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February

Helping an adult child buy a home

Economic and tax considerations make right now a good time for parents (and grandparents) who are willing and able to help their adult children buy a home. Some residential real estate markets are “hot” with homes selling for more than asking price. In other markets, the prices are recovering, but are still at lower levels than a few years ago. With mortgage interest rates at historically low levels, now may be a great time to buy a home. In addition, there are some favorable tax factors that will help. How long this good scenario will last is anyone’s guess, but we would bet not too much longer.

Beneficial tax factors

0% capital gains rate. For 2015, taxpayers in the 10% and 15% tax brackets for regular taxable income will enjoy a 0% tax rate on long-term capital gains (LTCGs). Thus, your child won’t pay any federal income taxes on any LTCGs they realize this year to the extent his or her taxable income (including LTCGs) does not exceed $74,900 if married and filing jointly, $50,200 if head of household, or $37,450 if single. So, if the child’s income (after the standard deduction and personal exemptions) will fall in this range in 2015 and you hold appreciated stocks and mutual fund shares in taxable brokerage firm accounts, you could give him or her some shares.

The child can then sell them and use the proceeds to help finance his or her home purchase. Gains will be long term (and federally income-tax-free) if your ownership period plus his or hers is over a year.

As long as the stock you give your child this year is worth $14,000 or less (when combined with any other gifts to the same child), your taxable estate is reduced without any adverse federal gift or estate tax consequences — thanks to the annual gift tax exclusion privilege ($14,000 for 2015 gifts). Married taxpayers can double this amount — they can give up to $28,000 ($56,000 if the child is married) this year without triggering adverse estate and gift tax consequences. You can give away even more than these amounts if you don’t mind dipping into your $5.43 million federal gift and estate tax exemption.

Low federal interest ratesIf additional funds are needed for your child to purchase a home, you might want to consider loaning the additional funds to him or her. Now is a very good time for taking this step, too. With loans between family members, the Applicable Federal Rate (AFR) is a big deal. Why? Because that’s the rate the lending parent can charge without causing any unwanted tax complications. Currently, AFRs are very low by historical standards, so making a loan that charges the AFR is a great way for a parental lender to give an adult child borrower a favorable loan without having to deal with the complicated below-market loan rules.

 

 

Standard mileage rates for 2015

Rather than keeping track of the actual cost of operating a vehicle, employees and self-employed taxpayers can use a standard mileage rate to compute their deduction related to using a vehicle for business. Likewise, standard mileage rates are available for computing the deduction when a vehicle is used for charitable, medical or moving purposes.

The 2015 standard mileage rates for use of a vehicle are 57.5 cents per mile for business miles (up from 56 cents per mile in 2014), 23 cents per mile for medical or moving purposes, and 14 cents per mile for rendering gratuitous services to a charitable organization.

The business standard mileage rate is considerably higher than the charitable and medical/moving rates because it contains a depreciation component. No depreciation is allowed for the charitable or medical/moving use of a vehicle. 

In addition to deductions based on the business standard mileage rate, taxpayers may deduct the parking fees and tolls attributable to the business use of an automobile, as well as interest expense relating to the purchase of the automobile and state and local personal property taxes. However, employees using a vehicle to perform services as an employee cannot deduct interest expense related to that vehicle. Also, if the vehicle is operated less than 100% for business purposes, the taxpayer must allocate the business and nonbusiness portion of the allowable taxes and interest deduction.

 

 

Employer reimbursements of individual health insurance policies

For plan years beginning after 2013, the Affordable Care Act (ACA) institutes so-called market reform provisions that place a whole host of new restrictions on group health plans. The penalty for violating the market reform restrictions is a punitive $100-per-day, per-employee penalty; or $36,500 per employee, per year. With a limited exception, these new market reform provisions significantly restrict an employer’s ability to reimburse employees for premiums paid on individual health insurance policies, referred to as employer payment arrangements.

Employer payment arrangements

Under employer payment arrangements, the employer reimburses employees for premiums they pay on their individual health insurance policies (or the employer sometimes pays the premium on behalf of the employee). As long as the employer (1) makes the reimbursement under a qualified medical reimbursement plan and (2) verifies that the reimbursement was spent only for insurance coverage, the premium reimbursement is excludable from the employee’s taxable income. These arrangements have long been popular with small employers who want to offer health insurance but are unwilling or unable to purchase group health coverage.

Unfortunately, according to the IRS and Department of Labor (DOL), group health plans can’t be integrated with individual market policies to meet the new market reform provisions. Furthermore, according to the DOL, an employer that reimburses employees for individual policies (on a pretax or after-tax basis) has established a group health plan because the arrangement’s purpose is to provide medical care to its employees. Therefore, reimbursing employees for premiums paid on individual policies violates the market reform provisions, potentially subjecting the employer to a $100 per-day, per-employee ($36,500 per year, per employee) penalty.

Limited exception for one-employee plansThe market reform provisions do not apply to group health plans that have only one participating employee. Therefore, it is still allowable to provide an employer payment arrangement that covers only one employee. Note, however, that nondiscrimination rules require that essentially all full-time employees must participate in the plan.

Bottom line. While still technically allowed under the tax code, employer payment arrangements, other than arrangements covering only one employee, are no longer a viable alternative.

What should you do if you still have an employer payment plan?

First of all, don’t panic. You are not alone. The impact of the market reform provisions to these plans has come as a great surprise to many small business employers, not to mention the tax practitioner community, and we believe there is reasonable cause to keep the penalty from applying for earlier payments. However, it is important to discontinue making payments under the plan and rescind any written documents. Also, any reimbursements made after 2013 should be classified as taxable wages.

Acceptable alternatives

Because of the ACA market reform requirements, employers are basically precluded from subsidizing or reimbursing employees for individual health insurance policies if there is more than one employee participating in the plan. Employers can, however, continue to do any of the following:

Provide a tax-free fringe benefit by purchasing an ACA-approved employer-sponsored group health plan. Small employers with 50 or fewer employees can provide a group health plan through the Small Business Health Options Plan (SHOP) Marketplace. A cafeteria plan can be set up for pretax funding of the employee portion of the premium.

Increase the employee’s taxable wages to provide funds that the employee may use to pay for individual insurance policies. However, the employer cannot require that the funds be used to pay for insurance — it must be the employee’s decision to do so (or not). The employer can claim a deduction for the wages paid. The wages are taxable to the employee, but the employee can claim the premiums as an itemized deduction subject to the 10%-of-AGI limit (7.5% if age 65 or older).

 

 

The importance of accountable expense reimbursement plans

Most companies cover their employees’ business expenses by reimbursing them for their actual expenses or by paying a travel or mileage allowance. Such arrangements are subject to strict tax rules concerning what qualifies as a legitimate reimbursement arrangement and what is treated (at least for tax purposes) as additional compensation to the employee.

According to the tax rules, the key distinction between a true expense reimbursement and disguised compensation is whether the employer’s payments are made in accordance with what the IRS calls an accountable plan. (Such a plan basically requires employees to substantiate all reimbursed expenses and return any advances in excess of expenses incurred.)

If an employer has an accountable plan in place, expense reimbursements and allowances to employees, who properly comply with the terms of the plan, are deductible by the company (subject to the 50% limit for most meals and entertainment expenses) and nontaxable to the employees.

If a company maintains a nonaccountable plan or an employee fails to comply with the company’s accountable plan, expense reimbursements and allowances are still deductible by the company. However, they are taxable to the employee as compensation. Thus, such amounts are included on the employee’s Form W-2 and subject to income tax withholding. In addition, both the employer and employee are subject to employment taxes on such payments. Although the employee is allowed an offsetting deduction for the expenses reported on his or her Form W-2, the deduction is claimed as a miscellaneous itemized deduction and thus normally provides little or no tax benefit.

Because the tax ramifications of a nonaccountable expense reimbursement plan are so unfavorable for employees and are potentially unfavorable for the employer, companies generally should use an accountable plan for employee expense reimbursements.

If you would like our help in establishing such a plan for your business (or in ensuring that your current reimbursement policy complies with the requirements for such a plan) please contact us. We would be glad to assist you.

 

 

What to do if you don’t get a Form W-2

If you worked as an employee during 2014, your employer must give you a Form W-2, “Wage and Tax Statement,” by February 2, 2015. This form shows the amount of wages you received for the year and the taxes withheld from those wages, and it must be filed with your return.

If you haven’t received yours by mid-February, you should first ask your employer to give you a copy of your Form W-2. If the employer mails the form to you, be sure they have the correct address.

If you exhaust the options with your employer and you still have not received the Form W-2, call the IRS at 800-829-1040. Have the following available when you call:

      Your name, address, Social Security number, and phone number.

      The employer’s name, address, and phone number.

      The dates you worked for the employer.

An estimate of the amount of wages paid and federal income tax withheld in 2014. If possible, use your final pay stub to figure these amounts.

Your tax return is due by April 15, 2015. If you don’t get your Form W-2 in time to file, we usually recommend extending your return for six months. However, you can use Form 4852, “Substitute for Form W-2, Wage and Tax Statement,” to file your return by April 15. You will need to estimate your wages and withheld taxes and the IRS may delay processing your return while it verifies the information. Also, an amended tax return may need to be filed if you receive the missing Form W-2 after you file and the tax information on the form is different from what you originally reported on your Forms 4852 and 1040.

 

 

ACA Liabilities Could Mount for Many Taxpayers and Preparers

BY ROGER RUSSELL

 

The Affordable Care Act requires that in 2014 all Americans must have qualified health insurance or face a Shared Responsibility Payment.

Treasury Department officials believe that most—80 percent—of taxpayers will have little more to do than check a box on their tax return indicating that they had health care coverage during 2014.

However, they also warned that up to 6 million taxpayers who failed to secure health insurance in part or all of 2014 will be liable for a penalty of up to 1 percent of income.

Since the Act allows insurance providers and large employers a one-year delay in reporting the coverage in 2014 to both the IRS and the taxpayers, this effectively renders the health care penalty a voluntary oral reporting item for 2014 in many cases, according to John Raspante, CPA, senior vice president and director of risk management at NAPLIA, the North American Professional Liability Agency.

However, Raspante warns accountants to be cautious with the advice they give clients about the ACA.

“One of the issues we’re struggling with is that not every accountant has an insurance background, particularly in medical insurance, but they should be as familiar as possible with the ACA,” he said. “There are specific questions they may be asked. Whether a CPA should entertain those questions and how much information they should provide is always questionable, because they may not have the necessary skill set for that.”

“In addition, there are a lot of employment law matters surrounding the ACA, and CPAs need to be very careful regarding UPL [unlawful practice of law],” Raspante said. “They can give advice about tax, but they have to be cautious when it’s construed to be the practice of law. Many states have prohibitions against accountants giving legal advice.”

“Once they get through all of that, the next thing will be the imposition of potential penalties for not having coverage,” Raspante added.

CPAs need to be very familiar with the exemptions available. The CPA struggling to get through tax season has the additional hurdle of filling out these forms.

CPAs may need to ask for the necessary information from the exchange to complete the return, Raspante noted. Form 1095-A gives the dates of coverage, the total amount of the monthly premiums for the insurance plan, the information needed to determine the amount of the premium tax credit, and any amount of advance payments of the premium tax credit. This form is supposed to be received by the taxpayer by early February, but many taxpayers will come in to see their tax preparer before they receive the form.

“It’s a distraction and a huge practice management issue,” said Raspante. “Even though we’re on the honor system for this year, it should be a learning year for CPAs. Preparers shouldn’t get relaxed that the IRS will not cross-reference to carriers if they checked the box on line 61.”

“We were getting so many calls on what level of due diligence CPAs ought to do,” he said. “We considered tax organizers, engagement letters or a standalone letter. We felt that both the organizers and the engagement letters may not get signed or returned, so we created a standalone letter. We suggest that every client of the accounting firm sign the letter.”

The letter states: “In order to remind you of the rules and to protect us both from future IRS liability in the event of an audit and/or IRS inquiry, we require all individual taxpayers for 2014 to positively affirm the following items related to health care.”

The letter has a box to check that the client had coverage for the full year, and five other boxes to check off, according to Raspante.

“In the event you do not have qualified health insurance for the entire year for all member of your household who qualify as dependents, we will calculate the penalty and include it with your return. Please attach any exemption certificates for dependents to this form,” the letter concludes.

“The best practice management advice is to read the Act, the forms and instructions, and do a few sample returns,” said Raspante. “They should do a few of the complicated ones, where the taxpayer went to an exchange, or had several insurance carriers during the year. It could impact what clients thought would be their refund.”

 

 

 

Important Information about Advance Payments of the Premium Tax Credit and Your Tax Return

The Affordable Care Act includes financial assistance in the form of the premium tax credit for eligible taxpayers with moderate incomes who purchase coverage through the Health Insurance Marketplace.

When you purchased coverage for 2014 through the Marketplace, you may have chosen to have the government send advance payments of the premium tax credit to your insurer to lower your monthly insurance premiums. At that time, the Marketplace estimated these credits based on information you provided about your expected household income and family size for the year. 

If you chose to have advance credit payments sent to your insurer, you must file a federal income tax return, even if otherwise not required to file. You will need to reconcile these payments with the amount of premium tax credit you’re eligible for on your tax return. Receiving too much or too little in advance can affect your refund or balance due when you file.

For example, if you had certain life changes during the year and notified the Marketplace, the Marketplace should have adjusted the amount of the advance credit payments sent to your insurer accordingly. If you did not notify the Marketplace about these life changes, the advance credit payments may have been either too high or too low.

Advance credit payments that are lower than the amount of premium tax credit on your tax return will reduce your tax bill or increase your refund.

