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Compliance on virtual currency transactions

By Mark A. Luscombe


Virtual currencies have been growing rapidly in terms of type and frequency of use. They are increasingly becoming an accepted form of payment even by major established companies and financial institutions. Not all taxpayers, however, appear to be familiar with or complying with their tax reporting obligations involving virtual currencies.


The Internal Revenue Service estimates that only a few hundred taxpayers have reported virtual currency transactions, while the agency has collected information on and started sending out letters to around 10,000 taxpayers that it believes have engaged in virtual currency transactions.

Addressing this area of noncompliance is becoming an IRS area of focus, and taxpayers and their tax advisors would be well-advised to review their virtual currency tax requirements before IRS enforcement action heats up further.


Notice 2014-21

The first guidance that the IRS issued in the virtual currency area was in 2014. That guidance stated that virtual currencies would be treated as property and not currency and that transactions involving virtual currencies would generally be taxable. No further guidance was forthcoming from the IRS until this year.


Revenue Ruling 2019-24

Revenue Ruling 2019-24 was issued on Oct. 9, 2019. It reaffirms the guidance under Notice 2014-21 and addresses a couple of particular forms of virtual currency transactions that have emerged since 2014.


The ruling defines a “hard fork” as a change to a distributed ledger underlying a cryptocurrency that results in a split from the original distributed ledger, which may result in a new cryptocurrency on a new ledger. The ruling defines an “air drop” as a means of distributing units of a cryptocurrency following a hard fork to the distributed ledger addresses of multiple taxpayers.


If through a hard fork, or a hard fork followed by an air drop, the taxpayer receives a new cryptocurrency over which the taxpayer has dominion and control, it will be taxable to the taxpayer. A taxpayer is considered to have dominion and control if the taxpayer has the ability to transfer, sell, exchange or otherwise dispose of the cryptocurrency units.


Cryptocurrencies are defined as a type of virtual currency that uses encryption to secure transactions digitally recorded on a distributed ledger. Virtual currencies also include digital currencies and any virtual currency having an equivalent value in, or acting as a substitute for, real currency, defined as the official legal currency of a country.


Revenue Ruling 2019-24 specifies that the income recognized will be ordinary income, and basis will be the fair market value at the time of their receipt.


Along with Revenue Ruling 2019-24, the IRS also released a set of 43 frequently asked questions. These give examples of some of the transactions discussed in the revenue ruling and discuss the calculation of gain or loss, the determination of fair market value, and the calculation of basis. The questions point out that virtual currency transactions involving gifts or charitable contributions and soft forks, when a distributed ledger undergoes a protocol change that does not result in a diversion of the ledger and does not result in the creation of a new cryptocurrency, will generally not be subject to tax.


The questions also address the ability of the taxpayer to specifically identify the units of cryptocurrency involved in a particular transaction. Absent such specific identification, the default treatment is first-in, first-out.


IRS letters

Starting in July 2019, the IRS began sending letters to taxpayers suspected of having been involved in virtual currency transactions. The information was obtained by the IRS from at least one virtual currency exchange. The IRS has said that it expects to issue around 10,000 letters in three versions. The three versions are addressed to taxpayers who may not have met their U.S. filing and reporting requirements for transactions involving virtual currency, taxpayers who may not know the requirements for reporting transactions involving virtual currency, or taxpayers who may not have properly reported their transactions involving virtual currency.


The IRS has described these “soft letters” as an effort to get taxpayers to voluntarily come into compliance before enforcement actions are initiated. They also indicate that the service already possesses significant information to initiate those enforcement actions. This appears to be a program that is similar to the IRS effort to bring foreign account and asset holders into compliance by offering opportunities to come into compliance as the IRS collected information on foreign account holders from foreign financial institutions.


Question on Form 1040 Schedule 1

Also, similarly to the approach that the IRS took with respect to foreign accounts, the IRS has added a question about virtual currencies to the tax return, in this case to the draft Schedule 1 of Form 1040. The question, requiring a yes or no response, is: “At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?” This would appear to require all taxpayers to file a Schedule 1, if only to respond to this question.



Even with the additional guidance from the IRS, there remain a number of unanswered questions about the tax treatment of certain virtual currency transactions. As the types of virtual currencies continue to expand and the transactions in which they are involved become more varied, that is likely to continue to be the case.


The thrust of the IRS guidance so far is fairly consistent — virtual currency is property and any transaction that results in something being exchanged for something new is a taxable transaction unless a specific exception can be found in IRS guidance.


The IRS has already obtained considerable information from at least one virtual currency exchange and is likely to be able to obtain additional information. Certainly, any taxpayer who has received a soft letter from the IRS should work promptly to come into compliance before an enforcement action commences.


Those taxpayers who have not received a letter but have engaged in virtual currency transactions should also consider coming into compliance. As the IRS continues to develop additional information on taxpayers engaged in virtual currency transactions, it is not certain that taxpayers in the future will receive a soft letter before enforcements commence.




The financial planner in times of trouble ...

By John P. Napolitano


NOTE – this article is written for the “planner” but should be of interest to investors as well.


The financial planning process is complex and includes many areas: advising on matters of cash flow today and in the future, risk management, retirement planning, income tax planning, investment planning, estate planning, business succession, family governance, and just about any financial issue that comes up in the lives of your clients. Notice that investment planning is just one of those critical components of a financial planning relationship (albeit a very important one).


The marketplace of financial advisors (note that I didn’t use the term “financial planner”) over the years has shaped the consumers’ view of what constitutes a good relationship with them. In short, most people think that financial planning is all about investing. The financial community, of course, is OK with that, as most revenues are generated from asset management or oversight. Ignoring the remaining items that would reasonably be included in a financial planning engagement saves the advisor a lot of time — except during times of high market volatility.

The single-dimensional relationship underpinned by investments puts the spotlight on you during times of market volatility. Especially if you try to sound like some big-shot analyst who believes their own forecasts. The reality, however, is that neither you nor anyone else who calls themselves an investment professional knows the date when markets will dip and the date when markets will start to rise again. Markets go up and down, as do most portfolios.


I believe that the planner’s role with respect to market volatility is to have open discussions about volatility when you engage with a client. If your client has a high risk tolerance, and wants their investments to match the performance that they hear about in the news, then you better explain markets and volatility to them.


I like to see volatility explained in terms of the range of expectations for any investment. Of course, the compliance people would be very unhappy with me if I didn’t remind you that past performance is no guarantee of future results — but you already knew that. But an education for clients about the past range of performance for the markets or the specific portfolio that you may recommend can be helpful to all.


Do the math, and more

There are two ways to find out what is the optimum portfolio for your client. One is to mathematically calculate what they need to earn in order to meet their life’s objectives. The other is to discover their tolerance for risk, and learn just how much volatility they can take.


The mathematical take sounds very intuitive and logical until you get into the details. In order to calculate the rate of return required by your client, a formula that includes many variables must be deployed. Many of these variables are out of your control: Inflation, tax rate, and portfolio results are just a few. While today you may all agree on the reasonableness of the assumptions used, we all know that they will not be 100 percent accurate and that the forecasts will need to be reassessed for the shifts that will occur within the variables. A good financial planner will reconcile each year the forecasts delivered in the prior year to the realities of the current day, and then adjust accordingly.


The second method is to use a risk tolerance questionnaire. This may feel a little superficial, but as each day passes there are technology tools being introduced that try to make this estimate of just how much risk your clients can tolerate into a quantifiable answer. Nothing in the RTQ space is foolproof, so find one that works for your firm and use it with every client.


With a little luck, you’ll find that your client’s quantitative take is not too far to the left or right of the risk assessment tool that you are using. If there is discord, it can’t be ignored. If your client needs to earn a relatively high amount but has absolutely no tolerance for risk, you must speak up. It’s the planner’s job to come up with alternative solutions, as painful as they may be. Some of these solutions may be to spend less, downsize the home, earn more, or delay retirement. None of these solutions are good news, but it is better that your clients find out about their core issues sooner than later.


In each client review, I think it’s good practice to bring the humility and reality that markets may behave irrationally, and there isn’t much that any individual can do about that except to turn off all risk and take cover. If you do that, good luck trying to decide when and how to get back in. We’ve all seen the data in terms of poor investor returns if you miss the few biggest rally days in any given period. You’ll also notice that the best periods for market-driven returns are typically just after the worst one.


Another way that you may talk to your clients about volatility is to stress test their financial plan. You can run “what-if” scenarios regarding the variables not going in their favor. You may test for a higher-inflation scenario, portfolio losses, or higher spending.


During times of volatility, you may end up revisiting many of these same tools that you used at the start of your planning relationship to see if anything has altered. In prior years and market corrections, we’ve retested some clients’ risk tolerance. For the most part there weren’t material changes in their tolerance for risk.

What you can do

Your most important role during turbulent times is to be there for your clients. Make proactive phone calls to let them know that you are watching and thinking about them. Hiding or ignoring headline news about losses is not advisable.


You may end up revisiting the portfolio as a whole in terms of how it was constructed based on their needs and tolerance for risk. Show them some of the risk statistics and the consequences of the current market conditions on their financial situation.


Remind your clients that this is one of the few elements in their financial plan that is out of their control. This could be a good time to take a look at some of the Callan charts that show the sector leaders and laggards in year-by-year format. This underscores the unpredictability of investing and helps your clients to understand why diversification may be helpful in any given year. Of course, diversification is also no guarantee against losses or of better performance.


For the most part, the financial planner who has been practicing proactive and holistic financial planning is probably not receiving a lot of client calls when markets get volatile. Their clients understand and have learned to appreciate their planner because of all the other good things that the planning team has done for the family. That doesn’t give you a pass for lousy investment performance, but it sure takes the pressure off when they know that you’ve got their best interests at the top of your list.




