This is particularly true of state governments, which generally have faced tougher times in the past four years due to growing social obligations and a changing business environment.


The Multistate Advisor observed at the outset of this year that 16 states — from tiny Rhode Island to Illinois — face substantial deficits. And while states like California and Ohio have amassed a budget surplus through fiscal belt-tightening, all of the states are looking to expand their revenue bases in order to drag their budgets into the black.


“The states are hurting for revenue,” noted Cory Barwick, technical product manager for Wolters Kluwer Tax & Accounting US, which publishes the CCH Sales Tax Office, a comprehensive tax calculation system that combines tax rate and taxability content with highly accurate jurisdiction boundary information and sophisticated logic. “Sales taxes account for about 30 percent of every state’s budget. In a troubled economy, it’s difficult for the state to simply raise the tax rates. So they are focusing on other, more aggressive tactics that include going after taxpayers and increasing audit activities.”

“At the same time, you can’t simply provide computations for sales and use taxes and feel that you have met the needs of accountants and their clients,” said John Minassian, vice president of tax content development at Vertex Inc., a leading provider of comprehensive, integrated tax technology solutions for corporations worldwide. “The key is to offer integrated enterprise technology that enables compliance for all taxes that businesses need to file. This may include income taxes, payroll taxes, and value-added taxes, as well as sales and use taxes. Ultimately, the solution should also feature tools to help professionals analyze tax data for audit and planning purposes.”

“The sales and use tax landscape continues to remain incredibly complex, with thousands of U.S. tax jurisdictions and hundreds of tax rate changes each year,” said Carla Yrjanson, vice president of tax research and content at Thomson Reuters, whose ONESOURCE provides indirect tax solutions to manage the entire sales and use tax lifecycle. “Over the last five years we have seen a broadening of activities that create nexus in tax jurisdictions, new tax authorities imposing sales/use tax, and a gradual expansion of goods and services subject to sales tax.”

“When the tax codes were originally created, the economy was mostly focused on the manufacturing of tangible goods,” said Ken Crutchfield, vice president of software products at Bloomberg BNA. BNA Sales Tax Rates delivers sales and use tax rates for every taxing jurisdiction in the United States (including Puerto Rico) and Canada. “As the economy shifted from manufacturing to services, and in particular with the advent of digital commerce, state tax codes have become outdated, and ultimately, have led to eroding tax bases. For businesses, this means a continual onslaught of ongoing tax code changes as states struggle to keep up with emerging service and digital economies.”

“The bottom line is that state and local governments are still struggling for revenue since the downturn,” said Pascal Van Dooren, chief financial officer for Avalara Inc., a provider of sales tax and compliance automation services in the cloud. “State revenue departments are hiring auditors and chasing down smaller and smaller businesses looking for missed revenue opportunities.”

Rebecca Newton-Clarke, senior editor with the Tax & Accounting business of Thomson Reuters, summarized it this way: “Our globalized world has seen an explosion in electronic transactions that map really uneasily onto the existing sales and use tax laws, which are based on the idea of a physical sale or use occurring in a state, on the idea of a person buying something in a store, the old-school way. With the increase in digital goods, downloaded and remotely accessed software and apps, and Web-based services, the sales and use tax landscape has become incredibly complex, requiring states to address a constantly expanding variety of transactions not involving any exchange of physical property, and companies to stay on top of the implications of new rulings.”




Where they can, states have attempted to use budgetary restraint in an effort to reduce spending to better match revenues with expenditures. But some federal initiatives related to immigration and health care, to name just two, have made this difficult. In addition to belt-tightening, the states have generally engaged in four strategies:


1. Redefinition of nexus. The reigning definition of nexus was established in the 1992 Supreme Court decision inQuill v. North Dakota. The court held that since office supply company Quill did not have a presence in North Dakota, that state had no right to require Quill to collect and remit sales taxes. But that has changed with the advent of the digital economy, with New York and other states cutting agreements with online vendors to have them collect and remit the taxes.

“Nexus laws are under scrutiny,” said Bloomberg BNA’s Crutchfield. “Physical presence is still the litmus test for whether or not a company must remit sales and use tax. However, many states have expanded their interpretation of what constitutes ‘physical presence.’ Since 2008, several states have enacted so called ‘Amazon tax laws’ establishing click-through nexus. These states require out-of-state online businesses to collect sales or use tax for goods sold within the states’ boundaries based on referrals from in-state bloggers. Currently there are at least 16 states that have adopted click-through nexus laws, with many more claiming that nexus laws are already built into their tax code.”

“We look for nexus standards to be expanded and redefined,” added Cory Barwick of Wolters Kluwer. “Services that have traditionally been exempt from sales taxes will have their status reconsidered, resulting in more taxes on services. The larger service industries will use their strength to ‘lobby out’ of sales tax, but smaller services will be increasingly taxed.”


2. Collection of taxes owed. For both sales and use taxes, states are becoming more aggressive in their collections. In addition to taxes owed by businesses, efforts also include taxes and fees owed by individuals.

“There is more of a focus on use tax,” said Ken Crutchfield. “In every state that imposes a sales tax, there is a use tax for items purchased out of state (typically online purchases shipped to a consumer). As more and more companies purchase equipment and materials online from out of state ‘etailers,’ states are ramping up efforts to collect on use tax. For example, many states have created new use tax look-up tables where companies pay a safe harbor amount based on their taxable income. With many states still desperate for revenue to shore up budget deficits, many businesses will need to begin taking this once-forgotten tax more seriously.”


3. Support for a national solution. State and local governments understand that the current system is both too complicated and too burdensome for small businesses. In response, they have looked toward a national solution, either in the form of a value-added tax or support for the Streamlined Sales and Use Tax Agreement that became effective in October of 2005. To date, 24 states have signed onto the agreement, including Arkansas, Georgia, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, Nevada, New Jersey, North Carolina, North Dakota, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Vermont, Washington, West Virginia, Wisconsin and Wyoming. The District of Columbia has also agreed to it.

“In the next three to five years, we anticipate an increased reliance on indirect tax as a revenue source for U.S. tax authorities,” said Thomson Reuters’ Yrjanson. “This could be finally bringing to fruition Streamlined Sales Tax and imposing tax on remote sellers, broadening the sales tax base, or it could be something even larger like implementing a federal-level VAT to fund specific government services.”

“The Simplified Sales Tax Initiative has resulted in much greater uniformity across the states,” noted Newton-Clarke of Thomson Reuters. “There are still many differences across the states, however, in terms of what they do and don’t tax. Whether Congress will act in this area, adopting an act that dispenses with the physical presence requirements established by the Supreme Court in Quill, remains to be seen.”


4. Increasing use of technology. Regardless of the other strategies employed, technology will play an increasing role in how effectively the states are able to collect sales and use taxes. For decades, compliance with sales and use taxes has been a matter of manual tracking and computation that requires filing monthly returns on the 20th of every month, mailing checks to the appropriate revenue authorities, and reviewing each invoice to ensure that the amount of tax due has been verified. It also involves a paper file containing exemption certificates for applicable customers, and preparations for the inevitable audits by state and local authorities. This manual process is inefficient and wrought with the potential for costly errors. For most of the solution providers, this means a strong commitment to tax technologies.