On the other hand, if your advance credit payments are more than the premium tax credit you are eligible for based on your actual income, you will need to repay the excess amount, subject to certain caps. This will result in a smaller refund or a larger bill when you file your return.  The repayment amount is based on your household income and family size. For more information on the repayment if your household income is less than 400 percent of the federal poverty line, the repayment amount is limited. Taxpayers with household incomes of 400 percent or more of the federal poverty line must repay all of the excess amount. See the instructions for Form 8962, Premium Tax Credit (PTC) for more information on the federal poverty line amounts.

Normally, taxpayers may owe certain penalties for late payments or underpayment of estimated tax. However, to help smooth the process for the first year of the Affordable Care Act, the IRS will waive these penalties for eligible taxpayers if they resulted from repayment of excess advance payments of the premium tax credit.  This has no effect on the fee individuals will pay if they chose not to buy affordable health coverage.

You must complete Form 8962 to claim the premium tax credit and reconcile your advance credit payments with the premium tax credit you are eligible to claim on your return. You should receive Form 1095-A, Health Insurance Marketplace Statement from your Marketplace by early February. This form provides information you will need when completing Form 8962. If you have questions about the information on Form 1095-A for 2014, or about receiving Form 1095-A for 2014, you should contact your Marketplace directly.  

Remember that filing electronically is the best and simplest way to file a complete and accurate tax return as it guides individuals and tax preparers through the process and does all the math. Electronic Filing options include free volunteer assistance, IRS Free File for taxpayers who qualify, commercial software, and professional assistance.

 

 

 

 

IRS Launches Directory of Federal Tax Return Preparers; Online Tool Offers New Option to Help Taxpayers

The Internal Revenue Service today announced the launch of a new, online public directory of tax return preparers. This searchable directory on IRS.gov will help taxpayers find a tax professional with credentials and select qualifications to help them prepare their tax returns.

“This new directory will be a practical tool for the millions of Americans who rely on the services of a paid return preparer,” said IRS Commissioner John Koskinen. “Taxpayers can also look to these tax professionals for help if they have questions about the new health care provisions on this year’s tax forms.”

The directory is a searchable, sortable listing featuring:  the name, city, state and zip code of attorneys, CPAs, enrolled agents and those who have completed the requirements for the voluntary IRS Annual Filing Season Program (AFSP). All preparers listed also have valid 2015 Preparer Tax Identification Numbers (PTIN).

Taxpayers may search the directory using the preferred credentials or qualifications they seek in a preparer, or by a preparer’s location, including professionals who practice abroad. Tax return preparers with PTINs who are not attorneys, CPAs, enrolled agents or AFSP participants are not included in the directory, nor are volunteer tax return preparers who offer free services.

The directory can also be a resource for taxpayers who may want to get help from tax professionals on the Affordable Care Act tax provisions that affect returns filed this year.

The vast majority of people will only have to check a box on their federal income tax returns to indicate they had health coverage. Others may have Marketplace coverage with tax credits, have exemptions or need them, or may have to make a payment because they could afford to buy health insurance but chose not to.

The IRS provides extensive information on IRS.gov/aca to help taxpayers better understand the details of the new health care law. Many tax professionals, including those listed on the new directory, will be able to help taxpayers understand these changes. 

More than 140 million individual tax returns were filed last year, and more than half of them were prepared with the help of a paid return preparer. To help taxpayers navigate the different types of professional tax help available, last December, the IRS unveiled IRS.gov/chooseataxpro, a page that explains the different categories of professionals. Taxpayers can also use a new partner page available on IRS.gov that provides links to the web sites of national non-profit tax professional groups, which can help provide additional information for taxpayers seeking the right type of qualified help.

The IRS also offers free tax return preparation for eligible taxpayers. But whether using a paid tax professional, relying on the help of a volunteer or preparing their own returns, taxpayers should consider preparing and filing their returns electronically. Electronic filing is the easiest way to file a complete and accurate tax return. There are a variety of electronic filing options, including IRS Free File for qualified taxpayers, commercial software and professional assistance.

In 2010, the IRS launched the Tax Return Preparer Initiative that generally requires anyone who prepares federal tax returns for compensation to obtain a PTIN from the IRS. As of the start of the filing season, more than 666,000 tax return preparers have active PTINs for 2015. Currently, anyone with a valid PTIN can prepare federal tax returns for compensation. At a minimum, taxpayers should make sure their tax preparer has a valid PTIN and includes it on the tax return.

 

 

 

Excessive Claims for Fuel Tax Credits Make the IRS “Dirty Dozen” List of Tax Scams for the 2015 Filing Season

The Internal Revenue Service today warned that taxpayers should watch for improper claims for fuel tax credits, one of the “Dirty Dozen” tax scams for the 2015 filing season.

“We will do everything we can to stop erroneous claims for the fuel tax credit and catch scammers promoting them,” said IRS Commissioner John Koskinen. “The IRS is also concerned about identity thieves trying to use this credit to inflation their bogus claims for refunds.”

Compiled annually, the “Dirty Dozen” lists a variety of common scams that taxpayers may encounter any time but many of these schemes peak during filing season as people prepare their returns or people to help with their taxes.

Fraud involving the fuel tax credit is considered a frivolous tax claim and can result in a penalty of $5,000. Furthermore, illegal scams can lead to significant penalties and interest and possible criminal prosecution. IRS Criminal Investigation works closely with the Department of Justice (DOJ) to shutdown scams and prosecute the criminals behind them.

The fuel tax credit is generally limited to off-highway business use or use in farming.  Consequently, the credit is not available to most taxpayers. But yet, the IRS routinely finds unscrupulous preparers who have enticed sizable groups of taxpayers to erroneously claim the credit to inflate their refunds.

Fuel Tax Credit Scams

The federal government taxes gasoline, diesel fuel, kerosene, alternative fuels and certain other types of fuel. Certain commercial uses of these fuels are nontaxable. Individuals and businesses that purchase fuel for one of those purposes can claim a tax credit by filing Form 4136, Credit for Federal Tax Paid on Fuels.

The tax is on fuels used to power vehicles and equipment on roads and highways. Taxes paid for fuel to power vehicles and equipment used off-road may qualify for the tax credit and may include farm equipment, certain boats, trains and airplanes.

Improper claims for the fuel tax credit generally come in two forms. An individual or business may make an erroneous claim on their otherwise legitimate tax return. Or an identity thief may claim the credit in a broader fraudulent scheme.

The IRS has taken a number of steps to improve compliance processes involving fuel tax credits.

IRS compliance filters are preventing a significant number of questionable fuel tax credit claims from being processed.  For example, new identity theft screening filters have also improved the IRS’s ability to identify questionable fuel tax credit claims during return processing, including preventing the issuance of $33 million in questionable credit claims in 2013.

For the upcoming filing season, the IRS has taken additional steps to identify returns for review that claim fuel tax credits, including broadening the identification criteria to ensure a more comprehensive compliance approach in selecting questionable tax returns.

 

 

 

What You Should Know if You Get Tipped at Work

If you get tips on the job, you should know some things about tips and taxes. Here are a few tips from the IRS to help you file and report your tip income correctly:

• Show all tips on your return.  You must report all tips you receive on your federal tax return. This includes the value of tips that are not in cash. Examples include items such as tickets, passes or other items.

• All tips are taxable.  You must pay tax on all tips you received during the year. This includes tips directly from customers and tips added to credit cards. It also includes your share of tips received under a tip-splitting agreement with other employees. 

• Report tips to your employer.  If you receive $20 or more in tips in any one month, you must report your tips for that month to your employer. You should only include cash, check and credit card tips you received. Do not report the value of any noncash tips on this report. Your employer must withhold federal income, Social Security and Medicare taxes on the reported tips. 

• Keep a daily log of tips.  Use Publication 1244, Employee's Daily Record of Tips and Report to Employer, to record your tips. This will help you report the correct amount of tips on your tax return.

For more on this topic, see Publication 531, Reporting Tip Income. You can get it on IRS.gov.

If you found this Tax Tip helpful, please share it through your social media platforms. A great way to get tax information is to use IRS Social Media. You can also subscribe to IRS Tax Tips or any of our e-news subscriptions.

 

 

 

Taxpayers Will Use New Information Statement to claim Premium Tax Credit

The Affordable Care Act is bringing several changes to the tax filing season this year, including a new form some taxpayers will receive. If you or anyone in your household enrolled in a health plan through the Health Insurance Marketplace in 2014, you’ll get Form 1095-A, Health Insurance Marketplace Statement.

You will receive Form 1095-A from the Marketplace where you purchased your coverage, not the IRS. This form should arrive in the mail from your Marketplace by early February. You should wait to receive your Form 1095-A before filing your taxes.

Form 1095-A will tell you the dates of coverage, total amount of the monthly premiums for your insurance plan, information you may use to determine the amount of your premium tax credit, and any amounts of advance payments of the premium tax credit.

You will use the information to calculate the amount of your premium tax credit and reconcile advance payments of the premium tax credit made on your behalf to your insurance provider with the premium tax credit you are claiming on your tax return.  To do this, you will use Form 8962, Premium Tax Credit (PTC), which you file with your tax return.

If you do not receive your Form 1095-A by early February, you should contact the state or federal Marketplace from which you received coverage. If you believe any information on your Form 1095-A is incorrect, you should contact the state or federal Marketplace from which you received coverage. The Marketplace may need to send you a corrected Form 1095-A.

You may receive more than one Form 1095-A if different members of your household had different health plans, you updated your coverage information during the year, or you switched plans during the year.

For more information about the Affordable Care Act and your 2014 income tax return, visit IRS.gov/aca.

 

 

 

 

Falsifying Income to Claim Tax Credits Hits the IRS “Dirty Dozen” List of Tax Scams for the 2015 Filing Season

The Internal Revenue Service today warned taxpayers about schemes to erroneously claim tax credits is on the annual list of tax scams known as the “Dirty Dozen” again for the 2015 filing season.

“Scam artists don't miss a trick and they can entice taxpayers to falsely inflate income on returns to claim tax credits they are not entitled to receive," said IRS Commissioner John Koskinen. "Taxpayers are ultimately responsible for the information on their tax returns, and I urge everyone to file the most accurate return possible."

Compiled annually, the “Dirty Dozen” lists a variety of common scams that taxpayers may encounter anytime but many of these schemes peak during filing season as people prepare their returns or hire professionals to do so.

Illegal scams can lead to significant penalties and interest and possible criminal prosecution. IRS Criminal Investigation works closely with the Department of Justice (DOJ) to shutdown scams and prosecute the criminals behind them.

Don’t Create Fake Income to Qualify for a Credit

Some people falsely increase the income they report to the IRS. This scam involves inflating or including income on a tax return that was never earned, either as wages or as self-employment income, usually in order to maximize refundable credits.

Just like falsely claiming an expense or deduction you did not pay, claiming income you did not earn in order to secure larger refundable credits such as the Earned Income Tax Credit could have serious repercussions. This could result in taxpayers facing a large bill to repay the erroneous refunds, including interest and penalties. In some cases, they can even face criminal prosecution.

Taxpayers may encounter unscrupulous return preparers who make them aware of this scam. Remember: Taxpayers are legally responsible for what’s on their tax return even if it is prepared by someone else. Make sure the preparer you hire is up to the task.

Here are a few tips when choosing a tax preparer:

  •  
    1. Check to be sure the preparer has an IRS Preparer Tax Identification Number (PTIN). Anyone with a valid 2015 PTIN is authorized to prepare federal tax returns. Tax return preparers, however, have differing levels of skills, education and expertise. An important difference in the types of practitioners is “representation rights”. You can learn more about the several different types of return preparers on IRS.gov/chooseataxpro.
    2. Ask the tax preparer if they have a professional credential (enrolled agent, certified public accountant, or attorney), belong to a professional organization or attend continuing education classes. A number of tax law changes, including the Affordable Care Act provisions, can be complex. A competent tax professional needs to be up-to-date in these matters. Tax return preparers aren’t required to have a professional credential, but make sure you understand the qualifications of the preparer you select.
    3. Check on the service fees upfront. Avoid preparers who base their fee on a percentage of your refund or those who say they can get larger refunds than others can.
    4. Always make sure any refund due is sent to you or deposited into your bank account. Taxpayers should not deposit their refund into a preparer’s bank account.
    5. Make sure your preparer offers IRS e-file and ask that your return be submitted to the IRS electronically. Any tax professional who gets paid to prepare and file more than 10 returns generally must file the returns electronically. It’s the safest and most accurate way to file a return, whether you do it alone or pay someone to prepare and file for you.
    6. Make sure the preparer will be available. Make sure you’ll be able to contact the tax preparer after you file your return – even after the April 15 due date. This may be helpful in the event questions come up about your tax return.
    7. Provide records and receipts. Good preparers will ask to see your records and receipts. They’ll ask you questions to determine your total income, deductions, tax credits and other items. Do not rely on a preparer who is willing to e-file your return using your last pay stub instead of your Form W-2. This is against IRS e-file rules.
    8. Never sign a blank return. Don’t use a tax preparer that asks you to sign an incomplete or blank tax form.
    9. Review your return before signing. Before you sign your tax return, review it and ask questions if something is not clear. Make sure you’re comfortable with the accuracy of the return before you sign it.
    10. Ensure the preparer signs and includes their PTIN. Paid preparers must sign returns and include their PTIN as required by law. The preparer must also give you a copy of the return.
    11. Report abusive tax preparers to the IRS. You can report abusive tax return preparers and suspected tax fraud to the IRS. Use Form 14157, Complaint: Tax Return Preparer. If you suspect a return preparer filed or changed the return without your consent, you should also file Form 14157-A, Return Preparer Fraud or Misconduct Affidavit. You can get these forms on IRS.gov.

