Back to top

February

 

 

My Predictons For The Top Security Threats Of 2016

Thomas Fox is president of Tech Experts, southeast Michigan's leading small business computer support company.

 

The year 2015 certainly saw its share of unusual technological security breaches, ranging from the Ashley Madison hack to controlling Jeeps from afar.

 

With the ever-growing breadth of technology services and gadgets, the opportunities to exploit them grows as well.

 

These are my predictions for the top security threats for the coming year:

Cloud Services

While cloud services solve countless storage and file-sharing issues for businesses, they also amass huge amounts of sensitive information in a single spot. We expect to see hackers try to sneak past the security measures in place on these services to hit paydirt on business data.

 

Hacktivism

In this day and age, forget traditional activism. Many think that in order to really get the public’s attention, you have to hit the target where it hurts – their technology.

 

Although this isn’t a new concept, it may soon grow, thanks to exploit sites where people can download the necessary codes for hacking without any specialized knowledge.

 

Hardware

This type of targeting has traditionally been limited to research and academic facilities, but it may increase in scope simply due to its old-school approach.

 

We are so busy scouring the Internet at large for risks that it is simple to overlook attacks that take place right under our noses.

 

Ransomware

For the average individual, ransomware perhaps poses the greatest risk because anyone who downloads the code can fall victim. Ransomware basically locks down your computer, encrypts all of its information, and then requests a fee in exchange for the digital key that unlocks everything stored on your device.

 

Vulnerabilities

Hackers will continue to target software as a means to amass information and gain control to private systems.

 

While attention to Flash and Java may cool down as they fall into disuse, there will always be new software to attack, including Microsoft’s new browser, Edge.

 

Wearables

As people adopt wearables like fitness trackers and smartwatches into their day-to-day lifestyles, hackers are surely examining these new opportunities to exploit.

 

Granted, cybercriminals likely have no use for knowing how many steps you took or stairs you climbed, but wearables could easily be used as back doors to their connected mobile devices.

While you can’t implement iron-clad security against would-be hackers, use common sense in your digital practices. Always run a business-class, constantly updated anti-virus and anti-malware suite!

 

Methods like keeping applications updated, using strong passwords, and not downloading anything you’re not positive you can trust go a long way in keeping you safe from cybercriminals.

 

 

 

 

IRS Issues Nine Out of 10 Refunds in less than 21 Days

 

The Internal Revenue Service today reminded taxpayers that it issues 90 percent of refunds in less than 21 days. The best way to check the status of a refund is online through the “Where’s my Refund?” tool at IRS.gov or via the IRS2Go phone app.

 

"As February approaches, more and more taxpayers want to know when they can expect their refunds," said IRS Commissioner John Koskinen. "There aren't any secret tricks to checking on the status of a refund. Using IRS.gov is the best way for taxpayers to get the latest information."

Many taxpayers are eager to know precisely when their money will be arriving, but checking "Where's My Refund" more than once a day will not produce new information. The status of refunds is refreshed only once a day, generally overnight.

 

"Where’s My Refund?" has the most up to date information available about your refund. Taxpayers should use this tool rather than calling.

 

Taxpayers can use “Where’s My Refund?”  to start checking on the status of their return within 24 hours after IRS has received an e-filed return or four weeks after receipt of a mailed paper return. "Where’s My Refund?" has a tracker that displays progress through three stages: (1) Return Received, (2) Refund Approved and (3) Refund Sent.

 

The IRS2Go phone app is another fast and safe tool taxpayers can use to check the status of a refund. In addition, users can use the app to find free tax preparation help, make a payment, watch the IRS YouTube channel, get the latest IRS news, and subscribe to filing season updates and tax tips. The app is free for Android devices from the Google Play Store or from the Apple App Store for Apple devices.

 

Users of both the IRS2Go app and “Where’s my Refund” tools must have information from their current, pending tax return to access their refund information.

 

The IRS reminded taxpayers there's no advantage to calling about refunds. IRS representatives can only research the status of your refund in limited situations: if it has been 21 days or more since you filed electronically, more than six weeks since you mailed your paper return, or "Where’s My Refund?" directs you to contact us. If the IRS needs more information to process your tax return, we will contact you by mail.

 

The IRS continues to strongly encourage the use of e-file and direct deposit as the fastest and safest way to file an accurate return and receive a tax refund. More than four out of five tax returns are expected to be filed electronically, with a similar proportion of refunds issued through direct deposit.

 

The IRS Free File program offers free brand-name software to about 100 million individuals and families with incomes of $62,000 or less. Seventy percent of the nation’s taxpayers are eligible for IRS Free File. All taxpayers regardless of income will again have access to free online fillable forms, which provide electronic versions of IRS paper forms to complete and file. Both options are available through IRS.gov.

 

 

 

Last Swiss Bank Settles in $1.37 Billion Tax Evasion Program

BY DAVID VOREACOS AND GILES BROOM

 

After three years and $1.37 billion in penalties, the U.S. is ending a disclosure program that forced Swiss banks to reveal all the secret ways they helped Americans evade taxes.

 

A final accord announced Wednesday, the 78th by the U.S. with 80 Swiss banks, clears the way for prosecution of other firms excluded from the program. Julius Baer Group Ltd. said last month that it expects to pay about $547 million to settle a separate U.S. criminal investigation into how it assisted American tax cheats.

 

In the final agreement, HSZH Verwaltungs AG avoided prosecution by agreeing to pay $49.8 million and admitting it helped U.S. clients dupe the Internal Revenue Service, the Justice Department said.

 

“Through this initiative, we have uncovered those who help facilitate evasion schemes and those who hide funds in secret offshore accounts,” Attorney General Loretta Lynch said in a statement.

 

“We have improved our ability to return tax dollars to the U.S. And we have pursued investigations into banks and individuals.”

 

$50 Billion

The U.S. reached non-prosecution agreements through the disclosure program with dozens of banks since securing $211 million from BSI SA last March. More deals followed in December when Credit Agricole SA agreed to pay $99.2 million; Bank Lombard Odier & Co. $99.8 million; and Bank J. Safra Sarasin AG $85.8 million. Union Bancaire Privee settled for almost $188 million on Jan. 6.

 

In all, the banks held about $50 billion in U.S. assets in 35,096 accounts from 2008 to 2013, according to data compiled by Bloomberg. The total penalties amounted to 2.7 percent of those assets.

 

“The program has been very tough for the banks in Switzerland, but after the settlement they are able to look ahead,” Daniela Flueckiger, a spokeswoman for the Basel, Switzerland-based Swiss Bankers Association, said in an e-mail.

 

Beat Werder, a spokesman for Switzerland’s State Secretariat for International Financial Matters, welcomed the fact that the tax disputes were resolved with banks “in accordance with Switzerland’s legal system and sovereignty.”

 

‘Treated Fairly’

“In particular, the transfer of client data is not permitted,” Werder said in an e-mail. “Switzerland is in regular contact with the DOJ, working towards ensuring that Swiss banks are treated fairly and are not disadvantaged relative to U.S. or other banks. Such contact also makes it possible to call for compliance with the Swiss legal system.”

 

Banks used an array of ruses to help clients hide assets. All but three held mail to reduce a paper trail, and most offered numbered accounts that concealed identities. Dozens helped clients withdraw untraceable cash, and the vast majority paid external asset managers to bring in clients.

 

U.S. clients also used offshore corporations, trusts and foundations titled in the names of others to cheat the IRS. Panama was cited in 41 of the accords, followed by Liechtenstein at 39 and the British Virgin Islands at 38. Hong Kong and the Cayman Islands were each cited in 10 of the accords.

 

Insurance ‘Wrappers’

One tactic described in 23 accords was banks offering life insurance policies that held a client’s accounts in the name of the insurer. Such insurance “wrappers” disguised the true owners of accounts.

 

Another 18 accords describe how banks helped clients hold assets in untraceable gold or other precious metals.

 

HSZH admitted in a statement of facts that it targeted U.S. clients who were leaving other Swiss banks that were under investigation by the Justice Department, particularly UBS Group AG, Switzerland’s largest bank. HSZH viewed those clients “as a business opportunity to be seized immediately rather than a warning to be heeded,” according to the statement.

 

The firm’s bankers also regularly visited clients in the U.S., delivering cash in amounts below $10,000 to avoid triggering reporting requirements, HSZH said in the statement.

 

Gold Bars

One client with more than $90 million in an account held by a Liechtenstein foundation got cash deliveries from an HSZH banker at a Swiss hotel or in London, according to the statement. Another U.S. couple with $24 million incrementally took out more than 19 million Swiss francs ($18.7 million) in cash and 55 kilograms in gold bars, worth more than 3 million Swiss francs, when they closed an account in 2012.

 

HSZH’s senior managers also approved two pipelines to 83 U.S. clients with undeclared accounts, most of whom left UBS, according to the statement. One top executive sent an e-mail in 2008 saying that discussions of such clients should be verbal and not written.

 

“The last thing we need is a ‘paper trail’ + ‘broadcast’ throughout” the organization, the executive wrote, according to the statement of facts.

 

Most of the accounts were managed by an external asset manager who was indicted in Florida in 2009, according to the indictment.

 

HSZH, which traces its roots to 1889, was once owned by UBS and later by St. Galler Kantonalbank AG, a regional lender. It was wound down in 2014 under the name Hyposwiss Zurich, or HSZH, after parts of the business were sold to various buyers.

 

—With assistance from Erik Larson.

 

 

 

Swiss Bankers Said to be Ready to Plead Guilty in U.S. Tax Case

BY DAVID VOREACOS, PATRICIA HURTADO AND GILES BROOM

 

Two client advisers from Julius Baer Group Ltd. accused of helping Americans evade taxes are expected to plead guilty in New York on Thursday, when the Swiss bank will resolve its own criminal case by agreeing to pay $547 million, according to two people familiar with the matter.

The bank’s deferred-prosecution agreement with the U.S. Department of Justice is part of a broad probe of tax evasion and undeclared offshore accounts by U.S. citizens helped by Swiss banks. Julius Baer follows larger rivals UBS Group AG and Credit Suisse Group AG in resolving U.S. tax probes.

 

Julius Baer advisers Daniela Casadei and Fabio Frazzetto were indicted in 2011 on a conspiracy charge. They are expected to enter their pleas on the same day the U.S. presents the deferred-prosecution pact for the bank to a judge in New York, said the people, who aren’t authorized to discuss the matter because it isn’t public.

 

The U.S. couldn’t extradite the Swiss bankers because tax evasion isn’t considered a crime in Switzerland.

 

U.S. Clients

Casadei and Frazzetto, accused of helping more than 180 U.S. clients hide at least $600 million in assets from the Internal Revenue Service, face as long as five years in prison. They made their first appearance Tuesday in a Manhattan federal court, where they pleaded not guilty to a conspiracy charge, and were released on a $1 million bond secured by $250,000 in cash. Prosecutors said they are scheduled to appear Thursday before U.S. District Judge Laura Taylor Swain in Manhattan.

 

Lloyd Liu, an attorney for Casadei, and David B. Weinstein, a lawyer for Frazzetto, declined to comment on whether their clients will plead guilty. Christian Saint-Vil, a spokesman for U.S. Attorney Preet Bharara, also declined to comment.

 

Julius Baer, Switzerland’s third-largest wealth manager, has agreed to the deferred-prosecution agreement to resolve the investigation, according to the people familiar with the matter. Under such an agreement, a company is charged with a crime that is later dismissed if the firm makes a payment, complies with specified conditions and makes a detailed statement of facts about its wrongdoing.

 

The bank, founded in 1890, will not plead guilty or have a monitor installed, and none of its senior executives will be prosecuted, according to one of the people. The bank will admit that it helped Americans hide money from the Internal Revenue Service through sham offshore entities and other means, the person said.

 

Offshore Bankers

More than three dozen offshore bankers, lawyers and advisers have been charged since 2008 as part of a broad probe of tax evasion and undeclared offshore accounts. Several bankers have come to the U.S. to plead guilty, including those who worked at UBS and Credit Suisse.

 

UBS resolved its tax probes by agreeing in 2009 to pay $780 million; Credit Suisse, by agreeing to pay $2.6 billion in 2014. A dozen or so Swiss banks, such as Pictet & Cie. Group SCA and the Swiss unit of HSBC Holdings Plc, are still waiting to end criminal tax investigations by the U.S.

 

Another 80 Swiss banks avoided prosecution by voluntarily disclosing their wrongdoing in the past year as part of a Justice Department disclosure program. BSI SA and Union Bancaire, which weren’t placed under criminal investigation, paid $211 million and $188 million respectively.

 

Julius Baer disclosed in December it had increased its provision for the Justice Department penalty and had reached an agreement in principle. Uncertainty around the Justice Department investigation has hampered the company in making deals, investing in renewing outdated information-technology platforms and returning capital to shareholders. The bank has grown through acquisitions in the past six years under Chief Executive Officer Boris Collardi, including the 2012 purchase of Bank of America Corp.’s non-U.S. wealth units.

 

Julius Baer said it had set aside $547 million to cover the U.S. penalty and expected an agreement in the first quarter. The bank said Monday that its gross margin fell in the second half of 2015 to the worst since Collardi took the helm in 2009.

 

Net income slumped 67 percent to 121 million francs in 2015, mainly due to the expected cost of the U.S. case, the company said in a statement. Operating income rose to 2.69 billion francs from 2.55 billion francs a year earlier, missing an average estimate of 2.73 billion francs by 20 analysts surveyed by Bloomberg.

 

The company was managing 297 billion francs ($292 billion) for wealthy individuals and families at the end of October and reported a 78 percent decline in first-half profit in July, mainly due to the initial provision for the U.S. tax settlement.

 

 

 

Can Website Cookies Establish State Sales Tax Nexus?

BY ROGER RUSSELL

 

The concept of nexus, the minimum amount of contact between a taxpayer and a state which allows the state to tax a business, is not new.

 

It arises from two clauses in the Constitution. The Commerce Clause prohibits a state from unduly burdening interstate commerce, and the Due Process Clause requires a minimum connection between a state and the entity it wishes to tax. What is new is the increasingly aggressive stance taken by the states in asserting nexus.

 

Now, at least one state looks to fatten up on cookies, the bits of computer code that websites leave on computers and smartphones to track user data and to improve website experience.

 

“In Crutchfield, Inc. v. Testa, Ohio’s tax commissioner has asserted a theory of Internet nexus that would create taxable presence every time a retailer’s website is accessed by a customer in the state,” said Matt Hedstrom, a partner with Alston & Bird’s State and Local Tax (SALT) Group. “This theory that a company owns tangible personal property in the form of browser cookies place on consumers’ computers and mobile apps placed on customers’ cell phones would dramatically change the nexus landscape. Because those cookie-containing computers and cell phones are located in Ohio, the commissioner argues, the out-of-state businesses have themselves established physical presence nexus within the state’s borders.”

 

“The issue was whether an economic presence test is Constitutional, and then randomly within the state’s brief came the argument that remote sellers own the cookies placed on the computers of consumers that visit their website,” he added. “They’re saying that it constitutes physical presence and is sufficient for nexus.”

 

“Since the case is still pending, it remains to be seen if the court takes this on or says nothing about it,” Hedstrom noted.

 

Under this theory, “any company that transacts business with customers over the Internet would have nexus anywhere its customers are located,” he said. “That’s assuming that most companies are using cookies to market, and in fact they are. It would dramatically change the nexus profile for Internet companies.”

 

Hedstrom believes that the state’s theory of cookie nexus is misguided. “When the U.S. Supreme Court decidedQuill [a 1992 decision that established a physical presence test in the sales and use tax arena], it established a bright-line physical presence standard,” he said. “My view is that simply defining software as tangible personal property is not sufficient to create physical presence. The presence of cookies on a customer’s computer just doesn’t rise to the level of physical presence under the Constitution.”

 

Moreover, several other states are also considering the Internet nexus theory, according to Hedstrom. He believes that it is unclear whether the commissioner’s brief in Crutchfield is merely arguing in the alternative or actually will adopt it as a new theory. “However, the fact that it would even be considered is cause for concern,” he said.

 

 

 

Fraudsters Undeterred by IRS's New Security Measures

BY MICHAEL COHN

 

The Internal Revenue Service’s new security measures this tax season to counter identity theft and tax fraud appear to be having little impact so far on criminals, according to a security expert who monitors the online chat rooms where fraudsters swap taxpayers’ sensitive personal and financial information.

 

SecurityScorecard, a computer security service based in New York City, has detected a significant spike in chatter relating to IRS tax fraud this tax season, as in past years.

 

“Since it’s tax season again, we’re noticing again that they are focusing on defrauding the IRS and more specifically defrauding U.S. taxpayers and the services that they use to process their tax returns in order to basically fill prepaid cards and cash them out with the returns before the actual person is able to,” said SecurityScorecard chief research officer Alex Heid. “They do that using a series of prepaid cards that are set up with fake identities. They use the same information from the fake identities to file a tax return before the actual person does, and it usually requires the coordination of several individuals.”

 

Last year, the IRS teamed up with state tax authorities, tax software developers, and major tax preparation chains on a security initiative in which they share information to deter identity thieves (see IRS, States and Tax Industry Adding New Safeguards to Curb Identity Theft). As part of the initiative, the IRS, states and tax industry are sharing more than 20 new data elements on tax return submissions this tax season to help detect identity-theft related filings. In addition, the software industry is putting in place enhanced identity requirements and validation procedures for their customers to protect accounts from identity thieves.

 

Despite these steps, some major tax software vendors such as TaxAct and TaxSlayer have needed to send out warnings to thousands of customers this tax season letting them know their information may have been compromise. Nearly two dozen Liberty Tax Service franchises have also been caught sending high volumes of suspicious tax returns in the state of Maryland.

 

SecurityScorecard found that criminals, mostly from overseas, are still finding ways around whatever new security measures are put in place and openly talking about their successes. Heid is seeing such discussions on underground forums on both the so-called “Darknet,” such as private invitation-only peer-to-peer networks, and the “Clearnet,” where information is unencrypted and more accessible.

 

“A lot of the forums are invite only and closed to the public, so they’re not being indexed on Google,” said Heid. “They like to keep a lot of their stuff closed and invite only where they’ll have multiple people vouch to even allow you access to the forum. We were able to gain visibility into these underground regions where we normally wouldn’t have access because, just as hackers are constantly attacking corporate targets, they’re also attacking each other. They brag about it. There are inter-crew rivalries constantly, and we just keep our ear to the ground for when they release the databases of certain forums. Once that happens, you’ve essentially got visibility into everything up to the administrator level for that forum. When people are members of one, they are usually members of multiple. We’re monitoring how they’re warring with each other and leveraging that to gain access.”

 

The extra security measures instituted by the IRS and the tax industry are ones that many identity thieves are already accustomed to skirting.

 

“A lot of banks and credit card companies and merchant processors use similar techniques, and fraudsters— essentially with just a little bit of persistence—are able to bypass them, usually by pulling combinations of credit reports, background reports and social media profiles on their targets,” said Heid. “By compiling all that information, they usually have enough info that they need to be able to answer the majority of the questions to gain access. So if that’s been implemented by tax return season, it doesn’t seem to be stopping them. It’s probably just another hurdle that they’re used to from the fraud that they’ve been doing.”

 

Scammers arm themselves with what they call “fullz,” anonymized debit cards, and a list of tax-filing websites. They then quickly file as many tax returns as possible before the legitimate tax returns are filed by the actual taxpayers so they can receive the cash refund on their debit cards, which can be cashed out anonymously. There is a time delay between the time the IRS processes a tax return and the time when the information is validated. Scammers take advantage of this time delay in order to steal millions of taxpayer dollars.