“As states become more sophisticated in their use of technology, businesses will need to do the same. And that means automating state tax analysis is more important than ever,” said Bloomberg BNA’s Crutchfield. “Savvy businesses are simply expected to take advantage of the latest technologies available. And because businesses tend to be more nimble than government, implementing cutting-edge technologies will help them to stay ahead of the curve and ensure that they remain compliant on taxes across the board.”

“If the past is any indication, we expect more of the same,” said Van Doren. “More government complexity, more government audits, and more affordable indirect tax automation solutions. We believe compliance automation is inevitable and will replace manual processes for substantially all businesses, much the same way outsourced and automated payroll compliance management became a standard many years ago.”


“Obviously, the cloud deployment model is being considered in businesses of every size,” said Minassian at Vertex. “There is a tendency among companies to shift from making a large up-front payment for a software license to paying for tax calculation as a service, similar to a utility.”


“Cloud deployment is a strong technology affecting our customers and their clients,” said Barwick of Wolters Kluwer. “Big businesses that used to demand on-premises solutions now see the value in the cloud as a technical solution to their needs, and we are moving all of our applications to the cloud. We have seen a big uptick in the number of customers demanding cloud services available over mobile technologies.”


Beyond the cloud, virtually all of the thought leaders surveyed were in agreement that the core technologies of sales and use tax today are:


-- Mobility. “Mobility enables business to keep pace and stay connected to the business,” said Minassian.

There is interest in the app space for sales and use tax lookup, added Barwick: “There is demand for that, but it is a complex issue because you have to deal not only with where the product is purchased but also where the mobile device is.”


-- Analytics and Big Data. “The key to this is that the answers are in the data, but there is so much of it and it is complicated,” observed Minassian. “The answer lies in being able to analyze the data utilizing software tool sets.”


“The use of sophisticated analytics with built-in tax law and audit trails can help businesses not only forecast the impacts of operational decisions, but also help to mitigate costly errors and audits. Our research shows that over 80 percent of state tax professionals are doing this type of analysis in spreadsheets, which are costly to create and maintain, and are risky — especially if relied upon for financial statement use,” said Bloomberg BNA’s Crutchfield.


Ultimately, serving CPAs and their clients in the diverse types of sales and use tax is not an issue of regulation or technology, though both play a critical role in how the software and solutions are devised.


As Barwick noted, “The real challenge we face is understanding the customer’s business. Technology advances at a high rate, and that demands that we get down to what a business is doing, what they are selling, and how and where they bring their products to market. Solution providers focus on the nuts and bolts of the system, so our customers can get what they need from the software.”





Into the Breach: What Preparers Tell Clients About ID Theft



With the revelation that another 220,000 taxpayers may find their identities at risk in the breach of the IRS’s “Get Transcript” application, you may find your clients worried that their identities, their credit scores and maybe their life savings will wind up at the mercy of some free-spending crook.


What can you tell them?


“To be careful everywhere and all the time,” said Paul Knapp of Exact Income Tax Service, in Santa Fe, Texas. “We’re publicizing scams and telling clients and non-clients to call us before they send money to anyone.”


“This is a tough area to explain to clients,” added Jim Loperfido of JGL Management Consulting in Auburn, N.Y. “I have long discussions with my clients who use the Internet often.”


“I encouraged taxpayers to have refunds direct-deposited [last season],” said Sandy Szumiloski, a preparer in Harleysville, Pa. “I made them aware that ID theft was an issue – and that it happened in my own family, to my mother-in-law. Also, I warned all clients about telemarketing scams; I personally received these calls. Several of my clients also received them.”


Enrolled agent Mele Perrego in Clayton, N.C., tells clients “that if they even just suspect that their identity might be compromised [to] file an identity theft affidavit (Form 14039)and also see the other recommendations on posted on”

Some preparers keep recommendations in reserve. “We don’t discuss ID theft unless the return is rejected due to someone stealing a Social Security number,” said R. Dale Dixon, an EA and president and CEO of The Tax Surgeon in Smyrna, Ga.


Crime Wave?


Hacking generates screaming headlines these days, as once-relatively minor breaches of retail giants’ and insurers’ databases gave way to hacks into the IRS and perhaps every other federal agency. One in four Americans fell victim to information security breaches in the past year, according to a new AICPA survey – more than double the number of respondents who reported being victimized just over a year ago.


“We now have about a dozen or more clients affected by it,” said EA David Spaulding, principal of Janover LLC in Garden City, N.Y. “E-filing is essentially neutralized for these [clients].”

The IRS recently joined with representatives of tax prep and software firms, payroll and tax financial product processors and state tax administrators in a new collaborative effort ( to combat ID theft refund fraud. The agreement includes identifying new steps to validate taxpayer and tax return information at the time of filing.


The IRS Criminal Investigation division has also created a cybercrime unit to combat ID theft-related tax fraud; the agency also recently agreed to change its policy on ID theft and provide victims with copies of the fraudulent tax returns that have been filed under their names by scammers.


Anybody can become an ID victim. Another recent AICPA survey showed that more than a third of adults ages 55 to 64 fell victim to information security breaches in the last year, compared with 22% of Millennials.

Several preparers still report only small numbers of ID theft victims in their entire client base. “I had two victims this year out of about 250 clients, but filed about an additional three or four 14039s as a precaution for other clients,” Perrego said.


Other countermoves


“I had to be proactive with the clients with the greatest risk and vulnerability: senior citizens,” said EA Yolanda Johnson of Tax Accountants Inc. in Orland Park, Ill. “I called to notify them that may get a call from someone impersonating an IRS collection employee and demanding money, and to refrain from giving out any personal information. I also provided them the phone number to the IRS to verify they didn’t have a balance due.”


Advanced Tax Centre in Rockledge, Fla., keeps “several promotional items in our reception area regarding the matter,” said EA Twila Midwood. “In addition, our newsletters always emphasize awareness of scams that the IRS will not initiate contact through phone or e-mail.”


EA Bob Smith with Albert Lea Tax Service in Albert Lea, Minn., added that his firm has had four clients get letters from the IRS regarding returns filed in those clients’ names and that the IRS believed to be fraudulent, “but got no explanation or other information from the IRS.”


The IRS itself also complicated Johnson’s client confidence this past season. “Due to the ID theft issues,” she said, “the IRS sent a form letter to the majority of our client base stating that they were reviewing their 2014 tax return. Many clients misunderstood the letter and thought they were being audited.”


Becky Neilson of Neilson Bookkeeping, in Sheridan, Calif., tells all her small-business clients to get an EIN “even if they don’t have employees,” she said. “Then when they complete W-9s for customers to give them 1099s, they’re only putting out their EIN and not their SSN out there. I also tell clients if they suspect ID theft, act quickly and let their bank or credit card company know.”