IRS.gov has general information on reporting tax fraud. More specifically, you report abusive tax preparers to the IRS on Form 14157, Complaint: Tax Return Preparer. Download Form 14157 and fill it out or order by mail at 800-TAX FORM (800-829-3676). The form includes a return address.

The IRS reminds taxpayers that tax scams can take many forms beyond the “Dirty Dozen,” and people should be on the lookout for many other schemes. More information on tax scams is available at IRS.gov.

 

 

 

The Burden of Accounting and Taxes on Small Business

By Michael Cohn 

The small business mentoring organization SCORE has compiled some new statistics demonstrating how much time and money small businesses spend each year on accounting, taxes and payroll administration.

The results may be dismaying to many accountants and tax professionals.

According to the small business owners polled by SCORE, 40 percent said bookkeeping and taxes are the worst part of owning a business.

Specifically, 47 percent indicated they dislike the financial cost, 13 percent said they dislike administrative headaches and time, 13 percent dislike the complexity of compliance, 10 percent dislike the changing regulations and confusion, 8 percent dislike all the paperwork, and 8 percent dislike the inequity of the tax code.

(It’s a little hard to understand how 92 percent might like all the paperwork and the inequity of the tax code, but there’s no accounting for taste.)

The majority of small business owners said they spend more than 41 hours on tax preparation each year. That breaks down to 40 percent of small business owners who said they spend over 80 hours a year, 18 percent spend 41 to 80 hours per year, 15 percent spend 21 to 40 hours a year, and 28 percent spend less than 21 hours per year.

The annual costs of the administration of taxes, internal costs, legal fees, etc. can be substantial as well, with the majority spending at least $1,000. Of the small business owners surveyed, 23 percent said they spend $1,000 or less, while 31 percent spend $1,000 to $5,000, 18 percent spend $5,000 to $10,000, 12 percent spend $10,000 to $20,000, and 16 percent spend $20,000 or more.

Many small businesses process their payroll in-house to keep costs down. Of those small business owners that do their own payroll, 21 percent said they spend no time at all (perhaps because none of their employees get paid?), 26 percent spend 1 to 2 hours a month, 26 percent spend 

to 5 hours a month, 17 percent spend 6 to 10 hours per month, and 11 percent spend 10+ hours/month.

Payroll costs vary widely, ranging from 8 percent of small businesses that pay less than $50 per month for payroll services to 5 percent that pay over $5,000 a month.

For more information, you can download SCORE’s infographic here or view it below.

 

 

IRS Fell Short on Law Enforcement Assistance Program for Identity Theft Victims

BY MICHAEL COHN

The Internal Revenue Service did not always respond with accurate, timely information to requests from law enforcement to help identity theft victims, according to a new report.

The report, from the Treasury Inspector General for Tax Administration, found a number of problems with a new program that is supposed to allow the IRS to share the tax information of identity theft victims with state and local law enforcement agencies. The IRS’s Law Enforcement Assistance Program, also known as LEAP, began as a pilot program in Florida in 2012 and later expanded the following year to help law enforcement officers across the country get the tax data they needed to investigate and prosecute cases of identity theft.

Law enforcement officers use Form 8821-A, IRS Disclosure Authorization for Victims of Identity Theft, to obtain consent from an identity theft victim to request tax return information from the IRS.

For the new report, TIGTA reviewed whether requests for tax return data under the LEAP are processed on a timely, accurate and secure basis. TIGTA reviewed a statistically valid sample of 194 of 2,481 Forms 8821-A that were processed between Jan. 3, 2013 and Sept. 27, 2013. Of these, 39 requests had been rejected and another four did not have the date that the information was mailed to the law enforcement officer.

Of the remaining 151 requests, 88 requests (58 percent) were not processed within the required 10 business days.

The report found that the IRS did not always maintain documentation of tax return information provided to law enforcement officers, and requests for tax return information were not always accurately worked on by IRS employees. Of the 39 requests that the IRS rejected, eight of them (that is, 21 percent) should not have been rejected, according to TIGTA. Most requests were erroneously rejected because the IRS assistors incorrectly concluded that a tax return associated with the identity theft victim was not filed.

The IRS’s quality reviews usually check to ensure that all actions and required research are performed. However, because IRS management had not established requirements for assistors to use a computer research command code, the quality reviews did not check to ensure that this research was completed.

In addition, 11 of the 155 requests (that is, 7 percent) for which the IRS provided the law enforcement officer with tax return information were invalid or incomplete and should not have been processed due to the risk of unauthorized disclosure, according to the report.

Finally, TIGTA noted, the IRS has not established an outreach strategy to increase awareness of the LEAP and the benefits provided by the program to both identity theft victims and law enforcement.

“Tax-related identity theft continues to be one of the most serious challenges facing the federal system of tax administration,” said TIGTA Inspector General J. Russell George in a statement. "It is incumbent upon the Internal Revenue Service to fully use all available tools in the fight against this fraudulent activity.”

TIGTA recommended that the IRS develop processes and procedures to ensure that requests for assistance are timely and accurately processed. In addition, TIGTA said the IRS should review the LEAP database to ensure the information is accurate and complete, and ensure that prescreening procedures are effective in rejecting requests that have missing, incomplete or altered information. Further, the report suggested that IRS Criminal Investigation should develop a LEAP outreach strategy that details specific actions to promote and expand participation in the program.

The IRS agreed with all six recommendations and said it plans to take the appropriate actions. “As the threat of identity theft and its impact on victims has continued to grow, we recognize the importance of ensuring the LEAP services requests by law enforcement officials are processed in a timely, accurate and secure manner,” wrote Debra Holland, commissioner of the IRS’s Wage and Investment Division, in response to the report. “We are also addressing report findings that some requests were not processed within established timeframes and accuracy guidelines by evaluating our quality review procedures, enhancing procedural guidance, and improving instructions to employees and managers that reinforce the importance of timely and accurate service delivery.”

She added that the IRS has already taken several actions, including consolidating the separate request-tracking report databases into a single system, revising its guidance on the processing of Form 8821-A, and creating a new form to provide more detailed information to law enforcement officials when requests for tax information are rejected.

 

 

 

 

College Sports Ticket Tax Break Would Vanish in Obama Budget

BY MARGARET COLLINS AND RICHARD RUBIN

President Barack Obama wants to remove a tax benefit for college sports fans.

Obama’s budget proposal sent to Congress Monday would end the deduction available to some fans for donations they make to get seats at college sporting events. This is a new proposal by the administration.

By closing what the White House calls a loophole in the system, people would pay about $2.5 billion over the next decade in higher taxes. Currently, college sports fans can deduct 80 percent of the cost of such donations.

The budget plan also would end the use of tax-exempt bonds to build professional sports facilities. Debt to finance stadiums and arenas would be taxable if more than 10 percent of the location is used for private-business use.

Repealing such financing would save $542 million from 2016 through 2025, according to the proposal.

While some alumni and fans would give money to schools regardless of tax benefits, ending the deduction would hurt revenue at some sports programs, said Robert Spielman, a senior tax partner at Marcum LLP who advises high-net-worth clients.

Some U.S. colleges use the tax benefit to generate more revenue from sports. They set a price for season tickets and then demand donations in the hundreds or thousands of dollars on top of that cost as a condition of the sale. Part of the pitch is that fans can claim the expense as a charitable deduction when they itemize their tax return.

Required Donations

At certain universities, fans can’t buy tickets unless they make a donation, and at other schools the donations help people get premium seating on the 50-yard line.

One athletic department that uses the donation is the University of Louisville, whose men’s basketball team made $40.5 million in revenue in 2013-2014, about $15 million more than the next closest program.

Louisville requires a donation to the Cardinal Athletic Fund for most of its season tickets— contributions that range from $2,500 to $250 a seat. Of the university’s $40.5 million in men’s basketball revenue, $21.7 million come from donations, according to the school’s annual report to the NCAA.

Contribution totals, and season ticket policies, vary significantly across the NCAA’s top division. The University of Washington, which requires a donation for its premium football season tickets, reported $19.1 million in football contributions in 2013-14. Rival Washington State’s program reported $2.1 million by comparison.

Duke Basketball

At Duke University in Durham, North Carolina, people who give $7,000 a year can get priority for coveted men’s basketball season tickets, according to the website for the school’s booster club. Buyers could then deduct 80 percent of that cost. For those in the top federal income tax bracket of 39.6 percent, the break is worth $2,218.

Richard Schmalbeck is a Duke law professor who has donated to the university’s athletic department to secure the right to buy basketball tickets. He has taken the allowed tax deduction, he said in a phone interview Monday. Even so, the law should change because it’s inconsistent with how the Internal Revenue Service usually treats charitable gifts, he said.

Typically, to get a deduction when a charity gives something of worth to the donor, the contribution amount must be reduced by the value of the benefit received, such as dinners and concert tickets at fundraising events, Schmalbeck said.

Sports Facilities

The separate proposal in the budget to eliminate the use of tax-exempt debt for sports facilities would affect states and municipalities that are working with professional teams to finance new or improved stadiums and arenas.

Wisconsin Governor Scott Walker proposed on Jan. 27 funding a new arena for the Milwaukee Bucks basketball team, in part with $220 million of bonds backed by taxes generated by the team.

Officials in Missouri are considering a new stadium for the St. Louis Rams NFL team. Two other new NFL venues are being considered in San Diego for the Chargers and in Oakland for the Raiders.

Theodore L. Jones, a lawyer in Baton Rouge, Louisiana, who lobbied Congress for the deduction for donations to college sports programs in 1986, said he opposes Obama’s plan to eliminate the break for donations because it helps colleges and universities raise money, he said in a phone interview Monday.

“It’s one of the best things to come down the pike,” Jones, 80, said.

Jones holds season tickets at Tiger Stadium, home of the Louisiana State University football team, and benefits from the tax deduction, he said.

“I wouldn’t want to take on all the college presidents and college sports programs around the country,” Jones said of the budget plan. “But I’m not the president.”

—With assistance from Eben Novy-Williams and Michelle Kaske in New York and Darrell Preston in Dallas

 

 

 

 

 

Abusive Tax Shelters Again on the IRS “Dirty Dozen” List of Tax Scams for the 2015 Filing Season

The Internal Revenue Service today said using abusive tax shelters and structures to avoid paying taxes continues to be a problem and remains on its annual list of tax scams known as the “Dirty Dozen” for the 2015 filing season.

"The IRS is committed to stopping complex tax avoidance schemes and the people who create and sell them," said IRS Commissioner John Koskinen. "The vast majority of taxpayers pay their fair share, and we are warning everyone to watch out for people peddling tax shelters that sound too good to be true.”

Compiled annually, the “Dirty Dozen” lists a variety of common scams that taxpayers may encounter anytime but many of these schemes peak during filing season as people prepare their returns or hire people to help with their taxes.

Illegal scams can lead to significant penalties and interest and possible criminal prosecution. IRS Criminal Investigation works closely with the Department of Justice (DOJ) to shutdown scams and prosecute the criminals behind them.

Abusive Tax Structures

Abusive tax schemes have evolved from simple structuring of abusive domestic and foreign trust arrangements into sophisticated strategies that take advantage of the financial secrecy laws of some foreign jurisdictions and the availability of credit/debit cards issued from offshore financial institutions.

IRS Criminal Investigation (CI) has developed a nationally coordinated program to combat these abusive tax schemes. CI's primary focus is on the identification and investigation of the tax scheme promoters as well as those who play a substantial or integral role in facilitating, aiding, assisting, or furthering the abusive tax scheme, such as accountants or lawyers. Just as important is the investigation of investors who knowingly participate in abusive tax schemes.

What is an abusive scheme? The Abusive Tax Schemes program encompasses violations of the Internal Revenue Code (IRC) and related statutes where multiple flow-through entities are used as an integral part of the taxpayer's scheme to evade taxes.  These schemes are characterized by the use of Limited Liability Companies (LLCs), Limited Liability Partnerships (LLPs), International Business Companies (IBCs), foreign financial accounts, offshore credit/debit cards and other similar instruments.  The schemes are usually complex involving multi-layer transactions for the purpose of concealing the true nature and ownership of the taxable income and/or assets.

Whether something is “too good to be true” is important to consider before buying into any arrangements that promise to “eliminate” or “substantially reduce” your tax liability.  If an arrangement uses unnecessary steps or a form that does not match its substance, then that arrangement is an abusive scheme.  Another thing to remember is that the promoters of abusive tax schemes often employ financial instruments in their schemes; however, the instruments are used for improper purposes including the facilitation of tax evasion.

The IRS encourages taxpayers to report unlawful tax evasion. Where Do You Report Suspected Tax Fraud Activity?

Misuse of Trusts

Trusts also commonly show up in abusive tax structures. They are highlighted here because unscrupulous promoters continue to urge taxpayers to transfer large amounts of assets into trusts. These assets include not only cash and investments, but also successful on-going businesses. There are legitimate uses of trusts in tax and estate planning, but the IRS commonly sees highly questionable transactions. These transactions promise reduced taxable income, inflated deductions for personal expenses, reduced (even to zero) self-employment taxes, and reduced estate or gift transfer taxes.

These transactions commonly arise when taxpayers are transferring wealth from one generation to another. Questionable trusts rarely deliver the tax benefits promised and are used primarily as a means of avoiding income tax liability and hiding assets from creditors, including the IRS.

IRS personnel continue to see an increase in the improper use of private annuity trusts and foreign trusts to shift income and deduct personal expenses, as well as to avoid estate transfer taxes. As with other arrangements, taxpayers should seek the advice of a trusted professional before entering a trust arrangement.