SALT cap ruling challenged on appeal by four eastern states

By Erik Larson


Four states in the eastern U.S. will attempt to revive their lawsuit challenging the Trump administration’s cap on the deduction for state and local taxes, known as SALT, after a judge dismissed the case.


New York, Connecticut, Maryland and New Jersey will take their challenge to the federal appeals court in Manhattan after a judge tossed their lawsuit in September, New York Attorney General Letitia James and the state’s governor, Andrew Cuomo, said Tuesday in a statement.

The 2017 tax law passed by Republican lawmakers capped the amount of state and local taxes that can be deducted on individual returns at $10,000. Previously, there was no limit. Democrats in Congress and some state officials said the change targeted Democratic-led states that tend to have higher taxes. Cuomo called it “economic civil war.”


The cap “is expected to cost New York’s taxpayers over $100 billion, which is why we will fight this senseless and unconstitutional law,” James said in the statement.


In September, U.S. District Judge J. Paul Oetken threw out a lawsuit, saying the federal government has the “exhaustive” power to impose and collect income taxes and that the states can enact their own tax policies as they wish.


Lawmakers in high-tax states have been trying to overturn the limit on SALT deductions since the law passed almost two years ago. The cap was one of the most politically contentious provisions in the 2017 tax overhaul.


New Jersey Governor Phil Murphy said in a statement that Trump is using the Internal Revenue Service “as a political weapon.” The state’s attorney general, Gurbir Grewal, called the cap “arbitrary and unprecedented.”


A media representative for the U.S. Treasury Department, which runs the IRS, didn’t immediately return a message seeking comment.

The case is State of New York v. Mnuchin, 18-cv-6427, U.S. District Court, Southern District of New York (Manhattan).




3 reasons to use a digital wallet



Key takeaways

  • Mobile payments are safe—and they are faster and easier than paying cash or using a card.
  • You can connect a debit card or a credit card to the digital wallet app in your phone to make mobile payments.


If you have a smartphone, you can use that to pay for things with a wave of your phone. If you have a smartwatch, you can even use it to pay. It's known as a digital or electronic wallet, or eWallet, and if you haven't yet given it a try, you may want to. Not only is it easy to use, it can be faster and more secure than swiping a credit or debit card.


"The convenience of a digital wallet is something that would be useful for most people," says Stefan Ross, vice president of credit card products at Fidelity. "You can quickly, safely, and securely pay for purchases with the touch of a button or, in many cases, your fingertip."


How it works

Most AndroidTM, Apple®, and Samsung® smartphones, as well as an Apple Watch® or iPad®, have a digital wallet. Apple Pay®, Google PayTM and Samsung Pay® make use of their devices' near field communication (NFC) technology to make payments. NFC allows information to pass between your device and a retailer's compatible payment terminal when they are "near" one another (usually within just a few centimeters). You just hold your device near, or tap it at the retailer's checkout reader to pay. Of course, not every retailer has NFC technology, but many major ones do.


Here are 3 important things to know about using your smartphone as a digital wallet.

1. It is safer than you may think

Having a digital wallet on your phone is not an open door to your debit or credit card account. Retailers don't have access to your card number because each transaction uses a unique, random transaction number—instead of your account or credit card number. In fact, your account number isn't even stored on your phone.


Your account information is encrypted, and can only be accessed via password or, with some mobile devices, your fingerprint. And, if your card information is ever lost or stolen, banks can reissue a new one immediately to your phone, instead of having to wait days for a card to arrive in the mail.


Should you ever misplace or lose your phone, you can lock your digital wallet remotely. Additionally, there are no fees for using digital wallets, and zero fraud liability is offered by most credit card issuers.


2. It can be faster and easier than paying cash or using a card

With a digital wallet, you can truly zip through a payment. Many new smartphones, including ones from Apple and Samsung, have fingerprint scanners. Hold your phone near the payment reader, and a subtle vibration and beep will confirm that your payment was registered. Many times, that's it—there's not even a need to open an app or wake up your phone. A record of your transaction is saved in your digital wallet, which you can view by accessing your wallet app.


3. You can use it with either a debit or a credit card

Most phones allow you to have more than one card in your wallet. So you are able to keep your card options flexible by adding all your favorite credit cards, including some store credit cards and debit cards.


Ready to try it?

If you don't already have a digital wallet app on your mobile device, download one from your online app store and follow the simple instructions. You should be able to start using your digital wallet in just a few minutes, although some card providers may require a phone call or other security step to confirm.


"All I really had to do was take a picture of my card with my phone and answer identification questions," said a recent digital wallet adopter. "One day, I ran into the grocery store to pick up something quickly and I didn't have my wallet. I had my phone and used it for the first time. It was remarkably quick and simple."




Moving from a high-tax state? Be prepared for a residency audit

By Sandy Weinberg


“Should I stay or should I go?” sang The Clash years ago. Residents of New York, Connecticut, New Jersey, Rhode Island, California and other high-tax states are now singing a similar song. The thought of moving to a lower-tax state is more prevalent than ever in light of the federal Tax Cuts and Jobs Act and its restrictive $10,000 cap on state tax deductions. One need look no further than President Trump, who recently announced he plans to establish his residence in Florida, apparently in part to save on New York state and city income taxes.


As 2018 was the first year to incorporate the rules of the TCJA, individuals who filed their 2018 returns by the recent Oct. 15 extended deadline — and grumbled when they saw their tax bill — may now be seeking greener pastures.


The greenest of pastures, of course, exists in the seven states that have no personal income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. Many other states have lower tax rates than the California high rate of over 13 percent or the combined New York State and City highest rate of over 12 percent. Abandoning a state of residence, even a high-tax state, however, is never easy. Further, many want to keep a home in that state because of family, friends and business contacts. If your clients plan to keep a home in a high-tax state, while intending to change residences to a taxpayer-friendlier state through the ownership or rental of a second home, beware. It’s complicated, and they will have a target on their backs.


This is particularly so for a high-net-worth/high-income individual, for example, who is a New York resident. New York is difficult on taxpayers trying to leave and establish residency in another state. The numbers speak for themselves. In the last five years, the New York State Department of Taxation and Finance (Department) has:


  • Initiated over 3,000 residency audits on high net worth and high income individuals each year;
  • Collected on average over $140,000 per taxpayer audited; and
  • Generated over a whopping $1 billion of revenue from these audits.


Nearly every high earner changing domiciles gets audited. In other words, the department has been humming a completely different classic rock tune, by the Eagles, where the lyrics are “you can check out any time you’d like, but you can never leave.”


The state of residency audits

Nonresidents are taxed only on the portion of income sourced to the state such as wage income or rental property income earned in the state. Residents, on the other hand, are taxed on all income, including capital gains, dividend and interest income. For a high-tax state, collecting tax on that second revenue stream can be significant.


Residency audits can be invasive, long, arduous and document-intensive, and the rules are getting more complicated. The burden of proof in a residency audit remains on the taxpayer. The evidence must be “clear and convincing.” A taxpayer must present a compelling case, supported by careful recordkeeping and documentary evidence.


In New York, as in other states, auditors determine residency if either of two tests — domicile or statutory residency (or the 183-day test) — is met. These tests were discussed in detail in an article regarding New York Residency Audit Keys, but, in general, developments have made changing residency more difficult.


For example, on Oct. 7, 2019, the United States Supreme Court declined to hear appeals in two New York cases: Edelman and Chamberlain. In both cases the taxpayers argued that New York’s statutory residency scheme, which subjected taxpayers who qualified as dual residents of New York and Connecticut to double taxation, was unconstitutional and in violation of the Commerce Clause. In lower court decisions, the taxpayers were unsuccessful in their arguments.

In another recent decision, Obus, an Administrative Law Judge held that a New Jersey domiciled taxpayer’s rarely used New York vacation property constituted a principal place of abode within the meaning of the law. Coupled with more than 183 days in New York, this meant that the taxpayer qualified as a statutory resident in New York. ALJ decisions are nonbinding, and Obus is on appeal. However, if upheld, Obus would narrow the breadth of the 2014 Gaied New York Court of Appeals case. Gaied held that in order for a dwelling place to constitute a “permanent place of abode,” there must be evidence that the taxpayer actually used the place as a residence. Apparently, as per Obus, this doesn’t apply to vacation homes. More generally, the courts recently have not been overly friendly to taxpayers.


Tricks of the residency audit trade

For the purpose of the 183-day test, New York is now using a whole new set of high-tech tools to track the number of days a taxpayer is present in the state. Auditors now rely heavily on cell phone tracking, which can reveal not only where calls are made and received, but in some cases track data even when you are not using your phone. EZ Pass records, credit card statements, flight occupancy records, swipe cards, doctor’s records and even social media feeds are also used to demonstrate that a taxpayer was present in New York. Further, the tax department can subpoena many of these records.


The domicile test is more subjective than the 183-day test and leaves opportunity for the state to aggressively audit. For this test, auditors primarily look at five factors and, for example, will still want to see that the home in New York is smaller and less expensive than the home in the taxpayer’s new state, and that the taxpayer’s most prized possessions, including their artwork, jewelry, photo albums, family heirlooms and even the treasured teddy bear are in the new state. Further, in addition to looking at where minor children live and attend school, the state, for the domicile test, weighs where other family members, including grandparents and even the family dog, live.


New York wins more than half its audits. Audits can drag on for five years or more. As more high-income individuals leave the state, the number of audits is increasing.