“We encourage quarterly review of their credit information when meeting to discuss their quarterly estimated taxes and financial reports,” added J. Alan Fagan, an EA and founder and CEO of The Mattox Group in Marina, Calif.


“I always make sure to inform clients about freezing their credit reports to provide additional protection, said Caitlin Campbell, an EA at Tower Financial Partners in Colorado Springs, Colo. “I also suggest they visit their credit reports at the free site and to pull one from a different bureau every four months.”


Loperfido’s Upstate New York firm abides by a “5% Rule.”


“That is, 5% of all business transactions are with people who have unethical motives,” he explained. “We want our clients to use whatever means is the best way to grow their business or make their quality of life better. It just needs a bit more practice and control to keep the five-percenters from getting into our pockets.”




Moving Expense Deduction


If you move your home you may be able to deduct the cost of the move on your federal tax return next year. This may apply if you move to start a new job or to work at the same job in a new location. In order to deduct your moving expenses, your move must meet three requirements:


1. Your move must closely relate to the start of work.  In most cases, you can consider moving expenses within one year of the date you start work at a new job location. Additional rules apply to this requirement.


2. Your move must meet the distance test.  Your new main job location must be at least 50 miles farther from your old home than your prior job location. For example, let’s say that your old job was three miles from your old home. To meet this test, your new job must be at least 53 miles from your old home.


3. You must meet the time test.  You must work full-time at your new job for at least 39 weeks the first year after the move. If you’re self-employed, you must also meet this test. In addition you must work full-time for a total of at least 78 weeks during the first two years at the new job site. If your tax return is due before you meet the time test, you can still claim the deduction if you expect to meet it.


See Publication 521, Moving Expenses, for more information about the rules.


If you qualify for this deduction, here are a few more tips from the IRS: 

  • Travel.  You can deduct certain transportation and lodging expenses while moving. This applies to costs for yourself and other household members while moving from your old home to your new home. You may not deduct your travel meal costs.
  • Household goods and utilities.  You can deduct the cost of packing, crating and shipping your property. This may include the cost to store or insure the items while in transit. You can deduct the cost to disconnect or connect utilities at your old and new homes.
  • Expenses you can’t deduct.  You may not deduct:

o    Any part of the purchase price of your new home.

o    The cost of selling your home.

o    The cost of breaking or entering into a lease.




Back-to-School Reminder for Parents and Students: Check Out College Tax Credits for 2015 and Years Ahead


With another school year just around the corner, the Internal Revenue Service today reminded parents and students that now is a good time to see if they will qualify for either of two college tax credits or other education-related tax benefits when they file their 2015 federal income tax returns.


In general, the American Opportunity Tax Credit or Lifetime Learning Credit is available to taxpayers who pay qualifying expenses for an eligible student. Eligible students include the taxpayer, spouse and dependents. The American Opportunity Tax Credit provides a credit for each eligible student, while the Lifetime Learning Credit provides a maximum credit per tax return.


Though a taxpayer often qualifies for both of these credits, he or she can only claim one of them for a particular student in a particular year.  To claim these credits on their tax return, the taxpayer must file Form 1040 or 1040A and complete Form 8863, Education Credits.


The credits apply to eligible students enrolled in an eligible college, university or vocational school, including both nonprofit and for-profit institutions. The credits are subject to income limits that could reduce the amount claimed on their tax return.

To help determine eligibility for these benefits, taxpayers should visit the Education Credits Web page or use the IRS’s Interactive Tax Assistant tool. Both are available on


Normally, a student will receive a Form 1098-T from their institution by Jan. 31 of the following year. (For 2015, the due date is Feb. 1, 2016, because otherwise it would fall on a Sunday.) This form will show information about tuition paid or billed along with other information. However, amounts shown on this form may differ from amounts taxpayers are eligible to claim for these tax credits. Taxpayers should see the instructions to Form 8863 and Publication 970 for details on properly figuring allowable tax benefits.


Many of those eligible for the American Opportunity Tax Credit qualify for the maximum annual credit of $2,500 per student. Students can claim this credit for qualified education expenses paid during the entire tax year for a certain number of years:

  • The credit is only available for four tax years per eligible student. 
  • The credit is available only if the student has not completed the first four years of postsecondary education before 2015.


Here are some more key features of the credit:

  • Qualified education expenses are amounts paid for tuition, fees and other related expenses for an eligible student. Other expenses, such as room and board, are not qualified expenses.
  • The credit equals 100 percent of the first $2,000 spent and 25 percent of the next $2,000. That means the full $2,500 credit may be available to a taxpayer who pays $4,000 or more in qualified expenses for an eligible student.
  • Forty percent of the American Opportunity Tax Credit is refundable. This means that even people who owe no tax can get an annual payment of up to $1,000 for each eligible student.
  • The full credit can only be claimed by taxpayers whose modified adjusted gross income (MAGI) is $80,000 or less. For married couples filing a joint return, the limit is $160,000. The credit is phased out for taxpayers with incomes above these levels. No credit can be claimed by joint filers whose MAGI is $180,000 or more and singles, heads of household and some widows and widowers whose MAGI is $90,000 or more.


The Lifetime Learning Credit of up to $2,000 per tax return is available for both graduate and undergraduate students. Unlike the American Opportunity Tax Credit, the limit on the Lifetime Learning Credit applies to each tax return, rather than to each student.


Also, the Lifetime Learning Credit does not provide a benefit to people who owe no tax.


Though the half-time student requirement does not apply to the lifetime learning credit, the course of study must be either part of a post-secondary degree program or taken by the student to maintain or improve job skills. Other features of the credit include:

  • Tuition and fees required for enrollment or attendance qualify as do other fees required for the course. Additional expenses do not.
  • The credit equals 20 percent of the amount spent on eligible expenses across all students on the return. That means the full $2,000 credit is only available to a taxpayer who pays $10,000 or more in qualifying tuition and fees and has sufficient tax liability.
  • Income limits are lower than under the American Opportunity Tax Credit. For 2015, the full credit can be claimed by taxpayers whose MAGI is $55,000 or less. For married couples filing a joint return, the limit is $110,000. The credit is phased out for taxpayers with incomes above these levels. No credit can be claimed by joint filers whose MAGI is $130,000 or more and singles, heads of household and some widows and widowers whose MAGI is $65,000 or more.


Eligible parents and students can get the benefit of these credits during the year by having less tax taken out of their paychecks. They can do this by filling out a new Form W-4, claiming additional withholding allowances, and giving it to their employer.


There are a variety of other education-related tax benefits that can help many taxpayers. They include:

  • Scholarship and fellowship grants — generally tax-free if used to pay for tuition, required enrollment fees, books and other course materials, but taxable if used for room, board, research, travel or other expenses.
  • Student loan interest deduction of up to $2,500 per year.
  • Savings bonds used to pay for college — though income limits apply, interest is usually tax-free if bonds were purchased after 1989 by a taxpayer who, at time of purchase, was at least 24 years old.
  • Qualified tuition programs, also called 529 plans, used by many families to prepay or save for a child’s college education.