Captive Insurance

Another abuse involving a legitimate tax structure involves certain small or “micro” captive insurance companies. Tax law allows businesses to create “captive” insurance companies to enable those businesses to protect against certain risks. The insured claims deductions under the tax code for premiums paid for the insurance policies while the premiums end up with the captive insurance company owned by same owners of the insured or family members.

The captive insurance company, in turn, can elect under a separate section of the tax code to be taxed only on the investment income from the pool of premiums, excluding taxable income of up to $1.2 million per year in net written premiums.

In the abusive structure, unscrupulous promoters persuade closely held entities to participate in this scheme by assisting entities to create captive insurance companies onshore or offshore, drafting organizational documents and preparing initial filings to state insurance authorities and the IRS. The promoters assist with creating and “selling” to the entities often times poorly drafted “insurance” binders and policies to cover ordinary business risks or esoteric, implausible risks for exorbitant “premiums,” while maintaining their economical commercial coverage with traditional insurers. 

Total amounts of annual premiums often equal the amount of deductions business entities need to reduce income for the year; or, for a wealthy entity, total premiums amount to $1.2 million annually to take full advantage of the Code provision.  Underwriting and actuarial substantiation for the insurance premiums paid are either missing or insufficient. The promoters manage the entities’ captive insurance companies year after year for hefty fees, assisting taxpayers unsophisticated in insurance to continue the charade.

 

 

Combating Cybercrime On A SMBs Budget

What happens on Main Street stays on Main Street... When hackers breach the security of corporations it makes headlines, yet there is rarely a mention when cybercrime hits small to medium sized businesses (SMBs). Very few people are even aware that today’s cybercriminals are targeting SMBs, not just super-sized global businesses"

According to Verizon’s 2013 Data Breach Investigations Report, 71% of the data breaches investigated by the company’s forensic analysis unit targeted small businesses with fewer than 100 employees. Of that group, businesses with less than 10 employees were the most frequently attacked.

Everyone Is A Victim When It Comes To Cybercrime

The loss and exposure of confidential data from a cyber attack is costly to both the people victimized and the businesses whose data was compromised.

For the victim, hackers typically retrieve personal information, bank account, credit card and social security numbers, resulting in identity fraud. The stress and time involved to reclaim their identity and get their financial house back in order is beyond measure.

For businesses, there are 47 state-specific DBN (Data Breach Notification) laws in effect in the United States. Adding to the complexity and costs of this process is the fact that laws and compliance obligations vary from state to state. A breach of customer data in Pennsylvania will have different breach notification and follow-up requirements than a breach involving a customer in Massachusetts. This means firms servicing customers and clients from more than one state are responsible for these duplicative legal, regulatory and compliance burdens.

Cybercrime Comes At A High Price For SMBs

According to research compiled by the Ponemon Institute in their 2nd Annual Cost of Cyber Crime Study, the average cost per breached record in the U.S. is anywhere between $150 to $200. This amount factors in the costs of the investigation and notification process, fixing the issue that led to the breach, possible liability and litigation costs, lost business, and the time and effort that go into damage control. In many cases, a damaged reputation may prove to be irreparable. Nearly two-thirds of victimized companies are out of business within six months of a significant cyber attack, making cybercrime the death knell for many SMBs. This is because the consequences of cybercrime extend well beyond the actual incident and have long-lasting implications.

Small businesses obviously don’t have the same financial footing to rebound and carry on with business as usual in the way organizations like Target, Amazon, Apple, or Citibank can.

Symantec’s research found that customers affected by security breaches are generally less forgiving of smaller businesses, especially smaller online retailers, than larger companies. SMBs are contending not only with lost revenue and expenses, but also the possibility of never regaining the trust of customers, clients and business partners.

Symantec’s 2012 State of Information Survey found that nearly half of all SMBs admitted to a data breach damaging their reputation and driving customers away.

The trend of cybercriminals preying on smaller businesses doesn’t seem to be waning. According to Symantec, the number of cybercrime attacks targeting firms with fewer than 250 employees jumped from 18 percent of all attacks in 2011 to 31 percent in 2012.

Why Cybercriminals Are Zeroing In on Small Businesses

Large corporations have the resources to invest heavily in the most sophisticated security strategies and successfully stop most cybercrime attempts. A typical large enterprise may have over twenty in-house IT dedicated employees ensuring that every device connecting to their network is adequately protected.

In comparison, SMBs have neither the money nor the manpower of large enterprises and can’t afford the same level of security. Very few SMBs have full-time IT dedicated personnel on hand to run routine security checks. Even those who do have in-house IT support often find that their internal resources are too bogged down with other tasks to properly address security upkeep.

A joint survey of 1000 SMBs conducted in September of 2013 by McAfee Internet Security and Office Depot further confirms how lax many SMBs are when it comes to protecting their data.

Not only have SMBs become easy prey for cybercriminals, but their sheer abundance also makes them an alluring target. There are roughly 23 million SMBs in the United States alone. Half of that figure is comprised of home-based businesses. Even in a struggling economy, it’s projected that there are still an estimated 500,000 startups launching every month with only a handful of employees.

SMBs Are Not "Too Small To Matter"

Since most cybercrime affecting smaller businesses go unreported by the media, there is no sense of urgency by SMBs to prepare for cyber attacks. Too many SMBs mistakenly view their operations and data as trivial to hackers. They feel that large online retailers, global banks, and government entities are much more attractive targets for hackers.

The goals and methods of cyber attackers are evolving and will continue to evolve. The era of one “big heist” for hackers is over. Cybercriminals today often prefer to infiltrate the data of many small businesses at once, stealing from victims in tiny increments over time so as to not set off an immediate alarm. This method takes advantage of those SMBs who are especially lax with their security processes and may not even realize there has been a security breach for days or sometimes even weeks.

SMBs must end the “It will never happen to us” mindset. For instance, political “hactivists” have been responsible for a number of high-profile Denial-of-Service (DDoS) attacks in recent years. The goal of a hactivist is to disrupt the status quo and wreck havoc on the technology infrastructure of larger corporations and government entities. It’s a form of cyber anarchy: A “stick it to the man” philosophy spearheaded by groups like 4chan, Anonymous, LulzSec, and Anti-Sec.

An owner or Chief Information Office (CIO) at a SMB may read of these highly publicized attacks in the press and not think anything of it. They aren’t Sony, Apple, or the Department of Defense, so why would a hactivist target their data? But it’s estimated that there are on average 1.29 DDoS attacks throughout the world every two minutes and such activity is much broader in scope than the press may lead us to believe.

SMBs - The Access Ramp To Better & Better Data

One reason small businesses are more vulnerable is they’re often the inroad to larger better-protected entities. They are often sub-contracted as a vendor, supplier, or service provider to a larger organization. This makes SMBs an attractive entry point for raiding the data of a larger company. Since larger enterprises have more sophisticated security processes in place to thwart cyber attacks, SMBs often unknowingly become a Trojan horse used by hackers to gain backdoor access to a bigger company’s data. There is malware specifically designed to use a SMBs website as a means to crack the database of a larger business partner.

For this reason, many potential clients or business partners may ask for specifics on how their data will be safeguarded before they sign an agreement. Some may require an independent security audit be conducted. They may also ask SMBs to fill out a legally binding questionnaire pertaining to their security practices.

Moving forward, a SMB that is unable to prove they’re on top of their infrastructure’s security will likely lose out on potentially significant deals and business relationships. More large enterprises are being careful to vet any business partners they’re entrusting their data to.

To Stay Secure A Good Defense Is The Best Offense

SMBs must understand that the time has come to get serious with their security. Sadly, many small businesses have a false sense of security. In the McAfee/Office Depot joint survey of 1000 SMBs, over 66% were confident in the security of their data and devices despite admitting to obvious flaws.

Cybercrime is only one cause of compromised data. There are 3 primary causes of breached security at businesses according to the June 2013 Symantec Global Cost of a Data Breach study. Only 37% are attributed to malicious attacks. The remaining 64% are human error and technology errors.

Data breaches aren’t always about bad people doing bad things. Many are the result of good employees making mistakes or of technology failure. SMBs don’t necessarily need a large budget or dozens of employees to adequately protect sensitive data. A secure environment is possible even on a SMBs budget. Here are a few steps to improving data and network security.

STEP 1 - Know All Devices Connecting To Your Network

Keep a frequently updated list of every device that connects to your network. This inventory is especially important given today’s BYOD (Bring-Your-Own-Device) workplace where employees can access your network through several different devices. Knowing what these devices are and ensuring they’re all configured properly will optimize network security.

All it takes is a regularly scheduled review to add or remove any devices and affirm that every endpoint is secure. Much of this process can be inexpensively automated through a Mobile Device Monitoring (MDM) tool. A MDM tool will approve or quarantine any new device accessing the network, enforce encryption settings if sensitive information is stored on such a device, and remotely locate, lock, and wipe company data from lost or stolen devices.

STEP 2 - Educate & Train Employees

Every employee should participate in regular general awareness security training. This will not only reduce security breaches directly tied to employee error or negligence but also train employees to be on the defense against cybercrime. Employees are critical to your security success and the prevention of data breaches. Hackers commonly break into networks by taking advantage of unknowing employees. Phishing attacks - legitimate looking emails specifically crafted to mislead recipients into clicking a malicious link where they’re asked to provide their username and password - are still successfully used by hackers to capture login credentials.

If a large company makes the news for a data breach tied to an infected email, be sure to share that news with employees with a warning. Come up with fun ways to teach employees how to identify spear-phishing email attempts and better secure their systems and devices.

It is also important to have a security policy written for employees that clearly identifies the best practices for internal and remote workers. For example, password security is critical and passwords should be frequently updated to a combination of numbers, lower case letters and special characters that cannot be easily guessed. Security policy training should be integrated into any new employee orientation. This policy should be updated periodically. More important than anything, this security policy must be enforced to be effective.

STEP 3 - Perform An Audit Of Sensitive Business Information

If you want to keep your most sensitive business information secure, it’s important to know exactly where it’s stored. A detailed quarterly audit is recommended.

STEP 4 - Use TRUSTED Cloud And Managed Service Providers

Overall, the cloud is likely a more secure data solution for small business. Any conception that the cloud isn’t safe is outdated. Most of 2013’s security breaches were the result of lost or stolen devices, printed documents falling into the wrong hands, and employee errors leading to unintended disclosures. It’s fair to speculate that many of these breaches wouldn’t have occurred had this information been stored in the cloud rather than computers, laptops, and vulnerable servers.

SMBs with limited budgets are actually enhancing their security by moving to the cloud. Since there is no way a SMB can match a large enterprise’s internal services, moving services like emails, backups, and collaborative file sharing to the cloud not only reduces total-cost-of-ownership, but gives access to top-level security to better defend against internal and external threats.

Meanwhile, a Managed Service Provider (MSP) can assume responsibility for security measures like the administering of complex security devices, technical controls like firewalls, patching, antivirus software updates, intrusion-detection and log analysis systems.

MSPs are also capable of generating a branded risk report for any potential client or business partner reviewing your security measures. This third-party manual assessment of your network security can instill confidence in prospective business partners by proving to them that any possible security risks or vulnerabilities will be properly managed and addressed.

Wishing You Much Success,

Manuel W. Lloyd
Founder & CEO, Manuel W. Lloyd Consulting®

Helping government, education, consumer, and business executives successfully achieve legislative compliance within their IT systems through thought leadership, business insight, and leading edge thinking since 1992.

 

 

 

 

Filing Fake Documents to Hide Income Is Again on the IRS “Dirty Dozen” List of Tax Scams for the 2015 Filing Season

Hiding taxable income by filing false Form 1099s or other fake documents is a scam that taxpayers should always avoid and guard against, the Internal Revenue Service said today. This scheme is one of those on the annual “Dirty Dozen” list of tax scams for the 2015 filing season.

“The mere suggestion of falsifying documents to reduce tax bills or inflate tax refunds is a huge red flag when using a paid tax return preparer.” said IRS Commissioner John Koskinen. “People should watch out for this type of scam especially when someone else prepares their returns.”

Compiled annually, the “Dirty Dozen” lists a variety of common scams that taxpayers may encounter any time but many of these schemes peak during filing season as people prepare their returns or hire people to help with their taxes.

Illegal scams can lead to significant penalties and interest and possible criminal prosecution. IRS Criminal Investigation works closely with the Department of Justice (DOJ) to shutdown scams and prosecute the criminals behind them.

Falsely Claiming Zero Wages

Filing a phony information return, such as a Form 1099 or W-2, is an illegal way to lower the amount of taxes an individual owes. These scofflaws use self-prepared, “corrected” or otherwise bogus forms that improperly report taxable income as zero. The taxpayer may also submit a statement rebutting wages and taxes reported by a third-party payer to the IRS.

Taxpayers should resist any temptation to participate in any variations of this scheme. The IRS is well-aware of this scam, the courts have consistently rejected attempts to use this tax dodge and perpetrators have received significant penalties, imprisonment or both. Just filing this type of return may result in a $5,000 penalty.

Some people also attempt fraud using false Form 1099 refund claims. In some cases, individuals have made refund claims based on the bogus theory that the federal government maintains secret accounts for U.S. citizens and that taxpayers can gain access to the accounts by issuing 1099-OID forms to the IRS.

In this scam, the perpetrator files a fake information return to justify a false refund claim on a corresponding tax return. Again, the IRS is well-aware of this scam, the courts have consistently rejected attempts to use this tax dodge and perpetrators have received significant penalties, imprisonment or both.

Don’t fall prey to people who encourage you to claim deductions or credits to which you are not entitled. Do not allow others to use your information to file false returns. If you are a party to such schemes, you could be liable for financial penalties or even face criminal prosecution. 