Plan ahead

Taxpayers interested in changing their state residency without paying more than their fair share of state personal income taxes should:


  • Seek advice from a state tax expert before taking any significant steps. This can potentially save tens of thousands of dollars;
  • If the 183-day limit may come into play when counting days, save documentation and consider a day counting app;
  • Understand the five-factor domicile test that New York, Connecticut and other states employ;
  • Consider a comprehensive analysis of the facts to implement a change in domicile that is as bulletproof as possible;
  • If audited, reach out for representation to avoid stepping into traps that auditors set up.




Gusto and Zenefits abruptly end key integrations; customers scramble

By Ranica Arrowsmith


Payroll and HR software providers Gusto and Zenefits have abruptly ended their API integration with an email to customers on November 15. Accountants who depend on the integration have been left scrambling to manually transfer data and figure out how to fill the software gap left by the severed partnership.


A spokesperson from Zenefits told Accounting Today, “Zenefits still has an integration with Gusto for payroll.” It technically does, but the integration will no longer support onboarding a new employee, changes in employee bank or tax details, exemptions or employee salary changes.

The statement from Zenefits went on: “Gusto required that we modify our payroll integration using the latest version of their API, which does not support the same features as the current integration. Effective next month, joint customers who continue to use Gusto for payroll will need to manually enter information the API does not support, such as banking and tax details.”


In kind, a spokesperson from Gusto said, "We asked Zenefits to update their practices for how they were using the integration because the approach they were using created risk of sensitive customer information falling into the wrong hands. Our request was for Zenefits to comply with our existing policies, which all of our partners do. None of this is a result of any new changes that Gusto has implemented. All of our external API documentation is public at These security protocols exist in order to keep customer information secure and private. We believe that keeping customer information secure and private is in fact, being customer first."


Around the time ZenPayroll changed its name to Gusto, in 2015, the company started offering benefits capabilities on top of payroll. But the startup had already established itself as a payroll software provider, and so its integration with Zenefits, another HR software platform, has been a key partnership for many accountant customers. The ending of their partnership, customer Scott Orn conjectures, may be a push by Gusto to make customers switch from Zenefits to their benefits offering.


Orn is chief operating officer of San Francisco-based accounting and professional services firm Kruze Consulting, which provides accounting and human resources services to more than 200 startups. Small, rapidly growing startups are a prime example of the type of company that is neither able nor willing to stop operations to sort out an interruption in services.


Orn said the two software platforms overlap in about 80 percent of their capabilities, and each offers about 20 percent of features that the other does not.


“It happened so fast we haven’t had time to react,” said Orn. “We really like the people at both companies, but this is one example of not putting the customer first — and both companies have built their brand on a ‘customer first’ approach.”


The first email Kruze Consulting received regarding the integration was from Zenefits. The email stated, “Gusto created an application programming interface which we are required to use for our joint customers. This latest connection does not support the same features as the integration you are currently using. As a result, in early December, some of the functionality that Zenefits has been able to provide to you through our current sync will no longer be available.”


Three days later, on November 18, Gusto sent an email to customers that appears to blame Zenefits’ unwillingness to comply with its requests around “security” for the severed integration: “Recently, we asked Zenefits to make changes to our shared integration so that it is in line with Gusto’s high security standards. As a result of the changes being made by Zenefits, some account information will no longer automatically sync between Zenefits and Gusto.”


It’s impossible to say what really happened behind the scenes, but the undeniable result is that firms and businesses that use the two apps together, with the integration, have had just about two weeks' notice before essential functionalities cease and they have to manually shift all the relevant data from one app to the other; or, as Orn points out, to another app altogether, because after going through a confusing and sudden change like this, users can sometimes lose trust completely and start seeking new options.


“The downside of this for both companies is it’s going to open up other options for customers,” Orn said. “You’re going to now look at Rippling or Justworks. That’s what Gusto and Zenefits should have thought about before they made this decision.”




IRS issues new guidance on per diem rates for business travel

By Michael Cohn


The Internal Revenue Service updated its guidance Tuesday for business travelers and their employers on the per diem rates for substantiating expenses, in light of the changes in the Tax Cuts and Jobs Act.


Revenue Procedure 2019-48 updates the rules for utilizing the per diem rates to substantiate the amount of ordinary and necessary business expenses paid or incurred while traveling away from home. Taxpayers aren’t required to use a method described in the revenue procedure, however, the IRS noted. Instead they can substantiate the actual allowable expenses, as long as they maintain adequate records.


While the 2017 tax law suspended the miscellaneous itemized deduction that workers can take for unreimbursed business expenses, self-employed people and certain employees, such as members of the Armed Forces Reserves, fee-basis state or local government officials, eligible educators and qualified performing artists, who deduct unreimbursed expenses for travel away from home can still use per diem rates for meals and incidental expenses, or incidental expenses only.


The revenue procedure clarifies that the Tax Cuts and Jobs Act amended the older rules to disallow a deduction for expenses for entertainment, amusement, or recreation paid or incurred after Dec. 31, 2017. But otherwise, the allowable meal expenses are still going to be deductible if the food and beverages are bought separately from the entertainment, or if the cost of the food and beverages is broken out separately from the cost of the entertainment.


The IRS traditionally issues guidance every year providing updated per diem rates; Notice 2019-55 provides the rates that have been in effect since Oct. 1, 2019.


The new revenue procedure provides the rules for using per diem rates, rather than actual expenses, to substantiate the amount of expenses for lodging, meals, and incidental expenses for travel away from home. Use of a per diem substantiation method is not mandatory. Taxpayers who use per diem rates to substantiate the amount of travel expenses under Rev. Proc. 2019-48 can use the federal per diem rates published annually by the General Services Administration. Rev. Proc. 2019-48 permits certain taxpayers to use a special transportation industry rate or to use rates under a high-low substantiation method for certain high-cost localities. The IRS announced the rates and the rate for the incidental expenses only deduction in its annual notice.




Start with the brackets: Year-end tax planning tips

By Roger Russell


For tax professionals, the approach of Thanksgiving signals that, while there’s still time for tax planning, the time is limited, with just a month left in 2019.


“Tax planning should begin with gauging taxable income to tax brackets,” observed Glenn DiBenedetto, a CPA and director of tax planning at the New England Investment & Retirement Group. “Establishing tax brackets is the first step in determining the most appropriate strategies, such as accelerating deductions, deferring income and harvesting long-term capital gains under the [Net Investment Income Tax] threshold,” he said.


“Optimum tax planning opportunities are based on special circumstances,” he said. “It’s important to know what bracket a taxpayer is in. A typical long-term move is to defer income and accelerate deductions. This continues to be effective for many taxpayers. However, the opposite is true for many in a lower tax bracket. Accelerating income and deferring deductions may allow the taxpayer to maximise the benefit of a lower lower tax bracket.”


“This can be very helpful in managing annuities,” he said. “Older people buy annuities and defer, defer, defer. But there’s no step-up for their beneficiaries at their death — when they die, their beneficiaries get taxed at their bracket rate, which might be considerably higher than that of the decedent. The same is true of IRAs. It makes a world of sense if you can take out some annuity income in a 10, 12 or 22 percent bracket when the beneficiaries are in the 37 percent bracket. People love to see the zeros on ‘tax due,’ but someone will eventually pay the tax. So it makes sense to take out the income at a lower bracket.”


“Taxpayers may be able to reduce their taxes by contributing as much as possible to IRAs and employee retirement plans,” suggested DiBenedetto. “The CPA can help the taxpayer determine if a traditional IRA should be converted to a Roth IRA. Factors to consider include their current and future anticipated tax status, family situation, and ability to pay the tax due from other sources. High-income earners might consider a ‘backdoor’ Roth IRA, which may enable taxpayers to fund a Roth even if their income is over the regular Roth contribution limits,” he said.


It might be worth it to purposely “harvest” investment losses to offset capital gains that have been realized during the year, DiBenedetto observed. “Keep in mind that net losses up to $3,000 can offset income and any further losses can be carried forward to future years,” he said.

And for those whose estate will potentially be subject to the estate tax, gifting, to either family or charities, can reduce the taxable estate, he noted.


“In addition to reducing the estate, charitable gifting can lower taxable income,” he noted. “In order to take advantage of the benefit of charitable gifting on 2019 returns, the taxpayer must itemize deductions and the gift must be made by Dec. 31, 2019. And for taxpayers 70½ or older that are required to make an required minimum distribution, they can transfer their 2019 RMD to a charity, up to a $100,000 limit. While the donation counts as their RMD, it does not increase their adjusted gross income. This can be particularly helpful if the taxpayer does not itemize and cannot deduct charitable contributions, and also help to avoid the Medicare high-income surcharge, or reduce the taxable portion of social security benefits.”


In 2019, a taxpayer can make personal gifts up to $15,000 a year per recipient without gift tax consequences, DiBenedetto said: “This equates to $30,000 per year for a married couple. The lifetime exclusion amount for gifts is $11,400,000 for 2019.”




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Portfolio managers offer investing insights for the months and years ahead.


What's next for electric vehicles?

Elliot Mattingly – November 27, 2019

"I believe it's a question of when, not if, average consumers consider an electric vehicle (EV) for their next car, truck, or SUV," says Elliot Mattingly, portfolio manager of Fidelity® Select Automotive Portfolio.



Look past the short-term operational ups and downs for Tesla.


Mattingly says. He thinks demand for the company's mainstream Model 3 sedan has remained robust.


Mattingly sees Tesla as the current leader in producing EVs that appeal to "regular" customers, mainly because of features and performance—not because Tesla's autos pollute less.


He thinks demand for Tesla EVs could increase further if the company follows through with plans for more service centers and rapid-charging stations.


More EV competition is coming, Mattingly says, but it's taking longer than initially expected for legacy original equipment manufacturers (OEMs) to introduce compelling and relevant products.