Taxpayers with qualifying children who are students up to age 24 may be able to claim a dependent exemption and the Earned Income Tax Credit.


The general comparison table in Publication 970 can be a useful guide to taxpayers in determining eligibility for these benefits. Details can also be found in the Tax Benefits for Education Information Center on




Key Tax Tips on the Tax Effects of Divorce or Separation


Income tax may be the last thing on your mind after a divorce or separation. However, these events can have a big impact on your taxes. Alimony and a name change are just a few items you may need to consider. Here are some key tax tips to keep in mind if you get divorced or separated.

  • Child Support.  If you pay child support, you can’t deduct it on your tax return. If you receive child support, the amount you receive is not taxable.
  • Alimony Paid.  If you make payments under a divorce or separate maintenance decree or written separation agreement you may be able to deduct them as alimony. This applies only if the payments qualify as alimony for federal tax purposes. If the decree or agreement does not require the payments, they do not qualify as alimony.
  • Alimony Received.  If you get alimony from your spouse or former spouse, it is taxable in the year you get it. Alimony is not subject to tax withholding so you may need to increase the tax you pay during the year to avoid a penalty. To do this, you can make estimated tax payments or increase the amount of tax withheld from your wages.
  • Spousal IRA.  If you get a final decree of divorce or separate maintenance by the end of your tax year, you can’t deduct contributions you make to your former spouse's traditional IRA. You may be able to deduct contributions you make to your own traditional IRA.
  • Name Changes.  If you change your name after your divorce, notify the Social Security Administration of the change. File Form SS-5, Application for a Social Security Card. You can get the form on or call 800-772-1213 to order it. The name on your tax return must match SSA records. A name mismatch can delay your refund. 


Health Care Law Considerations

  • Special Marketplace Enrollment Period.  If you lose your health insurance coverage due to divorce, you are still required to have coverage for every month of the year for yourself and the dependents you can claim on your tax return. Losing coverage through a divorce is considered a qualifying life event that allows you to enroll in health coverage through the Health Insurance Marketplace during a Special Enrollment Period.
  • Changes in Circumstances.  If you purchase health insurance coverage through the Health Insurance Marketplace you may get advance payments of the premium tax credit in 2015. If you do, you should report changes in circumstances to your Marketplace throughout the year. Changes to report include a change in marital status, a name change and a change in your income or family size. By reporting changes, you will help make sure that you get the proper type and amount of financial assistance. This will also help you avoid getting too much or too little credit in advance.
  • Shared Policy Allocation. If you divorced or are legally separated during the tax year and are enrolled in the same qualified health plan, you and your former spouse must allocate policy amounts on your separate tax returns to figure your premium tax credit and reconcile any advance payments made on your behalf. Publication 974, Premium Tax Credit, has more information about the Shared Policy Allocation.


For more on this topic, see Publication 504, Divorced or Separated Individuals. You can get it on at any time.


Each and every taxpayer has a set of fundamental rights they should be aware of when dealing with the IRS. These are your Taxpayer Bill of Rights. Explore your rights and our obligations to protect them on



Your Health Insurance Company May Ask for Your Social Security Number


Your health insurance company may request that you provide them with the social security numbers for you, your spouse and your children covered by your policy.  This is because the Affordable Care Act requires every provider of minimum essential coverage to report that coverage by filing an information return with the IRS and furnishing a statement to covered individuals. The information is used by the IRS to administer – and individuals to show compliance with – the health care law.


Health coverage providers will file an information return, Form 1095-B, Health Coverage, with the IRS and will furnish statements to you in 2016, to report coverage information from calendar year 2015.


The law requires coverage providers to list social security numbers on this form. If you don't provide your SSN and the SSNs of all covered individuals to the sponsor of the coverage, the IRS may not be able to match the Form 1095-B with the individuals to determine that they have complied with the individual shared responsibility provision.


Your health insurance company may send a letter that discusses these new rules and requests social security numbers for all family members covered under your policy. The IRS has not designated a specific form for your health insurance company to request this information. The Form 1095-B will provide information for your income tax return that shows you, your spouse, and individuals you claim as dependents had qualifying health coverage for some or all months during the year. You do not have to attach Form 1095-B to your tax return. Keep it with your other important tax documents.


Anyone on your return who does not have minimum essential coverage, and who does not qualify for an exemption, may be liable for the individual shared responsibility payment.


The information received by the IRS will be used to verify information on your individual income tax return. If you refuse to provide this information to your health insurance company, the IRS cannot verify the information you provide on your tax return and you may receive an inquiry from the IRS. You also may receive a notice from the IRS indicating that you are liable for a shared responsibility payment.


For more information, see our Questions and Answers about Reporting Social Security Numbers to Your Health Insurance Company on



Job Search Expenses May be Deductible


People often change their job in the summer. If you look for a job in the same line of work, you may be able to deduct some of your job search costs. Here are some key tax facts you should know about if you search for a new job:

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


For more on job hunting refer to Publication 529, Miscellaneous Deductions. You can get IRS tax forms and publications on at any time.




Former IRS Employee Sentenced to Prison for Identity Theft



A former Internal Revenue Service employee has been sentenced to two years and one day in prison for his role in an identity theft tax refund fraud scheme.


Kenneth Goheen, 57, of Austin Texas, received the prison sentence Wednesday. U.S. District Judge Lee Yeakel also ordered him to forfeit $15,442.02 seized from his bank accounts and pay a remaining sum of $104,292.02 restitution to the government. Judge Yeakel also ordered that Goheen be placed on supervised release for a period of three years after completing his prison term.


Goheen pleaded guilty in June to one count of wire fraud and one count of aggravated identity theft.  By pleading guilty, Goheen, a former Tax Examining Technician, admitted that he wrongfully obtained identification information from Individual Tax Identification Number applicants and used it to file more than 50 fraudulent tax returns between March 2013 and January 2015. Goheen collected over $120,000 in refunds based on those fraudulent tax returns.


“Goheen’s conduct is doubly offensive,” said U.S. Attorney Richard L. Durbin, Jr., in a statement.  “He not only stole money from the government, but he used his unique position in the government—a position of trust—to wrongfully enrich himself.”


The case was investigated by Internal Revenue Service-Criminal Investigation and the U.S. Treasury Inspector General for Tax Administration.  Assistant U.S. Attorneys Matt Harding and Daniel Castillo prosecuted the case on behalf of the government.




Rising Tax Revenues Shrink Deficit, for Now



The budget deficit this year is estimated to be $426 billion, $60 billion less than projected in March, according to new estimates from the Congressional Budget Office, thanks to stronger tax revenues.


Federal revenues are expected to climb by 8 percent in 2015, to $3.3 trillion, or 18.2 percent of GDP. Revenues from all major sources are expected to rise, including individual income taxes (by 10 percent), corporate income taxes (by 8 percent), and payroll taxes (by 4 percent).


Revenues from other sources are estimated to increase, on net, by 5 percent. The largest increase in that category derives from fees and fines, mostly as a result of provisions of the Affordable Care Act, the CBO said Tuesday.