 

The IRS’s new security measures aren’t so new to the scammers, according to Heid. “It seems like they’re just late to the game in adopting these standard practices, but the underground has already had evasion methodologies and practice for years where it’s just considered part of the hack to pull a background report and profile, what they call ‘doxxing,’” he said. “In the underground the slang term for a record of information—name, date of birth, Social Security Number, mother’s maiden name, address—that’s called ‘fullz.’ In order to fully utilize the fullz, they need to doxx their fullz, and once they doxx the fullz, then they have a profile that they can use to be able to answer any verification questions.”

 

The IRS did not immediately respond to a request for comment.

 

The fraudsters don’t need to be sophisticated hackers to access the tax information. “They’re not even so much penetrating them, as they’re just using the service as intended and they’re masquerading as a legitimate user,” Heid explained. “So they’re filing the tax return as a normal person would file a tax return. It’s just not their information that they’re using, and it’s not the person’s bank account that it’s being paid out to. The fraud measures of certain tax places are easier to bypass than others. We’ll see some discussions on ‘cash out methodologies’ using certain vendors. That’s what they’ll call it. They’ll call it a cash out method. ‘I need a cash out method for H&R Block. I need a cash out method for TurboTax,’ etc.”

 

Heid doesn’t believe the hackers he is monitoring on the underground forums are the same scammers who are calling taxpayers pretending to be from the IRS and harassing them into making payments.

 

“It’s a little out of their modus operandi, and sometimes you can even find discussions where they’re talking about receiving those calls and how they messed with the scammer,” he said. “The guys on the hacking forums, their modus operandi is more along the lines of phishing, exploit kits, botnets and credit card fraud. The call center stuff is usually a different type of criminal mind.”

 

The New York State Department of Taxation and Finance warned Wednesday that the phone scammers are also targeting tax preparers this season, saying, “Recent scams are targeting the preparers via phone calls demanding client information. In these cases, scammers pretend to be from the IRS in hopes of gaining usernames and passwords to taxpayer accounts.”

 

The new security measures put in place by the IRS, the states and tax industry are still lagging behind the methods used by the criminals. “Think about it along the lines of credit card fraud,” said Heid. “For almost 25 or 30 years, credit cards didn’t have the little three-digit code on the back, but in the mid-2000s they put the three-digit codes on the back and thought that would eliminate credit card fraud. Now they’re putting chips in the credit cards. Well, it’s still going on. It’s all reactionary instead of analyzing the root cause.”

 

 

 

 

10 Ways to Destroy the Value of a Company

Klatzkin & Co.’s Stephen Klein shares the biggest mistakes business owners make

 

For many business owners, that business is their biggest asset, and while they are almost certainly focused on running it as well as they can, they may not realize that there’s an extra set of steps they need to take to maximize its value in the case of a sale or transition – and in some cases, they may actually be driving down its eventual value.

 

To help business clients steer clear of some of the worst missteps, Stephen Klein, a CPA and partner with New Jersey-based Klatzkin & Co. LLP, put together a list of the 10 biggest value-destroying mistakes he has identified in his 40 years of working with closely held and family-owned businesses.

 

“Being proactive and taking the necessary steps now to avoid these mistakes will help owners to increase the value of their business while protecting their interests and securing their future,” Klein said.

 

Mistake No. 1: Not thinking about a sale -- today. Not running the business like they are going to sell it tomorrow is a big mistake, Klein says. The earlier owners start taking steps to prepare their business for sale, the more they’ll be able to maximize the value they eventually get.

 

Mistake No. 2: Not planning for trouble.Having a written contingency plan is critical -- if the owner passes away or becomes disabled, their family won’t get as much money for the business or they may have to liquidate it.

 

Klein suggests preparing a short memo and giving it to a spouse or family members that includes at a minimum whether the business should be sold to family members, key employee(s), an outsider, liquidated or continue to be operated. Owners should also indicate which of the employees are capable of running the business.

 

Mistake No. 3: Having the wrong entity status. If the business is a C corp, and stays a C corp for tax purposes or doesn’t elect S corp status earlier enough, Klein says the owner will pay more taxes and be left with less cash from the sale of the business. He suggests making an S corporation election for federal and state purposes.

 

Mistake No. 4: Bad accounting. Not keeping accurate books and records, and not having CPA-prepared financial statements and good internal controls, can kill a sale, especially if the buyer finds material errors when conducting due diligence, Klein notes.

 

Mistake No. 5: Mis-reporting income and expenses. Not reporting all income, and paying personal expenses through the business, could substantially lower the price that a buyer will be willing to pay, Klein says. Buyers of most businesses pay a multiple of earnings before interest, taxes, depreciation and amortization – not including all income, or including non-business expenses, will lower EBITDA.

 

Mistake No. 6: Having too many eggs in one basket. Not saving enough in other investments so that the business is not such a large part of the owner’s net worth may leave them without enough assets to retire as comfortably as they would like, Klein warns. Business owners should put as much into their retirement plans as they can, instead of leaving all the earnings in the business. They should also take a salary and distributions if the business is profitable and invest the money outside the business.

 

Mistake No. 7: Being indispensable. If the business can’t operate without the owner, buyers will be less interested, or want to pay less. As the business grows, Klein suggests cross-training key employees and developing a management team that can operate the business on their own.

 

Mistake No. 8: Not having an ownership agreement. If a company has partners or co-owners, not having a comprehensive ownership agreement with provisions for the sale of the owners’ interests could leave individual owners (or their heirs) with a lot less value.

Just as important, Klein says, is that co-owners should review the agreement annually and agree on the current value of the company each year, as well as reviewing the buy-sell insurance policies to see that they are sufficient to cover all or a substantial portion of each owner’s interest in the business if their interest had to be purchased.

 

Mistake No. 9: Not having written policies and procedures. Buyers like and want companies that have written operating policies and procedures that cover the major aspects of the business operations, Klein notes. Not having them may reduce the purchase price.

 

Mistake No. 10: Not having an exit plan early on. Without creating a written succession/transition and exit plan years in advance, the business owner won’t be able to maximize the after-tax proceeds from the sale of the business, won’t be able minimize the taxes (income and estate), and may not be able to accomplish their non-financial goals or leave on their timetable.

 

Business owners should engage a professional advisor who specializes in succession and exit planning to work with them and their advisory team (e.g., lawyer, CPA, investment advisor, etc.) to come up with a tailor-made exit strategy.

 

 

 

 

 

Former IRS Agent to Be Tried for Soliciting Bribe from Marijuana Business Owner

BY MICHAEL COHN

 

A former Internal Revenue Service revenue agent is facing trial this week for soliciting and receiving a bribe from the owner of a Seattle marijuana dispensary.

 

Paul G. Hurley was charged last September with soliciting and agreeing to receive a bribe by a public official and two counts of receiving a bribe by a public official.

 

According to prosecutors, Hurley was involved in the audit of the 2013 and 2014 tax returns of a Seattle marijuana dispensary known as Have A Heart Compassion Care. As marijuana remains illegal under federal law, no business deductions are allowed on federal tax returns and the gross revenue is taxable. Hurley presented the owner of the marijuana business, Ryan Kunkel, with a tax bill for both years, totaling more than $290,000. However, Hurley allegedly told Kunkel he had saved the business owner more than a million dollars and asked him for $20,000 in cash.

 

According to the Associated Press, during the audit Hurley rubbed his fingers together and suggested Kunkel should gradually pay off Hurley’s student loan debt. Kunkel initially told him that sounded like a bad idea, but eventually agreed to pay Hurley the cash.

 

The business owner alerted his lawyer, who contacted law enforcement. FBI agents watched and recorded two meetings at a Starbucks in which Hurley accepted money delivered by Kunkel. Hurley was arrested after the second meeting and resigned from the IRS three days later. He faces up to 15 years in prison and a $250,000 fine for the bribery charges.

 

“My recent actions have no place in the Federal Service and there is no way I could possibly write an apology to express the dissatisfaction and disgust I have within myself,” he wrote to his supervisor at the IRS, according to the AP. “I have let everyone down in the Seattle office and all across the United States and have brought a cloud of shame to the Internal Revenue Service.”

 

However, Hurley later denied soliciting a bribe. Instead, according to his attorneys, Kunkel had offered Hurley a job doing accounting services for his marijuana business, and the $20,000 payment had nothing to do with Hurley’s official duties at the IRS. They argued the government had induced him to take the $20,000.

 

“In the present case, the alleged bribe was not solicited or accepted until after Mr. Hurley had completed his final audit,” they wrote in a trial brief, according to the AP. “Thus, the Government cannot meet its burden of proof that Mr. Hurley received the alleged bribe in ‘return for being influenced in the performance of an official act.’”

 

Prosecutors disagreed, noting that Hurley requested the $20,000 and Kunkel agreed to pay him on September 11. Hurley did not submit the final audit paperwork until September 15 and got the money on September 16 and 21.

 

“There is nothing in the bribery statute that requires a bribery payment be made before the official act is taken,” they wrote, according to the AP. “To the contrary, courts have routinely found that statute permits a conviction for bribery where the payment of the bribe is made after the official act is undertaken.”

 

 

Maryland Suspends Liberty Tax Service Franchises

BY MICHAEL COHN

 

Maryland Comptroller Peter Franchot said Tuesday he has suspended processing of electronic and paper tax returns from 16 Liberty Tax Service franchise locations due to a high volume of questionable returns received, on top of seven Baltimore-area Liberty locations that he suspended processing last week.

 

Some of the suspicious characteristics detected on the tax returns included business income reported when taxpayers did not own a business, refund amounts requested much higher than previous year tax returns, inflated and/or undocumented business expenses, dependents claimed when taxpayer did not provide required 50 percent support or care, and inflated wages and withholding information.

 

The U.S. Attorney for the Eastern District of Michigan also issued a complaint last week seeking an injunction against another Liberty Tax Service franchisee in Detroit, Craig M. Comer, who manages five Liberty stores, claiming he filed hundreds, if not thousands, of fraudulent income tax returns.

 

Liberty told Accounting Today it is cooperating with the Maryland investigation, and that the franchisee in Detroit is no longer part associated with the company.

 

"Liberty Tax has a robust compliance program, and we expect our franchisees to make sure that their offices comply with all federal and state tax requirements," said Jim Wheaton, general counsel, chief compliance officer and vice president of legal and governmental affairs at Liberty Tax. "Since we learned of Maryland's concerns late last week, we have provided all requested information to the state, and have devoted significant efforts to looking at the offices identified last Thursday. We offered additional training to our franchisees' employees in Maryland earlier this week, and will do so again in the coming days. We will also address any concerns with the offices Maryland identified to us this afternoon. We have had a cooperative and productive relationship with the State of Maryland in the past, and expect to work with them to address their current concerns. In fact, we have offered to meet with them at their convenience, and look forward to the opportunity to work with the state to protect the public and meet the needs of each of our customers and the state."

 

Of the Detroit case, Wheaton said, "We’re looking at that concern, which relates to prior tax seasons, but the person who was the subject of that injunction lawsuit last week is actually no longer a franchisee. They disposed of their stores last year and they’re no longer on our system. So while we’re certainly looking at it and taking it seriously, that franchisee is not a franchisee in the Liberty system any longer."

 

 

 

Taxpayers Worried about Identity Theft and Tax Fraud

BY MICHAEL COHN

 

Taxpayers are increasingly aware of identity theft-related tax fraud this year and are concerned about becoming victims, according to a new survey.

 

The credit-reporting company Experian recently polled consumers across the country about their tax-filing habits, identity theft and what they are doing to protect themselves this tax season as part of an annual survey.

 

The number of survey respondents familiar with identity theft and tax fraud has risen nearly 20 percent in the past two years, to 76 percent, compared with only 57 percent in 2014 and 63 percent in 2015. In addition, 42 percent of respondents said they are now concerned that someone could access their personal data through their tax return, compared to only 35 percent in 2014 and 38 percent in 2015.

 

While 28 percent of respondents have been a victim or know someone who has been a victim of tax fraud, only 6 percent said they file their taxes on a computer with up-to-date antivirus software.
 

Those who have been affected by tax fraud most commonly file a police report (59 percent) and place a fraud alert on their credit reports (58 percent).

 

Despite the number of people affected by tax fraud, almost half of respondents (45 percent) aren’t aware of the IRS-issued Identify Protection PIN, or IP PIN, a unique number assigned to eligible taxpayers that helps prevent the misuse of their Social Security number and protects against thieves attempting to file fraudulent federal income tax returns. Furthermore, only 30 percent of actual victims surveyed requested the IRS-issued IP PIN last year.

 

Even though the concern over tax fraud has grown significantly, a majority of survey respondents aren’t planning to take the IRS recommended steps to protect themselves. Only 12 percent are planning to check their credit report, an important first step in monitoring for fraudulent activity that could indicate identity theft. 

 

“Tax season is a busy time of year for identity thieves,” said Experian vice president of consumer protection Michael Bruemmer in a statement. “Those filing taxes, especially electronically, should educate themselves on what precautions need to be taken, and what assistance is available to them if they become a victim of identity theft.”

 

Half of the respondents file their taxes themselves, electronically. Eighteen percent scan and save their tax documents electronically, up from 14 percent in 2015. More than three-quarters have used electronic fund transfers for tax refunds.

 

Of the 56 percent of respondents who prepare their own taxes, most prepare their taxes on their home network. Seventy-six percent of them said they file their taxes inside their own home, on a secure network, while 14 percent file their taxes while at work via a secure network, and 7 percent file their taxes outside their home over a free Wi-Fi network (not recommended as free Wi-Fi networks often have security vulnerabilities).

 

Most of the survey respondents (80 percent) expect to receive a tax refund and plan to use it to increase their personal savings or pay down credit card debt. Forty-one percent said the tax refund would go into a savings fund or investment, 35 percent said they would use the money to pay off or pay down their credit card debt, and 19 percent said they would use it to pay off or pay down personal loans.

 

 

 

Reacquainting Yourself With The Roth IRA

If you’ve looked into retirement planning, you’ve probably heard about the Roth IRA. Maybe in the past you decided against one of these arrangements, or perhaps you just decided to sleep on it. Whatever the case may be, now’s a good time to reacquaint yourself with the Roth IRA and its potential benefits, because you have until April 18, 2016, to make a 2015 Roth IRA contribution.

Free withdrawals

With a Roth IRA, you give up the deductibility of contributions for the freedom to make tax-free qualified withdrawals. This differs from a traditional IRA, where contributions may be deductible and earnings grow on a tax-deferred basis, but withdrawals (less any prorated nondeductible contributions) are subject to ordinary income taxes — plus a 10% penalty if you’re under age 59½ at the time of the distribution.

 

With a Roth IRA, you can withdraw your contributions tax-free and penalty-free anytime. Withdrawals of account earnings (considered made only after all your contributions are withdrawn) are tax-free if you make them after you’ve had the Roth IRA for five years and you’re age 59½ or older. Earnings withdrawn before this time are subject to ordinary income taxes, as well as a 10% penalty (with certain exceptions) if withdrawn before you are age 59½.

 

On the plus side, you can leave funds in your Roth IRA as long as you want. This differs from the required minimum distributions starting after age 70½ for traditional IRAs.

Limited contributions

For 2016, the annual Roth IRA contribution limit is $5,500 ($6,500 for taxpayers age 50 or older), reduced by any contributions made to traditional IRAs. Your modified adjusted gross income (MAGI) may also affect your ability to contribute, however.

 

In 2016, the contribution limit phases out for married couples filing jointly with MAGIs between $184,000 and $194,000. The 2016 phaseout range for single and head-of-household filers is $117,000 to $132,000.

Conversion question

Regardless of MAGI, anyone may convert a traditional IRA into a Roth to turn future tax-deferred potential growth into tax-free potential growth. From an income tax perspective, whether a conversion makes sense depends on whether you’re better off paying tax now or later.

When you do a Roth conversion, you have to pay taxes on the amount you convert. So if you expect your tax rate to be higher in retirement than it is now, converting to a Roth may be advantageous — provided you can afford to pay the tax using funds from outside an IRA. If you expect your tax rate to be lower in retirement, however, it may make more sense to leave your savings in a traditional IRA or employer-sponsored plan.

Retirement radar

Roth IRAs have become a fundamental part of retirement planning. Even if you’re not ready for one just yet, be sure to keep the idea of opening one on your radar.

 

 

Married Filers, The Choice Is Yours

Some married couples assume they have to file their tax returns jointly. Others may know they have a choice but not want to rock the boat by filing separately. The truth is that there’s no harm in at least considering your options every year.

 

Granted, married taxpayers who file jointly can take advantage of certain credits not available to separate filers. They’re also more likely to be able to make deductible IRA contributions and less likely to be subject to the alternative minimum tax.

 

But there are circumstances under which filing separately may be a good idea. For example, filing separately can save tax when one spouse’s income is much higher than the others, and the spouse with lower income has miscellaneous itemized deductions exceeding 2% of his or her adjusted gross income (AGI) or medical expenses exceeding 10% of his or her AGI — but jointly the couple’s expenses wouldn’t exceed the applicable floor for their joint AGI. However, in community property states, income and expenses generally must be split equally unless they’re attributable to separate funds.

 

Many factors play into the joint vs. separate filing decision. If you’re interested in learning more, please give us a call.

 

 

 

 

 

 

Fake Charities Are a Problem and on the IRS Dirty Dozen List of Tax Scams for 2016

 

The Internal Revenue Service today warned taxpayers about groups masquerading as charitable organizations to attract donations from unsuspecting contributors, one of the “Dirty Dozen” for the 2016 filing season.

 

"Fake charities set up by scam artists to steal your money or personal information are a recurring problem," said IRS Commissioner John Koskinen. "Taxpayers should take the time to research organizations before giving their hard-earned money.”


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.


Perpetrators of illegal scams can face 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. Legitimate charities will provide their Employer Identification Numbers (EIN), if requested, which can be used to verify their legitimacy through EO Select Check. It is advisable to double check using a charity's EIN.
  • 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 has called you and you have not yet confirmed they are calling from a legitimate charity.
  • 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.

 

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

 

 

 

 

Falsely Padding Deductions on Returns is on the IRS Annual “Dirty Dozen” List of Tax Scams to Avoid

 

The Internal Revenue Service today warned taxpayers to avoid the temptation of falsely inflating deductions or expenses on their returns to under pay what they owe and possibly receive larger refunds.

The vast majority of taxpayers file honest and accurate tax returns on time every year. However, each year some taxpayers fail to resist the temptation of fudging their information. That’s why falsely claiming deductions, expenses or credits on tax returns is on the “Dirty Dozen” tax scams list for the 2016 filing season.


"Taxpayers should file accurate returns to receive the refunds they are entitled to receive and shouldn't gamble with their taxes by padding their deductions," said IRS Commissioner John Koskinen.

Taxpayers should think twice before overstating deductions such as charitable contributions, padding their claimed business expenses or including credits that they are not entitled to receive – like the Earned Income Tax Credit or Child Tax Credit.

 

Increasingly efficient automated systems generate most IRS audits. The IRS can normally audit returns filed within the last three years. Additional years can be added if substantial errors are identified or fraud is suspected.


Significant civil penalties may apply for taxpayers who file incorrect tax returns including:

  • 20 percent of the disallowed amount for filing an erroneous claim for a refund or credit.
  • $5,000 if the IRS determines a taxpayer has filed a “frivolous tax return.” A frivolous tax return is one that does not include enough information to figure the correct tax or that contains information clearly showing that the tax reported is substantially incorrect.
  • In addition to the full amount of tax owed, a taxpayer could be assessed a penalty of 75 percent of the amount owed if the underpayment on the return resulted from tax fraud.

 

Taxpayers even may be subject to criminal prosecution (brought to trial) for actions such as:

  • Tax evasion
  • Willful failure to file a return, supply information, or pay any tax due
  • Fraud and false statements
  • Preparing and filing a fraudulent return, or
  • Identity theft.

 

Criminal prosecution could lead to additional penalties and even prison time.