Among luxury vehicles, Mattingly believes the Porsche.


Taycan stands out for delivering a combination of driving performance and technology. He sees the Taycan as the most serious challenger to the high-end Tesla Model S, though he says the Taycan's price is roughly double that of a Model S.

Truck owners will have to wait a bit, but Mattingly notes that Ford plans to introduce an all-electric version of its popular F-150 in the next several years. He thinks these all-electric pickups could find an audience once prospective owners take a test drive and experience the vehicle's performance.


As of September 30, the fund held sizable positions in both Tesla and Ford Motor Company.




IRS plans tougher background checks on practitioners

By Michael Cohn


The Internal Revenue Service intends to make the criminal background checks and tax compliance checks it performs on tax professionals such as enrolled agents, e-file providers and acceptance agents more consistent, with more up-to-date fingerprint information from the FBI, according to a new report.


The report, from the Treasury Inspector General for Tax Administration, acknowledged that the IRS’s suitability checks for applicants to the acceptance agent, EA and e-file provider programs generally ensured that only reputable individuals were accepted in the programs during fiscal year 2018. The IRS also does continuous suitability checks to ensure that individuals accepted in the programs prior to the initial suitability checks haven’t engaged in criminal activity warranting removal from the program.


However, the report pointed out that the initial and continuous suitability checks vary depending on the specific program to which an individual applies to or has been approved to participate in, even though their participation in each program presents similar risks. While the IRS performs a tax compliance check on all new applicants for each program, the other checks to determine if an individual has a criminal history, is incarcerated, or is a U.S. citizen differ depending on the program for which the person is applying.


The report also found that when the FBI discovers an applicant has a criminal history, the adjudication process is inconsistent depending on the program to which the person is applying. For example, the e‑file provider program rejects an applicant if the FBI reports a conviction, but the EA and acceptance agent programs allow them to participate.


The report also found the IRS hasn’t taken enough action to address the fraudulent submission of fingerprint cards by some applicants to pass their background investigations. TIGTA reported this issue to the IRS in February 2018, but it still hasn’t been addressed.


TIGTA made 10 recommendations in the report, including that the IRS should assess the risk to tax administration of doing inconsistent initial and continuous suitability checks on people who apply to participate or are enrolled in the e-file provider, acceptance agent and EA programs. The report also suggested the IRS should assess the risk of the e-file provider program’s use of decision matrices to adjudicate an applicant’s criminal history that are inconsistent with the matrices used by the acceptance agent and EA programs. It also recommended the IRS should work with the FBI to identify more people who may have submitted fingerprint cards that match the fingerprints of another individual.


The IRS agreed with all of TIGTA’s recommendations and has taken action or plans to take action to fix the problems.


“We verify that licensed individuals have valid credentials during the application process,” wrote Kenneth Corbin, commissioner of the IRS’s Wage and Investment Division. “However, we agree that performing a criminal background check at the time of the application process will provide additional safeguards to prevent unacceptable individuals from participating in IRS programs.”

He noted that the IRS is working with the FBI to update its fingerprinting application program to take full advantage of the FBI’s records of arrests and prosecution program. It will then resubmit previously provided fingerprint cards to check for duplicate submissions by different individuals. However, Corbin also pointed out that Congress would need to give the IRS the authority to regulate uncredentialed tax preparers for it to align its suitability checks for them as well. In addition, criminal background checks are only performed on licensed individuals if it's mandated in their licensing state or if they have disclosed any convictions on their EA application.




SEC chairman cites fishy letters in support of policy change

By Zachary R. Mider


When Securities and Exchange Commission Chairman Jay Clayton handed a policy win to corporate executives this month, he pointed to a surprising source of support: a mailbag full of encouragement from ordinary Americans.


To hear Clayton tell it, these folks are really focused on the intricacies of the corporate shareholder-voting process. “Some of the letters that struck me the most,” he said at a commission meeting in Washington, “came from long-term Main Street investors, including an Army veteran and a Marine veteran, a police officer, a retired teacher, a public servant, a single mom, a couple of retirees who saved for retirement.” Each bolstered Clayton’s case for limiting the power of dissenting shareholders.

But a close look at the seven letters Clayton highlighted, and about two dozen others submitted to the SEC by supposedly regular people, shows they are the product of a misleading — and laughably clumsy — public relations campaign by corporate interests.


That retired teacher? Pauline Yee said she never wrote a letter, although the signature was hers. Those military vets? It turns out they’re the brother and cousin of the chairman of 60 Plus Association, a Virginia-based advocacy group paid by corporate supporters of the SEC initiative. That single mom? Data embedded in the electronically submitted letter says someone at 60 Plus wrote it. That retired couple? Their son-in-law runs 60 Plus.


“I never wrote a letter,” said one of the retirees, Vytautas Alksninis, reached by phone at his home in Connecticut. “What’s this all about?”


Then there’s the public servant Clayton mentioned. Marie Reed’s letter has sharp words for proxy advisers, firms that counsel fund companies on how to vote at shareholder meetings. But when reached by phone in California, the retired state worker said she wasn’t familiar with the term. She said the letter originated with a public-affairs firm that contacted her out of the blue.


“They wrote it, and I allowed them to use my name after I read it,” she said. “I didn’t go digging into all of this.”


The SEC declined to comment on any irregularities with the letters. In a Tuesday interview, Clayton sidestepped a question about how the agency ensures comment letters are genuine. He did emphasize that the regulator’s potential revamp of shareholder voting rules are proposals, adding that there will be ample time for people on both sides to weigh in before any changes are finalized.


“We welcome input in all ways,” Clayton said in the interview with Bloomberg Television’s David Westin. “On this issue, where there are a lot of different views and a lot of different interests, we encourage people to come in and talk to us, send us their comments.”


Unusual error

Even a casual reading of the letters shows something amiss. Four of the seven bear the same unusual error — an out-of-context phrase inserted into the SEC’s mailing address. The same mistake turns up in at least 20 other letters submitted by supposedly ordinary Americans in support of the change. It’s an inadvertent digital fingerprint revealing the scope of the campaign.

At issue is the proxy process, the rules for how corporations conduct shareholder votes, such as when directors stand for re-election at annual meetings. Most of the time, management wins in a landslide. But shareholders occasionally revolt over excessive pay or mismanagement, or a small investor forces a vote on an issue that management doesn’t endorse.


In recent years, more small shareholders have been proposing resolutions about social or environmental issues such as climate change. And investment managers that control large numbers of votes, such as BlackRock Inc., have begun prioritizing these topics as well, arguing that they’re relevant to the long-term sustainability of business models. That’s an unwelcome change for some corporate boards, especially in the fossil-fuel industry.


Last year, the National Association of Manufacturers helped form the Main Street Investors Coalition to oppose what it calls the “politicization” of the investment process and to argue that fund managers and boards should focus on maximizing profits. One of its priorities is changing shareholder voting rules.


Although the coalition has other members, NAM provided most of its initial funding, according to a person with knowledge of the arrangement who spoke on condition of anonymity. The manufacturers’ association represents corporate giants such as Exxon Mobil Corp. and Chevron Corp.


NAM said in a statement that it didn’t fund 60 Plus or direct any advocacy efforts on the SEC issue. Chevron wouldn’t comment on the coalition but acknowledged in a statement that it sometimes works with trade associations to “help inform their understanding of issues.” Exxon Mobil said it had no immediate comment.


Public comments

Last year, Clayton signaled he was considering changes to the rules and issued a call for public comments. Letters poured in. Most were from investment firms, corporations, trade groups and other interested parties that openly identified themselves. Many fund managers wrote to say some of the changes under consideration would be counterproductive.


The National Association of Manufacturers, Exxon Mobil and Chevron all called for new limits on shareholders’ proposals. So did two ordinary citizens who identified themselves as members of Main Street Investors. Other letters were ostensibly written by regular folks.


But more than two dozen of them appear to have ties to 60 Plus, a member of the Main Street Investors Coalition. While the nonprofit group calls itself an advocate for senior citizens’ issues, it routinely takes money from corporations and advocates for their causes on issues as varied as sugar subsidies and Alabama utility commissioners.


The group didn’t cast a wide net in recruiting letter-writers. Names included those of a woman who used to work at 60 Plus’s accounting firm; a former secretary at 60 Plus; and various friends and relatives of Saul Anuzis, the 60 Plus president. None mentioned a connection to the organization.


One letter bore the name of Chad Connelly. In an email, Connelly acknowledged being friends with Anuzis but disavowed the letter. “Someone apparently used my name,” he wrote. “That’s not a letter I’ve ever even seen.”


Even Scott Hogenson, a contractor for 60 Plus who has appeared in the press as its spokesman, submitted a comment. The letter gives his name as S. Alan Hogenson and doesn’t mention his relationship to the group. In an interview, Hogenson said he wrote the letter and stands by it.


Anuzis, the 60 Plus president, acknowledged that his group recruited submitters, provided drafts and, in two cases, sent letters on members’ behalf. He also acknowledged getting money from members of the coalition. “We don’t get paid for specific projects,” he said in an interview. “We get contributions from members who are part of the coalition. We’re not getting paid for a specific letter.”


Anuzis said the project aligns with 60 Plus’s policy goals and that no names were used without permission. Those who said they hadn’t agreed, such as his in-laws, were mistaken. “They are 80-some-years old,” he said. “This happened months ago. I’m sure it’s not top of their minds.”


Clandestine aid

Two letters point to another source of clandestine aid for the coalition. Reed, the retired state worker from California whose letter was cited by Clayton, said the man who provided her with a letter worked at FSB Core Strategies, a California public-affairs shop, and said he was working on behalf of a group called Protect Our Pensions. Another SEC letter containing similar phrases, also cited by Clayton, came from a California sheriff who said in a 2017 interview that he was introduced to Protect Our Pensions by the same FSB staffer. An FSB executive didn’t respond to requests for comment.