Fiscal year 2015 will mark the sixth consecutive year in which the deficit has declined as a percentage of gross domestic product since it peaked in 2009. Over the next 10 years, however, the budget outlook is expected to remain much the same as the CBO forecast earlier this year. If current laws generally remain unchanged, within a few years the deficit will begin to rise again relative to GDP, and by 2025, debt held by the public will be higher relative to the size of the economy than it is now.


In the CBO’s baseline projections, the budget shortfall will decline to $414 billion next year but then rise substantially to $1.0 trillion in 2025. According to those estimates, which incorporate the assumption that current laws will generally remain the same, the combination of significant growth in spending on health care and retirement programs and rising interest payments on federal debt would outpace the growth in revenues.




Mystic Pizza Owner Gets Prison Sentence for Tax Evasion



The owner of Mystic Pizza, the Connecticut pizzeria made famous by the 1988 Julia Roberts movie of the same name, has been sentenced to over a year in prison on charges of tax evasion and structuring cash transactions.


John Zelepos, 49, of North Stonington, Conn., was sentenced Monday by U.S. District Judge Victor A. Bolden in Bridgeport to 12 months and one day of imprisonment, followed by three years of supervised release, for tax evasion and structuring cash transactions.  Zelepos also was ordered to pay a $25,000 fine, forfeit more than $500,000, and pay back taxes with interest and penalties.


Zelepos is the sole owner of Mystic Pizza, LLC, a Schedule C retail restaurant business in Mystic, Conn.  From 2006 to 2010, he allegedly diverted approximately $567,435 in cash from Mystic Pizza’s gross receipts, approximately $330,005 of which was deposited into his personal bank account, his and his wife’s personal checking account, his wife’s personal checking account and passbook savings accounts in the name of each of his three minor children, according to prosecutors. 


During the same time period, Zelepos caused Mystic Pizza to pay a total of $162,168 to two “no-show” employees who performed no work for the restaurant.  He then deducted the wages as expenses on his tax return’s Schedule C for Mystic Pizza.  Prosecutors claimed Zelepos failed to disclose to his tax return preparer receipt of the diverted cash and the two no-show employees.


Based on this conduct, the federal tax loss for 2006 to 2010 was $234,407.  Zelepos has paid restitution in that amount, but still is required to pay interest and substantial penalties.


Zelepos also intentionally structured financial transactions to avoid having the bank file Currency Transaction Reports, according to prosecutors.  Federal law requires all financial institutions to file a CTR for currency transactions that exceed $10,000.  To evade the filing of a CTR, individuals will often structure their currency transactions so that no single transaction exceeds $10,000. 


Structuring involves the repeated depositing of amounts of cash less than the $10,000 limit, or the splitting of a cash transaction that exceeds $10,000 into smaller cash transactions in an effort to avoid the reporting requirements.  Even if the deposited funds are derived from a legitimate means, financial transactions conducted in this manner are still in violation of federal criminal law.  Structured funds are subject to forfeiture to the United States.


Between January 2010 and January 2011, Zelepos engaged in 61 currency transactions in amounts less than $10,000, depositing a total of $522,658 into the business account, his personal account, his and wife’s personal bank account, and his three children’s bank accounts in amounts ranging from $3,000 to $9,998. The cash deposits were made on sequential days, or multiple cash deposits were made on the same day. Prosecutors said Zelepos knew the bank was required to issue a report for a currency transaction in excess of $10,000 and by conducting his financial transactions in amounts less than $10,000 he intended to evade the transaction reporting requirements.


Zelepos was ordered to forfeit $522,658 as a result of his illegal structuring. On January 2012, pursuant to a court-authorized federal seizure warrant, the IRS seized $63,084.49 from a payroll account Mystic Pizza held at Chelsea Groton Bank. Those funds are being applied to the forfeiture, reducing the remaining forfeiture amount to $459,573.51.


On March 31 of this year, Zelepos waived his right to indictment and pleaded guilty to one count of tax evasion and one count of structuring financial transactions. He was ordered to report to prison on Oct. 30, 2015.




1 in 4 Employers Could be Subject to 'Cadillac Plan' Tax



Twenty-six percent of employers offering health benefits could be subject to the Affordable Care Act’s tax on high-cost health plans, also known as the “Cadillac plan” tax, in 2018 unless they make changes to their plans, according to a new analysis.


report from the Kaiser Family Foundation estimates that the share of employers potentially affected by the tax could grow significantly over time—to 30 percent in 2023 and 42 percent in 2028 — if their plans remain unchanged and health benefit costs increase at expected rates.


However, the report acknowledges it is likely that many employers will revise their plans to avoid the tax, at least initially, through modifications that could include reducing options for employees or shifting costs to workers in the form of higher deductibles and other patient cost sharing.


The ACA’s high-cost plan tax, which takes effect in 2018, aims to raise revenue to fund coverage expansions under the health care law and to help contain health spending. It taxes plans at 40 percent of each employee’s health benefits that exceed certain cost thresholds: In the first year, the thresholds are $10,200 for self-only coverage and $27,500 for other than self-only coverage. The thresholds increase annually with inflation.


Using data from the forthcoming 2015 Kaiser/HRET Employer Health Benefits Survey, the Foundation’s new analysis estimates the percentage of employers who offer one or more plans that would reach Cadillac tax thresholds for some employees and who would face a choice between paying the tax or restructuring their benefits to avoid it. The analysis provides projections for 2018, 2023 and 2028, using different scenarios, including with and without flexible spending accounts; small vs. large employers; and with various growth rates in premiums. The estimates assume the health plans remain unchanged.


In addition to projections, the new analysis also explains how the high-cost plan tax works and describes its implications for how employers structure and administer their health benefits.




IRS Raps T.I. and Tiny with $4.5 Million Tax Liens


The Internal Revenue Service has filed tax liens totaling more than $4.5 million against the rapper T.I., whose real name is Clifford Harris, and his wife “Tiny,” singer-songwriter Tameka Cottle.


The first tax lien, filed in Georgia, stated the couple owes $1,397,283.47 in unpaid taxes for 2012, while the second tax lien said they owe $3,173,476.39 in unpaid taxes for 2013, according to the Daily Mail.


Harris, 34, is estimated to be worth $215 million and was one of the highest paid rap performers this year, according to People magazine. He founded Grand Hustle Records, owns two popular nightclubs and restaurants in Atlanta, along with several clothing companies, a $4 million mansion, a Ferrari Spider, a Mercedes Benz SLR McLaren, and gold and diamond Rolex watches. He and Cottle, 40, married in 2010.


A representative for T.I. said he is working on a resolution. “Mr. Harris and his team are working with the appropriate parties to resolve this matter,” his rep toldUs Weekly.




Donald Trump Puts 'Hedge Fund Guys' on Notice about Taxes



For a moment there, Donald Trump was starting to sound a lot like Bernie Sanders.


The billionaire Republican front-runner assailed hedge fund managers in a Sunday appearance on CBS' Face the Nation in which he portrayed himself as a champion of the middle class.