 

 

 

 

Fake Charities Among the IRS “Dirty Dozen” List of Tax Scams for 2015

The Internal Revenue Service today warned taxpayers about groups masquerading as a charitable organization to attract donations from unsuspecting contributors, one of the “Dirty Dozen” for the 2015 filing season.

"When making a donation, taxpayers should take a few extra minutes to ensure their hard-earned money goes to legitimate and currently eligible charities,” said IRS Commissioner John Koskinen. “IRS.gov has the tools taxpayers need to check out the status of charitable organizations.”

Compiled annually, the “Dirty Dozen” lists a variety of common scams that taxpayers may encounter anytime, but many of these schemes peak during filing season as people prepare their returns or hire someone to prepare their taxes.

Illegal scams can lead to significant penalties and interest and possible criminal prosecution. IRS Criminal Investigation works closely with the Department of Justice to shut down scams and prosecute the criminals behind them.

The IRS offers these basic tips to taxpayers making charitable donations:

  • Be wary of charities with names that are similar to familiar or nationally known organizations. Some phony charities use names or websites that sound or look like those of respected, legitimate organizations. IRS.gov has a search feature, Exempt Organizations Select Check, which allows people to find legitimate, qualified charities to which donations may be tax-deductible.
  • Don’t give out personal financial information, such as Social Security numbers or passwords to anyone who solicits a contribution from you. Scam artists may use this information to steal your identity and money. People use credit card numbers to make legitimate donations but please be very careful when you are speaking with someone who called you.
  • Don’t give or send cash. For security and tax record purposes, contribute by check or credit card or another way that provides documentation of the gift.

Call the IRS toll-free disaster assistance telephone number (1-866-562-5227) if you are a disaster victim with specific questions about tax relief or disaster related tax issues.

Impersonation of Charitable Organizations

Another long-standing type of abuse or fraud involves scams that occur in the wake of significant natural disasters.

Following major disasters, it’s common for scam artists to impersonate charities to get money or private information from well-intentioned taxpayers. Scam artists can use a variety of tactics. Some scammers operating bogus charities may contact people by telephone or email to solicit money or financial information. They may even directly contact disaster victims and claim to be working for or on behalf of the IRS to help the victims file casualty loss claims and get tax refunds.

They may attempt to get personal financial information or Social Security numbers that can be used to steal the victims’ identities or financial resources. Bogus websites may solicit funds for disaster victims.

To help disaster victims, the IRS encourages taxpayers to donate to recognized charities.

 

 

 

Affordable Care Act Penalty to Be Owed by as Many as 6 Million Taxpayers

BY ALEX WAYNE

As many as 6 million U.S. taxpayers will have to pay a penalty of as much as 1 percent of income because they went without health insurance in part or all of 2014, the Treasury Department said.

The penalty, part of the Patient Protection and Affordable Care Act, is designed to encourage people to sign up for health insurance using the expanded options and financial assistance available under the law, known as Obamacare. The penalty would apply to about 2 percent to 4 percent of all taxpayers for 2014.

Tax filing for 2014 opened Jan. 20, and the Internal Revenue Service’s Form 1040—for federal income tax—includes a new Line 61 asking if the taxpayer has health insurance. Three-quarters of taxpayers won’t have to do anything more than check that box, said Mark Mazur, the department’s assistant secretary for tax policy. The remainder will have to take additional steps, though most won’t pay a penalty, he said on a conference call with reporters.

The IRS has been preparing for additional strain during the tax season as people adjust to the rule, warning that about half the people who call its toll-free phone lines won’t be able to get through.

About 3 percent to 5 percent of taxpayers got tax credits last year to help them absorb the cost of paying premiums on Obamacare insurance plans, Mazur said. Ten percent to 20 percent weren’t insured for all or part of the year but will be able to claim an exemption. People who owe a penalty “will pay a fee because they made a choice not to obtain health insurance that they could have afforded, and they’re not eligible for one of the exemptions,” he said.

About 8 million people purchased health-care policies through the insurance exchanges in 2014. About 85 percent of those who initially enrolled received subsidies, which went directly to insurance companies during 2014. The U.S. gets about 150 million income tax returns a year.

—With assistance from Richard Rubin in Washington.

 

 

 

 

By implementing just a few simple steps and procedures, business owners can catch or prevent financial fraud that can have devastating financial and personal consequences. In this article, Chris Hamilton outlines six simple steps business owners can put into practice today.

“I Can’t Believe It Happened to Me—I Should Have Known”

The shock of realization when a victim recognizes that a trusted employee—and even a friend—has stolen from them ranges from sad to tragic. It is a very personal feeling of betrayal and violation. It strikes fear in some, grief in others, and anger in most. In my experience, it is almost always accompanied by a sense that “I should have known this was going on.” The evidence of theft sheds a very bright light on the rearview mirror. Patterns and circumstances take on a clarity that contemporaneous experience either hid or obscured. Sometimes the clarity was there, but for a variety of reasons, it was ignored.

The following is just such a case: The victim, a business owner, immediately recognized the theft and simultaneously felt incredibly stupid for “allowing it to happen.” The lesson cost him several hundred thousands of dollars in uninsured losses. The recognition happened when his bookkeeper unexpectedly missed a few days of work, and the business owner ventured into the mail and opened a bank statement. The simple act of thumbing through canceled checks from one month’s bank statement prompted a phone call to his attorney who directed him to a forensic accountant.

What developed was evidence of a simple and devastatingly effective embezzlement scheme. The bookkeeper had set up vendors that were very similar to existing real vendors. For example, if the real vendor was ABC Service Company, then a fake vendor was established called ABC Service Co. The bookkeeper went to the bank and set up bank accounts for the fake vendors. That was the hard part. The rest was easy. The business owner signed hundreds of checks to the fake vendors thinking the checks went to legitimate business activity.

Since that worked so well, the bookkeeper began forging checks, made payable to pay the vendors, for personal expenses and to provide cash gifts to family and friends. And, since all that worked without any notice by the business owner, the bookkeeper got an unauthorized increase in salary. It was bold. It was also easily discovered and should have been easily prevented.

The bookkeeper was pretty quickly arrested and has spent some serious time in jail. The following are Fraud Prevention 101 steps that were ignored and could have prevented the fraud:

  • Know your employee. In this particular case, the business owner recounted that he knew the prior employer of the bookkeeper really well. He was aware that the bookkeeper had left the prior employer on less-than-positive terms but figured it was none of his business and hired the bookkeeper because of the bookkeeper’s knowledge of the industry. A phone call to the prior employer/friend after the embezzlement was discovered revealed that the bookkeeper was probably stealing from the current employer to pay off a judgment obtained by the prior employer to recover embezzled funds.
  • Embezzlers tend to be repeat offenders. This is an obvious follow-up to the prior point. A simple background check is not expensive, easy to do, and in this case would have prevented a really bad hiring decision. It would have confirmed the ill-at-ease feeling of the employer at the time of hiring.
  • Open your own mail. Let the bookkeeper do the bookkeeping. You cannot abdicate other important (and seemingly unimportant) functions because the clerk is always around and does their job well. Vendor communications, bank statements, and bills from vendors and suppliers are important sources of information.
  • Separate functions and duties. Many small business owners are so busy that they tend to overlook common sense when assigning work. In this case, a bookkeeper was eventually given the responsibility for answering the phones, opening all the mail, writing checks, making deposits, preparing invoices, reconciling the bank statements, and preparing the financial reporting provided to the business owner and his outside tax preparer. As noted above, simply opening the mail would have prevented some of the problems or would have brought the fraud to light a lot earlier.
  • Don’t accept bad answers to good questions. When the forensic accountant arrived on-scene, the business owner requested a report showing payments to all vendors. In the past, the business owner’s similar requests to the bookkeeper were met with a long list of reasons that it was difficult to put such a report together, would take a long time, and would not be precisely correct. The accountant produced the report in about 90 seconds. The business owner was shocked, and the point was made. His bookkeeper for a long time had prevented him from seeing the very report that exposed the whole scheme. He had been given every reason in the book why the report couldn’t be produced.
  • Force vacations. Nobody else had access to the bookkeeper’s work for over two years. Another set of eyes on the accounting records would have exposed everything.


Chris Hamilton is a Certified Public Accountant, Certified Fraud Examiner, Certified Valuation Analyst, and a diplomate with the American Board of Forensic Accounting. Mr. Hamilton is a California State University, Northridge graduate and is a member of the American Institute of Certified Public Accountants, California Society of Certified Public Accountants, Litigation Services Committee of the California Society of CPAs, Association of Certified Fraud Examiners, National Association of Certified Valuators and Analysts, San Fernando Valley Bar Association, The American College of Forensic Examiners, and Ventura County Bar Association. In addition, Mr. Hamilton has published articles on a variety of topics in several publications including The Forensic Examiner, Los Angeles Lawyer, The Value Examiner, Valuation Strategies, and the Journal of Forensic Accounting. Mr. Hamilton can be reached at chamilton@arxisfinancial.com or at (805) 306-7890.

 

 

 

White House Seeks to Limit Health Law’s Tax Troubles

By ROBERT PEARJAN. 31, 2015

WASHINGTON — Obama administration officials and other supporters of the Affordable Care Act say they worry that the tax-filing season will generate new anger as uninsured consumers learn that they must pay tax penalties and as many people struggle with complex forms needed to justify tax credits they received in 2014 to pay for health insurance.

The White House has already granted some exemptions and is considering more to avoid a political firestorm.

Mark J. Mazur, the assistant Treasury secretaryfor tax policy, said up to six million taxpayers would have to “pay a fee this year because they made a choice not to obtain health care coverage that they could have afforded.”

But Christine Speidel, a tax lawyer at Vermont Legal Aid, said: “A lot of people do not feel that health insurance plans in the marketplace were affordable to them, even with subsidies. Some went without coverage and will therefore be subject to penalties.”

The penalties, approaching 1 percent of income for some households, are supposed to be paid with income taxes due April 15. In addition, officials said, many people with subsidized coverage purchased through the new public insurance exchanges will need to repay some of the subsidies because they received more than they were entitled to.

More than 6.5 million people had insurance through the exchanges at some point last year, and 85 percent of them qualified for financial assistance, in the form of tax credits, to lower their premiums. Most people chose to have the subsidies paid in advance, based on projected income for 2014. If their actual income was higher — because they got a raise or found a new job — they will be entitled to a smaller subsidy and must repay the difference, subject to certain limits.

“If the advanced premium tax credit amount is too high, the taxpayer could have an unwelcome surprise and owe money,” said Nina E. Olson, the national taxpayer advocate at the Internal Revenue Service.

Many people awarded insurance subsidies for 2014 did not realize that the amount would be reviewed and recalculated at tax time in 2015.

Consumers are sure to have questions, but cannot expect much help from the tax agency, where officials said customer service had been curtailed because of budget cuts.

The 2015 filing season could be the most difficult in decades, officials said. Ms. Olson said new paperwork resulting from the Affordable Care Act would probably exacerbate problems with customer service, which “has reached unacceptably low levels and is getting worse.”

“The I.R.S. is unlikely to answer even half the telephone calls it receives,” she added. “Taxpayers who manage to get through are expected to wait on hold for 30 minutes on average and considerably longer at peak times.”

Timothy S. Jost, an expert on health law at the Washington and Lee University School of Law who supports the Affordable Care Act, said: “It will be very easy to find people who are unhappy with the new tax obligations — people who have to pay a penalty, who have to wait forever to get through to somebody at the I.R.S. or have to pay back a lot of money because of overpayments of premium tax credits.”

Taxpayers normally report income and compute taxes annually. But thehealth care law is different. Consumers may be subject to tax penalties for any month in which they had neither insurance coverage nor an exemption.

The calculations will be relatively simple if all members of a household had coverage for every month of 2014. They can simply check a box on their tax return. But lower-income people often have changes in employment, income and insurance. If any members of a household were uninsured in 2014, they must fill out a work sheet showing coverage month by month, and they may owe penalties.

To claim tax credits, consumers need to fill out I.R.S. Form 8962, which includes a matrix with 12 rows and six columns — a total of 72 boxes, to compute subsidies for each month. Most taxpayers use software to prepare returns, and that will simplify the process, officials said.

Federal officials have authorized more than 30 types of exemptions from the penalty for not having insurance. One is for low-income people who live in states that did not expand Medicaid. Another is available to people who would have to pay premiums amounting to more than 8 percent of their household income. The government will also allow a variety of hardship exemptions and in most cases will require taxpayers to send in documents as evidence of hardship.

The open enrollment period, during which people can sign up for health insurance in the public markets and avoid future penalties, ends on Feb. 15. But many people will not realize that they must have coverage or pay a penalty until they file their tax returns in April.

Obama administration officials said they were considering a “special enrollment period” that would give some people extra time to obtain insurance. But they said consumers could not count on an extension of the Feb. 15 deadline and should not delay signing up.

Health plans are classified in five categories, such as gold, silver and bronze, based on how generous the coverage is. To calculate their tax credits, consumers need to know the cost of their own policies, but must also know the cost of a benchmark plan, the second-lowest-cost silver plan. To claim an exemption if the available coverage was unaffordable, they also need to know the premium for the lowest-cost bronze plan in the area in 2014.

Sylvia Mathews Burwell, the secretary of health and human services secretary, said the administration was working with nonprofit groups like AARP and tax preparation companies like H&R Block and Intuit, the maker of TurboTax software, to help people meet their tax obligations under the health care law.