 

Using tax software is one of the best ways for taxpayers to ensure they file an accurate return and claim only the tax benefits they’re eligible to receive. IRS Free File is an option for taxpayers to use online software programs to prepare and e-file their tax returns for free.

 

Community-based volunteers at locations around the country also provide free face-to-face tax assistance to qualifying taxpayers helping make sure they file their taxes correctly, claiming only the credits and deductions for which they’re entitled by law.

 

Taxpayers should remember that they are legally responsible for what is on their tax return even if it is prepared by someone else, so they should be wise when selecting a tax professional. The IRS offers important tips for choosing a tax preparer at IRS.gov.

 

More information about IRS audits, the balance due collection process and possible civil and criminal penalties for noncompliance is available at the IRS.gov website.

 

Taxpayers can also learn more about the Taxpayer Bill of Rights at IRS.gov. This is a set of fundamental rights each and every taxpayer should be aware of when dealing with the IRS, including when the IRS audits a tax return.

 

 

 

 

Do Tax Preparers Know What They're Doing?

BY BEN STEVERMAN

 

For several years, researchers have been sending people into tax preparation offices to test the quality of the work. The results have been scary:

 

• A tax preparer in North Carolina wasn’t sure what to do with one client's dividend income form. She decided to just ignore it.

 

• At a major tax prep chain in Florida, “the preparer seemed to want to help me with owing less, but was unsure how to go about it,” a client told researchers. The preparer tried clicking and unclicking various fields on her computer, explaining that “sometimes it made customers owe less.”

 

• An independent preparer deducted car expenses from a return. The client didn’t own a car.

 

• A New Mexico tax preparer asked plenty of questions, but then forgot to list her client’s daughter as a dependent—even though the daughter attended the tax session.

 

• A second New Mexico preparer needed to ask a supervisor how to round a number to the nearest whole dollar.

 

Such incompetence isn’t hard to find. Last year, the National Consumer Law Center tested 29 tax prep offices and found only two forms completed correctly. Just two of 19 preparers randomly selected by the U.S. Government Accountability Office calculated the correct refund amount in 2014. One GAO tester was told that income didn’t need to be reported to the Internal Revenue Service if it was reinvested in a mutual fund.

 

The studies aren’t big enough to generalize about tax preparers. No doubt, there are many well-educated practitioners—professionals who really know tax law, or at least basic math.

 

The problem is that it’s hard to be sure your preparer knows what he or she is doing. Almost anyone can claim to be a tax preparer; no CPA, law degree, or formal education is required. Pretty much the only thing you need to open up shop is a tax identification number, which the IRS gives out for a $50 fee.

 

Consumer groups are pushing federal and state lawmakers to impose tighter rules on preparers, requiring certification and education. A Consumer Federation of America survey released on Jan. 19 found that 80 percent of 1,011 respondents supported the idea of requiring tax preparers to pass a test.

 

While large tax prep companies, including H&R Block Inc., support tighter regulations, new rules are opposed by many independent tax preparers. Representing them is Dan Alban, an attorney at the Institute for Justice who in 2014 successfully used federal courts to block new IRS regulation of tax preparers.

 

“Licensing doesn’t ensure that people are honest,” Alban said, arguing that education requirements would do little to fight fraud by tax preparers who try to inflate customer refunds (and thus, their fees). Burdensome rules would only push part- time and mom-and-pop preparers out of the business, driving up prices and benefiting larger firms, he said. And it’s not clear if uncertified preparers are any worse than CPAs or attorneys who do taxes.

 

“Just about every tax return has an error on it,” Alban said. “That’s because the tax code is so complex.”

 

Consumer groups counter that the lack of standards has turned tax preparation into a quick way to make a buck, rather than a true profession. “Preparer regulations won’t eliminate all mistakes,” said Chi Chi Wu of the National Consumer Law Center. “By having a profession that is tested and trained, you raise the level of professionalism. You give businesses and people who are licensed an incentive not to commit fraud or be sloppy.”

 

Paul Harrison, director of the tax clinic at the Chicago-based Center for Economic Progress, must regularly clean up messes made by tax preparers. He has often found dumb mistakes that, while boosting a client’s refund, are easy for IRS computers to spot. Examples include ignoring income from a 1099 form or twice deducting car expenses by utilizing both mileage and the standard deduction. "If you were trying to scam the IRS and the taxpayer, you wouldn’t put such a glaring mistake in a return," Harrison said.

 

It’s the taxpayers who end up suffering from these blunders. Even if they get a larger refund in the short term, they must eventually pay when the IRS spots the mistake. By then, refund checks have commonly been spent.

 

How can taxpayers find competent tax preparers? A year ago the IRS launched a database of tax professionals who voluntarily provided proof of their education and credentials. In addition to CPAs and attorneys, the list includes “enrolled agents,” who go through at least 72 hours of tax courses every three years.

 

Taxpayers can also download some software and do their taxes themselves. They'd be taking chances, but the odds are in their favor: The GAO estimates that half of all self-prepared individual tax returns contain at least one error, compared to 60 percent of returns completed by a paid preparer.

 

 

 

Obama Budget Includes Tax Increases and Tax Preparer Regulation

BY MICHAEL COHN

 

The Obama administration released its fiscal year 2017 budget containing a number of tax increases on high-income taxpayers, oil and foreign income, along with tax breaks for the middle class and small businesses, plus a provision giving the Treasury Department the explicit authority to regulate all paid tax preparers.

 

Among the changes proposed for reforming the international tax system, the budget plan would impose a 19-percent minimum tax on foreign income, impose a 14 percent one-time tax on previously untaxed foreign income, and limit the ability of domestic entities to expatriate.

 

The budget plan would also restrict deductions for excessive interest of members of financial reporting groups, provide tax incentives for locating jobs and business activity in the U.S. and remove tax deductions for shipping jobs overseas, limit shifting of income through intangible property transfers, and restrict the use of hybrid arrangements that create stateless income.

 

“We have seen a sustained economic recovery since President Obama took office seven years ago in the midst of the worst financial crisis since the Great Depression,” said Treasury Secretary Jacob J. Lew in a statement. “Nonetheless, we have much more work to do to ensure that the benefits of our growth are shared by all Americans. Today’s budget and Treasury’s Greenbook strive to address these and other pressing challenges our country faces through a series of tax proposals aimed at reforming the tax code, investing in infrastructure and protecting working families. These proposals would create the conditions for sustained economic growth while upholding the basic American belief that everyone who works hard should get a fair shot at success.”

 

The budget blueprint is not likely to go far in the Republican-dominated Congress, however. “President Obama will leave office having never proposed a budget that balances—ever,” said Speaker of the House Paul Ryan, R-Wis. “This isn’t even a budget so much as it is a progressive manual for growing the federal government at the expense of hardworking Americans. The president’s oil tax alone would raise the average cost of gasoline by 24 cents per gallon, while hurting jobs and a major sector of our economy. Americans deserve better. We need to tackle our fiscal problems before they tackle us. House Republicans are working on a balanced budget that grows our economy in order to secure a Confident America.”

 

Information Return Due Dates

One proposal would accelerate information return filing due dates. This proposal would accelerate the due date for filing for many information returns with the Internal Revenue Service, including Forms 1098 and 1099, from late February to January 31, the same day that the payee statements are due.

 

Tax Preparer Oversight and IRS Enforcement

Another proposal would increase oversight of paid tax return preparers. This proposal would explicitly provide that the Secretary of the Treasury has the authority to regulate all paid tax return preparers. This proposal would be effective as of the date of enactment.

Another budget proposal would increase funding for IRS enforcement through a program integrity cap adjustment. This proposal would adjust the discretionary spending limits for IRS tax enforcement, compliance, and related activities, including tax administration activities at the Alcohol and Tobacco Tax and Trade Bureau.


The proposed cap adjustment for fiscal year 2017 would fund $515 million in enforcement and compliance initiatives and investments above current levels of activity, allowing the IRS to continue to target international tax compliance and restore previously reduced enforcement levels. Beyond 2017, the Administration proposes further increases in new enforcement and compliance initiatives each fiscal year from 2018 through 2021 and to sustain all of the new initiatives and inflationary costs via cap adjustments through FY 2026.

 

IRS Whistleblower Program

To improve the IRS Whistleblower Program, this proposal would explicitly protect whistleblowers from retaliatory actions, consistent with the protections currently available to whistleblowers under the False Claims Act. In addition, the proposal would also provide that certain safeguarding requirements apply to whistleblowers and their legal representatives who receive tax return information in whistleblower administrative proceedings and extend the penalties for unauthorized inspections and disclosures of tax return information to whistleblowers and their legal representatives.

 

Identity Theft

In the area of combatting tax-related identity theft, this proposal would provide that criminals who are convicted for tax-related identity theft may be subject to longer sentences than the sentences that apply to those criminals under current law.

 

In addition, the proposal would add a $5,000 civil penalty to the Tax Code to be imposed in tax identity theft cases on the individual who filed the fraudulent return. Under the proposal, the IRS would be able to immediately assess a separate civil penalty for each incidence of identity theft. There is no maximum penalty amount that may be imposed.

 

Family Tax Credits

One of the budget proposals would provide a new, simple tax credit to two-earner families. This proposal would provide a second earner tax credit of up to $500 per year to help cover the additional costs faced by families in which both spouses work. The proposal would benefit over 23 million low- and middle-income two-earner married couples.

 

To reform child care tax incentives, this proposal would repeal dependent care flexible spending accounts, increase the child and dependent care credit, and create a larger credit for taxpayers with children under age five. The income level at which the current-law credit begins to phase down would be increased from $15,000 to $120,000, so the rate reaches 20 percent at income above $148,000.

 

Taxpayers with young children could claim a child care credit of up to 50 percent of expenses up to $6,000 ($12,000 for two young children). The credit rate for the young child credit would phase down at a rate of one percentage point for every $2,000 (or part thereof) of adjusted gross income over $120,000 until the rate reaches 20 percent for taxpayers with incomes above $178,000. The expense limits and income at which the credit rates begin to phase down would be indexed for inflation for both young children and other dependents after 2017.

 

For workers without qualifying children, another budget proposal would expand the Earned Income Tax Credit for workers without children by doubling the maximum credit and expanding the range of eligible ages to cover workers between 21 and 67.

 

Education Tax Credits

To simplify and better target education tax benefits to improve college affordability, one proposal would consolidate the Lifetime Learning Credit and student loan interest deduction into an expanded AOTC, which would be available for the first five years of postsecondary education and for five tax years. In addition, this proposal would exclude all Pell Grants from gross income and the AOTC calculation, modify reporting of scholarships, repeal the student loan interest deduction, and provide a tax exclusion for certain debt relief and scholarships.

 

Tax Increases for Upper-Income Taxpayers

Other proposals would raise additional tax revenue by asking the wealthiest to pay more taxes. One proposal would limit the tax rate at which upper-income taxpayers could use itemized deductions and other tax preferences to reduce tax liability to a maximum of 28 percent. This limitation would reduce the value to 28 percent of the specified exclusions and deductions that would otherwise reduce taxable income in the top three individual income tax rate brackets of 33, 35, and 39.6 percent.

 

Another proposal would reform the taxation of capital income. This proposal would eliminate the capital gains step-up in basis at death with protections for the middle class, surviving spouses, small businesses and charities. Among other provisions, there would be a $100,000 per-person exclusion of other gains recognized at death. The proposal also raises the top tax rate on capital gains and qualified dividends from 20 percent to 24.2 percent, or 28 percent including the Net Investment Income Tax.

 

Building off of last year’s proposal to conform Self-Employment Contributions Act taxes for professional service businesses, this year’s proposal further closes loopholes in the SECA tax and the Net Investment Income Tax (NIIT). Under this proposal, all active business income would be subject to either the NIIT or Medicare payroll tax, so choice of business entity would not be a strategy for avoiding these taxes. All the revenues from the NIIT would be deposited in the Medicare Trust Fund.

 

This proposal would also rationalize the taxation of professional services businesses by treating individual owners or professional service businesses taxed as S corporations or partnerships as subject to SECA taxes in the same manner and to the same degree. This proposal would go into effect after December 31, 2016.

 

To implement the Buffett Rule, another proposal would impose a new “Fair Share Tax.” This budget proposal would ensure that high-income taxpayers could not use deductions and preferential tax rates on capital gains and dividends to pay a lower effective rate of tax than many middle-class families. The tax is intended to ensure that very high income families pay tax equivalent to no less than 30 percent of their income, adjusted for charitable donations.

 

Another proposal would restore the Estate, Gift, and Generation-Skipping Transfer (GST) tax parameters in effect in 2009. This proposal would make permanent the estate, GST, and gift tax parameters as they applied during 2009. The top tax rate would be 45 percent and the exclusion amount would be $3.5 million per person for estate and GST taxes, and $1 million for gift taxes. The proposal would be effective for the estates of decedents dying, and for transfers made, after Dec. 31, 2016.

 

Another proposal would modify the transfer tax rules for grantor retained annuity trusts and other grantor trusts. The proposal would make overly generous outcomes more difficult to achieve by requiring that donors leave assets in grantor retained annuity trusts (GRATs) for a fairly long period of time, prohibiting the grantor from engaging in a tax-free exchange of any asset held in the trust, and imposing other restrictions.

 

Retirement Plans

Other proposals would dramatically expand access to employer-based retirement savings options, including automatic IRA options for employees.

 

Still another proposal would permit unaffiliated employers to maintain a single Multiple Employer Defined Contribution Plan (MEP). Under current law, unaffiliated employers (firms not in the same line of business or without other common characteristics) cannot form a single defined contribution (401(k)) retirement plan. As a result, some smaller firms are unable to take advantage of the potential savings in administrative costs such a combination would allow. This proposal would permit unaffiliated employers to join a defined contribution MEP that would be treated as a single plan under the Employment Retirement Income Security Act (ERISA). This proposal would go into effect after December 31, 2016.

 

Cadillac Tax

The budget also proposes to ease the excise tax on high cost employer-sponsored health coverage, also known as the Cadillac tax. Under current law for 2020 and later, the cost of employer-sponsored health coverage in excess of a threshold is subject to a 40-percent excise tax. The threshold is $10,200 for self-only coverage and $27,500 for other coverage in 2018 dollars, indexed to the Consumer Price Index for All Urban Consumers (CPI) plus one percentage point for 2019 and to the CPI thereafter.

 

To ensure that the tax is only ever applied to higher-cost plans, this proposal would increase the tax threshold to the greater of the current law threshold or a “gold plan average premium” that would be calculated for each state. This proposal would also simplify the accounting of employer and employee contributions to a flexible spending account.

 

Carried Interest

Another proposal would tax carried interest profits as ordinary income. Current law provides that an item of income or loss of the partnership retains its character and flows through to the partners, regardless of whether the partners received their interests in the partnership in exchange for services.

 

Thus, some service partners in investment partnerships are able to pay a 20-percent long-term capital gains tax rate, rather than ordinary income tax rates on income items from the partnership. The Obama administration would tax as ordinary income a partner’s share of income on an “investment service partnership interest” (ISPI) regardless of the character of the income at the partnership level. In addition, the partner would be required to pay self-employment taxes on such income, and the gain recognized on the sale of an ISPI that is not attributable to invested capital would generally be taxed as ordinary income, not as capital gain.

 

Financial Firm Fee

To discourage excessive risk-taking by financial firms, under another budget proposal, large financial firms would pay an annual 7 basis point fee on their liabilities.

 

Oil Taxes

Another proposal would impose a fee on oil and oil products that would be equivalent to $10.25 per barrel of crude oil. The fee would be phased-in over a five-year period and would be collected on domestically produced as well as imported petroleum and imported petroleum products. Exported petroleum products would not be taxed and home heating oil would be temporarily exempt. Revenue from the fee would fund a 21st Century Clean Transportation Plan to upgrade the transportation system, invest in cleaner technologies, improve resilience, and reduce carbon emissions. In addition, 15 percent of the revenues would be dedicated for relief for households with particularly burdensome energy costs. Other fuel-related trust funds would be held harmless.

 

Tax Inversions

To limit the ability of U.S. companies to do tax inversions, one of the budget proposals would broaden the definition of an inversion under the law by reducing the 80-percent shareholder continuity threshold for domestic corporation status to a greater-than-50-percent threshold, and eliminate the 60-percent threshold. It would also provide that, regardless of the level of shareholder continuity, a transaction is an inversion if the fair market value of the stock of the domestic entity is greater than the fair market value of the stock of the foreign acquiring corporation, and if the affiliated group that includes the foreign acquiring corporation is primarily managed and controlled in the United States and does not have substantial business activities in the foreign country.

 

Multinational Tax Reforms

Another proposal aims to make the U.S. a more attractive location for businesses by creating a tax incentive to bring offshore jobs and investments back home, while reducing incentives to ship jobs overseas. The proposal would create a new general business credit against income tax equal to 20 percent of the eligible expenses paid or incurred in connection with insourcing a U.S. trade or business, and would disallow deductions for expenses paid or incurred in connection with outsourcing a U.S. trade or business.

 

To restrict the use of hybrid arrangements that create stateless income, another proposal would deny deductions for interest and royalty payments (which are generally deductible under current law) when such payments are made to related parties pursuant to transactions involving hybrid arrangements that result in income that is not subject to tax in any jurisdiction.

 

In addition, the proposal would eliminate exceptions under current law which lead to situations where shareholders are not subject to tax currently in either the United States or in the related firm’s foreign jurisdiction because an entity is considered a separate corporation under U.S. tax law and a pass-through entity in another jurisdiction. The proposal would require current U.S. taxation of such payments.

 

Small Business Expensing and Accounting

Another proposal would expand expensing for investments made by small businesses. The proposal would increase the maximum expensing limitation to $1 million and the phase-out threshold would remain at $2 million with both amounts being indexed for inflation. The proposal would become effective for property placed in service in 2017.

 

The budget plan would also expand a simplified accounting for small businesses and establish a uniform definition of small business for accounting methods. Beginning in 2017, small businesses —defined as those with less than $25 million in average annual gross receipts—would be exempted from certain accounting requirements, allowing them to use the cash method of accounting, avoid the uniform capitalization requirements for both inventory and produced property, and use an inventory method that either conforms to the taxpayer’s financial accounting method or is otherwise properly reflective of income. The gross receipts threshold would be indexed for inflation for taxable years beginning after Dec. 31, 2017.

 

The budget plan would also increase the limitations for deductible new business expenditures and consolidate provisions for start-up and organizational expenditures. A taxpayer is generally allowed to deduct up to $5,000 of start-up expenditures in the taxable year in which an active trade or business begins, and may deduct up to $5,000 of organizational expenditures in the taxable year in which a corporation or partnership begins business. In each case, the $5,000 amount would be reduced (but not below zero), by the amount by which such expenditures exceed $50,000. The proposal would consolidate these provisions, and would allow $20,000 of combined new business expenditures to be expensed, beginning in 2017. That immediately expensed amount would be reduced by the amount by which the combined new business expenditures exceed $120,000.

 

Another proposal would expand and simplify the tax credit provided to qualified small employers for non-elective contributions to employee health insurance. This proposal would expand the credit for small employers to provide health insurance for employees and their families to employers with up to 50 (rather than 25) full-time equivalent employees and would phase out the credit between 20 and 50, rather than between 10 and 25, full-time equivalent employees. A new phase-out methodology would benefit qualified smaller businesses by ensuring they were eligible for some amount of credit if they met the statutory constraints.

 

R&D Tax Credit

To enhance and simplify research and development tax incentives, another proposal would improve on the research and experimentation (R&E) tax credit that was recently made permanent using one of two allowable methods. Under the “traditional” method, the credit is 20 percent of qualified research expenses above a base amount related to the firm’s historical research intensity during the 1984 to 1988 period. Under the alternative simplified research credit (ASC), the credit would be 14 percent of qualified research expenses in excess of a base amount reflecting its research spending over the prior three years. This proposal would repeal the “traditional” method.