Protect Our Pensions, whose talking points align with those of the fossil-fuel industry, was the subject of a 2017 Bloomberg Businessweek article showing it was put together by corporate public-affairs employees and that some of its alleged members, including the retired firefighter identified as its founder, said they had nothing to do with it or couldn’t remember agreeing to join.


Opponents of changes to the voting system stuffed the SEC’s mailbox too. The agency reported getting more than 18,000 identical form letters supporting the current rules. Those letters were obvious duplicates and are grouped together on the SEC’s comments page. Clayton’s speech didn’t mention them.


In his Nov. 5 remarks, Clayton unveiled proposals along the lines of those pushed by Main Street Investors Coalition and its corporate backers that would shift power from investors to corporate boards. In addition to Clayton, who was appointed by President Donald Trump, the changes are backed by two Republicans on the five-member commission. For the changes to take effect, the SEC will have to vote again to finalize the rules after a 60-day public comment period.

The SEC’s proposal would increase the amount of stock newer shareholders must own to get a proposal on the ballot, aligning with corporate claims that many resolutions are wastes of time and money. Under current rules, investors must have owned at least $2,000 of stock for a year before they can submit resolutions. The SEC’s proposal would raise that dollar threshold to $25,000 for shareholders of less than two years and $15,000 for shareholders of less than three years, while leaving the $2,000 threshold in place for longer-term holders.


The proposal also would impose new restrictions on proxy-advisory firms, whose recommendations are often decisive on shareholder votes. Corporations complain that their advice is sometimes poorly reasoned or inscrutable. Clayton would require the firms to show their recommendations to companies before issuing them.


Fund managers warn the measure may have a chilling effect on proxy advisers, because a corporation could threaten a lawsuit if a draft recommendation isn’t revised.


Anuzis said he was glad to hear that Clayton had cited letters generated by his organization. “I’m extremely proud that we were very effective,” he said. “If four of our letters were quoted, that means we did a great job.”




IRS confirms tax break for large gifts

By Michael Cohn


The Internal Revenue Service and the Treasury Department issued final regulations Friday confirming that individuals who take advantage of the increased gift and estate tax exclusion amounts that are in effect from 2018 to 2025 under the Tax Cuts and Jobs Act won’t be adversely affected after 2025 when the exclusion amount is scheduled to drop to pre-2018 levels.

Treasury Decision 9884, which was posted Friday in the Federal Register, implements changes made by the Tax Cuts and Jobs Act of 2017, which made corporate tax cuts permanent, but allowed for individual tax cuts to expire in 2025. While the final regulations mostly adopt the proposed regulations that were released last November, they also include some clarifying technical language to address the concerns raised in several public comments. The final rules also include four examples to illustrate the impact of inflation adjustments and other matters. As a result of the final regulations, individuals who have planned to make large gifts between 2018 and 2025 can do so without worrying they will lose the tax benefit of the higher exclusion level once it decreases after 2025.


In general, gift and estate taxes are computed using a unified rate schedule on taxable transfers of money, property and other assets. Any tax that’s due is determined after applying a credit — formerly known as the unified credit — based on an exclusion amount. The applicable exclusion amount is the total sum of the basic exclusion amount (BEA) established in the statute, and other elements, if applicable, described in the final regulations. The credit is first used during life to offset gift tax and any remaining credit is available to reduce or eliminate estate tax.


The Tax Cuts and Jobs Act temporarily increased the basic exclusion amount from $5 million to $10 million for tax years 2018 through 2025, with both dollar amounts adjusted for inflation. For 2019, the inflation-adjusted BEA is $11.4 million. In 2026, the BEA will revert back to the 2017 level of $5 million, as adjusted for inflation.


In response to concerns that an estate tax could apply to gifts exempt from gift tax by the increased BEA, the final regulations include a special rule allowing the estate to figure its estate tax credit using the higher of the BEA applicable to gifts made during life or the BEA applicable on the date of death.




How to pick a Medicare Part D plan



Key takeaways

  • Never pick a Medicare Part D prescription drug plan just because it has a low monthly premium. Instead, pick a plan based on how the prescription drugs you're taking are covered.
  • Pay attention to Medicare Part D plans with special rules that may limit prescription usage or force you to satisfy requirements before you can have a prescription drug.
  • Typically, you can switch Medicare Part D plans each year during open enrollment (October 15–December 7), but some states may have more switching options available.


For most retirees, health care—especially prescription drugs—can be a significant expense. The average annual cost of therapy for widely used generic drug products was $365 in 2017 and $6,798 for widely used brand name drug products.1


Whether or not you need coverage when you first sign up for Medicare, it's critical to plan ahead. Most people will need coverage at some point in retirement. If you're uncovered and need prescription drugs, the costs can be crippling. And if you wait to sign up for drug coverage until you need it, you will likely need to pay a much higher insurance premium.


Those eligible for Medicare have 2 options: A stand-alone Medicare Part D prescription drug plan or an "all-in-one" approach with a Medicare Advantage plan. Here we will focus on Medicare Part D. (For insights on Medicare Advantage, read Viewpoints on Are Medicare Advantage plans really an advantage?)


Either way, it's crucial to consider Medicare drug coverage options carefully.


Your Medicare Part D checklist

Not all Part D plans are created equal. Each plan varies in terms of cost, the drugs covered, special rules, and so on. Just because a friend or family member's Part D plan works for their needs doesn't mean it will work for yours. Instead, do some homework. Here are 5 simple steps to get started.


  1. Make a list of your current prescription drugs, including the dosage, quantity (30-day supply, 60-day supply, etc.) and frequency (how often you take them).
  2. Take your list to the Medicare Plan Finder at It can show you which Part D drug plans are available in your area and which of those plans cover your drugs. (You can also use the Plan Finder each year to check your current Part D plan and see if better options are available.)
  3. Once you find plans that cover your prescriptions, see how much they will cost you. Costs are typically your monthly premium (what you pay to have the Part D plan) and any out-of-pocket amount you pay for a drug. While a Part D plan may cover your prescriptions, you may wind up paying more compared to other plans, depending on which pricing tier the plan places your prescriptions (referred to as a drug formulary).
  4. Your share of the prescription drug costs can fluctuate based on your drug's category (generic or brand). Part D plans usually spell out this information in their plan details. If you want to choose a plan with a low monthly premium, make sure to consider the plan's total cost (premium plus out-of-pocket costs) per year.
  5. Check out the Part D plan's ratings. Medicare gives Part D plans a rating of 1 start (poor) to 5 star (excellent) based on customer service, customer experience and complaints, performance, drug safety, and pricing accuracy. These ratings can help you know how good a job the plan is doing in providing coverage. Keep in mind new plans might not have a rating.


What if I'm not taking prescription drugs?

No one can predict the future. Even if you're a super fit 65-year-old and you're not taking any prescription drugs, you could need a prescription because of a sudden illness or accident. Without prescription drug coverage, you could wind up paying the full cost, which could be hundreds or thousands of dollars.


Even if you don't take prescription drugs currently, if you need them later and you try signing up for a Part D plan late, you could face a penalty of 1% for each month you went without coverage. Not having Part D coverage could be a costly—and long-term—mistake.

You should consider enrolling in a Part D prescription drug plan as soon as you become eligible for Medicare (unless you have creditable drug coverage such as from an employer health plan), regardless of your current prescription drug needs.2


Read Viewpoints on Getting ready for Medicare Part D to learn more about late penalties. 


Navigating Part D restrictions

A Part D plan may also feature restrictions around certain prescriptions. These restrictions are intended to address drug safety and manage prescription drug costs. You'll usually see these drug restrictions on the higher pricing tiers in a drug plan. Here are some common ones:


  • Prior authorization: A plan can require you to get physician authorization and/or insurance company approval before your prescription is covered.
  • Quantity/dosage limits: If your doctor prescribes a prescription drug at a certain dosage or for a certain period that a plan considers outside the range necessary to treat your condition, the plan may not cover the drug. Or, the plan may ask that it be prescribed at a lower dosage or for a shorter period.
  • Step therapy: If your doctor prescribes an expensive drug, the plan may require you to try a similar but lower-priced drug first.


While not every Part D prescription drug plan includes these restrictions, there are steps you can take to avoid them in plans that do. The 2 biggest actions you can take are:


  1. Try a different drug. Ask your doctor if there's a more affordable alternative to a restricted drug or a generic version of the drug. Read Viewpoints on How to save money on prescription drugs to learn more about cost-saving strategies for prescriptions.
  2. Try a different Part D plan. You can switch Part D plans during open enrollment.


Yes, you can switch plans as your needs change


If your Part D plan isn't working for you, there's hope. Each September, plans send out an Annual Notice of Change letter. This letter lets you know about plan changes for the upcoming year, such as cost increases or drugs being added or removed from the plan (or switched to a different pricing tier). Read the Annual Notice of Change letter carefully to see if it makes sense to keep or switch your plan. You can change plans during open enrollment.


Get ready

Before you enroll in a Part D prescription drug plan, find out which plans are available in your area and whether they cover your prescriptions. Compare their overall cost and look for a plan that:


  1. Features the lowest overall cost
  2. Has either no restrictions or minimal restrictions
  3. Best meets your health and financial needs


If the costs to cover your drugs are too high for your budget, contact your local State Health Insurance Assistance Program (SHIP) office about programs available in your state that help with costs. These services are provided at no extra charge to you. (You can also check with your state's SHIP representatives to see when you are allowed to change Part D plans.)