A version of this article appears in print on February 1, 2015, on page A15 of the New York edition with the headline: White House Seeks to Limit Health Law’s Tax Troubles. Order ReprintsToday's Paper|Subscribe

 

 

 

 

 

Inflated Refund Claims Remain on the IRS “Dirty Dozen” List of Tax Scams for the 2015 Filing Season

The Internal Revenue Service today warned taxpayers to be on the lookout for unscrupulous tax return preparers pushing inflated tax refund claims. This scam remains on the annual list of tax scams known as the “Dirty Dozen” for the 2015 filing season.

"Every filing season, scam artists lure victims in by promising outlandish refunds,” said IRS Commissioner John Koskinen. “Taxpayers should be wary of anyone who asks them to sign a blank return, promise a big refund before looking at their records, or charge fees based on a percentage of the refund."

Compiled annually, the “Dirty Dozen” lists a variety of common scams that taxpayers may encounter any time but many of these schemes peak during filing season as people prepare their returns or hire someone to help with their taxes.

Illegal scams can lead to significant penalties and interest and possible criminal prosecution. IRS Criminal Investigation works closely with the Department of Justice (DOJ) to shutdown scams and prosecute the criminals behind them.

Don't Fall Victim to Promises of Outlandish Refunds

Scam artists routinely pose as tax preparers during tax time, luring victims in by promising large federal tax refunds or refunds that people never dreamed they were due in the first place.

Scam artists use flyers, advertisements, phony store fronts and even word of mouth to throw out a wide net for victims. They may even spread the word through community groups or churches where trust is high. Scammers prey on people who do not have a filing requirement, such as low-income individuals or the elderly. They also prey on non-English speakers, who may or may not have a filing requirement.

Scammers build false hope by duping people into making claims for fictitious rebates, benefits or tax credits. They charge good money for very bad advice. Or worse, they file a false return in a person's name and that person never knows that a refund was paid.

Scam artists also victimize people with a filing requirement and due a refund by promising inflated refunds based on fictitious Social Security benefits and false claims for education credits, the Earned Income Tax Credit (EITC), or the American Opportunity Tax Credit, among others.

The IRS sometimes hears about scams from victims complaining about losing their federal benefits, such as Social Security benefits, certain veteran’s benefits or low-income housing benefits. The loss of benefits was the result of false claims being filed with the IRS that provided false income amounts.

While honest tax preparers provide their customers a copy of the tax return they’ve prepared, victims of scam frequently are not given a copy of what was filed. Victims also report that the fraudulent refund is deposited into the scammer’s bank account. The scammers deduct a large “fee” before paying victims, a practice not used by legitimate tax preparers.

The IRS reminds all taxpayers that they are legally responsible for what’s on their returns even if it was prepared by someone else. Taxpayers who buy into such schemes can end up being penalized for filing false claims or receiving fraudulent refunds.

Taxpayers should take care when choosing an individual or firm to prepare their taxes. The IRS has a list of tips and other resources to help taxpayers select a qualified tax professional.

 

 

 

 

Hiding Money or Income Offshore Among the “Dirty Dozen” List of Tax Scams for the 2015 Filing Season

The Internal Revenue Service today said avoiding taxes by hiding money or assets in unreported offshore accounts remains on its annual list of tax scams known as the “Dirty Dozen” for the 2015 filing season.

"The recent string of successful enforcement actions against offshore tax cheats and the financial organizations that help them shows that it’s a bad bet to hide money and income offshore,” said IRS Commissioner John Koskinen. “Taxpayers are best served by coming in voluntarily and getting their taxes and filing requirements in order.”

Since the first Offshore Voluntary Disclosure Program (OVDP) opened in 2009, there have been more than 50,000 disclosures and we have collected more than $7 billion from this initiative alone.  The IRS conducted thousands of offshore-related civil audits that have produced tens of millions of dollars. The IRS has also pursued criminal charges leading to billions of dollars in criminal fines and restitutions.

The IRS remains committed to our priority efforts to stop offshore tax evasion wherever it occurs.  Even though the IRS has faced several years of budget reductions, the IRS continues to pursue cases in all parts of the world, regardless of whether the person hiding money overseas chooses a bank with no offices on U.S. soil.

Through the years, offshore accounts have been used to lure taxpayers into scams and schemes.

Compiled annually, the “Dirty Dozen” lists a variety of common scams that taxpayers may encounter anytime, but many of these schemes peak during filing season as people prepare their returns or hire people to help with their taxes.

Illegal scams can lead to significant penalties and interest and possible criminal prosecution. IRS Criminal Investigation works closely with the Department of Justice (DOJ) to shut down scams and prosecute the criminals behind them.

Hiding Income Offshore

Over the years, numerous individuals have been identified as evading U.S. taxes by hiding income in offshore banks, brokerage accounts or nominee entities and then using debit cards, credit cards or wire transfers to access the funds. Others have employed foreign trusts, employee-leasing schemes, private annuities or insurance plans for the same purpose.

The IRS uses information gained from its investigations to pursue taxpayers with undeclared accounts, as well as the banks and bankers suspected of helping clients hide their assets overseas. The IRS works closely with the Department of Justice (DOJ) to prosecute tax evasion cases.

While there are legitimate reasons for maintaining financial accounts abroad, there are reporting requirements that need to be fulfilled. U.S. taxpayers who maintain such accounts and who do not comply with reporting requirements are breaking the law and risk significant penalties and fines, as well as the possibility of criminal prosecution.

Since 2009, tens of thousands of individuals have come forward voluntarily to disclose their foreign financial accounts, taking advantage of special opportunities to comply with the U.S. tax system and resolve their tax obligations. And, with new foreign account reporting requirements being phased in over the next few years, hiding income offshore is increasingly more difficult.

At the beginning of 2012, the IRS reopened the Offshore Voluntary Disclosure Program (OVDP) following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs. This program will be open for an indefinite period until otherwise announced.

 

 

 

 

Blood Battles: Inheritance Planning

BY MADDY PERKINS

During a talk at the 2015 AICPA Personal Financial Planning Conference, Mark Accettura, elder law attorney and author of "Blood and Money: Why families fight about inheritance and what to do about it," warned his audience of the various conflicts that can arise from inheritance planning. Often, conflicts are fueled by common family dynamics. But sometimes, they arise from abusive relationships.

“If you’ve been in this field at all, people do some odd things,” he said. “Part of the reason people act as crazy as they [do] is we are catching them at the worst time of their life.”

While inheritance planning is no doubt a complex problem, Accettura thinks that some are quick to identify its cause: “Greed is not the problem—it is the symptom. The problem is fear,” he said.

But what are clients afraid of? Exclusion. Accettura cites favoritism, sibling rivalry and fraught relationships between stepchildren and stepparents as some of the leading causes of conflict.

Favoritism is usually associated with larger gifts, which can strain relationships between both groups—particularly among stepchildren and stepparents, who are behind the majority of inheritance disputes.

“Those stepparents and stepchildren are not connected genetically,” said Accettura. “They don’t have the same wish to see [each other] succeed as they do their own children.”

When discussing inheritance plans with clients, advisors and lawyers should work together and attempt to draft a plan that doesn’t pit any one group against the other.

Accetura also warns that family members who have been excluded—either from estate plans or even the family altogether—can often see the process as a prime time for re-entry. Inheritance disputes are not just lawsuits when a loved one dies. “A vast majority of disputes begin as the parent fails,” he said.

A family "black sheep" can see an elderly family member struggling with dementia, for example, and attempt to get back in their good graces just in time to secure a place in the will.

Planners should ask themselves whether or not the family members they are working with have the authority to make changes or additions to pre-existing estate plans—particularly when a client has dementia. Legally, diagnosis of dementia (especially mild dementia) does not negate an individual’s legal capacity to change a will.

This touches on an issue closer to home that advisors need to watch for. Since anyone with testamentary capacity can legally change their will, these types of clients need extra protection from predators within their families.

Indeed, 90 percent of financial elder abuse is perpetrated by an individual’s own family—often a child— most of whom tend to be unemployed or suffer from substance abuse problems, according to Accetura.

“When you combine the fact that humans are very suspicious and worried about being left out, and the fact that often they are often literally entitled to nothing, the opportunity for bad behavior arises, but also the reason and legitimacy of those anxieties,” Accettura said.

What’s the takeaway for advisors? Start far ahead of your clients’ decline. Ask your clients questions about their estate plans and the legacies they want to leave.

“With younger people with young families, it’s harder because you’re looking into the future and their demise is so far out,” said Rob Lemmons, a Cincinnatti-based CFP attending the conference. “I think a lot of times as people see their kids go off to college and get married, that’s when they get really serious about it."

Accettura says the goal for all parties involved with inheritance planning is keeping families as intact as possible.

“The importance of family is really our ultimate legacy,” he said. Ask clients: “What’s the plan? How do you want to help your family, how do you make your life better? What are your goals? [Advisors] can help them fill those in with the various tools that you have.”

This article originally appeared on Financial Planning.

 

 

 

 

IRS Lists Fraudulent Tax Preparers among 'Dirty Dozen' Scams

BY MICHAEL COHN

The Internal Revenue Service is warning taxpayers to be on the lookout for unscrupulous tax preparers, citing preparers as one of the most common “Dirty Dozen” tax scams seen during tax season.

The IRS has traditionally compiled a list of 12 of the most common tax scams each tax season, calling the annual list the “Dirty Dozen,” also the title of a 1967 action movie set during World War II. Tax preparers also made the list last year (see IRS Warns of Dirty Dozen Tax Scams of 2014).

This tax season, the IRS has been highlighting the various scams one by one, but has not yet released a complete list for this year. Other “Dirty Dozen” scams highlighted since last week by the IRS include phone scams, phishing scams, identity theft, inflated refund claims and the hiding of money or assets in unreported offshore accounts.

In regard to tax preparers, the IRS acknowledged that the vast majority of tax professionals provide honest high-quality service. But the agency warned that there are some dishonest preparers who set up shop each filing season to perpetrate refund fraud, identity theft and other scams that hurt taxpayers, explaining that's why unscrupulous preparers who prey on unsuspecting taxpayers with outlandish promises of overly large refunds make the Dirty Dozen list every year.

“Filing a tax return can be one of the biggest financial transactions of the year, so taxpayers should choose their tax return preparers carefully,” said IRS commissioner John Koskinen in a statement. “Most tax professionals provide top-notch service, but we see bad actors every year that steal from their clients or compromise returns in ways that can severely harm taxpayers."

The IRS acknowledged that tax return preparers are a vital part of the U.S. tax system, and approximately 60 percent of taxpayers use tax professionals to prepare their returns. However, it also advised taxpayers to make sure their preparer has a Preparer Tax Identification Number, or PTIN; has a professional credential such as CPA, enrolled agent or attorney; belongs to a professional organization; and to check on the preparer's service fees upfront, among other suggestions.

 

 

Ten Facts That You Should Know about Capital Gains and Losses

When you sell a capital asset the sale results in a capital gain or loss. A capital asset includes most property you own for personal use or own as an investment. Here are 10 facts that you should know about capital gains and losses:

 

1. Capital Assets.  Capital assets include property such as your home or car, as well as investment property, such as stocks and bonds.

 

2. Gains and Losses.  A capital gain or loss is the difference between your basis and the amount you get when you sell an asset. Your basis is usually what you paid for the asset.

 

3. Net Investment Income Tax.  You must include all capital gains in your income and you may be subject to the Net Investment Income Tax. This tax applies to certain net investment income of individuals, estates and trusts that have income above statutory threshold amounts. The rate of this tax is 3.8 percent. For details visit IRS.gov.

 

4. Deductible Losses.  You can deduct capital losses on the sale of investment property. You cannot deduct losses on the sale of property that you hold for personal use.

 

5. Long and Short Term.  Capital gains and losses are either long-term or short-term, depending on how long you held the property. If you held the property for more than one year, your gain or loss is long-term. If you held it one year or less, the gain or loss is short-term.

 

6. Net Capital Gain.  If your long-term gains are more than your long-term losses, the difference between the two is a net long-term capital gain. If your net long-term capital gain is more than your net short-term capital loss, you have a net capital gain. 

 

7. Tax Rate.  The capital gains tax rate usually depends on your income. The maximum net capital gain tax rate is 20 percent. However, for most taxpayers a zero or 15 percent rate will apply. A 25 or 28 percent tax rate can also apply to certain types of net capital gains.  

 

8. Limit on Losses.  If your capital losses are more than your capital gains, you can deduct the difference as a loss on your tax return. This loss is limited to $3,000 per year, or $1,500 if you are married and file a separate return.

 

9. Carryover Losses.  If your total net capital loss is more than the limit you can deduct, you can carry over the losses you are not able to deduct to next year’s tax return. You will treat those losses as if they happened in that next year.

 

10. Forms to File.  You often will need to file Form 8949, Sales and Other Dispositions of Capital Assets, with your federal tax return to report your gains and losses. You also need to file Schedule D, Capital Gains and Losses with your tax return.

 

 

 

IRS Launches Tax Preparer Directory

BY MICHAEL COHN

 

The Internal Revenue Service has launched a new, online public directory of tax return preparers as part of its effort to promote its Annual Filing Season Programfor testing and continuing education of tax preparers on a voluntary basis.

This searchable directory on IRS.gov will help taxpayers find a tax professional with credentials and select qualifications to help them prepare their tax returns.

“This new directory will be a practical tool for the millions of Americans who rely on the services of a paid return preparer,” said IRS Commissioner John Koskinen in a statement. “Taxpayers can also look to these tax professionals for help if they have questions about the new health care provisions on this year’s tax forms.”

The directory is a searchable, sortable listing featuring the name, city, state and zip code of attorneys, CPAs, enrolled agents and those who have completed the requirements for the voluntary IRS Annual Filing Season Program. All preparers listed also have valid 2015 Preparer Tax Identification Numbers, or PTIN.