 

In addition, the proposal would increase the rate of the ASC from 14 percent to 18 percent, eliminate the reduced ASC rate of six percent for business without qualified research expenses in the prior three years, allow the credit to offset Alternative Minimum Tax liability, repeal a special rule for pass-thru entities that limited use of the credit, and allow 75 percent of payments to qualified non-profit organizations (such as universities) to be included as contract research (an increase from 65 percent).

 

Work Opportunity Tax Credit

Another proposal would extend and modify certain employment tax credits, including incentives for hiring veterans. This proposal would permanently extend the Work Opportunity Tax Credit (WOTC) to qualified individuals who begin work after Dec. 31, 2019. The Indian Employment Credit would be permanently extended to apply to qualified individuals who being work after Dec. 31, 2016.

 

Beginning in 2017, the Administration also proposes to expand the definition of disabled veterans eligible for the WOTC to include disabled veterans who use the GI bill to receive education or training starting within one year after discharge and who are hired within six months of leaving the program.

 

To provide a Community College Partnership Tax Credit, another proposal would provide businesses with a new tax credit for hiring graduates from community and technical colleges as an incentive to encourage employer engagement and investment in these education and training pathways. The proposal would provide $500 million in tax credit authority for each of the five years, 2017 through 2021. The tax credit authority would be allocated annually to states on a per capita basis and would be available to qualifying employers that hire qualifying community college graduates.

 

Renewable Energy Incentives

Another proposal would modify and permanently extend the renewable electricity production tax credit and the investment tax credit. This proposal would permanently extend the renewable electricity production tax credit, make it refundable, and make it available to otherwise eligible renewable electricity consumed directly by the producer rather than sold to an unrelated third party, provided this production can be independently verified. This proposal would also allow individuals to claim the production tax credit for electricity produced in connection with a residence, regardless of whether it is consumed on-site or sent back to the grid. Further, the proposal would permanently extend the renewable energy investment tax credit for businesses under the terms available in 2017. Specifically, the proposal would permanently extend the 30 percent investment tax credit for solar, fuel cell, and small wind property and the 10 percent credit for geothermal and other sources.

 

To provide a Carbon Dioxide Investment and Sequestration Tax Credit, this proposal would provide $2 billion for a new, refundable allocable investment tax credit for carbon capture and storage property. In determining the award of the investment tax credit, the Treasury Secretary would consider (i) the credit per ton of net sequestration capability and (ii) the expected contribution of the technology and the type of plant to which that technology is applied to the long-run economic viability of carbon sequestration from fossil fuel combustion. The proposal would also provide a 20-year, indexed, refundable sequestration tax credit. The credit would be $50 per metric ton of carbon dioxide permanently sequestered and not beneficially reused (e.g., in enhanced oil recovery) and $10 per metric ton for carbon dioxide that is permanently sequestered and beneficially reused.

 

New Markets Tax Credit

Another proposal would modify and permanently extend the New Markets Tax Credit. The proposal would permit NMTCs resulting from qualified equity investments made after Dec. 31, 2019, to offset AMT liability, which is not currently allowed. This proposal would also permanently extend the NMTC and provide $5 billion of credit allocation authority per year. This proposal aims to create greater certainty for taxpayers and encourage additional capital investments in low-income communities.

 

Low-Income Housing Tax Credit

President Obama’s budget includes several proposals to reform and expand the Low-Income Housing Tax Credit (LIHTC), including allowing conversion of private activity bond (PAB) volume cap into LIHTCs. Under current law, each state is provided annually a statutorily determined amount of LIHTCs (the LIHTC ceiling) for the state to allocate to developers who want to construct or rehabilitate buildings for low-income residents.

 

Also, under current law, each state is provided annually a statutorily determined limit (volume cap) on the qualified PABs that the state may issue. If a building is at least half financed with PABs subject to the volume cap, the building may earn LIHTCs that are not subject to the state’s LIHTC ceiling but that are earned at a lower rate than the rate that generally applies to allocated LIHTCs, provided that all the qualifications are met.

 

A major part of the proposal is that it would allow each state annually to convert up to 18 percent of its PAB volume cap into an increase in its LIHTC ceiling. If a developer is awarded sufficient PAB volume cap to issue bonds that would qualify its building for LIHTCs but the developer does not need PAB financing, then the developer would be able to convert its volume cap into the amount of LIHTCs that it would have earned if it had issued the bonds and financed the building with them.

 

Tax-Exempt Bonds

To build upon the successful temporary Build America Bond program under the American Recovery and Reinvestment Act of 2009, another proposal would create a new, expanded, and permanent America Fast Forward Bond (AFFB) program as an optional alternative to traditional tax-exempt bonds. AFFBs would be taxable bonds issued by state and local governments for which the federal government makes direct borrowing subsidy payments to those issuers (through refundable tax credits) at a subsidy rate equal to 28 percent of the coupon interest on the bonds. This subsidy rate is intended to be approximately revenue neutral relative to the estimated future federal tax expenditures for tax-exempt bonds. As an expansion of uses, AFFBs could be used for projects typically financed with qualified private activity bonds and qualified public infrastructure bonds in order to support a wide variety of public investments.

 

To facilitate public-private partnerships, another proposal would create a new category of tax-exempt qualified private activity bonds, called “Qualified Public Infrastructure Bonds” (QPIBs) to finance specified types of infrastructure projects. The projects must be owned by State or local governments and be available for general public use. Eligible types of projects would include airports, docks and wharves, mass commuting facilities, facilities for the furnishing of water, sewage facilities, solid waste disposal facilities, qualified highway or surface freight transfer facilities, and broadband telecommunications assets. The proposal would be effective for bonds issued starting Jan. 1, 2017.

 

 

 

 

 

Former IRS Agent to Be Tried for Soliciting Bribe from Marijuana Business Owner

BY MICHAEL COHN

 

A former Internal Revenue Service revenue agent is facing trial this week for soliciting and receiving a bribe from the owner of a Seattle marijuana dispensary.

 

Paul G. Hurley was charged last September with soliciting and agreeing to receive a bribe by a public official and two counts of receiving a bribe by a public official.

 

According to prosecutors, Hurley was involved in the audit of the 2013 and 2014 tax returns of a Seattle marijuana dispensary known as Have A Heart Compassion Care. As marijuana remains illegal under federal law, no business deductions are allowed on federal tax returns and the gross revenue is taxable. Hurley presented the owner of the marijuana business, Ryan Kunkel, with a tax bill for both years, totaling more than $290,000. However, Hurley allegedly told Kunkel he had saved the business owner more than a million dollars and asked him for $20,000 in cash.

 

According to the Associated Press, during the audit Hurley rubbed his fingers together and suggested Kunkel should gradually pay off Hurley’s student loan debt. Kunkel initially told him that sounded like a bad idea, but eventually agreed to pay Hurley the cash.

 

The business owner alerted his lawyer, who contacted law enforcement. FBI agents watched and recorded two meetings at a Starbucks in which Hurley accepted money delivered by Kunkel. Hurley was arrested after the second meeting and resigned from the IRS three days later. He faces up to 15 years in prison and a $250,000 fine for the bribery charges.

 

“My recent actions have no place in the Federal Service and there is no way I could possibly write an apology to express the dissatisfaction and disgust I have within myself,” he wrote to his supervisor at the IRS, according to the AP. “I have let everyone down in the Seattle office and all across the United States and have brought a cloud of shame to the Internal Revenue Service.”

 

However, Hurley later denied soliciting a bribe. Instead, according to his attorneys, Kunkel had offered Hurley a job doing accounting services for his marijuana business, and the $20,000 payment had nothing to do with Hurley’s official duties at the IRS. They argued the government had induced him to take the $20,000.

 

“In the present case, the alleged bribe was not solicited or accepted until after Mr. Hurley had completed his final audit,” they wrote in a trial brief, according to the AP. “Thus, the Government cannot meet its burden of proof that Mr. Hurley received the alleged bribe in ‘return for being influenced in the performance of an official act.’”

 

Prosecutors disagreed, noting that Hurley requested the $20,000 and Kunkel agreed to pay him on September 11. Hurley did not submit the final audit paperwork until September 15 and got the money on September 16 and 21.

 

“There is nothing in the bribery statute that requires a bribery payment be made before the official act is taken,” they wrote, according to the AP. “To the contrary, courts have routinely found that statute permits a conviction for bribery where the payment of the bribe is made after the official act is undertaken.”

 

 

 

Maryland Halts Returns from More Preparers

BY JEFF STIMPSON

 

Maryland Comptroller Peter Franchot has suspended processing electronic and paper tax returns from 11 private preparers at 14 locations due to what his office called “a high volume of questionable returns received.”

 

The additional suspensions come on the heels of the comptroller’s office halting the processing of returns from 23 Liberty Tax Service franchises (http://www.accountingtoday.com/news/tax-practice/maryland-suspends-liberty-tax-service-franchises-77118-1.html) and three private preparers in the last two weeks.

 

The new preparers or businesses notified of the action are: Beverly Branch, Loyalty Tax Services, EMACK Tax Service, People Tax Service (a.k.a. Neighborhood Tax Services), AO Tax Services and Hartley Financial Enterprises, all in Baltimore; Tax Rite Services in Baltimore and Middle River, Md.; Deldan Tax and Accounting Services and Tax Relief Solution in Laurel, Md.; REMG Inc. in Windsor Mill, Md.; and Fred Accounting & Tax Services in Washington, D.C.

 

Suspicious characteristics on returns prompting the determination included business income reported when taxpayers did not own a business; refund amounts requested that were much higher than previous-year returns; inflated or undocumented, or both, business expenses; dependents claimed when taxpayer did not provide required 50 percent support or care; and inflated wages and withholding information.

 

In a statement, Liberty said it has 102 active offices in Maryland, almost all of which are operated by independent franchisees. Maryland has also advised Liberty that the suspended offices may continue to file state tax returns on paper, which will be reviewed by the state before processing and the suspension does not affect federal return filing in the offices, the company said.

 

“Liberty Tax has a robust compliance program, and we expect our franchisees to make sure that their offices comply with all federal and state tax requirements,” said Jim Wheaton, Liberty Tax’s chief compliance officer. “Since we learned of Maryland's concerns … we have cooperated with the state, and immediately began significant efforts to look at the offices identified by the state. We are in the midst of our own investigation of the offices involved, and will continue to conduct that investigation aggressively, and support the state’s review, until all questions are resolved.”

 

 

 

IRS is Giving More Money to Whistleblowers

BY MICHAEL COHN

 

The Internal Revenue Service nearly doubled the amount of money it paid to tax whistleblowers last year and is taking steps to make the process move faster.

 

A new report from the IRS Whistleblower Office indicated the total amount of awards paid in fiscal year 2015 increased to $103,486,677 from over $52,281,628 in fiscal year 2014, even though the total number of awards decreased slightly to 99 from 101.

 

“FY 2015 was a big year for awards under the Whistleblower Program, with 99 awards made to whistleblowers totaling more than $103 million before sequestration, which reduced the total payouts,” wrote IRS Whistleblower Office director Lee D. Martin.

 

While the number of claims received in fiscal 2015 from tipsters declined 17 percent from the prior year to 12,078 claims, the total number of claims closed increased by 27 percent for the same period to 10,615 claims closed in fiscal 2015. 

 

“Since 2007, information received from whistleblowers has assisted the IRS in collecting over $3 billion in tax revenue, and the IRS has awarded more than $403 million to whistleblowers,” said Martin.

 

He noted the IRS is looking for ways to streamline the process. In FY 2015, the IRS initiated a program review of the Whistleblower Office to identify opportunities to maximize the efficiency and effectiveness of the claim process. Those include, among other things, leveraging IRS expertise and resources, both within and beyond the Whistleblower Office, to strengthen the overall program. Once the review is completed and recommendations are finalized, he said the IRS will proceed with implementation.

 

However, Martin acknowledged that many of the steps in the whistleblower claim process cannot be expedited or shortened. For example, the length of an IRS examination varies based on the complexity of the issues, taxpayer cooperation and documentation, and other factors that exist whether a whistleblower is involved or not.

 

“Likewise, the IRS cannot expedite the time required for the expiration of appeals rights and refund rights,” he added. “These are prerequisites to the payout of a whistleblower award that can add several years to the waiting period before an award is paid.”

 

Sen. Chuck Grassley, R-Iowa, who drafted the 2006 provisions that improved the IRS whistleblower office to combat tax fraud, saw positive trends in the report, but criticized the report for leaving out some key information about how long it takes to award whistleblowers for their tips.

 

“The uptick in awards paid out under the mandatory award program is good news,” Grassley said in a statement. “Whistleblowers have long been frustrated with the lack of awards, which may be part of the reason claims were down 17 percent from previous years. I hope the increase in awards will reverse this trend and send a signal of things to come. I also was glad to see positive statements about the program by the new director of the whistleblower office, as well as his effort to release this report in a much more timely manner than in previous years. The information about the whistleblower program is helpful for the public and for Congress in knowing how the whistleblower office is performing. I appreciate that the report adopted GAO recommendations that will make it easier for Congress and others to evaluate the program from year to year. But I’m concerned that it looks as if the IRS has dropped some of the more detailed information it provided before about how long it takes claims to move through each step of the process. That’s an important data point. Whistleblowers often put their livelihoods on the line to point out tax fraud, and they need assurances that the IRS will move their cases along as quickly as possible.”

 

 

 

Scam Calls and Emails Using IRS as Bait Persist

Scams using the IRS as a lure continue. They take many different forms. The most common scams are phone calls and emails from thieves who pretend to be from the IRS. They use the IRS name, logo or a fake website to try to steal your money. They may try to steal your identity too.

Be wary if you get an out-of-the-blue phone call or automated message from someone who claims to be from the IRS. Sometimes they say you owe money and must pay right away. Other times they say you are owed a refund and ask for your bank account information over the phone. Don’t fall for it. Here are several tips that will help you avoid becoming a scam victim.

 

The real IRS will NOT:

  • Call you to demand immediate payment. The IRS will not call you if you owe taxes without first sending you a bill in the mail.
  • Demand tax payment and not allow you to question or appeal the amount you owe.
  • Require that you pay your taxes a certain way. For example, demand that you pay with a prepaid debit card.
  • Ask for your credit or debit card numbers over the phone.
  • Threaten to bring in local police or other agencies to arrest you without paying.
  • Threaten you with a lawsuit.

 

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

  • Contact the Treasury Inspector General for Tax Administration. Use TIGTA’s “IRS Impersonation Scam Reporting” web page to report the incident.
  • You should also report it to the Federal Trade Commission. Use the “FTC Complaint Assistant” on FTC.gov. Please add "IRS Telephone Scam" to the comments of your report.

 

If you think you may owe taxes:

  • Ask for a call back number and an employee badge number.
  • Call the IRS at 800-829-1040. IRS employees can help you.

 

In most cases, an IRS phishing scam is an unsolicited, bogus email that claims to come from the IRS. They often use fake refunds, phony tax bills, or threats of an audit. Some emails link to sham websites that look real.  The scammers’ goal is to lure victims to give up their personal and financial information. If they get what they’re after, they use it to steal a victim’s money and their identity.

 

If you get a ‘phishing’ email, the IRS offers this advice:

  • Don’t reply to the message.
  • Don’t give out your personal or financial information.
  • Forward the email to phishing@irs.gov. Then delete it.
  • Don’t open any attachments or click on any links. They may have malicious code that will infect your computer.

 

More information on how to report phishing or phone scams is available on IRS.gov.

 

 

 

 

 

Falsifying Income to Claim Tax Credits is on the IRS “Dirty Dozen” List of Tax Scams for the 2016 Filing Season

 

The Internal Revenue Service today warned taxpayers to avoid schemes to erroneously claim tax credits on their returns, which is on the annual list of tax scams known as the “Dirty Dozen” again for the 2016 filing season.

 

“Taxpayers should not falsify their income or other information on their tax returns to improperly claim tax credits,” said IRS Commissioner John Koskinen. "Misrepresenting facts is cheating and taxpayers are legally responsible for all the information reported on their tax returns.”

 

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 Fake Income

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 may 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 ethical and up to the task.

 

Choose Return Preparers Carefully

It is important to choose carefully when hiring an individual or firm to prepare your return. Well-intentioned taxpayers can be misled by preparers who don’t understand taxes or who mislead people into taking credits or deductions they aren’t entitled to in order to increase their fee. Every year, these types of tax preparers face everything from penalties to even jail time for defrauding their clients.

 

Here are a few tips when choosing a tax preparer:

  • Ask if the preparer has an IRS Preparer Tax Identification Number (PTIN). Paid tax return preparers are required to register with the IRS, have a PTIN and include it on your filed tax return.
  • Inquire whether the tax return preparer has a professional credential (enrolled agent, certified public accountant, or attorney), belongs to a professional organization or attends 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.
  • Check the preparer’s qualifications.  Use the IRS Directory of Federal Tax Return Preparers with Credentials and Select Qualifications. This tool can help you find a tax return preparer with the qualifications that you prefer. The Directory is a searchable and sortable listing of certain preparers registered with the IRS. It includes the name, city, state and zip code of:
    • Attorneys
    • CPAs
    • Enrolled Agents
    • Enrolled Retirement Plan Agents
    • Enrolled Actuaries
    • Annual Filing Season Program participants
  • Check the preparer’s history.  Ask the Better Business Bureau about the preparer. Check for disciplinary actions and the license status for credentialed preparers. For CPAs, check with the State Board of Accountancy. For attorneys, check with the State Bar Association. For Enrolled Agents, go to IRS.gov and search for “verify enrolled agent status” or check the Directory
  • Ask about service fees.  Preparers are not allowed to base fees on a percentage of their client’s refund. Also avoid those who boast bigger refunds than their competition. Make sure that your refund goes directly to you – not into your preparer’s bank account.
  • Ask to e-file your return.  Make sure your preparer offers IRS e-file. Paid preparers who do taxes for more than 10 clients generally must offer electronic filing. The IRS has processed more than 1.5 billion e-filed tax returns. It’s the safest and most accurate way to file a return.
  • Provide records and receipts. Good preparers will ask to see your records and receipts. They’ll ask 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.
  • Make sure the preparer is available.  In the event questions come up about your tax return, you may need to contact your preparer after the return is filed. Avoid fly-by-night preparers.
  • Understand who can represent you. Attorneys, CPAs, and enrolled agents can represent any client before the IRS in any situation. Non-credentialed tax return preparers can represent clients before the IRS in only limited situations, depending upon when the tax return was prepared and signed.  For all returns prepared and signed after December 31, 2015, a non-credentialed tax return preparer can represent clients before the IRS in limited situations only if the preparer is a participant in the IRS Annual Filing Season Program.
  • Never sign a blank return.  Don’t use a tax preparer that asks you to sign an incomplete or blank tax form.
  • 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.
  • Report tax preparer misconduct to the IRS. You can report improper activities by 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.

 

To find other tips about choosing a preparer, better understand the differences in credentials and qualifications, research the IRS preparer directory, and learn how to submit a complaint regarding a tax return preparer, visit www.irs.gov/chooseataxpro.

 

Remember: Taxpayers are legally responsible for what is on their tax return even if it is prepared by someone else. Make sure the preparer you hire is up to the task. 

 

 

 

 

 

Affordable Care Act: Tax Facts for Individuals and Families

The Affordable Care Act includes the individual shared responsibility provision and the premium tax credit that may affect your tax return. This year marks the first time that certain taxpayers will receive new health-care related information forms that they can use to complete their tax return and then keep with their tax records.