Choosing Medicare prescription drug coverage is a decision you'll have to make throughout your retirement. It's important to map Medicare and prescription drug costs into your overall retirement plan, either on your own or with the help of your financial advisor.




IRSAC warns about IRS underfunding

By Jeff Stimpson


Continued underfunding of the Internal Revenue Service undermines the tax system, and the agency must dedicate the resources necessary for areas of post-tax reform guidance identified by industry, according to the IRS Advisory Council’s annual report for 2019.


“Recent deficiencies in funding are eroding the significant investments and substantial progress made in the last two-and-a-half decades in modernizing and streamlining the IRS,” the report noted. “Insufficient funding may have even more dramatic and costly future effects on our system of voluntary compliance and self-assessment, particularly if the rate of that voluntary compliance starts to slip down a slippery slope of taxpayer respect for our system of taxation.”


The 2019 Public Report includes recommendations on a range of topics and concerns, including accelerating the use of e-signatures in federal tax administration; the W-4 for 2020; and broadening and improving a self-correction program for tax-exempt bonds.


IRSAC commended the IRS for efforts to release post-Tax Cuts and Jobs Act guidance but said more was needed. “For example, employers are seeking guidance, particularly in the tax-exempt sector, on how to comply with the calculation for unrelated business income from providing parking to employees and how to properly identify a separate trade or business for the Unrelated Business Income Tax,” the report reads.


The IRSAC also identified such issues as maintaining the hiring of attorneys in the Office of Professional Responsibility; an “efficient and educational approach” to the First-Time Abate Policy; and improving the Free File program.


The IRSAC is a federal advisory committee that provides an organized public forum for discussion of relevant tax administration issues between IRS officials and representatives of the public. It draws members from the public, the tax professional community, small and large businesses, tax-exempt and government entities and the payroll industry.




10 major trends in IRS audits

By Jim Buttonow


Most taxpayers envision Internal Revenue Service audits as intrusive investigations resulting in criminal sentences. Today, nothing could be farther than the truth: The IRS’s auditing power has been greatly diminished in the past decade. IRS audit resources have been reduced by 28 percent in the last decade and the audit rate has dropped from 0.9 percent in 2010 to 0.5 percent in 2018. In fact, the number of IRS audits in 2018 (991,168) dropped by almost half compared to 2010 (1.735 million).


Since 2010, the IRS has been tasked with doing more with less resources, but the reality is that the IRS cannot do more audits with less resources. The IRS audit data reveals 10 trends from the past decade that have become the new realities for current state of IRS audits.


                                                    1. Most audits are done by mail

This trend started with IRS reforms in the late 1990s. In 1998, just before IRS reforms, the service audited 47 percent of taxpayers by mail. In the past decade, IRS data shows that the service prefers the less-intrusive mail audit. Today, three out of four audits of individual taxpayers are done by mail — a ratio that has held since 2010. These audits usually challenge small amounts of credits or deductions on a return, and require only a mail response, with documentation, to an IRS central campus location.


AT-112119-Buttonow Field versus Mail audits.png

2. The main issue in audits: The EITC

Fifty percent of all individual audits involve a taxpayer who is claiming the Earned Income Tax Credit. IRS efforts to curb EITC errors largely rely on audits to hold a questionable EITC claim on a return. Politicians have criticized the IRS in the past for picking on low-income taxpayers, and the EITC audit rate is their main evidence. Compared to other taxpayer profiles, the IRS clearly has the propensity to address the EITC taxpayer more than other issues, even the small-business individual taxpayers. (See below for the trend on high wealth audits.)


AT-112119-Buttonow - EITC audits.png

3. An alarming amount of people do not respond to an audit

There is linkage here to the EITC mail audit. The Taxpayer Advocate reports that almost two-thirds of all mail audits go without response or are assessed by taxpayer default. That is, the IRS just assesses the additional tax without the taxpayer contesting the service’s determination. Only one in five taxpayers agree to their mail audit adjustment — and likely, from the data, they don’t understand how to appeal. This mess leads to many audit reconsiderations (i.e., an audit “re-do” request). Again, more question marks here for the targets of mail audits — the low-income population.


4. The most common IRS challenge to a return is not an audit

The dreaded CP2000 Automated Underreporter notice is current three times more prevalent than an IRS audit. The CP2000 program utilizes IRS information returns (W-2s and 1099s) to match them against the filed return to discover discrepancies. A discrepancy may result in a CP2000 notice proposing additional tax (and possibly penalties) to the return. Most taxpayers do not realize (or care, for that matter) that a CP2000 is not an audit. The CP2000 is less intrusive than an audit because the IRS is not allowed to examine the taxpayer’s books and records. For most taxpayers, however, the difference does not matter: The average amount owed for a CP2000 notice in 2018 was $1,773.

However, there is good news for taxpayers: Even the mostly automated underreporter process has been cut back due to lack of IRS resources.


5. The IRS knows who to audit

The audit change rate was 89 percent for all taxpayer types in 2018. In fact, the audit change rate has been between 81 percent and 89 percent since 2005. When the IRS selects a return for audit, they pretty much know it will likely result in an adjustment.


6. Field audits are rare, but expensive

In 2018, the IRS hit an all time low for the number of field audits conducted. Field audits are the most comprehensive, and are saved for complex taxpayers and situations — like businesses and tax avoidance schemes. The IRS has said that their audits have a great return on investment and reduction of audit results in large amounts lost to the U.S. Treasury. The numbers support the IRS. In 2018, the average amount owed in a field audit was $85,400. Luckily for taxpayers, the IRS only conducted just under a quarter of a million field audits in 2018.


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7. Want your business to escape audit? Be an S corp or partnership

The IRS continues to struggle to audit S corp and partnership returns. This situation is likely to get worse as the more experienced IRS business auditors continue to retire. Audit rates for S corps and partnerships are both 0.22 percent — or, put another way, one in every 455 passthrough entities were examined in 2018. It is no wonder that the number of S corporations have increased by 38 percent from 2005 to 2018 (3.5 million in 2005 versus 4.85 million in 2018).


8. Audits on the wealthy are still popular, but have dropped

In 2011, one out of every eight taxpayers who earned more than $1 million in income were audited. In 2018, the number dropped to one in every 31 taxpayers. However, those who earn more than $1 million are still among the most popular audit profiles.


9. Audits have dropped, but penalties are still prevalent

The total volume of individual audits and CP2000 notices has dropped from 4 million in 2005 to 3.9 million in 2018. However, in 2018, 606,121 individual taxpayers were assessed the accuracy penalty for making an error on a tax return (audit or CP2000 notice). In 2005, that number was only 58,366. The moral here is if the IRS has to audit or send a CP2000 notice, it will now look to penalize errors to deter future noncompliance. The number of individual taxpayers with an accuracy penalty from an audit/CP2000 notice has increased 10 times since 2005.


10. Tax evasion prosecutions are low

Finally, the “fear of an audit” myth buster. The IRS does not like to publish this statistic. In 2018, there were only 636 indictments of legal source tax crimes. IRS tax evasion criminal investigation cases have dropped by 58 percent since 2013. The main source of IRS legal source tax crime cases are IRS field auditors and criminal investigators, i.e., revenue agents and special agents. From 2013 to 2018, the numbers of revenue agents and special agents have decreased by 26 percent and 21 percent, respectively. As a result, the number of criminal investigations and indictments continue to decline.


AT-112119-Buttonow - Tax crime investigations and indictments.png

Realities and the IRS ability to close the tax gap

Fear of an audit has always been a main driver for compliance with the IRS. The 2018 Comprehensive Taxpayer Attitude Survey continued to show that 63 percent of taxpayers cited fear of an audit as an influential behavioral factor for correctly filing and timely paying their taxes. The tax gap, as currently measured on 2011-2013 returns, shows that the Treasury loses $352 billion a year due to inaccurate tax returns. With the fear of an audit becoming a myth, how will the IRS close the tax gap?

As the fear of an audit motivator becomes less of a reality, the IRS must seek to simulate the audit by touching as many taxpayers as they can. For now, that looks like sending a lot of non-audit notices to taxpayers. Recently, the Treasury Inspector General for Tax Administration reported that the IRS sent over 219 million notices annually to taxpayers. In 2001, the number of notices sent was only 30 million. With the IRS’s current resources, the IRS notice may be the only means the IRS has to let taxpayers know that they are still there.




House bill would decriminalize and tax marijuana at federal level

By Bloomberg News


The House Judiciary Committee approved legislation on Wednesday that would decriminalize marijuana at the federal level and reassess pot convictions.


The Marijuana Opportunity Reinvestment and Expungement Act, H.R. 3884, would expunge convictions and authorize a 5 percent sales tax on marijuana to help minority communities enter the cannabis business. The legislation was approved by the committee 24-10 Wednesday, clearing the way for a vote in the full House.


“These steps are long overdue,” Judiciary Chairman Jerrold Nadler, a New York Democrat, said in his opening statement. “For far too long, we have treated marijuana as a criminal justice problem instead of a matter of personal choice and public health.”


The bill has little chance of becoming law with the Republican-controlled Senate, and it appears to be geared toward building momentum for the Secure and Fair Enforcement Banking Act, which would allow banks to do business with legal cannabis companies. That legislation passed a House vote in September.


The timing of the vote, amid the ongoing impeachment drama and just prior to the Thanksgiving holiday, is a “source of concern,” Cowen analyst Jaret Seiberg wrote in a note published Monday.


“Committee passage is about creating momentum for the SAFE Act on cannabis banking, medical research legislation and expanded access for military veterans,” Seiberg said. “Voting just before Congress leaves for the Thanksgiving recess with the Christmas recess just a few weeks away does not help.”