Taxpayers can search the directory using the preferred credentials or qualifications they seek in a preparer, or by a preparer’s location, including professionals who practice abroad. Tax preparers with PTINs who are not attorneys, CPAs, enrolled agents or Annual Filing Season Program participants are not included in the directory, nor are volunteer tax return preparers who offer free services.

The IRS said the directory can also be a resource for taxpayers who want to get help from tax professionals on the Affordable Care Act tax provisions that affect returns filed this year.

To help taxpayers navigate the different types of professional tax help available, last December, the IRS unveiledIRS.gov/chooseataxpro, a page that explains the different categories of professionals. Taxpayers can also use a new partner page available on IRS.gov that provides links to the web sites of national non-profit tax professional groups, which can help provide additional information for taxpayers seeking the right type of qualified help.

In 2010, the IRS launched the Tax Return Preparer Initiative, which generally requires anyone who prepares federal tax returns for compensation to obtain a PTIN from the IRS. As of the start of the filing season, more than 666,000 tax return preparers have active PTINs for 2015. Currently, anyone with a valid PTIN can prepare federal tax returns for compensation. At a minimum, taxpayers should make sure their tax preparer has a valid PTIN and includes it on the tax return.

However, in 2013, a federal court invalidated the IRS’s efforts to require mandatory testing and continuing education of tax preparers in the case of Loving v. IRS, which an appeals court upheld in 2014. In response, the IRS unveiled the Annual Filing Season Program last year to provide testing and continuing education on a voluntary basis.

 

 

 

Intuit Denies Putting Profit Before TurboTax User Security

BY ANTONIA MASSA

 

Intuit Inc., maker of tax-preparation software TurboTax, denied claims that it prioritized the processing of fraudulent state and federal tax refunds at the expense of customers.

Intuit temporarily halted filing of state tax returns earlier this month after learning that its software and services may have been used to file bogus returns.

Accusations by former employees that Intuit put profit before customer security “doesn’t hold water,” the Mountain View, California-based company said in astatement Monday.

 “We recognize that some employees who work in information security would like us to do more to prevent fraud, and we are committed to doing so as fast as we can to combat the constantly evolving and increasingly sophisticated methods of cybercriminals,” Intuit said. “But we cannot always immediately implement the most innovative methods to detect and prevent fraud without considering other factors.”

The statement follows claims from former security employees that Intuit failed to take basic measures to ensure customers’ safety. In an interview with cybersecurity-news blog KrebsOnSecurity, former employee Robert Lee said Intuit refused to implement a ban on using a single Social Security number across multiple TurboTax accounts, and limit the number of tax returns a single account can file. Management refused to adopt these precautions because fraudulent returns were profitable for TurboTax, Lee said.

U.S. taxpayers are typically issued refunds on national and state taxes already paid, creating an opportunity for crooks to file false claims for the money. Americans are in the middle of the annual tax-filing season ahead of an April 15 deadline.

Suspicious Filings

Criminals, using stolen identification information gather data on taxpayers, can create a phony TurboTax account in a person’s name to file for a tax return. In these cases, because the filing fee is deducted from the total amount of the refund request, TurboTax still receives payment when the Internal Revenue Service approves the fraudulent return.

Any revenue from suspicious filings is “immaterial to Intuit’s business, and simply does not drive a business decision,” the company said.

 

 

 

IRS Offers Guidance on Obamacare Tax on ‘Cadillac’ Health Plans

BY MICHAEL COHN

The Internal Revenue Service has issued guidance on the potential approaches it may take in the future on proposed regulations for the excise tax on high-cost employer-sponsored health coverage in the Affordable Care Act.

The excise tax on so-called “Cadillac” health plans is scheduled to take effect in 2018 and would impose a 40 percent tax on employers who pay for overly generous and expensive health coverage in an effort to encourage them to offer more cost-effective health plans in which employees and executives share more of the costs.

Notice 2015-16 discusses Section 4980I of the Tax Code, which was added by the Affordable Care Act and applies to taxable years beginning after Dec. 31, 2017. Under this provision, if the aggregate cost of “applicable employer-sponsored coverage” provided to an employee exceeds a statutory dollar limit, which is revised annually, the excess is subject to a 40 percent excise tax.

The notice describes potential approaches with regard to a number of issues under Section 4980I, which could be incorporated in future proposed regulations, and invites comments on these potential approaches.

The issues addressed in the notice mainly relate to the definition of applicable coverage, the determination of the cost of applicable coverage, and the application of the annual statutory dollar limit to the cost of applicable coverage.

The Treasury Department and the IRS are asking for comments on the issues addressed in the notice and on any other issues under Section 4980I. They expect to release another notice before the publication of the proposed regulations, describing and inviting comments on potential approaches to a number of other issues, including procedural issues relating to the calculation and assessment of the excise tax.

 

 

 

Majority of Taxpayers with Obamacare Premium Tax Credits Need to Pay Back Portion

BY MICHAEL COHN

H&R Block reported that six weeks into tax season, a 52 percent majority of taxpayers who enrolled in health insurance coverage through a state or federal marketplace have needed to pay back a portion of the Advance Premium Tax Credit, and the average amount they paid back is $530, decreasing their tax refund on average by 17 percent.

With many clients relying on 2012 income as a baseline to estimate their 2014 income at the time of the first open enrollment, H&R Block anticipated that most filers would not accurately estimate their 2014 household income. This income underreporting has led to a majority of Marketplace-enrolled taxpayers paying back a portion of the tax credit. The average tax refund for these taxpayers was almost $3,100, but it was reduced by $530 due to the tax credit reconciliation process.

“The level of payback of the Advance Premium Tax Credit is significant in that it's costing taxpayers a large percentage of their refund—a refund many of them count on to pay household expenses,” said Mark Ciaramitaro, vice president of H&R Block health care and tax services in a statement.

The analysis found that a majority of year-end Marketplace-enrolled clients who reconciled using Form 8962 underestimated their household income and therefore must repay a portion of the APTC.

Conversely, the analysis also showed that roughly one-third of Marketplace enrollees overestimated their 2014 household income, and therefore received an Additional Premium Tax Credit of close to $365 on average. That represented an additional 11 percent increase, resulting in an average $3,816 refund.

Penalties and Exemptions for Lacking Insurance

The average tax penalty for not having insurance was $172, an indication that most taxpayers are paying more than the flat fee of $95 per uncovered adult penalty that many consumers anticipated.

Of those taxpayers who claimed an exemption, more than nine out of 10 claimed a tax return exemption at the time they filed. The most common tax return exemption was due to the taxpayer’s income being below the filing requirement. The second and third most common exemptions were due to a gap in health insurance coverage or being a resident of a state without Medicaid expansion.

For next tax filing season, Block noted that the base penalty will increase to the greater of $325, or 2 percent of household income for 2015. However, anyone who has not filed a 2014 tax return, and learns they will be penalized for not having insurance during their tax preparation this season, may qualify for a special enrollment period to obtain Marketplace health insurance.

In addition, Block found that taxpayers appear to be accurately indicating their insurance coverage status, as the number of those selecting a penalty and/or qualifying for an exemption seems to be in line with Block’s own preseason projections. Taxpayers appear to be foregoing hunting down Marketplace hardship exemptions and instead claiming tax return exemptions, especially those that are income based.

“Our data suggests that most taxpayers are accurately indicating their household insurance coverage status,” said Ciaramitaro.

He added that clients “appear to be answering truthfully by paying the tax penalty for being uninsured. We don’t think they are just checking the box that they are covered when they’re not.”

 

 

 

The Secret Tax Lives of the Rich and Famous

BY BEN STEVERMAN

 From Willie Nelson to Wesley Snipes, celebrities have a long history of tax trouble. In just the last year, comedian Chris Tucker, supermodel Gisele Bundchen, the lead singer of Creed and at least one of the Real Housewives have had reported run-ins with the IRS. What’s going on?

Singers, actors, and professional athletes get ensnared in complicated money situations that confuse even advisers with CPAs and law degrees. Here’s why: the costs of doing show business.

Just as Uber drivers can deduct the cost of gas from their taxes, celebrities can deduct their necessary expenses. But there’s a fine line between show-business expenses and the perks of a celebrity lifestyle.

Hiring a stylist or personal assistant might be deductible—as long as their pay is well-documented—but an expensive car or a poolside massage probably aren’t.

Dave Lopez, a Philadelphia-based CPA financial planner, works with hip hop artists for whom it’s crucial to network with other producers and musicians around the country. That can mean that hotel or airfare is deductible, but not drinking in the back of the city’s priciest club. Anyway, it can be impossible to get entertainers to keep track of their expenses. “Everybody’s doing everything in cash,” Lopez said. “The record-keeping is not that great.” Stars’ income can be as fickle as their fans

The IRS charges a penalty if taxpayers don’t pay enough in estimated taxes throughout the year. But many entertainers have no way to estimate how much they’ll make by Dec. 31. In the film business, “you can have one job a year. You can have four jobs a year. You can have three years without a job,” said CPA financial planner Mitchell Freedman.

And a lot of their income arrives in strange ways, which makes it tempting to cheat the IRS. Professional athletes get paid for autograph signings, reality TV stars for appearing at clubs. Those checks can't just be cashed; they must be reported on tax returns.

They’re Big in Japan, Milwaukee and Everywhere Else

When you’re an actor shooting on location or a tennis player going from tournament to tournament, you can end up owing taxes to dozens of jurisdictions. States, the IRS and foreign countries all want a piece of you.

The complications multiply on concert tours, said Victor Wlodinguer of Citrin Cooperman. Backup musicians and roadies need the right W-2s and worker’s compensation insurance for each jurisdiction. Managers must keep track of not just expenses and income but where they occur. States like California and New York will otherwise demand concert promoters withhold a big chunk of revenue for taxes, Wlodinguer says. Foreign artists visiting the U.S. get the same treatment from the IRS.

Sudden Wealth Syndrome

Some stars are good with money. But it’s hard to expect financial savvy from people known primarily for their jokes, their three-pointers or their ability to cry on cue. “They’re on set for 12 to 14 hours a day,” Jeff Fishman of Los Angeles-based JSF Financial said of his clients. “They don’t have time to focus on the financial world.”

When they hit it big, many don’t know what to do with all the money. So they start spending it, quickly.

“There’s a temptation to be the kid in the candy store,” Fishman says, even though much of that new money may belong to the IRS.

Making planning harder: Unless you’re the next Betty White, the income won’t last forever.  “This year you’re hot—you’re at every awards show—and then we don’t hear from you ever again,” Lopez says.
When you get famous enough, everyone knows you’re rich. That brings out friends and family from deep in your past, begging for a loan, a job, or an investment in their soon-to- fail business. If you give your cousin money, you'll need to fill out a W-2, a 1099, or a gift tax return. He or she may be family, but the IRS demands the correct form.

 

 

 

 

Social Security Benefits and Your Taxes

If you receive Social Security benefits, you may have to pay federal income tax on part of your benefits. These IRS tips will help you determine whether or not you need to pay taxes on your benefits. They also explain the best way to file your tax return.

• Form SSA-1099.  If you received Social Security in 2014, you should receive a Form SSA-1099, Social Security Benefit Statement, showing the amount of your benefits.

• Only Social Security.  If Social Security was your only income in 2014, your benefits may not be taxable. You also may not need to file a federal income tax return. If you get income from other sources you may have to pay taxes on some of your benefits.

• Free File.  Use IRS Free File to prepare and e-file your tax return for free. If you earned $60,000 or less, you can use brand-name software. The software does the math for you and helps avoid mistakes. If you made more than $60,000, you can use Free File Fillable Forms. This option uses electronic versions of IRS paper forms. It is best for people who are used to doing their own taxes. Free File is available only on IRS.gov/freefile.

• Interactive Tax Assistant.  The IRS has a helpful tool that you can use to see if any of your benefits are taxable. Visit IRS.gov and use the Interactive Tax Assistant.

• Tax Formula.  Here’s a quick way to find out if you must pay taxes on your Social Security benefits: Add one-half of your Social Security to all your other income, including tax-exempt interest. Then compare the total to the base amount for your filing status. If your total is more than the base amount, some of your benefits may be taxable.

• Base Amounts.  The three base amounts are:

o $25,000 – if you are single, head of household, qualifying widow or widower with a dependent child or married filing separately and lived apart from your spouse for all of 2014

o $32,000 – if you are married filing jointly

o $0 – if you are married filing separately and lived with your spouse at any time during the year

For more information on this topic visit IRS.gov.

 

 

 

Ten Facts That You Should Know about Capital Gains and Losses

When you sell a capital asset the sale results in a capital gain or loss. A capital asset includes most property you own for personal use or own as an investment. Here are 10 facts that you should know about capital gains and losses:

1. Capital Assets.  Capital assets include property such as your home or car, as well as investment property, such as stocks and bonds.

2. Gains and Losses.  A capital gain or loss is the difference between your basis and the amount you get when you sell an asset. Your basis is usually what you paid for the asset.

3. Net Investment Income Tax.  You must include all capital gains in your income and you may be subject to the Net Investment Income Tax. This tax applies to certain net investment income of individuals, estates and trusts that have income above statutory threshold amounts. The rate of this tax is 3.8 percent. For details visit IRS.gov.

4. Deductible Losses.  You can deduct capital losses on the sale of investment property. You cannot deduct losses on the sale of property that you hold for personal use.

5. Long and Short Term.  Capital gains and losses are either long-term or short-term, depending on how long you held the property. If you held the property for more than one year, your gain or loss is long-term. If you held it one year or less, the gain or loss is short-term.