 

Information Forms – Forms 1095-A, 1095-B and 1095-C

Depending upon your specific circumstances, the Health Insurance Marketplace, health coverage providers, and certain employers may provide information forms to you early in 2016. These forms can help you accurately report health coverage information for you, your spouse and any dependents when you file your 2015 individual income tax return in 2016. The Marketplace, health coverage providers, and employers will also file these forms with the IRS.

The information forms are:

  • Form 1095-A, Health Insurance Marketplace Statement: The Health Insurance Marketplace sends this form to individuals who enrolled in coverage there, with information about the coverage, who was covered, and when.  This is the second year in which the Marketplace is issuing Form 1095-A to enrollees.
  • Form 1095-B, Health Coverage: Health insurance providers – for example, health insurance companies – send this new form to individuals they cover, with information about who was covered and when. 
  • Form 1095-C, Employer-Provided Health Insurance Offer and Coverage: Certain employers send this new form to certain employees, with information about what coverage the employer offered. Employers that offer health coverage referred to as “self-insured coverage” send this form to individuals they cover, with information about who was covered and when.

 

The list below highlights key elements regarding these information forms:

  • The deadline for the Marketplace to provide Form 1095-A is February 1, 2016. 
  • The deadline for coverage providers to provide Forms 1095-B and employers to provide Form 1095-C is March 31, 2016.
  • If you are expecting to receive a Form 1095-A, you should wait to file your 2015 income tax return until you receive that form. 
  • Some taxpayers may not receive a Form 1095-B or Form 1095-C by the time they are ready to file their 2015 tax return. It is not necessary to wait for Forms 1095-B or 1095-C in order to file. Taxpayers may instead rely on other information about their health coverage and employer offer to prepare their returns
  • These new forms should not be attached to your income tax return. 

 

See our questions and answers that explain who should expect to receive the forms, how they can be used, and how to file with or without the forms, and that address various other questions you may have about these new forms.   

 

Individual Shared Responsibility Provision

The individual shared responsibility provision requires everyone on your tax return to have qualifying health care coverage for each month of the year or have a coverage exemption. Otherwise, you may be required to make an individual shared responsibility payment.

 

The list below highlights key elements of the individual shared responsibility provision:

  • If you maintain qualifying health care coverage for the entire year, you don’t need to do anything more than report that coverage on your federal income tax return by simply checking a box. Qualifying coverage includes most employer-sponsored coverage, coverage obtained through a Health Insurance Marketplace, coverage through most government-sponsored programs, as well as certain other specified health plans.
  • If you go without coverage or experience a gap in coverage, you may qualify for an exemption from the requirement to have coverage. If you qualify for an exemption, you use Form 8965, Health Coverage Exemptions, to report a coverage exemption granted by the Marketplace or to claim a coverage exemption on your tax return.
  • If for any month during the year you don’t have qualifying coverage and you don’t qualify for an exemption, you will have to make an individual shared responsibility payment when you file your federal income tax return.
  • The payment amount for 2015 is the greater of 2 percent of the household income above the taxpayer’s filing threshold, or $325 per adult plus $162.50 per child (limited to a family maximum of $975). This payment is capped at the cost of the national average premium for a bronze level health plan available through Marketplaces that would provide coverage for the taxpayer’s family members that neither had qualifying coverage nor qualify for a coverage exemption. The instructions for Form 8965, Health Coverage Exemptions, provide the information needed to calculate the payment that will be reported on you federal income tax return.
  • Form 1095-B will be sent to individuals who had health coverage for themselves or their family members that is not reported on Form 1095-A or Form 1095-C. Form 1095-A will be sent to individuals who enrolled in health coverage for themselves or their family members through the  Marketplace. Form 1095-C will be sent to certain employees of applicable large employers.
  • Some taxpayers may not receive a Form 1095-B or Form 1095-C by the time they are ready to file their 2015 tax return. It is not necessary to wait for Forms 1095-B or 1095-C in order to file. Taxpayers may instead rely on other information about their health coverage and employer offer to prepare their returns

 

Health Coverage Exemptions

 Individuals who go without coverage or experience a gap in coverage may qualify for an exemption from the requirement to have coverage. 

  • You may qualify for an exemption if one of the following applies:
    • You do not have access to affordable coverage
    • You have a one-time gap of less than three consecutive months without coverage
    • You qualify for one of several other exemptions, including a hardship exemption
  • How you get an exemption depends upon the type of exemption. You can obtain some exemptions only from the Marketplace in the area where you live, others only from the IRS when filing your income tax return, and others from either the Marketplace or the IRS. For more information, visit IRS.gov/aca or see the instructions to Form 8965.
  • If you qualify for an exemption, you use Form 8965 to report a coverage exemption granted by the Marketplace or to claim a coverage exemption on your tax return.

 

Premium Tax Credit

For an explanation of the Premium Tax Credit see IRS Fact Sheet 2016-05, entitled “Tax Credit Helps Make Health Insurance Affordable for Middle-Class Americans.”

 

More Information

 Remember that filing electronically with tax preparation software is the quickest and easiest way to file a complete and accurate tax return, as the software guides you through the filing process and does all the math for you.

 

For more information about the premium tax credit or the individual shared responsibility payment, visit IRS.gov/aca. For more information about the Marketplace, visit HealthCare.gov. For more information on the new health care related information forms, see the Form 1095 questions and answers

 

 

What You Need to Know about Taxable and Non-Taxable Income

 

All income is taxable unless a law specifically says it isn’t. Here are some basic rules you should know to help you file an accurate tax return:

  • Taxable 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 normally taxable.

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

  • Life insurance.  Proceeds paid to you upon the death of an insured person are usually not taxable. However, if you redeem a life insurance policy for cash, any amount you get that is more than the cost of the policy is taxable.
  • Qualified scholarship.  In most cases, income from a scholarship is not taxable. This includes amounts used for certain costs, such as tuition and required books. On the other hand, amounts you use for room and board are taxable.
  • Other income tax refunds.  State or local income tax refunds may be taxable. You should receive a Form 1099-G from the agency that paid you. They may have sent the form by mail or 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 items 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 at IRS.gov/forms anytime.

 

 

 

Consumers Warned of New Surge in IRS E-mail Schemes during 2016 Tax Season; Tax Industry Also Targeted

 

The Internal Revenue Service renewed a consumer alert for e-mail schemes after seeing an approximate 400 percent surge in phishing and malware incidents so far this tax season.

The emails are designed to trick taxpayers into thinking these are official communications from the IRS or others in the tax industry, including tax software companies. The phishing schemes can ask taxpayers about a wide range of topics. E-mails can seek information related to refunds, filing status, confirming personal information, ordering transcripts and verifying PIN information.

 

Variations of these scams can be seen via text messages, and the communications are being reported in every section of the country.

 

"This dramatic jump in these scams comes at the busiest time of tax season," said IRS Commissioner John Koskinen. "Watch out for fraudsters slipping these official-looking emails into inboxes, trying to confuse people at the very time they work on their taxes. We urge people not to click on these emails."

 

This tax season the IRS has observed fraudsters more frequently asking for personal tax information, which could be used to help file false tax returns.

 

When people click on these email links, they are taken to sites designed to imitate an official-looking website, such as IRS.gov. The sites ask for Social Security numbers and other personal information. The sites also may carry malware, which can infect people's computers and allow criminals to access your files or track your keystrokes to gain information.

 

The IRS has seen an increase in reported phishing and malware schemes, including:

  • There were 1,026 incidents reported in January, up from 254 from a year earlier.
  • The trend continued in February, nearly doubling the reported number of incidents compared to a year ago. In all, 363 incidents were reported from Feb. 1-16, compared to the 201 incidents reported for the entire month of February 2015.
  • This year's 1,389 incidents have already topped the 2014 yearly total of 1,361, and they are halfway to matching the 2015 total of 2,748.

 

"While more attention has focused on the continuing IRS phone scams, we are deeply worried this increase in email schemes threatens more taxpayers," Koskinen said. "We continue to work cooperatively with our partners on this issue, and we have taken steps to strengthen our processing systems and fraud filters to watch for scam artists trying to use stolen information to file bogus tax returns."

 

As the email scams increase, the IRS is working on this issue through the Security Summit initiative with state revenue departments and the tax industry. Many software companies, tax professionals and state revenue departments have seen variations in the schemes.

 

For example, tax professionals are also reporting phishing scams that are seeking their online credentials to IRS services, for example the IRS Tax Professional PTIN System. Tax professionals are also reporting that many of their clients are seeing the e-mail schemes.

 

As part of the effort to protect taxpayers, the IRS has teamed up with state revenue departments and the tax industry to make sure taxpayers understand the dangers to their personal and financial data as part of the “Taxes. Security. Together” campaign.

 

If a taxpayer receives an unsolicited email that appears to be from either the IRS e-services portal or an organization closely linked to the IRS, report it by sending it to phishing@irs.gov.  Learn more by going to the Report Phishing and Online Scams page.

 

It is important to keep in mind the IRS generally does not initiate contact with taxpayers by email to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels. The IRS has information online that can help protect taxpayers from email scams.

 

Phishing and malware schemes again made the IRS "Dirty Dozen" tax scam list this year. Check out the last IRS Phishing Scam news release for more info.

 

What to look for in these scams

Taxpayers receive an official-looking email from what appears to be an official source, whether the IRS or someone in the tax industry.

 

The underlying messages frequently ask taxpayers to update important information by clicking on a web link. The links may be masked to appear to go to official pages, but they can go to a scam page designed to look like the official page. The IRS urges people not to click on these links but instead send the email to phishing@irs.gov.

 

Recent email examples the IRS has seen include subject lines and underlying text referencing:

  • Numerous variations about people's tax refund.
  • Update your filing details, which can include references to W-2.
  • Confirm your personal information.
  • Get my IP Pin.
  • Get my E-file Pin.
  • Order a transcript.
  • Complete your tax return information.

Numbers provided are for phishing and malware incidents combined.

 

 

 

Self Employed? Check Out These IRS Tax Tips

 

If you are self-employed, you normally carry on a trade or business. Sole proprietors and independent contractors are two types of self-employment. If this applies to you, there are a few basic things you should know about how your income affects your federal tax return. Here are six important tips from the IRS:

  • SE Income. Self-employment can include income you received for part-time work. This is in addition to income from your regular job.
  • Schedule C or C-EZ. You must file a Schedule C, Profit or Loss from Business, or Schedule C-EZ, Net Profit from Business, with your Form 1040. You may use Schedule C-EZ if you had expenses less than $5,000 and meet certain other conditions. See the form instructions to find out if you can use the form.
  • SE Tax. You may have to pay self-employment tax as well as income tax if you made a profit. Self-employment tax includes Social Security and Medicare taxes. Use Schedule SE, Self-Employment Tax, to figure the tax. If you owe this tax, attach the schedule to your federal tax return.
  • Estimated Tax. You may need to make estimated tax payments. Try IRS Direct Pay. People typically make these payments on income that is not subject to withholding. You usually pay estimated taxes in four annual installments. If you do not pay enough tax throughout the year, you may owe a penalty.
  • Allowable Deductions. You can deduct expenses you paid to run your business that are both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and proper for your trade or business.
  • When to Deduct. In most cases, you can deduct expenses in the same year you paid, or incurred them. However, you must ‘capitalize’ some costs. This means you can deduct part of the cost over a number of years.

 

Visit the Small Business and Self-Employed Tax Center on IRS.gov for all your federal tax needs. You can also get IRS tax forms on IRS.gov/forms anytime.

 

 

 

IRS Releases Dirty Dozen Scam List: Don’t be a Victim

 

Each year, people fall prey to tax scams. That’s why the IRS sends a list of its annual “Dirty Dozen.” Stay safe and be informed – don’t become a victim.

 

If you get involved in illegal tax scams, you can lose money or face stiff penalties, interest and even criminal prosecution. Remember, if it sounds too good to be true, it probably is. Be on the lookout for these scams:


Identity theft.Identity theft, especially around tax time, is at the top of the “Dirty Dozen” list again this year. The IRS continues to aggressively pursue criminals who file fraudulent returns using someone else’s Social Security number. The IRS is making progress on this front. Remain vigilant to avoid becoming a victim.

 

Telephone scams. Threatening phone calls by criminals impersonating IRS agents remain an ongoing threat. The IRS has seen a surge of these phone scams in recent years as scam artists threaten taxpayers with police arrest, deportation, license revocation and more. These con artists often demand payment of back taxes on a prepaid debit card or by immediate wire transfer. Be alert to con artists impersonating IRS agents and demanding payment.

 

Phishing. Phishing scams typically use unsolicited emails or fake websites that appear legitimate but are attempting to steal your personal information. The IRS will not send you an email about a bill or tax refund out of the blue. Don’t click on strange emails and websites that may be scams to steal your personal information.

 

Return Preparer Fraud.

About 60 percent of taxpayers use tax professionals to prepare their returns. While most tax professionals provide honest, high-quality service, there are some dishonest ones who set up shop each filing season to perpetrate refund fraud, identity theft and other scams. Be on the lookout for unscrupulous tax return preparers. Choose your preparer wisely.

 

Offshore Tax Avoidance.

Hiding money and income offshore is a bad bet. If you have money in offshore banks, it’s best to contact the IRS to get your taxes in order.


The IRS offers the Offshore Voluntary Disclosure Program to help you do that.

 

Inflated Refund Claims.

Be on the lookout for anyone promising inflated tax refunds. Also be wary of anyone who asks you to sign a blank return, promises a big refund before looking at your tax records or charges fees based on a percentage of the refund. Scam artists use flyers, advertisements, phony store fronts and word of mouth via trusted community groups to find victims.

 

Fake Charities.

Be on guard against groups masquerading as charitable organizations to attract donations from unsuspecting contributors. If you are making a charitable contribution, you should take a few extra minutes to ensure your hard-earned money goes to legitimate and currently eligible charities. IRS.gov has the tools you need to check out the status of charitable organizations. Be wary of charities with names that are similar to familiar or nationally-known organizations.

 

Falsely Padding Deductions on Returns.

Don’t give in to the temptation to inflate deductions or expenses on your tax return. Think twice before overstating deductions such as charitable contributions, inflating claimed business expenses or including credits that you are not entitled to receive, such as the Earned Income Tax Credit or Child Tax Credit. Complete an accurate return.

 

Excessive Claims for Business Credits.

Don’t make improper claims for fuel tax credits. The credit is generally limited to off-highway business use, including use in farming. It is generally not available to most taxpayers. Also avoid misuse of the research credit. If it doesn’t apply to your business and you don’t meet the criteria, don’t make the claim.

 

Falsifying Income to Claim Credits.

Don’t invent income to erroneously claim tax credits. A scam artist may try to talk you into doing this. You should file the most accurate tax return possible because you are legally responsible for what is on your return. Falling prey to this scam may mean you have to pay back taxes, interest and penalties. In some cases, you may even face criminal prosecution.

 

Abusive Tax Shelters.

Avoid using abusive tax structures to avoid paying taxes. The IRS is committed to stopping complex tax avoidance schemes and the people who create and sell them. Be on the lookout for people peddling tax shelters that sound too good to be true. When in doubt, seek an independent opinion regarding these complex situations or offers. Most taxpayers pay their fair share, and so should you.

 

Frivolous Tax Arguments.

Using frivolous tax arguments to avoid paying taxes can have serious financial consequences. Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish claims to avoid paying taxes. The law is crystal clear that people must pay their taxes. For decades, the federal courts have consistently upheld the tax laws. The penalty for filing a frivolous tax return is $5,000.

 

Tax scams can take many forms beyond the “Dirty Dozen.” The best defense is to remain alert. Additional information about tax scams is available on IRS social media sites, including YouTube and Tumblr , where people can search “scam” to find all the scam-related posts.

 

 

 

Five Things You Should Know about the Child Tax Credit

 

The Child Tax Credit is an important tax credit that may save you up to $1,000 for each eligible qualifying child. Be sure you qualify before you claim it. Here are five useful facts from the IRS on the Child Tax Credit:

 

1. Qualifications. For the Child Tax Credit, a qualifying child must pass several tests:

  • Age. The child must have been under age 17 at the end of 2015.
  • Relationship. The child must be your son, daughter, stepchild, foster child, brother, sister, stepbrother, stepsister, half brother, or half sister. The child may be a descendant of any of these individuals. A qualifying child could also include your grandchild, niece or nephew. You would always treat an adopted child as your own child. An adopted child includes a child lawfully placed with you for legal adoption.
  • Support. The child must have not provided more than half of their own support for the year.
  • Dependent. The child must be a dependent that you claim on your federal tax return.
  • Joint return. The child cannot file a joint return for the year, unless the only reason they are filing is to claim a refund.
  • Citizenship. The child must be a U.S. citizen, a U.S. national or a U.S. resident alien.
  • Residence. In most cases, the child must have lived with you for more than half of 2015.

 

2. Limitations. The Child Tax Credit is subject to income limitations. The limits may reduce or eliminate your credit depending on your filing status and income.

 

3. Additional Child Tax Credit. If you qualify and get less than the full Child Tax Credit, you could receive a refund even if you owe no tax with the Additional Child Tax Credit.

 

4. Schedule 8812. If you qualify to claim the Child Tax Credit, make sure to check if you must complete and attach Schedule 8812, Child Tax Credit, with your tax return. For example, if you claim a credit for a child with an Individual Taxpayer Identification Number, you must complete Part I of Schedule 8812. If you qualify to claim the Additional Child Tax Credit, you must complete and attach Schedule 8812. You can visit IRS.gov to view, download or print IRS tax forms anytime.

 

 

 

Ikea Accused of Tax Avoidance in Europe

BY MICHAEL COHN

 

Swedish home furnishings giant Ikea has become the latest multinational company to be accused of dodging taxes.

 

A new report from Green Party members of the European Parliament features graphics mocking the style of the diagrams included by Ikea in the assembly kits for its products, showing how Ikea shifts royalty fees and profits to entities in low-tax countries such as the Netherlands, Liechtenstein and Luxembourg.

 

For 2014, the researchers estimate the tax strategies led to €35 million ($39 million) of missing tax revenues in Germany, €24 million ($27 million) in France and €11.6 million ($13 million) in the United Kingdom. The report estimates that countries such as Sweden, Spain and Belgium are probably losing between €7.5 million ($8.4 million) and €10 million ($11 million) as well.

 

The company defended its tax policies. “Ikea Group has not received the alleged Green/EPA group report,” said a statement forwarded by spokesperson Mona Liss. “Thus, Ikea Group cannot provide comments on its content. The Ikea Group pays taxes in accordance with laws and regulations, wherever we are present as retailer, manufacturer or in any other role. We have a strong commitment to manage our operations in a responsible way and to contribute to the societies where we operate.”

 

Ikea noted that it paid €822 million ($922 million) in corporate taxes on a global basis in its fiscal year 2015, an effective corporate income tax rate of 19 percent. Local and other taxes, such as property, business and environmen¬tal taxes together with custom duties, totalled € 700 million ($787 million). Thus, the total tax charge was more than €1.5 billion ($1.7 billion). Ikea also collected substantial taxes on behalf of governments, such as VAT and employee taxes, the company noted.

 

In explaining its finances, the statement said Ikea Group, as well as any other Ikea franchisee, pays a 3 percent franchise fee to Inter Ikea Systems B.V., the worldwide franchisor and owner of the Ikea concept. “The franchise fee is an operational cost. The franchise agreement gives Ikea Group the right to operate Ikea stores under the Ikea trademark. Ikea Group has the franchise right to operate Ikea stores in 28 markets. Other franchisees have the right to operate Ikea stores in additional 19 markets worldwide.” All franchisees outside of Ikea Group also pay the 3 percent franchise fee.

 

 

 

IRS Gouges Martin Shkreli with $4.6 Million Tax Lien

BY MICHAEL COHN

 

The Internal Revenue Service has filed a tax lien for $4,628,928.55 against Martin Shkreli, the former CEO of Turing Pharmaceuticals who hiked the price of a lifesaving medication produced by the company by 5,000 percent.