While 33 states and the District of Columbia have legalized at least some uses of marijuana, the issue remains highly contentious at the federal level.


Republican committee members argued that it could be a mistake to advance the bill without holding more thorough hearings.


“This should not be rushed into,” Representative Louie Gohmert, a Texas Republican, said.

The bill has 54 Democratic co-sponsors, and one Republican co-sponsor: Florida Representative Matt Gaetz.


Democratic Senator Kamala Harris, 2020 presidential candidate, introduced a companion bill in the Senate.




How big data can help reduce profit bleeding

By Will Auchincloss


Many clients believe that spending millions of dollars on the latest apps, customer relationship management and enterprise resource planning software will help improve internal efficiencies and optimize operations. They view these systems and platforms as the golden ticket toward achieving maximum workforce productivity.


Implementing these increasingly complex systems and platforms, however, can silo critical data and stymie productivity. It can block companies from having complete visibility into all the data they produce, which results in incomplete analyses and poor strategic planning.


This is why it is critical for your clients to have visibility into all the data generated by their various systems and platforms. Not only because it allows their various departments — from finance and accounting to operations and IT — to operate more effectively, but it creates a centralized, company-wide resource for data utilization. Teams can then use this opportunity to create standards for data use and reinforce their role as defenders of the company’s bottom line.


Of course, it takes more than hiring additional staff to compile and centralize all of an organization’s data. Even though centralization is a key step towards better data analysis, using big data without context or focus is unproductive at best, and misleading at worst.


Instead, clients should be advised to have hypotheses or goals in place before analysis begins. These hypotheses serve as guide-rails for data use and allow for more advanced, sophisticated data analysis over time. Once companies adopt this strategic approach, they can create more efficient, high-performing teams that create smarter finance and market strategies and help maximize company profitability.


Big data trends chartCreating a data mountain

Finance and IT departments are storing, tracking and analyzing more data than ever. Many finance and IT leaders believe the more data they track, the more insight they’ll have into how their business operates and where to make improvements. Systematic improvements, though, depend on how this data is put to use.


Companies often refer to the term “data lake” when discussing big data and where all of it is stored and analyzed. These lakes are filled with structured and unstructured data from across an organization, and companies will attempt to analyze and test data to identify operational inefficiencies or losses.


Instead of a lake, however, consider the idea of a data mountain. Rather than dragging an entire lake to identify improvements, analysts start at the bottom of the mountain and use some of the most readily available data to create well-informed business decisions. From there, users build upon that foundation to track and analyze increasingly complex sets of information and data.


From this perspective, analysts build upon their data to create more informed business decisions and strategies. Instead of starting with the most complex data sets at the top, which can create data paralysis, they identify which data sets provide actionable intelligence first. For example, retailers will oftentimes overcomplicate their data sets by analyzing at the product level, instead of first analyzing products by segment or supplier.


Making better use of data

Once this foundation is built, businesses can work to analyze their “long tail” of data that is much smaller and more difficult to analyze. This data tail grows exponentially over time as analysts and companies centralize increasingly disparate data sets and identify what information matters most to their businesses. At the end of the day, analyzing the long tail is what helps companies achieve that never-ending goal of having 100 percent of their customers drive 100 percent of their revenue.


This data can help companies better recognize where revenue is coming in, or out, and then make systematic changes that maximize revenue from all possible sources. Retailers, for example, can use data to identify which products are performing over others in specific stores and regions. Likewise, manufacturers can leverage such data to better understand their supply chains and pinpoint which products are profitable. Additionally, financial institutions can use data to minimize erroneous costs or purchasing decisions.


Creating the next generation of spend analytics

Even as businesses take advantage of improvements in big data analytics, new technology will allow them to further build upon their success and analyze broader data sets. Technologies such as artificial intelligence and machine learning can help business leaders analyze their data faster than ever, and perhaps, create systems that improve upon themselves over time.


At the end of the day, it depends on how businesses develop their hypotheses and use cases for big data. By taking a strategic approach, companies can focus on what matters most: high-value tasks that further optimize their businesses and help them achieve their strategic mission.




Democrats draft legislation to expand renewable energy tax credits

By Michael Cohn


Democrats on the tax-writing House Ways and Means Committee introduced a package of draft legislation to deal with climate change by offering further tax incentives for use of renewable energy.


The Growing Renewable Energy and Efficiency Now, or GREEN, Act would promote the use of green energy technologies and incentivize the reduction of greenhouse gas emissions through new and existing tax benefits. It aims to increase energy efficiency and green energy use in both residential and commercial buildings, support the use of zero-emission transportation and supporting infrastructure, invest in a green workforce through energy credits for manufacturers, and tax credits for research and academic programs on environmental justice. The legislation would also require the Treasury Department to analyze the feasibility of a price on greenhouse gas emissions, using the EPA’s Greenhouse Gas Reporting Program.


The GREEN Act includes several bills for providing tax credits for renewable energy and reducing greenhouse gases:


  • The Renewable Energy Investment Act would allow taxpayers to be treated as having made an overpayment of tax equivalent to 85 percent of the value of the credit they would otherwise be eligible for under the Section 48 investment tax credit or the Section 45 production tax credit.
  • The Empowering Homeowners Energy Efficiency Act would enable individuals to claim a credit of up to 30 percent of the cost of a home energy audit under Section 25C, up to a maximum credit of $150.
  • The Innovative Energy Manufacturing Act would revive the Section 48C qualified advanced energy property credit for investments in manufacturing facilities for clean energy technologies. It would allocate an additional $2.5 billion to be awarded each year from 2020-2024.
  • The Creating Opportunities in Research for Environmental Justice Act, or CORE Justice Act, would create a tax credit of $1 billion for each year from 2020-2024 to institutions of higher education for environmental justice programs.


“Estimates say that climate change will cost Americans more than $500 billion each year by the end of this century. We cannot afford to wait any longer to address this existential threat,” said the chairman of the House Ways and Means Subcommittee on Select Revenue Measures, Mike Thompson, D-Calif., in a statement Tuesday. “This bill will build on existing tax incentives that promote renewable energy and increase efficiency and create new models for technology and activity to reduce our carbon footprint. I’ve long said that if we don’t address climate change, nothing else matters as we won’t have a planet to pass on to our next generation. The GREEN Act is a critical step forward in our fight to tackle climate change head on.”




Where do you stand? Year-end review

Follow our 3-step plan to help keep your long-term goals on track.



Key takeaways

  • Evaluate your progress toward any specific goals.
  • Check your mix of stocks, bonds, and short-term investments.
  • Evaluate the performance of individual investments against benchmarks.


"Am I investing the right way for my situation?" It's a source of anxiety or confusion for many investors. How do you know?


Consider our simple 3-step checkup plan to help find out.

1. Focus on your goals

Why are you investing? You may have some long-term goals, like retirement, and some shorter-term goals, like buying a new car or a house. The time frames around your goals, along with your tolerance for risk and your financial situation, will help determine your investment strategy.

Let's start with saving for college. Say you envision sending your newborn to an in-state public school and plan to cover half of the expenses with your savings (with the remaining half to be covered by a combination of scholarships, grants, and financial aid). According to the College Cost CalculatorOpens in a new window from the College Board, the total cost would be about $222,466, for which you will pay $111,233 over the course of 4 years.


Using Fidelity's college savings calculator, we estimate you would need to save about $200 per month over 18 years.1 Saving less per month would require a longer period of time over which to save—or a higher rate of return, which you can't always count on.


What about retirement savings? For a 25-year-old aiming to retire at age 67, Fidelity would suggest aiming to have saved 1✕ (one times) your salary by age 30. By the time retirement hits, we estimate you should have amassed 10✕ your salary.2


Here's an example—if you earn $100,000 per year as a 67-year-old, 10✕ your salary means you would aim to save $1,000,000 by retirement at age 67.


To learn more about Fidelity's retirement guidelines, read Viewpoints on Retirement roadmap


Fidelity's Planning & Guidance Center can help you see if your savings are on track for your goals and help you come up with a strategy if they're not.


2. Check your asset mix

When you started investing, you probably set up a diversified mix of investments that targeted a certain level of risk based on your goals, time horizon, and tolerance for volatility.


A diversified portfolio is made up of different types of investments with varying patterns of risk and return—like stocks, bonds, and short-term investments. If one part of your investment is declining, another part may be doing well, or at least not going down as much. The goal of diversification is not necessarily to maximize performance, but it may help limit the losses for the level of risk in your portfolio if the markets decline.


Ensuring that your mix of investments continues to reflect your chosen level of risk is an important part of the review process. Market moves can shift that allocation out of alignment with your goals. As a result, your investment mix may become more or less risky than you intended. Your stock and bond investments may become a bigger or smaller share of your overall investments, which can shift the level of risk and return you may be trying to target.


Check your asset mix at least once a year to help keep it on track with your objectives. If your goals change significantly—or, after big moves in the market—review your investments. If your investment mix has drifted significantly from your target mix of stocks, bonds, and short-term investments (for example, by 10% or more), consider rebalancing your portfolio to your initial target mix.


A good rule for rebalancing is to direct more of your contributions into the investments that have lagged behind and reduce purchases of investments that have appreciated. Consider bringing your portfolio back to the target asset mix at least annually—the habit of doing so will allow you to maintain your portfolio in a disciplined way.


3. Benchmark individual investments

You should look at your investments to ensure that they are still an essential part of your plan. Evaluate the performance of stocks, bonds, mutual funds, or ETFs by comparing them to appropriate benchmarks. The easiest way to find the appropriate benchmark index is on the stock, bond, fund, or ETF research page on


Answer these questions:

Why did you buy this investment?