6. Net Capital Gain.  If your long-term gains are more than your long-term losses, the difference between the two is a net long-term capital gain. If your net long-term capital gain is more than your net short-term capital loss, you have a net capital gain. 

7. Tax Rate.  The capital gains tax rate usually depends on your income. The maximum net capital gain tax rate is 20 percent. However, for most taxpayers a zero or 15 percent rate will apply. A 25 or 28 percent tax rate can also apply to certain types of net capital gains.  

8. Limit on Losses.  If your capital losses are more than your capital gains, you can deduct the difference as a loss on your tax return. This loss is limited to $3,000 per year, or $1,500 if you are married and file a separate return.

9. Carryover Losses.  If your total net capital loss is more than the limit you can deduct, you can carry over the losses you are not able to deduct to next year’s tax return. You will treat those losses as if they happened in that next year.

10. Forms to File.  You often will need to file Form 8949, Sales and Other Dispositions of Capital Assets, with your federal tax return to report your gains and losses. You also need to file Schedule D, Capital Gains and Losses with your tax return.

 

 

 

Obama Backs Tougher Rules for Brokers on Retirement Funds

BY DAVE MICHAELS AND ANGELA GREILING KEANE

President Barack Obama threw the weight of the White House behind an effort that would make it harder for brokers to push higher-fee mutual funds or other expensive products on people saving for retirement.

The plan to be issued by the Labor Department would require brokers to act in a customer’s best interest, a change that could limit the earnings of financial advisers in the handling of Americans’ $11 trillion of retirement savings.

The president said the current regulations are out of date, devised in the era when most Americans could count on a traditional pension from employers. Through self-directed retirement accounts, some brokers are skimming significant sums annually from small investors, he said.

 “Financial advisers absolutely deserve fair compensation,” he said in remarks Monday to AARP, the nation’s biggest lobby for retirees. “But they shouldn’t be able to take advantage of their clients.”

40-Year-Old Rules

Obama’s involvement underscores the opposition the government faces in revising 40-year-old rules that affect tens of millions of baby boomers nearing retirement and younger workers without pensions.

Having beaten back previous efforts to update the rules, Wall Street now has more at stake. Banks have boosted their asset-management businesses after the 2008 financial crisis, while curtailing riskier and more capital-intensive trading units.

“There are some financial interests that are going to fight it with all they’ve got,” Obama said.

The president promoted the Labor Department proposal at the AARP event Monday along with U.S. Senator Elizabeth Warren of Massachusetts, whose popularity has surged among Democrats based on her claims that bankers and the financial industry too often try to take advantage of workers.

Officials declined to outline specifics of the plan to impose a standard known as a fiduciary duty on brokers, which will crack down on “backdoor payments and hidden fees,” according to a fact sheet issued by the White House.

Issues Distorted

Financial-industry groups say the Obama administration and Labor Department have distorted the issue and disregarded existing tough rules for brokers. Those measures are enforced by the Securities and Exchange Commission and Financial Industry Regulatory Authority.

The Labor Department planned to send the proposal on Monday to the Office of Management and Budget for review, Labor Secretary Tom Perez said on a conference call with reporters.

It could take several months before the rule is publicly released, Perez said on the Sunday call, where he was joined by Obama administration officials and John Bogle, the founder of mutual-fund company Vanguard Group Inc. That step will allow the securities industry, investor groups and lawmakers to comment on the plan before the Labor Department can issue a final regulation.

At the heart of the proposal is an effort to tighten the legal standard for brokers handling retirement funds in individual retirement accounts and 401(k)s, which now hold more than $11 trillion. Under current rules, brokers can sell any product that is “suitable” for an investor, meaning it fits the client’s needs and tolerance for risk.

Broker Profits

Brokers typically earn money from upfront sales commissions or fees paid by investors who purchase mutual funds. White House officials said that kind of compensation arrangement provides an incentive to recommend products that net higher fees or commissions without yielding better returns for investors.

Clients lose as much as $17 billion a year from such conflicted advice, according to the Obama administration.

“The corrosive power of fine print, hidden fees and conflicted advice can eat away like a chronic illness at people’s hard-earned retirement savings,” Perez said.

Investors are particularly vulnerable to conflicts of interest when moving investments from an employer-sponsored 401(k) plan to an IRA, the White House said. That process allows brokers to steer investors into products that earn them higher fees. The average IRA rollover for investors between 55 and 64 years old in 2012 was more than $100,000, according to Jason Furman, chairman of Obama’s Council of Economic Advisers.

IRA Investments

Former employees of companies such as AT&T Inc., Hewlett- Packard Co. and United Parcel Service Inc. have complained that brokers persuaded them to roll their 401(k) plans into high- cost, unsuitable IRA investments, according to a three-month Bloomberg News investigation published last June.

Subjecting brokers to a fiduciary duty, a standard that now applies to professional money managers, will lead to more lawsuits against the industry and add burdensome compliance requirements, industry groups argue.

The added costs will probably prompt brokers to drop client accounts with less than $50,000 of assets, leaving those investors to manage their own savings, according to the Securities Industry and Financial Markets Association.

“We have ongoing concerns that the DOL and the White House have completely ignored the existence of the robust regulatory regime under SEC and Finra, and this re-proposal could make it harder to save for retirement by cutting access to affordable advice and limiting options for savers,” Sifma Chief Executive Officer Kenneth Bentsen said in a statement. “The DOL re-proposal could ultimately raise the cost of saving and hurt all Americans trying to save for retirement, particularly middle- class workers.”

When the Labor Department issued a fiduciary-duty proposal in 2010, financial companies including JPMorgan Chase & Co. and Fidelity Investments said it was overly broad and would cover activities such as communications with call centers that process routine questions from investors. Morgan Stanley questioned whether selling investors bonds from a broker’s inventory could have been prohibited by the earlier plan.

Congressional Republicans were also opposed, with the House approving legislation in 2013 that would have blocked the Labor Department from taking action.

Perez said the new rule will be “very different” from previous versions and would spell out practices, such as sales commissions and fee sharing, that would still be allowed.

“I’m confident we can actually do more to help the small and moderate savers in the context of the proposal we will be putting forth,” he said.

—With assistance from Toluse Olorunnipa in Washington and John Hechinger in Boston.

 

 

 

Block Warns Taxpayers in 12 States Could Get Smaller Tax Refunds

BY MICHAEL COHN

H&R Block is warning that taxpayers in 12 states will be unable to use certain federal tax breaks on their state tax returns because of Congress’s late passage of tax extenders legislation, leading to lower state tax refunds.

Although Congress extended dozens of expired tax breaks in December, 12 states have not passed legislation recognizing those changes on their state tax return. These popular tax breaks benefit teachers, students, homeowners and retirees, or approximately one in six taxpayers nationwide.

Most states generally conform automatically to federal tax benefits or pass legislation annually to do so, Block noted. Because the federal tax benefits were extended in the middle of December, however, some states were unable to update their state legislation before the start of tax season. These include states that tie to the federal Internal Revenue Code as of a fixed date, but tend to advance conformity yearly.

"Even though taxpayers in these dozen states may choose to wait and see if their state will recognize the federal tax benefits before they file their state return, there is no reason why they should delay filing their federal return and getting their federal refund," said Kathy Pickering, executive director of The Tax Institute at H&R Block, in a statement. "Because this does not impact the benefits taxpayers can claim on their federal return, they should get any federal refund they're owed, which so far averages about $3,500 according to the IRS."

Taxpayers in the 12 states that do not recognize the extended federal tax benefits may consider a few options when they file their state tax returns. The first is to wait to file their state return in the event that the state eventually passes conformity legislation. Although this may delay their state refund, it would prevent them from needing to file an amended return. However, in the past, some states have waited until after the April 15 filing deadline to recognize federal tax benefits. Taxpayers should consult a tax professional to learn when their state has passed this legislation in previous years.

The second option affected taxpayers have is to file their state return without the benefit of the federal tax breaks. Then, if the state passes conformity legislation, they may file an amended state return to claim their federal benefits. This would require filing an amendment, but could deliver a refund earlier than if the taxpayer waited to file.

In either case, taxpayers in these states can file a federal return and get all the tax benefits they are entitled.

These 12 states tend to pass yearly legislation to conform to federal tax breaks:

•    Arizona*
•    California
•    Georgia
•    Hawaii*
•    Iowa*
•    Idaho*
•    Indiana
•    North Carolina
•    Ohio*
•    Virginia*
•    Wisconsin*
•    West Virginia*

* These states have introduced bills to update their conformity date and will likely conform in the near future.

When a state tax return begins with federal adjusted gross income, federal tax benefits that reduce income flow to the state return, Block pointed out. However, if the state does not recognize certain federal tax benefits, taxpayers have to recalculate their state income without those benefits for the purposes of completing their state tax return. This results in higher state taxable income, which could lead to a higher state tax.

 

 

 

When a House Is a Tax Home

BY ROGER RUSSELL

It takes a heap o’ living just to make a house a home, as the old poem teaches. In Joel Evans’ case, he did enough living in two houses in Louisiana to make the U.S. his tax home.

Perhaps he should have joined the Sakhalin Island Chamber of Commerce or become active in the local Russian branch of Kiwanis. It was that lack of local ties in Russia that was a factor in the Tax Court’s recent decision in Evans v. Commissioner, T.C. Memo 2015-12, that Evans’ tax home was in the U.S., not Russia, and therefore precluded his foreign earned income exclusion.

In order to qualify for the foreign earned income exclusion under section 911 of the Tax Code, taxpayers must satisfy two requirements: first, they must have their tax home in a foreign country, and second, they must either be a bona fide resident of one or more foreign countries or be physically present in a foreign country during at least 330 days in a 12-month period.

Evans, who supervised oil rigs in Russia during the years at issue (2007-2010), failed to satisfy the first test despite living in Russia during his employment there. Code section 911(d)(3) provides that an individual shall not be treated as having a tax home in a foreign country for any period for which his abode is within the U.S. The Tax Court said that during the time that Evans worked in Russia his “abode” was not in Russia but in Louisiana. He came back to Louisiana for a month at a time six times per year, sometimes staying at his parents’ house, and sometimes at his own house.

“While he was overseas, his first wife, his second wife and his daughter lived in this house or in his parents’ house, also in West Monroe,” the court noted. “During his off-duty periods petitioner regularly returned to West Monroe for an average of 23 days per period to be with his family. His driver’s license, voter registration, bank accounts and motor vehicles were all centered in Louisiana. His ties to Sakhalin Island, by contrast, were entirely transitory and did not extend much beyond the bare minimum required to perform his duties there.”

An abode doesn’t necessarily mean one distinct house, the court observed. “Section 911(a) does not require that we determine which particular building in West Monroe constituted petitioner’s ‘abode.’

Rather, as applied here, the statute asks whether his ‘abode’ was in the United States or in Russia. Because of petitioner’s family situation, he necessarily had ties both to his own home and to his parents’ home. These two residences, together with his other ties to Louisiana, gave rise to an ‘abode’ within the United States.”

The court refused the Service’s request to impose the 20 percent accuracy-related penalty since Evans’ tax returns were prepared by a tax professional who advised him that he qualified for the exclusion. “Although this advice was incorrect, this is a technical area of tax law, and we are satisfied that petitioners reasonably relied on the advice they were given,” the court stated.

The court observed that because Evans’ possession of an abode within the United States is fatal to his claim, it did not need to decide whether he met the second requirement for the exclusion by satisfying the bona fide residence test. It noted that the requirement that he have his abode outside the U.S. is distinct from the requirement that he be a bona fide resident of or be physically present in a foreign country.

“The tests for abode and residence are clearly distinct; since petitioner fails the former, it does not matter whether he can satisfy the latter,” the Court said.

“The Tax Court got it right,” said Linda de Marlor, president of Rockville, Md.-based Tax-Masters, Inc. “In this case, the taxpayer was an employee. If taxpayers are self-employed, they don’t get the whole $99,200 exclusion because they lose a percentage based on what their deductions are for being self-employed. And the exclusion itself is prorated based on the number of qualifying days spent in the foreign country.”

“By choosing corporate status, a self-employed person can become salaried,” she advised. “Then they would be eligible for the whole exclusion, assuming they spent the entire year in the foreign country.”

 

 

 

Taxable or Not – What You Need to Know about Income

All income is taxable unless the law excludes it. Here are some basic rules you should know to help you file an accurate tax return:

  • Taxed income.  Taxable income includes money you earn, like wages and tips. It also includes bartering, an exchange of property or services. The fair market value of property or services received is taxable.

Some types of income are not taxable except under certain conditions, including:

  • Life insurance.  Proceeds paid to you because of the death of the insured person are usually not taxable. However, if you redeem a life insurance policy for cash, any amount that you get that is more than the cost of the policy is taxable.
  • Qualified scholarship.  In most cases, income from this type of scholarship is not taxable. This means that amounts you use for certain costs, such as tuition and required books, are not taxable. On the other hand, amounts you use for room and board are taxable.
  • State income tax refund.  If you got a state or local income tax refund, the amount may be taxable. You should have received a 2014 Form 1099-G from the agency that made the payment to you. If you didn’t get it by mail, the agency may have provided the form electronically. Contact them to find out how to get the form. Report any taxable refund you got even if you did not receive Form 1099-G.

Here are some types of income that are usually not taxable:

  • Gifts and inheritances
  • Child support payments
  • Welfare benefits
  • Damage awards for physical injury or sickness
  • Cash rebates from a dealer or manufacturer for an item you buy
  • Reimbursements for qualified adoption expenses

For more on this topic see Publication 525, Taxable and Nontaxable Income. You can get it on IRS.gov/forms anytime.

 

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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