 

The IRS prepared the tax lien against Shkreli on December 18, a day after the FBI arrested him for securities fraud charges related to his management of a hedge fund, and filed the tax lien last month. The tax lien against Shkreli comes from unpaid 2014 taxes of $4,625,496.70 and unpaid 2013 taxes of $3,431.85, according to Gawker.

 

In the unrelated securities fraud case, Shkreli is accused of using money from a pharmaceutical company that he founded, Retrophin, to pay off investors in his hedge fund. Retrophin filed suit against him last August for $65 million. His other drug company, Turing, replaced him as CEO last December following his arrest.

 

Shkreli gained notoriety last summer after he defended his decision to increase the price of Turing’s HIV medication Daraprim from $13.50 to $750 for each pill, opening him to accusations of price gouging.

 

He has continued to stoke controversy for paying $2 million for the only copy of a Wu-Tang Clan album, “Once Upon a Time in Shaolin,” and then argued in a series of back-and-forth YouTube videos with Wu-Tang Clan rapper Ghostface Killah. He has gained the nickname of "Pharma Bro." Last week, Shkreli offered rapper Kanye West $10 million for his new album, “The Life of Pablo,” on Twitter.

 

Earlier this month, Shkreli refused to testify before Congress about drug prices, repeatedly invoking his Fifth Amendment privilege against self-incrimination during the House Oversight and Government Reform Committee hearing. Lawmakers repeatedly criticized him for refusing to answer questions and smirking during the hearing before they dismissed him. “It’s not funny, Mr. Shkreli,” said Rep. Elijah Cummings, D-Md., the ranking member on the committee. “People are dying and they’re getting sicker and sicker.”

 

Soon after leaving the hearing, Shkreli called the lawmakers “imbeciles” on Twitter. “Hard to accept that these imbeciles represent the people in our government,” he wrote.

 

 

 

IRS Begins EITC Due Diligence Audits

BY MICHAEL COHN

 

The Internal Revenue Service has begun conducting on-site inspections of tax preparers who continue to have problems with verifying their clients’ eligibility for claiming the Earned Income Tax Credit, and warned that the penalty has increased.

 

In an email to tax professionals last Friday, the IRS said that in keeping with itsEITC Compliance Program, which ensures tax preparers practice proper due diligence, the IRS will begin conducting on-site audits of preparers who received pre-filing season warning letters and whose 2015 EITC returns appear not to have improved. 

 

The IRS said it is also sending acknowledgement alerts to tax preparers who filed two or more tax year 2015 e-filed returns claiming the Earned Income Tax Credit without submitting Form 8867, Paid Preparers’ EITC Checklist.

 

However, the alerts contained the wrong penalty of $500 per return. The penalty amount has been adjusted to $505 per return as required by Revenue Procedure 2016-11.

More due diligence information can be viewed on theEITC Central page on IRS.gov.

 

 

 

 

 

Are Millennials Afraid to File Their Taxes?

By Michael Cohn 

 

Millennials are more fearful of filing taxes than most Americans, according to a new survey.

The survey, by the personal finance site NerdWallet and conducted by Harris Poll, found 80 percent of taxpayers in the 18- to 34-year-old age group report concerns such as making a mistake and not getting a full refund or paying too much, compared with 60 percent of adults aged 55 and older. Approximately a third (34 percent) of millennial taxpayers said they turn to friends or family with questions instead of tax professionals (27 percent) or online sources (20 percent).

 

Millennials also have a higher rate of mailing paper returns than taxpayers aged 35 and older (17 percent compared to 8 percent). The most popular way to file taxes last year across all age groups was tax software, with 36 percent of millennial taxpayers using this method, compared with an average of 35 percent for all age groups.

 

 

 

16 IRS Audit Red Flags

Kiplingers By Joy Taylor
 

Ever wonder why some tax returns are eyeballed by the Internal Revenue Service while most are ignored? Short on personnel and funding, the IRS audited only 0.86% of all individual returns in 2014. And the audit rate in 2015 has fallen to 0.84%. So the odds are pretty low that you will be singled out for review. And, of course, the only reason filers should worry about an audit is if they are fudging on their taxes.

 

That said, your chances of being audited or otherwise hearing from the IRS escalate depending upon various factors, including your income level, the types of deductions or losses claimed, the business in which you're engaged and whether you own foreign assets. Math errors may draw IRS inquiry, but they'll rarely lead to a full-blown exam. Although there's no sure way to avoid an IRS audit, these 16 red flags could increase your chances of unwanted attention from the IRS.

 

Making a Lot of Money

Although the overall individual audit rate is only about one in 119, the odds increase dramatically as your income goes up. IRS statistics for 2015 show that people with incomes of $200,000 or higher had an audit rate of 2.61%, or one out of every 38 returns. Report $1 million or more of income? There's a one-in-10 chance your return will be audited. The audit rate drops significantly for filers making less than $200,000: Only 0.78% (one out of 132) of such returns were audited during 2015, and the vast majority of these exams were conducted by mail.

 

We're not saying you should try to make less money — everyone wants to be a millionaire. Just understand that the more income shown on your return, the more likely it is that you'll be hearing from the IRS.

 

Failing to Report All Taxable Income

The IRS gets copies of all 1099s and W-2s you receive, so make sure you report all required income on your return. IRS computers are pretty good at matching the numbers on the forms with the income shown on your return. A mismatch sends up a red flag and causes the IRS computers to spit out a bill. If you receive a 1099 showing income that isn't yours or listing incorrect income, get the issuer to file a correct form with the IRS.


Taking Higher-than-Average Deductions

If deductions on your return are disproportionately large compared with your income, the IRS may pull your return for review. But if you have the proper documentation for your deduction, don't be afraid to claim it. There's no reason to ever pay the IRS more tax than you actually owe.


Running a Small Business

Schedule C is a treasure trove of tax deductions for self-employeds. But it's also a gold mine for IRS agents, who know from experience that self-employeds sometimes claim excessive deductions and don’t report all of their income. IRS looks at both higher-grossing sole proprietorships and smaller ones.

 

Special scrutiny is also given to cash-intensive businesses (taxis, car washes, bars, hair salons, restaurants and the like) as well as to small business owners who report a substantial net loss on Schedule C.

Other small businesses also face extra audit heat, as the IRS shifts its focus away from auditing regular corporations. The agency thinks it can get more bang for its audit buck by examining S corporations, partnerships and limited liability companies. So it’s spending more resources on training examiners about issues commonly encountered with pass-through firms.

 

Taking Large Charitable Deductions

We all know that charitable contributions are a great write-off and help you feel all warm and fuzzy inside. However, if your charitable deductions are disproportionately large compared with your income, it raises a red flag.

 

That's because the IRS knows what the average charitable donation is for folks at your income level. Also, if you don't get an appraisal for donations of valuable property, or if you fail to file Form 8283 for noncash donations over $500, you become an even bigger audit target. And if you've donated a conservation or façade easement to a charity, chances are good that you'll hear from the IRS. Be sure to keep all your supporting documents, including receipts for cash and property contributions made during the year.


Claiming Rental Losses

Normally, the passive loss rules prevent the deduction of rental real estate losses. But there are two important exceptions. If you actively participate in the renting of your property, you can deduct up to $25,000 of loss against your other income. This $25,000 allowance phases out as adjusted gross income exceeds $100,000 and disappears entirely once your AGI reaches $150,000. A second exception applies to real estate professionals who spend more than 50% of their working hours and over 750 hours each year materially participating in real estate as developers, brokers, landlords or the like. They can write off losses without limitation.

 

The IRS is actively scrutinizing rental real estate losses, especially those written off by taxpayers claiming to be real estate pros. It’s pulling returns of individuals who claim they are real estate professionals and whose W-2 forms or other non-real estate Schedule C businesses show lots of income. Agents are checking to see whether these filers worked the necessary hours, especially in cases of landlords whose day jobs are not in the real estate business. The IRS started its real estate professional audit project several years ago, and this successful program continues to bear fruit

 

Taking an Alimony Deduction

Alimony paid by cash or check is deductible by the payer and taxable to the recipient, provided certain requirements are met. For instance, the payments must be made under a divorce or separate maintenance decree or written separation agreement. The instrument can’t say the payment isn’t alimony. And the payer’s liability for the payments must end when the former spouse dies. You’d be surprised how many divorce decrees run afoul of this rule.

 

Alimony doesn’t include child support or noncash property settlements. The rules on deducting alimony are complicated, and the IRS knows that some filers who claim this write-off don’t satisfy the requirements. It also wants to make sure that both the payer and the recipient properly reported alimony on their respective returns. A mismatch in reporting by ex-spouses will almost certainly trigger an audit.


Writing off a Loss for a Hobby

You must report any income you earn from a hobby, and you can deduct expenses up to the level of that income. But the law bans writing off losses from a hobby. To be eligible to deduct a loss, you must be running the activity in a business-like manner and have a reasonable expectation of making a profit. If your activity generates profit three out of every five years (or two out of seven years for horse breeding), the law presumes that you're in business to make a profit, unless the IRS establishes otherwise. Be sure to keep supporting documents for all expenses.


Deducting Business Meals, Travel and Entertainment

Big deductions for meals, travel and entertainment are always ripe for audit, whether taken on Schedule C by business owners or on Schedule A by employees.

 

A large write-off will set off alarm bells, especially if the amount seems too high for the business or profession. Agents are on the lookout for personal meals or claims that don't satisfy the strict substantiation rules. To qualify for meal or entertainment deductions, you must keep detailed records that document for each expense the amount, the place, the people attending, the business purpose and the nature of the discussion or meeting. Also, you must keep receipts for expenditures over $75 or for any expense for lodging while traveling away from home. Without proper documentation, your deduction is toast.

 

Failing to Report a Foreign Bank Account

The IRS is intensely interested in people with money stashed outside the U.S., especially in countries with the reputation of being tax havens, and U.S. authorities have had lots of success getting foreign banks to disclose account information. The IRS also uses voluntary compliance programs to encourage folks with undisclosed foreign accounts to come clean — in exchange for reduced penalties. The IRS has learned a lot from these amnesty programs and has been collecting a boatload of money (we’re talking billions of dollars). It’s scrutinizing information from amnesty seekers and is targeting the banks that they used to get names of even more U.S. owners of foreign accounts.

 

Failure to report a foreign bank account can lead to severe penalties. Make sure that if you have any such accounts, you properly report them. This means electronically filing FinCEN Form 114 by June 30 (April 15 for filings beginning in 2017) to report foreign accounts that total more than $10,000 at any time during the previous year. And those with a lot more financial assets abroad may also have to attach IRS Form 8938 to their timely filed tax returns

 

Claiming 100% Business Use of a Vehicle

When you depreciate a car, you have to list on Form 4562 what percentage of its use during the year was for business. Claiming 100% business use of an automobile is red meat for IRS agents. They know that it's rare for someone to actually use a vehicle 100% of the time for business, especially if no other vehicle is available for personal use.

 

The IRS also targets heavy SUVs and large trucks used for business, especially those bought late in the year. That’s because these vehicles are eligible for favorable depreciation and expensing write-offs. Make sure you keep detailed mileage logs and precise calendar entries for the purpose of every road trip. Sloppy recordkeeping makes it easy for a revenue agent to disallow your deduction.

 

As a reminder, if you use the IRS's standard mileage rate, you can't also claim actual expenses for maintenance, insurance and the like. The IRS has seen such shenanigans and is on the lookout for more.


Taking an Early Payout from an IRA or 401(k) Account

The IRS wants to be sure that owners of traditional IRAs and participants in 401(k)s and other workplace retirement plans are properly reporting and paying tax on distributions. Special attention is being given to payouts before age 59½, which, unless an exception applies, are subject to a 10% penalty on top of the regular income tax. An IRS sampling found that nearly 40% of individuals scrutinized made errors on their income tax returns with respect to retirement payouts, with most of the mistakes coming from taxpayers who didn’t qualify for an exception to the 10% additional tax on early distributions. So the IRS will be looking at this issue closely.

 

The IRS has a chart listing withdrawals taken before the age of 59½ that escape the 10% penalty, such as payouts made to cover very large medical costs, total and permanent disability of the account owner, or a series of substantially equal payments that run for the longer of five years or until age 59½

 

Claiming Day-Trading Losses on Schedule C

Those who trade in securities have significant tax advantages compared with investors. The expenses of traders are fully deductible and are reported on Schedule C (investors report their expenses as a miscellaneous itemized deduction on Schedule A, subject to an offset of 2% of adjusted gross income), and traders’ profits are exempt from self-employment tax. Losses of traders who make a special section 475(f) election are fully deductible and are treated as ordinary losses that aren’t subject to the $3,000 cap on capital losses. And there are other tax benefits.

 

But to qualify as a trader, you must buy and sell securities frequently and look to make money on short-term swings in prices. And the trading activities must be continuous.This is different from an investor, who profits mainly on long-term appreciation and dividends. Investors hold their securities for longer periods and sell much less often than traders.

The IRS knows that many filers who report trading losses or expenses on Schedule C are actually investors. So it’s pulling returns and checking to see that the taxpayer meets all of the rules to qualify as a bona fide trader.


Gambling: Failing to Report Winnings or Claiming Big Losses

Whether you’re playing the slots or betting on the horses, one sure thing you can count on is that Uncle Sam wants his cut. Recreational gamblers must report winnings as other income on the front page of the 1040 form. Professional gamblers show their winnings on Schedule C.Failure to report gambling winnings can draw IRS attention, especially if the casino or other venue reported the amounts on Form W-2G.

 

Claiming large gambling losses can also be risky. You can deduct these only to the extent that you report gambling winnings (and recreational gamblers must also itemize). But the costs of lodging, meals and other gambling-related expenses can only be written off by professionalgamblers. The IRS is looking at returns of filers who report large miscellaneous deductions on Schedule A, Line 28 from recreational gambling, but aren’t including the winnings in income. Also, taxpayers who report large losses from their gambling-related activity on Schedule C get extra scrutiny from IRS examiners, who want to make sure that these folks really are gaming for a living.

 

Claiming the Home Office Deduction

The IRS is drawn to returns that claim home office write-offs because it has historically found success knocking down the deduction. Your audit risk increases if the deduction is taken on a return that reports a Schedule C loss and/or shows income from wages. If you qualify for this savings, you can deduct a percentage of your rent, real estate taxes, utilities, phone bills, insurance and other costs that are properly allocated to the home office. That's a great deal.

 

Alternatively, you have a simplified option for claiming this deduction: The write-off can be based on a standard rate of $5 per square foot of space used for business, with a maximum deduction of $1,500.

 

To take advantage of this tax benefit, you must use the space exclusively and regularly as your principal place of business. That makes it difficult to successfully claim a guest bedroom or children's playroom as a home office, even if you also use the space to do your work. "Exclusive use" means that a specific area of the home is used only for trade or business, not also for the family to watch TV at night.

 

Engaging in Currency Transactions

The IRS gets many reports of cash transactions in excess of $10,000 involving banks, casinos, car dealers and other businesses, plus suspicious-activity reports from banks and disclosures of foreign accounts. So if you make large cash purchases or deposits, be prepared for IRS scrutiny. Also, be aware that banks and other institutions file reports on suspicious activities that appear to avoid the currency transaction rules (such as persons depositing $9,500 in cash one day and an additional $9,500 in cash two days later).

 

Tax Strategy Scan: The Tax Advantages of Old Age

The Motley Fool

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

 

10 financial perks of growing older: Clients are entitled to certain tax privileges when they reach old age, according to U.S. News & World Report. Aside from a higher standard deduction, seniors may be entitled to property or school tax deferrals and exemptions. Tax filing requirements will also be less stringent for older people. -- U.S. News & World Report

 

Should you tax-loss harvest in your IRA? Tax-loss harvesting is a strategy to recoup losses from a market decline, but it is not a good option if the investments are in an IRA, according to Morningstar. IRA investors will be better off if they consider a Roth conversion when the markets tumble, since the cost of converting those assets will be less than if the assets were converted when the market was higher. Another option is to recharacterize Roth assets back to traditional, because they would incur a lower tax bill than on the earlier conversion, completed when the account was worth more. -- Morningstar

 

States with the lowest and highest gas tax: Alaska, New Jersey and South Carolina are among the states that charge the lowest gas tax rates, while gas is taxed the highest in Pennsylvania, based on estimates provided by the American Petroleum Institute, according to USA Today. Often the highest taxes are in the Northeast and West Coast, whereas the lowest taxes are in the Southeast and the Central United States. --USA Today

 

The similarities and difference between sole proprietorship and partnership: Clients may be unaware of how they should approach proprietorships and partnerships when doing their taxes, according to The Motley Fool. Taxpayers engaged in a sole proprietorship are required to include business income and other related taxes in their personal tax returns. Those who are in a partnership also have to report their business profits on their personal tax returns, but they need to register with the state and get a federal tax ID number. Clients who entered into a business partnership are required to file a business return to make sure all partners have claimed the business' profit

 

 

 

Ted Cruz Tax Plan Seen as Aiding Wealthy and Costing $8.6 Trillion

BY LYNNLEY BROWNING

 

Presidential candidate Ted Cruz’s tax proposals, which include cutting taxes for most individuals and replacing the corporate income tax with a flat 16 percent business tax, would reduce federal revenue by $8.6 trillion over a decade and “almost surely depress the economy over the long run,” according to a policy study and its authors.

 

Cruz’s plan would benefit wealthy taxpayers “dramatically” and raise taxes slightly for some people in the bottom fifth of low-income taxpayers, according to areport released Tuesday by the Tax Policy Center, a research group in Washington, D.C. The center is a joint project of the Urban Institute and the Brookings Institution.

 

The Republican senator from Texas proposes to refashion the U.S. regime as a consumption-tax system, spurring the growth that many economists say comes from eliminating tax-driven barriers to saving, working and investing. But if interest rates rose and Congress failed to enact either “extraordinarily large cuts in government spending or future tax increases,” the plan would create “persistently large, and likely unsustainable, budget deficits,” the report said.

 

The Cruz campaign, which has described the plan as so simple that all Americans will be able to file their taxes “on a postcard or an iPhone app,” didn’t immediately respond to a request for comment.

 

Prior analyses of Cruz’s tax plan reached varying conclusions regarding its cost over a decade. The conservative Tax Foundation found it would cut revenue by $3.6 trillion, while the liberal Citizens for Tax Justice said it would produce a $16.2 trillion shortfall.

 

Len Burman, director of the Tax Policy Center, said Cruz’s plan was “a major tax reform” and “a fundamental change,” calling it “the simplest plan we’ve analyzed” from Republican candidates so far. But Burman added that it “would almost surely depress the economy over the long run.”

 

‘Unprecedented Territory’

Cruz’s plan would cut revenue by $12.2 trillion more in its second decade through 2037, the report said. Combined with increased debt and deficits, the losses would increase the federal debt by 68.8 percent relative to gross domestic product. “This is unprecedented territory,” Burman said.

 

Cruz would replace the corporate income tax, now at a top rate of 35 percent, with what he calls a “business flat tax.” It’s a value-added tax of 16 percent on all businesses, from corporations to partnerships to passthroughs—which, under current law, do not pay federal income taxes and pass their profit directly to individuals. Nonprofits and government entities, including state governments, would also be subject to the tax.

 

Businesses would be allowed to lower their taxes by using unclaimed depreciation, net operating losses and other credits accumulated through 2016. The value-added flat tax would apply to wages paid by nonprofits and by federal, state and local governments and would disallow exemptions or deductions on business sales to nonprofits or governments. Also, the VAT would apply only to imports, not to exports, meaning that profits generated abroad wouldn’t be taxed, and businesses would have an incentive to boost their offshore income.