"They're paying nothing. And it's ridiculous," Trump said of those who make a living running hedge funds. "I want to save the middle class. You know, the middle class—the hedge fund guys didn't build this country. These are guys that shift paper around and they get lucky. And, by the way, when the market collapses, like it is now, the market is going down, they're losing a fortune."


Sanders, the leading challenger to Hillary Clinton for the Democratic presidential nomination, has routinely gone after hedge fund managers during his populist campaign.


For Trump, who often boasts of his own wealth and business dealings, taxation of hedge fund earnings has not been a central campaign focus. Still, on Sunday, Trump took aim at those who profited from the investment strategy.


"Half of them, look, they're energetic, they're very smart, but a lot of them, it's like they're paper pushers. They make a fortune, they pay no tax. It's ridiculous, OK? This—and some of them are friends of mine. Some of them, I couldn't care less about. It's the wrong thing," Trump said. "The hedge fund guys are getting away with murder. They're making a tremendous amount of money. They have to pay taxes. I want to lower the rates for the middle class. The middle class is the one, they're getting absolutely destroyed. This country doesn't have—won't have a middle class very soon."


Clinton has also woven an attack on hedge fund managers into her stump speeches.


“Something is wrong when CEOs earn more than 300 times than what the typical American worker earns and when hedge fund managers pay a lower tax rate than truck drivers or nurses,” Clinton said in May while campaigning in Cedar Falls, Iowa.


The rhetorical similarities between Trump and his would-be Democratic rivals have given Jeb Bush an attack opening.


“He was a Democrat longer than he was a Republican,” Bush said last week during a town hall in New Hampshire. “He's given more money to Democrats than he has to Republicans.”


On Sunday, Trump countered those who question his Republican bona fides by invoking Ronald Reagan.  
"Well, you know, you could say that about Ronald Reagan, because Ronald Reagan was a Democrat with a very, very liberal lean. And he actually became Republican who was fairly conservative. I wouldn't say he was the most conservative, but fairly," Trump said. "And he talked about he evolved as he got older. And I have also. And don't forget, I—when you label me—I was never a politician.”




Inspector General Uncovers Problems with IRS Tax Levy System



The Internal Revenue Service’s computer systems are failing to send some taxpayers notices of additional tax levies, according to a new report.


The report, from the Treasury Inspector General of Tax Administration noted that the IRS has the authority to work directly with financial institutions and other third parties to seize taxpayers’ assets when taxpayers do not pay delinquent taxes. This action is commonly referred to as a “levy.” The law requires the IRS to notify taxpayers at least 30 calendar days prior to the issuance of a levy and allows taxpayers the opportunity to request a Collection Due Process hearing prior to the first levy on a delinquent account.


The report found that the IRS is generally protecting taxpayers’ rights when issuing systemic and manual levies in cases for which additional assessments were not included in the levy. TIGTA reviewed statistical samples of systemic and manual levies issued by the Automated Collection System and the Integrated Collection System and determined that controls ensured that most taxpayers were given notice of their Collection Due Process rights at least 30 calendar days prior to the issuance of the levies.


However, an additional review of statistical samples of taxpayers’ cases that were worked on in the Automated Collection System and that had additional tax assessed included in the systemic (30 taxpayers) and manual (30 taxpayers) levies determined that 12 of the 30 taxpayers with systemic levies, or 40 percent, did not receive a new notice of intent to levy after an additional assessment was made on a tax period listed on the levy. In addition, six of the 30 taxpayers with manual levies, or 20 percent, did not receive a new notice of intent to levy after an additional assessment was made on a tax period listed on the levy. 


IRS management advised TIGTA that they had made computer programming changes to correct this problem for fiscal year 2014 levies. However, TIGTA’s review helped identify other systemic problems management was not aware of. TIGTA said management is currently working with IRS programmers to isolate the problems and resolve them.


In addition, a review of a statistical sample of the delinquent accounts of 30 taxpayers whose cases were worked in Field Collection and who had additional assessments included in the systemic levies determined that there were 24 taxpayers, or 80 percent, who did not receive a new notice of intent to levy after an additional assessment was made on a tax period listed on the levy. Management implemented a computer programming change to correct this problem after TIGTA selected the sample. TIGTA said it will test the effectiveness of this corrective action in next year’s review.


Because IRS management has identified the problems and is taking corrective actions, TIGTA did not make any recommendations. TIGTA said IRS officials were provided with an opportunity to review the draft report but did not provide any report comments.



Proposed salary threshold for overtime pay


Under new rules proposed by the Obama administration, the Department of Labor would require most salaried workers earning less than $50,440 annually to be paid 1.5 times their normal pay for time worked beyond 40 hours. This is slated to take effect, if passed, on Jan. 1, 2016.




Congress has passed a variety of tax provisions so far in 2015



Before leaving for its August recess, Congress passed a three-month extension of funding for the Highway Trust Fund, funding which was set to expire on July 31, 2015. The legislation includes several tax-related provisions. Congress had also passed a variety of other tax provisions during the year. Still on the table are the most significant pieces of tax legislation that Congress has been working on this year: international tax reform and an extension of expiring provisions. The following is a list of what Congress has managed to accomplish so far.




Perhaps the change that will affect the largest number of tax practitioners is a change in the due dates for certain tax and information returns. While a game-changer for many return preparers’ workflow, most deadlines do not shift under the new law until returns due in 2017. Partnership information returns will be due on or before the fifteenth day of the third month following the close of the fiscal year, or March 15 for calendar-year entities. For corporate tax returns, the due date shifts from the fifteenth day of the third month to the fifteenth day of the fourth month, or April 15 for calendar year taxpayers. For partnerships, the maximum filing extension is for six months, to September 15 for calendar-year taxpayers. For corporations, the maximum extension is six months, or seven months for June 30 year-end corporations through 2025. The changes are generally effective for returns for tax years beginning after Dec. 31, 2015, so the changes will not affect the 2015 tax returns of calendar-year taxpayers.


Taxpayers with foreign accounts who have had a June 30 FBAR deadline will now be required to file FinCen Report 114 by April 15, although a new six-month extension is also provided. A penalty waiver may also be available for first-time filers who fail to request an extension. The due date for Form 3520, for reporting transactions with foreign trusts and receipt of certain foreign gifts, becomes April 15 for calendar-year taxpayers, with a maximum six-month extension. The due date for Form 3520-A with respect to foreign trusts with a U.S. owner will become the fifteenth day of the third month after the close of the trust’s tax year, with a maximum six-month extension. The maximum extension for return of trusts filing Form 1041 is a five-and-a-half-month period, to September 30 for calendar-year taxpayers.


Other extension dates provided include an extension for Form 5500 by employee benefit plans of three-and-a-half months, to November 15 for calendar-year plans; an extension for Form 990 series by exempt organizations of six months, to November 15 for calendar-year filers; an extension for Form 4720 by exempt organizations reporting excise taxes of six months beginning on the due date for filing the return; an extension for Form 5227 trust returns of six months beginning on the due date for filing the return; an extension for Form 6069, Return of Excise Tax on Excess Contributions to Black Lung Benefit Trust Under Section 4953 and computation of Section 192 deduction of six months beginning on the due date for filing the return; and an extension for Form 8870 of six months beginning on the due date for filing the return.