 

Cruz proposes to transition to the new system by imposing a 10 percent tax on profit accumulated by foreign subsidiaries of U.S. companies through 2016. U.S. companies have deferred taxes on an estimated $2.1 trillion of such earnings. The 10 percent tax would be payable over a decade.

 

Republican Debate

Cruz’s business-tax plan stirred conflict during a Republican debate last month, when Florida Senator Marco Rubio said it would lead to higher prices for consumers and act as a hidden tax. Many conservatives say value-added taxes aren’t as transparent as other forms of taxation. At the time, Cruz disputed Rubio’s description of his plan.

 

“My proposal is not a VAT,” the Texas senator said during the Jan. 14 debate in North Charleston, South Carolina. “A VAT is imposed as a sales tax when you buy a good.” Yet the Tax Policy Center’s analysis, like others from across the political spectrum, concluded that Cruz’s business-tax plan is indeed a value-added tax.

 

“The base of this new tax would be the difference between a firm’s sales and its purchases from other businesses, which is equal to the value-added of the business,” according to the analysis.

Cruz’s plan would create a bigger deficit than Rubio’s plan or Jeb Bush’s, but a smaller revenue loss compared with Donald Trump’s plan, said the Tax Policy Center’s Burman. In South Carolina, which holds its Republican primary election Saturday, polls put Cruz in second place behind Trump. Cruz finished in fifth place in the New Hampshire primary earlier this month.

 

Social Security

Cruz also proposes to repeal individuals’ payroll taxes for Social Security and Medicare, including the 0.9 percent Medicare tax on high-income workers under the Affordable Care Act. Burman said it was unclear how Social Security would be funded.

 

For individuals, Cruz would collapse the current seven tax brackets into a single, 10 percent rate on income, capital gains and dividends—about one-fourth the current top 39.6 percent rate. The plan would increase standard deductions but repeal most itemized deductions, except those for charitable donations, contributions to retirement savings accounts and a limited deduction for home mortgage interest. As a result, fewer taxpayers would itemize their deductions, which might hurt charitable contributions, the analysis found.

 

Cruz would also repeal the 12.4 percent payroll tax for Social Security and a 2.9 percent payroll tax for Medicare. He’d eliminate Medicare’s 3.8 percent net investment income tax on high-income taxpayers.

 

The payroll tax cuts would reduce federal revenue by about $12.2 trillion over a decade, the analysis found, while the various changes to federal income taxes would cut about $11.9 trillion more. Scrapping the corporate income tax would cost about $3.5 trillion and creating the new value-added tax would raise $19.2 trillion over the decade, offsetting about 70 percent of the various tax cuts, the report said.

 

Except for the child tax credit and the earned income tax credit, a key source of income for the poor, all other credits would be repealed. Cruz would also repeal all federal estate and gift taxes.

 

Universal Savings Account

Through a new “Universal Savings Account,” taxpayers would be allowed to deduct contributions of up to $25,000 annually. Most taxpayers don’t have $25,000 in savings, so the account would result in most of them paying no income tax on their investment returns, the report said. Burman said that “for the vast majority of Americans, savings would be untaxed.” Cruz hasn’t detailed what the account could be used for.

 

While the business flat tax would reduce individuals’ pre-tax wages in general, most workers would have higher after-tax wage income from reduced income taxes and lower payroll taxes, according to the analysis.

 

Taxpayers in the top 0.1 percent of the income scale—those earning more than $3.7 million annually—would get an average tax cut of more than $2 million next year, the analysis found. Overall, taxpayers earning in the top fifth would see their after-tax income rise by 11.3 percent. Those in the middle would get an average cut of $1,800, or 3.2 percent of after-tax income.

Some 47.8 million tax filers, or the bottom 20 percent of taxpayers, would receive an average tax cut of $46, or 0.4 percent of after-tax income. Some taxpayers in that bracket would eventually see their after-tax income decline by 0.6 percent, due to the effect of the VAT, the analysis found.

 

 

 

Man Faces Charges for Cursing out IRS

BY MICHAEL COHN

 

A taxpayer has been charged with mailing a threatening communication after he responded to a notice from the Internal Revenue Service about overdue taxes by scribbling a profanity on the letter and mailing it back to the IRS.

 

Enrique Santiago of the Bronx, N.Y., allegedly wrote, “I do not live at this address anymore, so go f--k yourself,” on the IRS notice and told the post office to return it to the sender. The IRS had intended the notice for his nephew, named Enrique A. Santiago, but he had moved out of the elder Santiago’s home a month earlier after a “physical altercation” with his uncle, according to the New York Post. Santiago shares a similar name with his nephew, who owes the IRS $3,032.57 in unpaid taxes.

 

In addition to the curse-filled missive, the elder Santiago also allegedly put white powder in the envelope, causing an IRS office in Long Island to be locked down until authorities determined it was only soap. He was charged with providing false information and mailing a threatening communication.

 

 

 

Taxpayers Have False Sense of Security about Identity Theft

BY MICHAEL COHN

 

Taxpayers are not doing enough to protect themselves from identity theft-related tax fraud and a majority of them don’t expect it to happen to them, according to a new survey.

 

The survey, from security company IDT911, found that 63 percent of Americans are taking an “it could never happen to me” approach and say they aren’t worried about their identities being stolen this tax season despite high-profile data breaches involving the Internal Revenue Service and some service providers.

 

Nineteen percent admitted they have not ensured their Wi-Fi network is password protected if they are filing their taxes online, and 49 percent said they don’t even lock their mailbox when receiving their tax refund through the mail, potentially exposing sensitive personal and financial information to thieves.

 

More than a third (38 percent) of the 1,500 adult U.S. consumers surveyed said they’re unsure how to vet a tax preparer, including an overwhelming 92 percent of Millennials aged 18 to 34. Over half of the respondents (52 percent) said they do not trust, or are not sure if they trust, online tax services, likely due to the recent data breaches of multiple providers.

 

Despite the uptick in tax-related identity theft incidents, 48 percent of those surveyed believe the holiday shopping season is the most risky time of year. Tax-filing season came in second at 30 percent.

 

Only 12 percent planned to file their taxes in January despite experts advising consumers to file as early as possible in order to beat out identity thieves who might potentially claim their tax refunds.

 

“Tax season has become fraud season,” said IDT911 chairman Adam Levin. “As breaches have become the third certainty in life, cybercriminals are able to glean information from literally hundreds of millions of compromised records in order to target consumers in tax related identity theft and phishing schemes. In today's dangerous digital world, each of us must be vigilant and remain on high alert.”

 

IDT911 said its fraud center saw a 154 percent increase in tax-related cases from 2014 to 2015, with 2016 showing no signs of slowing down. Tax refund fraud losses are estimated to reach $21 billion by 2016, according to the Treasury Inspector General for Tax Administration, and the Federal Trade Commission recently announced that it received a 47 percent increase in identity theft complaints in 2015, with tax refund fraud being by far the biggest contributor. These numbers are expected to rise if the proper precautions are not put in place.

 

Despite the increased likelihood of identity theft during tax season, many Americans may not know where to go when they are eventually impacted. More than a third of the survey respondents (38 percent) are unsure if their financial services or insurance providers offer identity theft or fraud protection services. The majority of respondents (57 percent) said their financial institution would be the first entity they’d contact once they learned they were the victim of a data breach.

 

 

 

IRS Auctions Rock & Roll Memorabilia

By Michael Cohn 

 

The Internal Revenue Service is planning a massive public auction in Overland Park, Kansas, on Thursday of a mind-blowing set of rock & roll memorabilia, including autographed records from Jimi Hendrix and Led Zeppelin, a 10-piece drum set from Anthrax, an autographed guitar from Joe Walsh of the Eagles, Nirvana items, a guitar from Nikki Sixx of Motley Crue, and Stevie Ray Vaughn’s shoes.

 

The property comes from an unidentified collector who clearly fell considerably behind on his or her tax payments.

 

One nonmusical item in the lot is the jacket worn by actor Brandon Lee, the son of Bruce Lee, during the filming of “The Crow,” the 1993 movie where he was killed by an accidental gunshot wound.

 

Also in the mix is Ozzie Osbourne’s guitar, even though, as NBC News pointed out, Osbourne doesn’t play guitar. There’s also a pair of snakeskin platform boots once worn by KISS singer Gene Simmons, and another pair of silver boots that used to belong to KISS guitarist Ace Frehley. Other items include a pair of jeans worn by Lita Ford of the Runaways, a Madonna print, and “No More Censorship” artwork once owned by Jello Biafra of the Dead Kennedys. There's also a framed record and photos of the Clash and their song "Clash City Rockers," an autographed copy of the Cure's "Fascination Street," plus a guitar from a member of the Sex Pistols alongside their classic album "Never Mind the Bollocks. Here's the Sex Pistols."

 

The IRS has set a starting bid for the entire lot of $15,495, but the actual closing price is likely to go considerably further in filling the IRS’s budget gap.

 

 

 

Bronx Tax Preparer Sentenced to 9 Years for Stealing Children’s Identities

A former New York tax preparer was sentenced to nine years in prison for filing thousands of fraudulent tax returns using the stolen identities of minors.

 

Noel Cuello, 32, the former operator of a tax preparation business with multiple names and locations in the Bronx, N.Y., was sentenced Monday in Manhattan federal court for leading a large-scale identity theft and tax fraud scheme through which identifying information of minors, including Social Security numbers, was obtained through corrupt payments to a former fraud investigator with the New York City Human Resources Administration. The Human Resources Administration is the largest social services agency in the country and administers 12 major public assistance programs.

 

The identifying information was then used to file thousands of fraudulent tax returns, resulting in millions of dollars in loss to the U.S. Treasury. U.S. District Judge Richard J. Sullivan imposed the nine-year sentence.

 

“Noel Cuello ran a criminal tax preparation business, raking in big fees by helping thousands of taxpayers to commit tax fraud,” said U.S. Attorney for the Southern District of New York Preet Bharara in a statement. “Using identity information stolen from the city’s Human Resources Administration, Cuello enabled taxpayers to falsely claim dependent children, resulting in millions of dollars in lost tax revenue for the government.”

 

According to prosecutors, between at least approximately 2009 and spring 2014, Cuello and his associates charged taxpayers for preparing and filing tax returns falsely claiming they had one or more minor dependents, to take fraudulent advantage of the Earned Income Tax Credit. The business filed thousands of such returns, resulting in refunds totaling millions of dollars. To obtain Social Security Numbers and other information of minors to be used in the scheme, Cuello repeatedly bribed Francisco Abreu, who worked at the time as a fraud investigator with the New York City Human Resources Administration.

 

The business, which used several names over the years, was principally operated by Cuello and his girlfriend, Luz C. Ricardo, with the assistance of his brother, Arismendy Cuello, and Jonathan Orbe, Catherine Ricart, and Joel Vargas, who played various roles, including bringing taxpayers to the business, preparing fraudulent returns, and receiving cash payments from clients.

 

The scheme continued even after law enforcement executed multiple search warrants of the business, with Orbe claiming to have purchased the business from Noel Cuello, and Ricart establishing new electronic filer accounts with the Internal Revenue Service, and opening new bank accounts.

 

In addition to accepting cash in return for assisting other taxpayers to file fraudulent returns, Ricardo, Arismendy Cuello, Orbe, Ricart, and Vargas filed their own fraudulent returns in multiple years, falsely claiming to have one or more minor dependents.

 

Noel Cuello, who previously pled guilty to conspiracy to commit wire fraud, was sentenced to three years of supervised release in addition to his nine-year prison term. He was also ordered to forfeit $3.5 million, and ordered to pay $3.5 million in restitution.

 

Cuello, 32, was indicted last April, along with Ricardo, 34, Arismendy Cuello, 29, Orbe, 26, Ricart, 38, and Vargas, 29, all from the Bronx. They all subsequently pled guilty and were sentenced last month by Judge Sullivan. Ricardo was sentenced to 66 months in prison, Vargas to 24 months in prison, Arismendy Cuello to 36 months in prison, Orbe to 60 months in prison, and Ricart to 36 months in prison.

 

Abreu, 44, who had previously been indicted separately for unrelated robbery and firearm offenses, pled guilty in August 2015 to those unrelated offenses, along with accepting bribes, fraud, and theft counts related to his participation in the scheme. He is scheduled to be sentenced at a future date by U.S. District Judge Naomi Reice Buchwald.

 

 

 

Obama Budget Includes Tax Increases and Tax Preparer Regulation

BY MICHAEL COHN

 

The Obama administration released its fiscal year 2017 budget containing a number of tax increases on high-income taxpayers, oil and foreign income, along with tax breaks for the middle class and small businesses, plus a provision giving the Treasury Department the explicit authority to regulate all paid tax preparers.

 

Among the changes proposed for reforming the international tax system, the budget plan would impose a 19-percent minimum tax on foreign income, impose a 14 percent one-time tax on previously untaxed foreign income, and limit the ability of domestic entities to expatriate.

 

The budget plan would also restrict deductions for excessive interest of members of financial reporting groups, provide tax incentives for locating jobs and business activity in the U.S. and remove tax deductions for shipping jobs overseas, limit shifting of income through intangible property transfers, and restrict the use of hybrid arrangements that create stateless income.

 

“We have seen a sustained economic recovery since President Obama took office seven years ago in the midst of the worst financial crisis since the Great Depression,” said Treasury Secretary Jacob J. Lew in a statement. “Nonetheless, we have much more work to do to ensure that the benefits of our growth are shared by all Americans. Today’s budget and Treasury’s Greenbook strive to address these and other pressing challenges our country faces through a series of tax proposals aimed at reforming the tax code, investing in infrastructure and protecting working families. These proposals would create the conditions for sustained economic growth while upholding the basic American belief that everyone who works hard should get a fair shot at success.”

 

The budget blueprint is not likely to go far in the Republican-dominated Congress, however. “President Obama will leave office having never proposed a budget that balances—ever,” said Speaker of the House Paul Ryan, R-Wis. “This isn’t even a budget so much as it is a progressive manual for growing the federal government at the expense of hardworking Americans. The president’s oil tax alone would raise the average cost of gasoline by 24 cents per gallon, while hurting jobs and a major sector of our economy. Americans deserve better. We need to tackle our fiscal problems before they tackle us. House Republicans are working on a balanced budget that grows our economy in order to secure a Confident America.”

 

Information Return Due Dates

One proposal would accelerate information return filing due dates. This proposal would accelerate the due date for filing for many information returns with the Internal Revenue Service, including Forms 1098 and 1099, from late February to January 31, the same day that the payee statements are due.

 

Tax Preparer Oversight and IRS Enforcement

Another proposal would increase oversight of paid tax return preparers. This proposal would explicitly provide that the Secretary of the Treasury has the authority to regulate all paid tax return preparers. This proposal would be effective as of the date of enactment.

 

Another budget proposal would increase funding for IRS enforcement through a program integrity cap adjustment. This proposal would adjust the discretionary spending limits for IRS tax enforcement, compliance, and related activities, including tax administration activities at the Alcohol and Tobacco Tax and Trade Bureau.

 

The proposed cap adjustment for fiscal year 2017 would fund $515 million in enforcement and compliance initiatives and investments above current levels of activity, allowing the IRS to continue to target international tax compliance and restore previously reduced enforcement levels. Beyond 2017, the Administration proposes further increases in new enforcement and compliance initiatives each fiscal year from 2018 through 2021 and to sustain all of the new initiatives and inflationary costs via cap adjustments through FY 2026.

 

IRS Whistleblower Program

To improve the IRS Whistleblower Program, this proposal would explicitly protect whistleblowers from retaliatory actions, consistent with the protections currently available to whistleblowers under the False Claims Act. In addition, the proposal would also provide that certain safeguarding requirements apply to whistleblowers and their legal representatives who receive tax return information in whistleblower administrative proceedings and extend the penalties for unauthorized inspections and disclosures of tax return information to whistleblowers and their legal representatives.

 

Identity Theft

In the area of combatting tax-related identity theft, this proposal would provide that criminals who are convicted for tax-related identity theft may be subject to longer sentences than the sentences that apply to those criminals under current law.

 

In addition, the proposal would add a $5,000 civil penalty to the Tax Code to be imposed in tax identity theft cases on the individual who filed the fraudulent return. Under the proposal, the IRS would be able to immediately assess a separate civil penalty for each incidence of identity theft. There is no maximum penalty amount that may be imposed.

 

Family Tax Credits

One of the budget proposals would provide a new, simple tax credit to two-earner families. This proposal would provide a second earner tax credit of up to $500 per year to help cover the additional costs faced by families in which both spouses work. The proposal would benefit over 23 million low- and middle-income two-earner married couples.

 

To reform child care tax incentives, this proposal would repeal dependent care flexible spending accounts, increase the child and dependent care credit, and create a larger credit for taxpayers with children under age five. The income level at which the current-law credit begins to phase down would be increased from $15,000 to $120,000, so the rate reaches 20 percent at income above $148,000.

 

Taxpayers with young children could claim a child care credit of up to 50 percent of expenses up to $6,000 ($12,000 for two young children). The credit rate for the young child credit would phase down at a rate of one percentage point for every $2,000 (or part thereof) of adjusted gross income over $120,000 until the rate reaches 20 percent for taxpayers with incomes above $178,000. The expense limits and income at which the credit rates begin to phase down would be indexed for inflation for both young children and other dependents after 2017.

 

For workers without qualifying children, another budget proposal would expand the Earned Income Tax Credit for workers without children by doubling the maximum credit and expanding the range of eligible ages to cover workers between 21 and 67.

 

Education Tax Credits

To simplify and better target education tax benefits to improve college affordability, one proposal would consolidate the Lifetime Learning Credit and student loan interest deduction into an expanded AOTC, which would be available for the first five years of postsecondary education and for five tax years. In addition, this proposal would exclude all Pell Grants from gross income and the AOTC calculation, modify reporting of scholarships, repeal the student loan interest deduction, and provide a tax exclusion for certain debt relief and scholarships.

 

Tax Increases for Upper-Income Taxpayers

Other proposals would raise additional tax revenue by asking the wealthiest to pay more taxes. One proposal would limit the tax rate at which upper-income taxpayers could use itemized deductions and other tax preferences to reduce tax liability to a maximum of 28 percent. This limitation would reduce the value to 28 percent of the specified exclusions and deductions that would otherwise reduce taxable income in the top three individual income tax rate brackets of 33, 35, and 39.6 percent.

 

Another proposal would reform the taxation of capital income. This proposal would eliminate the capital gains step-up in basis at death with protections for the middle class, surviving spouses, small businesses and charities. Among other provisions, there would be a $100,000 per-person exclusion of other gains recognized at death. The proposal also raises the top tax rate on capital gains and qualified dividends from 20 percent to 24.2 percent, or 28 percent including the Net Investment Income Tax.

 

Building off of last year’s proposal to conform Self-Employment Contributions Act taxes for professional service businesses, this year’s proposal further closes loopholes in the SECA tax and the Net Investment Income Tax (NIIT). Under this proposal, all active business income would be subject to either the NIIT or Medicare payroll tax, so choice of business entity would not be a strategy for avoiding these taxes. All the revenues from the NIIT would be deposited in the Medicare Trust Fund.

 

This proposal would also rationalize the taxation of professional services businesses by treating individual owners or professional service businesses taxed as S corporations or partnerships as subject to SECA taxes in the same manner and to the same degree. This proposal would go into effect after December 31, 2016.

 

To implement the Buffett Rule, another proposal would impose a new “Fair Share Tax.” This budget proposal would ensure that high-income taxpayers could not use deductions and preferential tax rates on capital gains and dividends to pay a lower effective rate of tax than many middle-class families. The tax is intended to ensure that very high income families pay tax equivalent to no less than 30 percent of their income, adjusted for charitable donations.

 

Another proposal would restore the Estate, Gift, and Generation-Skipping Transfer (GST) tax parameters in effect in 2009. This proposal would make permanent the estate, GST, and gift tax parameters as they applied during 2009. The top tax rate would be 45 percent and the exclusion amount would be $3.5 million per person for estate and GST taxes, and $1 million for gift taxes. The proposal would be effective for the estates of decedents dying, and for transfers made, after Dec. 31, 2016.

 

Another proposal would modify the transfer tax rules for grantor retained annuity trusts and other grantor trusts. The proposal would make overly generous outcomes more difficult to achieve by requiring that donors leave assets in grantor retained annuity trusts (GRATs) for a fairly long period of time, prohibiting the grantor from engaging in a tax-free exchange of any asset held in the trust, and imposing other restrictions.

 

Retirement Plans

Other proposals would dramatically expand access to employer-based retirement savings options, including automatic IRA options for employees.

 

Still another proposal would permit unaffiliated employers to maintain a single Multiple Employer Defined Contribution Plan (MEP). Under current law, unaffiliated employers (firms not in the same line of business or without other common characteristics) cannot form a single defined contribution (401(k)) retirement plan. As a result, some smaller firms are unable to take advantage of the potential savings in administrative costs such a combination would allow. This proposal would permit unaffiliated employers to join a defined contribution MEP that would be treated as a single plan under the Employment Retirement Income Security Act (ERISA). This proposal would go into effect after December 31, 2016.

 

Cadillac Tax

The budget also proposes to ease the excise tax on high cost employer-sponsored health coverage, also known as the Cadillac tax. Under current law for 2020 and later, the cost of employer-sponsored health coverage in excess of a threshold is subject to a 40-percent excise tax. The threshold is $10,200 for self-only coverage and $27,500 for other coverage in 2018 dollars, indexed to the Consumer Price Index for All Urban Consumers (CPI) plus one percentage point for 2019 and to the CPI thereafter.

 

To ensure that the tax is only ever applied to higher-cost plans, this proposal would increase the tax threshold to the greater of the current law threshold or a “gold plan average premium” that would be calculated for each state. This proposal would also simplify the accounting of employer and employee contributions to a flexible spending account.

 

Carried Interest

Another proposal would tax carried interest profits as ordinary income. Current law provides that an item of income or loss of the partnership retains its character and flows through to the partners, regardless of whether the partners received their interests in the partnership in exchange for services.

 

Thus, some service partners in investment partnerships are able to pay a 20-percent long-term capital gains tax rate, rather than ordinary income tax rates on income items from the partnership. The Obama administration would tax as ordinary income a partner’s share of income on an “investment service partnership interest” (ISPI) regardless of the character of the income at the partnership level. In addition, the partner would be required to pay self-employment taxes on such income, and the gain recognized on the sale of an ISPI that is not attributable to invested capital would generally be taxed as ordinary income, not as capital gain.

 

Financial Firm Fee

To discourage excessive risk-taking by financial firms, under another budget proposal, large financial firms would pay an annual 7 basis point fee on their liabilities.

 

Oil Taxes

Another proposal would impose a fee on oil and oil products that would be equivalent to $10.25 per barrel of crude oil. The fee would be phased-in over a five-year period and would be collected on domestically produced as well as imported petroleum and imported petroleum products. Exported petroleum products would not be taxed and home heating oil would be temporarily exempt. Revenue from the fee would fund a 21st Century Clean Transportation Plan to upgrade the transportation system, invest in cleaner technologies, improve resilience, and reduce carbon emissions. In addition, 15 percent of the revenues would be dedicated for relief for households with particularly burdensome energy costs. Other fuel-related trust funds would be held harmless.

 

Tax Inversions

To limit the ability of U.S. companies to do tax inversions, one of the budget proposals would broaden the definition of an inversion under the law by reducing the 80-percent shareholder continuity threshold for domestic corporation status to a greater-than-50-percent threshold, and eliminate the 60-percent threshold. It would also provide that, regardless of the level of shareholder continuity, a transaction is an inversion if the fair market value of the stock of the domestic entity is greater than the fair market value of the stock of the foreign acquiring corporation, and if the affiliated group that includes the foreign acquiring corporation is primarily managed and controlled in the United States and does not have substantial business activities in the foreign country.

 

Multinational Tax Reforms

Another proposal aims to make the U.S. a more attractive location for businesses by creating a tax incentive to bring offshore jobs and investments back home, while reducing incentives to ship jobs overseas. The proposal would create a new general business credit against income tax equal to 20 percent of the eligible expenses paid or incurred in connection with insourcing a U.S. trade or business, and would disallow deductions for expenses paid or incurred in connection with outsourcing a U.S. trade or business.

 

To restrict the use of hybrid arrangements that create stateless income, another proposal would deny deductions for interest and royalty payments (which are generally deductible under current law) when such payments are made to related parties pursuant to transactions involving hybrid arrangements that result in income that is not subject to tax in any jurisdiction.

 

In addition, the proposal would eliminate exceptions under current law which lead to situations where shareholders are not subject to tax currently in either the United States or in the related firm’s foreign jurisdiction because an entity is considered a separate corporation under U.S. tax law and a pass-through entity in another jurisdiction. The proposal would require current U.S. taxation of such payments.

 

Small Business Expensing and Accounting

Another proposal would expand expensing for investments made by small businesses. The proposal would increase the maximum expensing limitation to $1 million and the phase-out threshold would remain at $2 million with both amounts being indexed for inflation. The proposal would become effective for property placed in service in 2017.

 

The budget plan would also expand a simplified accounting for small businesses and establish a uniform definition of small business for accounting methods. Beginning in 2017, small businesses —defined as those with less than $25 million in average annual gross receipts—would be exempted from certain accounting requirements, allowing them to use the cash method of accounting, avoid the uniform capitalization requirements for both inventory and produced property, and use an inventory method that either conforms to the taxpayer’s financial accounting method or is otherwise properly reflective of income. The gross receipts threshold would be indexed for inflation for taxable years beginning after Dec. 31, 2017.

 

The budget plan would also increase the limitations for deductible new business expenditures and consolidate provisions for start-up and organizational expenditures. A taxpayer is generally allowed to deduct up to $5,000 of start-up expenditures in the taxable year in which an active trade or business begins, and may deduct up to $5,000 of organizational expenditures in the taxable year in which a corporation or partnership begins business. In each case, the $5,000 amount would be reduced (but not below zero), by the amount by which such expenditures exceed $50,000. The proposal would consolidate these provisions, and would allow $20,000 of combined new business expenditures to be expensed, beginning in 2017. That immediately expensed amount would be reduced by the amount by which the combined new business expenditures exceed $120,000.

 

Another proposal would expand and simplify the tax credit provided to qualified small employers for non-elective contributions to employee health insurance. This proposal would expand the credit for small employers to provide health insurance for employees and their families to employers with up to 50 (rather than 25) full-time equivalent employees and would phase out the credit between 20 and 50, rather than between 10 and 25, full-time equivalent employees. A new phase-out methodology would benefit qualified smaller businesses by ensuring they were eligible for some amount of credit if they met the statutory constraints.

 

R&D Tax Credit

To enhance and simplify research and development tax incentives, another proposal would improve on the research and experimentation (R&E) tax credit that was recently made permanent using one of two allowable methods. Under the “traditional” method, the credit is 20 percent of qualified research expenses above a base amount related to the firm’s historical research intensity during the 1984 to 1988 period. Under the alternative simplified research credit (ASC), the credit would be 14 percent of qualified research expenses in excess of a base amount reflecting its research spending over the prior three years. This proposal would repeal the “traditional” method.

 

In addition, the proposal would increase the rate of the ASC from 14 percent to 18 percent, eliminate the reduced ASC rate of six percent for business without qualified research expenses in the prior three years, allow the credit to offset Alternative Minimum Tax liability, repeal a special rule for pass-thru entities that limited use of the credit, and allow 75 percent of payments to qualified non-profit organizations (such as universities) to be included as contract research (an increase from 65 percent).

 

Work Opportunity Tax Credit

Another proposal would extend and modify certain employment tax credits, including incentives for hiring veterans. This proposal would permanently extend the Work Opportunity Tax Credit (WOTC) to qualified individuals who begin work after Dec. 31, 2019. The Indian Employment Credit would be permanently extended to apply to qualified individuals who being work after Dec. 31, 2016.

 

Beginning in 2017, the Administration also proposes to expand the definition of disabled veterans eligible for the WOTC to include disabled veterans who use the GI bill to receive education or training starting within one year after discharge and who are hired within six months of leaving the program.

 

To provide a Community College Partnership Tax Credit, another proposal would provide businesses with a new tax credit for hiring graduates from community and technical colleges as an incentive to encourage employer engagement and investment in these education and training pathways. The proposal would provide $500 million in tax credit authority for each of the five years, 2017 through 2021. The tax credit authority would be allocated annually to states on a per capita basis and would be available to qualifying employers that hire qualifying community college graduates.

 

Renewable Energy Incentives

Another proposal would modify and permanently extend the renewable electricity production tax credit and the investment tax credit. This proposal would permanently extend the renewable electricity production tax credit, make it refundable, and make it available to otherwise eligible renewable electricity consumed directly by the producer rather than sold to an unrelated third party, provided this production can be independently verified. This proposal would also allow individuals to claim the production tax credit for electricity produced in connection with a residence, regardless of whether it is consumed on-site or sent back to the grid. Further, the proposal would permanently extend the renewable energy investment tax credit for businesses under the terms available in 2017. Specifically, the proposal would permanently extend the 30 percent investment tax credit for solar, fuel cell, and small wind property and the 10 percent credit for geothermal and other sources

 

To provide a Carbon Dioxide Investment and Sequestration Tax Credit, this proposal would provide $2 billion for a new, refundable allocable investment tax credit for carbon capture and storage property. In determining the award of the investment tax credit, the Treasury Secretary would consider (i) the credit per ton of net sequestration capability and (ii) the expected contribution of the technology and the type of plant to which that technology is applied to the long-run economic viability of carbon sequestration from fossil fuel combustion. The proposal would also provide a 20-year, indexed, refundable sequestration tax credit. The credit would be $50 per metric ton of carbon dioxide permanently sequestered and not beneficially reused (e.g., in enhanced oil recovery) and $10 per metric ton for carbon dioxide that is permanently sequestered and beneficially reused.

 

New Markets Tax Credit

Another proposal would modify and permanently extend the New Markets Tax Credit. The proposal would permit NMTCs resulting from qualified equity investments made after Dec. 31, 2019, to offset AMT liability, which is not currently allowed. This proposal would also permanently extend the NMTC and provide $5 billion of credit allocation authority per year. This proposal aims to create greater certainty for taxpayers and encourage additional capital investments in low-income communities.

 

Low-Income Housing Tax Credit

President Obama’s budget includes several proposals to reform and expand the Low-Income Housing Tax Credit (LIHTC), including allowing conversion of private activity bond (PAB) volume cap into LIHTCs. Under current law, each state is provided annually a statutorily determined amount of LIHTCs (the LIHTC ceiling) for the state to allocate to developers who want to construct or rehabilitate buildings for low-income residents.

 

Also, under current law, each state is provided annually a statutorily determined limit (volume cap) on the qualified PABs that the state may issue. If a building is at least half financed with PABs subject to the volume cap, the building may earn LIHTCs that are not subject to the state’s LIHTC ceiling but that are earned at a lower rate than the rate that generally applies to allocated LIHTCs, provided that all the qualifications are met.

 

A major part of the proposal is that it would allow each state annually to convert up to 18 percent of its PAB volume cap into an increase in its LIHTC ceiling. If a developer is awarded sufficient PAB volume cap to issue bonds that would qualify its building for LIHTCs but the developer does not need PAB financing, then the developer would be able to convert its volume cap into the amount of LIHTCs that it would have earned if it had issued the bonds and financed the building with them.

 

Tax-Exempt Bonds

To build upon the successful temporary Build America Bond program under the American Recovery and Reinvestment Act of 2009, another proposal would create a new, expanded, and permanent America Fast Forward Bond (AFFB) program as an optional alternative to traditional tax-exempt bonds. AFFBs would be taxable bonds issued by state and local governments for which the federal government makes direct borrowing subsidy payments to those issuers (through refundable tax credits) at a subsidy rate equal to 28 percent of the coupon interest on the bonds. This subsidy rate is intended to be approximately revenue neutral relative to the estimated future federal tax expenditures for tax-exempt bonds. As an expansion of uses, AFFBs could be used for projects typically financed with qualified private activity bonds and qualified public infrastructure bonds in order to support a wide variety of public investments.

 

To facilitate public-private partnerships, another proposal would create a new category of tax-exempt qualified private activity bonds, called “Qualified Public Infrastructure Bonds” (QPIBs) to finance specified types of infrastructure projects. The projects must be owned by State or local governments and be available for general public use. Eligible types of projects would include airports, docks and wharves, mass commuting facilities, facilities for the furnishing of water, sewage facilities, solid waste disposal facilities, qualified highway or surface freight transfer facilities, and broadband telecommunications assets. The proposal would be effective for bonds issued starting Jan. 1, 2017.

 

 

 

Companies Will Need to Adjust to New Leasing Standard

BY MICHAEL COHN

 

Now that the Financial Accounting Standards Board has released its long-awaited lease accounting standard, companies and their accountants will need to get ready to put their operating leases on the balance sheet.

 

Companies will need to inventory all the leases that are currently out there as operating leases and then calculate the asset and liability amounts at the date of adoption in order to include them on the balance sheets, according to Jared Rosen, a director at the Baltimore accounting firm Ellin & Tucker.

 

“We’re going to be advising our clients to gather information on all their existing leases and capture data for new leases as they’re entering into them now because they will be affected by the new standard if they’re long-term leases and still in place a few years from now,” said Rosen. “I think it’s also going to affect the way leases are negotiated. In the past there was an advantage to negotiating a lease that would be treated as an operating lease if a company did not want to have that liability recorded on their balance sheet.”

 

He believes the new standard will have an impact on financial covenants, benchmark ratios and leverage. “That will be a key impact that will need to be discussed with lenders in advance because many financial ratios are going to be impacted, including debt to equity ratios, return on asset ratios, and just overall leverage of the balance sheet, said Rosen.

 

The accounting standards update will take effect for public companies for fiscal years, and interim periods within those fiscal years, beginning after Dec. 15, 2018 (see FASB Releases Lease Accounting Standard). For all other organizations, the ASU on leases will take effect for fiscal years beginning after Dec. 15, 2019, and for interim periods within fiscal years beginning after Dec. 15, 2020. Early application will be permitted for all organizations.

 

There are some differences between FASB’s version of the standard for U.S. GAAP and the version released last month by the International Accounting Standards Board for International Financial Reporting Standards. “Probably the biggest and most notable difference is the difference around the expense attribution of the various leases,” said Sean Torr, advisory director at Deloitte & Touche LLP. “Whereas under IFRS there is a one-model attribution of expense, which will be a front-loaded finance lease model, the U.S. GAAP version is going to have a dual model where some of the leases will be following the same approach as IFRS, which is the finance model, and others will be following a different model, which is an operating lease model. That’s probably the most notable difference. There are some other items as well. For example, the IFRS version had a specific materiality component of the standard and we’ve not expecting that to be in the U.S. GAAP version.”

 

Technology will be an important component of the effort to adjust to the new leasing standard. “There’s a significant amount of effort around data, and systems and technology and processes that will need to be comprehended to comply,” said Torr. “There’s also the financial statement impact, which is going to be much more pronounced visibility in the financial statements about leasing transactions, with assets and liabilities on the face of the financial statements or disclosure in the footnotes. But beyond that it’s the process data and the technology aspects that are going to drive a significant amount of work for companies to comply with this requirement, both to get this implemented for the first time, but also to maintain this on a go-forward basis.”

 

The leasing standard may require a re-examination of a business's technology systems. “Most companies will need to revisit their technology around leasing because the requirements for the new standard are so different from a data perspective and a calculation perspective as well as a footnote disclosure reporting perspective,” said Torr. “So systems will need to be reviewed. How companies address that will differ, depending on the systems that are currently used. This might be an opportunity for companies to revisit their systems, or it might be an opportunity to implement a new system around this compliance requirement. Depending on what the company’s current systems landscape looks like, most companies would need to have some modification to their technology to accommodate these new requirements.”

 

However, according to FASB officials, the new standard should not require a significant technology upgrade. “If companies are being told they need to implement costly or complex solutions, be skeptical,” FASB vice chair Jim Kroeker told Accounting Today. “I think it’s built in a way that should allow companies to leverage their existing systems.”

 

There are some differences from the IASB’s version for IFRS. Multinational companies will need to be aware of some of those differences if they are preparing financial statements in both U.S. GAAP and IFRS.

 

“We did agree on some first-order principles, that is, the definition of a lease, so you’re dealing with the same population, which is very important, because if you’re dealing with different populations of what a lease is, it could be relatively more difficult,” said Kroeker. “The other first-order principle is we agreed they should go on the balance sheet, with an exception for short-term leases.”

 

He noted there are some differences in the details. “The IASB has provided an exception for small-ticket leases,” said Kroeker. “That shouldn’t pose a problem for multinationals because that’s an election you can make under IFRS. The biggest difference that people talk about is our continuing to distinguish operating leases from capital leases. While they’re both on the balance sheet, we have different recognition treatment of the underlying expense for operating leases than they have. Our change was in direct response to stakeholder feedback that the 2013 ED [exposure draft] proposed to distinguish between a capital lease and an operating type lease, or a finance lease and an operating lease. We called them A and B leases in a fundamentally new way, and constituents’ feedback broadly to us was 'while we think there should be a difference, you should keep the dividing line that you have today.' We reached out to multinationals in the U.S., saying, ‘OK, but if the IASB doesn’t head in the same direction, what would be the impact to you?’ By and large—and I can’t think of anyone who told us otherwise—they told us it was more important for them to be able to leverage their existing systems in the U.S. than it was for us to facilitate a global platform. So that was the reaction.”

 

Companies can start preparing for the new standards as they take effect over the next few years.

“We’re going to be advising our clients to gather information on all their existing leases and capture data for new leases as they’re entering into them now because they will be affected by the new standard if they’re long-term leases and still in place a few years from now,” said Rosen. “I think it’s also going to affect the way leases are negotiated. In the past there was an advantage to negotiate a lease that would be treated as an operating lease if a company did not want to have that liability recorded on their balance sheet.”

 

The standard may encourage some companies to negotiate shorter-term leases. “Any leases less than 12 months in duration are excluded from the scope of this standard,” said Rosen. “That will be a consideration.”

 

However, he believes it will be difficult for companies to get out of leases that they’ve previously entered into just based on the effect of the standard. Most renegotiations that take place will probably relate to new leases. “That could be new leases that are being entered into now because of the retrospective application of the standard,” said Rosen. “If a lease is entered into now and it’s a five-year lease, it will be affected by the standard because it will still be ongoing as of the date of adoption.”

 

Lease vs. buy decisions may also be affected by the new standard. “There are many aspects to consider when a company is determining whether to lease or buy equipment, but from a financial statement reporting perspective the new standard eliminates the difference in reporting as far as capital leases vs. operating leases vs. finance purchases so it sort of brings those three from a financial reporting perspective in line,” said Rosen.

 

His main advice for clients is that they get all the necessary information in order. “We’re going to be advising our clients to make sure that they gather all the information on their current leases and think about the controls in place in order to capture both existing leases and any new leases that are entered into and then develop accounting policies that will enable them to record these leases properly when the new standard is adopted,” said Rosen. “That could lead into information technology, with new accounting software considerations for large companies that have many leases in order to manage all this data.”

 

 

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.

 

15427 Vivian - Taylor, Michigan 48180 – voice (734) 946-7576  fax (734) 946-8166

website: www.rigotticpa.com    email: rigotticpa@gmail.com  Tax ID # 38-3083077