  • Mortgage reporting requirements. Lenders will be required to include additional information on Form 1098: the amount of the outstanding principal on the mortgage as of the beginning of the year, the date of origination of the mortgage, and the address or other description of the property which secures the mortgage. This change applies to returns and statements after Dec. 31, 2016. This change is designed to provide the Internal Revenue Service with information to better audit the accuracy of mortgage interest deductions.
  • Consistent basis reporting. For property acquired from a decedent, a new provision requires that the basis in inherited property reported by the heir not exceed the basis in the property reported by the estate. The executor of the estate is also required, along with filing an estate tax return, to file an information return reporting basis information with the IRS and those inheriting property. A penalty is provided for inconsistent basis reporting. These changesa apply to property with respect to which an estate tax return is filed after July 31, 2015.
  • Six-year statute of limitations on overstatement of basis. Responding to the Supreme Court decision in Home Concrete that an overstatement of basis did not constitute an understatement of income and therefore did not engage the six-year statute of limitations, a law change ”clarifies” that an overstatement of basis is an omission from gross income engaging the six-year statute of limitations. This change applies for returns filed after July 31, 2015, and any other returns for which the statute of limitations has not yet run.
  • Excess pension assets. Another law change permits employers to transfer excess defined-benefit plan assets to retiree medical accounts and group term life insurance for an additional four years through 2025.
  • Equalization of excise taxes. The legislation also includes an excise tax provision equalizing excise taxes on liquefied natural gas, liquefied petroleum gas, and compressed natural gas.
  • Veterans health coverage. The legislation also modifies the Internal Revenue Code to provide that, under the Affordable Care Act and the employer health insurance mandate, for purposes of determining whether an employer is an applicable large employer for any month, an individual shall not be taken into account as an employee for such month if the individual has medical coverage under Tricare or the Veterans Administration. This change applies to months beginning after Dec. 31, 2013.

The legislation also provides that an individual shall not fail to be eligible for a health savings account merely because the individual receives hospital care or medical services for a service-connected disability. This change applies to months beginning after Dec. 31, 2015.




At the end of June, Congress passed a couple of pieces of trade legislation that also included a few tax provisions. The bipartisan Congressional Trade Priorities and Accountability Act of 2015 permits penalty-free withdrawals from qualified retirement plans for certain federal law enforcement officers, federal firefighters, customs and border protection officers, and air traffic controllers.


The Trade Preferences Extension Act of 2015 also included several tax provisions. Included is a provision to retroactively extend the Health Coverage Tax Credit from 2014 through 2019. Another tax provision prohibits taxpayers claiming a foreign earned income exclusion or foreign housing cost exclusion from also claiming the refundable child tax credit. A provision also provided increased penalties for certain information returns.


In an effort to better audit entitlement to education tax breaks, an additional provision requires taxpayers claiming certain education deductions and credits to have a Form 1098-T, and penalties are provided for educational institutions that fail to provide information returns with accurate taxpayer identification numbers.




The three-month extension of funding the Highway Trust Fund will require Congress to revisit the issue in the fall, with the House and Senate still pushing for different forms of longer-term funding, and also with additional tax provisions likely to be included as revenue offsets. The fall will also see Congress continue to deal with the more significant tax issues of international tax reform and extension of expiring provisions. International tax reform consensus still appears a little elusive; however, extension of expiring provisions is likely to get done somehow, even if once again at the eleventh hour.


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




As Stocks Tumble, Understanding When A Loss Isn't Really A Loss

Kelly Phillips Erb



 “I swear it is better to stuff your mattress with your money.”


That was a comment from one of my friends today after she took a peek at the market. It’s been a volatile day. Within minutes of the opening bell, the Dow Jones industrial average plummeted more than 1,000 points. That was reportedly the largest drop ever on a trading day. As of this writing, the market had recovered significantly but was still off about 400 points from the open.


The wild ride, and the fact that numbers for the Dow Jones are still low for somestocks, make it easy for folks like my friend to think that they’ve “lost” money today. But strictly speaking, they’ve haven’t. What they have is an unrealized loss, sometimes called a paper loss.


Stocks go up and down: it’s the nature of the beast. And while we hope they go up more than they go down, statistically, there are going to be dips. But every time the market dips, that doesn’t equal a real, or realized loss. Similarly, when the market goes back up, that doesn’t equal a real, or realized gain. To realize a gain or a loss for accounting purposes, you have to do something with the stock. Typically, that means that you sell it or otherwise dispose of it. The same is true for tax purposes.


Even if you were to sell your stock today, just because it was worth less this morning than when you went to bed last night doesn’t necessarily mean you’ll have a realized loss. For tax and accounting purposes, gains and losses aren’t determined moment to moment but instead how much your cost basis has gone up or down from the time you acquired the asset to the disposition of the asset.


Basis is, at its most simple, the cost that you pay for assets. The actual cost is sometimes referred to as “cost basis” because you can make adjustments to basis over time. When it comes to stocks, your basis is generally equal to the original cost of the shares; if you participate in a DRIP or other reinvestment plan, your basis is your cost plus the cost of each subsequent purchase/reinvestment subject, of course, to other adjustments for splits and the like. When you dispose of the asset at sale or transfer, sometimes called a taxable event, the value of the stock or asset at that moment is what matters. Nothing else matters. It doesn’t matter if the stock went up and down a hundred times in the middle. Your realized gain or loss is figured by calculating the difference from purchase (plus adjustments) to sale. All that stuff in the middle is, for tax and accounting purposes, just a bunch of squiggly lines.


At tax time, you’ll report your realized gains and losses on a Schedule D, and then transfer the results to the reconciliation page on your federal form 1040. You don’t file a Schedule D if you don’t have any realized gains or losses: even if the value of your shares went up and down significantly, if there’s no sale or disposition, there’s nothing to report.

  • If your realized gains exceed your realized losses, you have a capital gain which is taxable; the rate will be dependent on whether those gains or losses are long term or short term. If you hold the shares for one year or less and then sell or otherwise dispose of the stock, your capital gain is considered short-term. Short term gains are generally taxed at your ordinary income tax rate (you can check 2015 rates here). If you hold the shares for more than one year before you get rid of them, your capital gain is called long-term. For 2015, the highest tax rate on a net long term capital gain of regularly traded stock is 20%.
  • If your realized losses exceed your realized gains, you have a capital loss for tax purposes. You can claim up to $3,000 (or $1,500 if you are married filing separately) of capital losses in any tax year. The amount of your loss offsets your taxable income for the tax year. If your losses exceed those limits, you can carry the loss forward to later years subject to certain limitations. Some other limits and restrictions apply depending on the kind of assets: for example, you may not claim a capital loss for a personal residence.


Here’s a quick example to help you sort out the math:


Assume you buy a stock for $100. Over the year, assume that the value of that stock climbs to $250 due to market conditions and not any additional investment on your part.

You continue to hold the stock. Result? Unrealized gain. No capital gain.


The stock takes a hit and falls to $85. Unrealized loss. No capital loss.


The stock takes another hit and falls to $25. You continue to hold the stock. Unrealized loss. No capital loss.


The stock climbs back up to $75. You finally get rid of it. You have a capital loss of $25 ($75 selling price – $100 basis). You take the loss at the basis, not the high price (the $250 high value is meaningless for purposes of capital gain or loss) nor at the low price (the $25 low value is similarly meaningless for purposes of capital gain or loss). That seems to be the sticking point for many taxpayers. You want it to mean something. But it doesn’t. At least not for tax purposes.


The reality is that capital gains and losses can be confusing. But let’s not make them more confusing than they need to be. In a volatile market, your portfolio may go up and down but unless you’re trading or selling off, you’re not actually realizing those losses for tax purposes.


A quick note: capital gains and losses can be super complicated. Exceptions and special rules may apply to small businesses, retirement assets and other circumstances, as well as adjustments related to calls, puts and straddles. There are also special rules for artwork, real estate and other assets, especially as they relate to capital losses and carry forwards but those are way beyond the scope of this piece.


Want more taxgirl goodness? Pick your poison: follow me on twitter, hang out on Facebook and Google, play on Pinterest or check out my YouTube channel. For cases and tax related docs, visit Scribd.




Crowdfunding As An Investment Tool: Is Trouble Brewing?

Kelly Phillips Erb



Opinions expressed by Forbes Contributors are their own.

This story appears in the June 29, 2015 issue of Forbes.


After college, high school buddies Richard Wolf, Tyler Fontaine and Chris Carbutt started playing with a $75 home-brewing kit in the vacant barn on the Wolf family’s horse farm in Skippack, Pa. After two years of experimentation with fermentation and a lot of taste-testing by friends, they decided their craft brews had commercial potential. So in 2012 the three incorporated Stable 12 Brewing Co. and went looking for a business loan. Nine banks weren’t swayed by Wolf’s Penn State degree in hotel management, Carbutt’s in engineering or the craft brewing boom. The lenders wanted three years of financials, which Stable 12 obviously didn’t have.


What next? They decided to try a Kickstarter crowdfunding campaign, posting a bid for $20,000 on Mar. 13, 2013, the same day screenwriter Rob Thomaslaunched a $2 million ask to make a movie based on his canceled TV series Veronica Mars , starring Kristen Bell as a teenage detective. Thomas booked more than $2 million in a day and $5.7 million in a month, offering such rewards as copies of the script ($10) and an appearance as a background extra ($2,500).


The Stable 12 guys took two months to hit their goal. (On Kickstarter you get the money only if you reach the goal.) They offered their backers two pint-size glasses with the brand’s horse-head logo ($10), a beer growler ($50) and a day at their brewery when it opened ($1,000). Wolf says the partners considered these premiums “a way to say thank you, really,” and were careful not to offer anything that would cost them much cash up front or be hard to produce. Still, Wolf says, they ran into an unexpected snag when it came time to have Stable 12’s 2013 tax return done: Their H&R Block HRB +0.00% preparer hadn’t a clue how to report their Kickstarter take.


That’s not surprising. While $1.8 billion has been raised on Kickstarter since 2009, the IRS has remained largely and unhelpfully mum on the tax consequences of crowdfunded projects, leaving entrepreneurs, donors and even tax lawyers groping for answers. “It would be nice if the IRS would address the issue,” says Jack Bogdanski, a tax prof at Lewis & Clark Law School in Portland, Ore.


Note that this uncertainty doesn’t relate to crowdfunding in which investors get equity or make loans to a business. The tax rules on treatment of equity and debt, while sometimes complicated, are well established and are no different simply because money is raised from a lot of people on the Web.


But backers of a Kickstarter campaign aren’t investors or lenders in the legal or tax sense—they don’t get an equity interest or hold a note. On its site Kickstarter states: “In general, in the U.S., funds raised on Kickstarter are considered income.” That’s certainly true in some cases.


Example: In February and March Pebble Technology Corp. raised $20.3 million on Kickstarter to produce its Pebble Time smartwatch; all 78,471 backers preordered and prepaid for watches—at a discount. The money raised is revenue to Pebble. Of course, all expenses related to the production of the watches and the costs of the campaign can be deducted against those revenues. (For smaller businesses operating on a cash accounting basis this can present a problem if revenue is booked in one year and expenses aren’t incurred until the next year—so run your campaigns early in the year.)


But income is only part of the story. When a backer contributes more than the market value of the reward he receives, the excess is arguably a gift and not subject to income tax at all. Remember that day at the Stable 12 brewery for $1,000? Tellingly, the purchaser was Wolf ’s dad, who can spend time with him whenever he likes. If Wolf ’s dad had simply given Stable 12 $1,000 outside of Kickstarter and with no reward, it would have clearly been a gift, with no income tax consequences for Stable 12 or the dad.


Gift taxes? They’re paid by the donor. But no gift tax would be owed, since any donor can give as many individuals as he likes $14,000 each a year without it being taxed or even counted against the donor’s lifetime exemption from tax ongifts totaling $5.43 million. (The IRS considers a gift to a company as a gift for the benefit of a particular person or limited class of people—in this case, the three company owners.)


In tax law the motivation of the giver also comes into play when determining whether something is a gift. Gifts, the courts have ruled, are transfers made out of “detached and disinterested generosity” or “out of affection, respect, admiration, charity or like impulses.” That’s not always easy to determine. “It might be quite difficult to prove the motivations of crowdfunding contributors,’’ says Bogdanski, “in which case the burden of proof might play an important role.” Who has that burden? Ordinarily the taxpayer, not the IRS.


Another complication is determining the fair market value of a premium. The market value of two Stable 12 pint glasses is $10—which is what they’re normally sold for. The value of a day with three Millennial wannabe craft brewers? Not $0 (lunch was included) but nowhere near $1,000.


So what did the flummoxed tax preparer for Stable 12 do? She asked her supervisor, who said to treat all the Kickstarter take as a gift. According to H&R Block’s internal instructions, absent IRS guidance “there are no hard and fast rules.”


Using the Kickstarter cash and family loans, the guys have moved $90,000 worth of brewing equipment into the commercial district of Phoenixville, Pa. They offer four brews on tap there and distribute to three bars, with more lined up for when they ramp up production. They’re aiming to be in stores, too, by year-end. Fontaine works at the brewery full-time, while the other two have kept their day jobs—Wolf as a food safety auditor and Carbutt as an engineer. They’re treating this as a serious business, hiring a lawyer and accountant to make sure it’s all done by the book. Whatever that is.


Want more taxgirl goodness? Pick your poison: follow me on twitter, hang out on Facebook and Google, play on Pinterest or check out my YouTube channel. For cases and tax related docs, visit Scribd.




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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