Does it still fit into your strategy? What role is it supposed to play in your overall plan? Different types of investments play different roles in your portfolio and may provide varying patterns of risk and return. For instance, does it give you more exposure to domestic bonds or international bonds, or does it target a particular style of equity investing, like value or growth?


What is impacting the performance of your investment?

How does it compare to others like it? For instance, what is going on in the world, in the stock market, or in the industry, that affects returns? Keep in mind that different types of investments do well at different times.


Are you considering performance and risk?

Look at how your fund has performed relative to the benchmark index—as well as similar funds. Recent performance shouldn't be your only metric—consider annual performance in the context of fees as well.


Risk is another important dimension—it's important to evaluate the historical risk (variability of returns) associated with a fund's historical return. Risk-adjusted returns can be a useful metric when comparing funds with different levels of risk and/or return. You can find that information on the research page for each mutual fund under the section called "Fund risk and return."


Get help if needed

Don't get discouraged if it seems like a lot of work—target date funds, target risk funds, and managed accounts are options to consider if you don't have the skill, will, and time to manage your investments.


Target date funds

Target date funds gradually become more conservative as they approach the investment goal date.


Target risk funds

Target risk funds offer a set level of risk (mostly stock market risk) and the fund managers work to maintain that level of risk over time.


Managed accounts

These could be digital options like robo advisors that invest and rebalance for you. Or at the other end of the spectrum, managed accounts could include comprehensive financial planning with a dedicated financial advisor. Note that managed account services usually require a fee.


Getting help with your investments could keep your portfolio in good shape to achieve your financial goals. Of course, the do-it-yourself approach works too—as long as you have the inclination, skill, or time to invest appropriately for your goals and time frame.


Whether you choose your own investments or pay someone to help you, saving and investing for your goals takes patience and consistency. Try reviewing your savings in the Planning & Guidance Center. Seeing your hard work paying off through the years as you get closer to achieving your objectives can keep you motivated and on track.




Back taxes for online sales?

By Roger Russell


The tax landscape for online sales just got more confusing — again.


Despite signing on to a U.S. Supreme Court amicus brief stating otherwise, California is now retroactively seeking sales tax from out-of-state online merchants, going back as far as 2012. The move is seen as a bellwether, as other states are watching to see how California fares.


To further complicate matters, while the states did sign an amicus brief, the Supreme Court’s Wayfair ruling didn’t say, explicitly, that states could not impose a retroactive tax collection for online sales. Not only do third-party sellers have to navigate the compliance complexities of the current landscape, but may now be required to remedy old transaction taxes.


“California said they wouldn’t apply the sales tax retroactively, then they turned around and did,” said Michael Bernard, chief tax officer at Vertex Inc. “They’re doing the same thing that South Carolina did to Amazon, and Louisiana did to Walmart, running the same play out of the same playbook.”


“There are some differences, but they are essentially the same,” he said. “These states have the determination that they would go back to pre-Wayfair and would make facilitators collect tax from third-party sellers using their platform.”


“The Wayfair decision allowed states to require remote sellers that exceed a certain economic threshold to collect tax destined for that state,” he said. “What California, South Carolina and Louisiana are doing is to go back into pre-Wayfair territory where the test was physical presence. They’re relying on legal theory such as agency, bailment or consignment to impose sales tax responsibilities prior to Wayfair.


This is concerning, because of the lack of notice and a violation of the principle of fundamental fairness, according to Bernard.


“Prior to Wayfair, the law of the land was the 1992 Supreme Court decision in Quill,” he said. “Now they’re coming back to collect on transactions that were closed three to six years before Wayfair. The amicus brief, filed by every state that has a sales and use tax, said that retroactivity was not an issue because they would only apply the tax prospectively.”


In their brief, the states wrote, ”Defenders of the physical presence rule often cite the possibility of retroactive tax liability if Quill is abrogated. But those questions are not presented in this case. By its terms, South Dakota’s law is prospective in operation only; imposing retroactive tax liability is prohibited and an injunction bars enforcement of the law while the instant case remains pending. Because of these features of South Dakota’s law, any holding by this court abrogating Quill will not apply retroactive tax liability on respondents [Wayfair Inc., Inc., and Newegg Inc.]. Their tax liability, if any, will be on a prospective basis only. South Dakota’s law thus removes the retroactive-tax-liability issue from this case.”


Bernard cited the fact that the Multistate Tax Commission recently issued a white paper dealing with marketplace facilitators. “One of the issues they did not take up was the issue of retroactivity,” he said. “They probably felt that it did not need to be addressed because the states would not impose a retroactive tax. In fact, the opposite is occuring.”


In both South Carolina and Louisiana, the government has won lower court decisions that validate the retroactive application of the sales tax on remote sellers, Bernard indicated. “There hasn’t been a case yet in California,” he said. “So far, the state has issued directives to remote sellers.” He expects that once the state picks out a facilitator to go after, there will be legal proceedings.


Bernard’s advice to smaller sellers is to not try it alone: “The most advantageous way for the small seller to meet the compliance requirement in a post-Wayfair world is to get on the platform of a facilitator, or actually procure your own cloud-based solution,” he said.




Opportunity zone investments off to an uncertain start

By Michael Cohn


Opportunity zones, the tax break included in the Tax Cuts and Jobs Act that encourages real estate investors to develop projects in economically distressed communities in exchange for deferring capital gains taxes for years, have come under fire for not living up to their promise.


The zones in many cases have been located in areas that were already gentrifying or attracting investment before the tax law was enacted in December 2017. One of the more successful opportunity zone developers is Cresset, a $6 billion financial firm that is partnering with Diversified Real Estate Capital on one of the biggest opportunity zone funds. It has made seven investments in the fund so far and attracted $330 million to its fund, with a possible eighth project under consideration. Dan Terlep, senior managing director in Cresset’s CFO Services group, acknowledged that many of the investments to date haven’t been in economically distressed communities, but he predicted that will change in future waves of investment.


“The first wave of properties are really in zones that have been turning and gentrifying, but we believe that wave 2, wave 3 and wave 4 will be in impactful areas, and you can’t get to those waves unless you go through wave 1 first,” he said. “These really are on the path of progress to really developing in these blighted areas. With that said, it’s bringing a lot of jobs into the area, a lot of construction jobs, and a lot of ancillary jobs that get underreported, but that I think are important.”


So far, Cresset has decided to develop projects in Houston, Denver, Portland, Nashville, Silver Spring, Charleston and Omaha. “It’s probably about 65 percent or so multi-residential, about 25 percent office, and the rest are ground floor retail,” said Terlep.


He contended that all of the projects are being developed as a result of the tax law’s incentives and weren’t underway already in a significant way. “All of these are ground-up development,” he said. “There wasn’t a pre-existing shell or any development there. In a couple of cases, there were plans to move forward. But we all know plans are plans. This is all ground-up development.”


He believes critics will need to look at the impact of opportunity zones over the long term, instead of expecting an immediate impact on low-income communities. “When you look back on this over a period of 10 years, that span in the rules there, I think it will do what it was intended to do,” said Terlep. “It’s hard to go directly into these blighted areas from an investor return and a fiduciary standard. It doesn’t make financial sense, and we’re beholden to our investors. However, when you start laying out the path of progress, when you start developing the first wave, the second wave, the third wave, you start seeing it. And I think after you look at this over a period of 10 years or so, I think the rules will do what they were intended to do.”


He anticipates that his firm will begin to make investments in more economically disadvantaged areas in the next wave. “We’ve looked at a number of these areas,” said Terlep. “I think, consistent with that second wave, fund two will have more of these areas in the fund there. When you look at it from a return perspective, you’re not only looking at the tax breaks, but you’re looking at a long-term hold asset, a 10-plus year hold asset. Usually these assets are a mix of development and stabilized property. The returns are condensed a little bit because of that fact.”


The IRS recently previewed a draft version of a tax form that will be used for reporting on opportunity zone projects (see IRS and Treasury propose opportunity zone tax form). But some Democrats in the Senate and the House want to go further and have proposed new legislation to require more detailed reporting to prevent abuses in the program, while calling for an investigation by the Government Accountability Office (see Democrats probe opportunity zone abuses with investigation, GAO report and legislation).


The draft tax form seems to be in line with what the industry had been expecting, but calls for more detailed reporting are likely to encounter resistance from developers and investment funds.

“I’ve taken a look at the draft forms,” said Terlep. “The information they’re asking for is fine. They’re asking for tract-specific information, and holding company information, and from a transparency perspective, I think that’s great. I know there’s draft legislation out there asking for more information. I think that might be difficult. They still have to define what type of information they ultimately want to gather and in what format do they want to gather it in. Does it belong on the tax return or on some other form with some other agency?”


Developers will likely be willing to provide some information about the projects, but only up to a point. “I think they’re open to providing as much transparency as possible,” said Terlep. “There’s going to be a back and forth in determining what is that transparency and can you easily provide it. It’s one thing to ask for that data, but where is it published and how can you provide it while balancing the privacy concerns of investors. I think it’s really hard to comment on draft legislation because that legislation can change a hundred times before it even sees the light of day.”


Some of the opportunity zone funds have been slow to attract the amount of investment initially anticipated given all the hype, but Terlep is pleased with how his firm has been doing so far. “It’s probably been a little bit longer than we thought it would be to raise the capital,” he admitted. “Our fund has been, from a raise standpoint, one of the top three funds in the marketplace, and so I think a lot of our competitors have dropped out because of that fact. I think it goes to show you that if you have good properties with the characteristics that we have, with a geographically diverse nature and with the risk management effort that we put in place of having good development partners and so forth, they can be attractive to investors, and we’re seeing that from our investors.”




IRS updates guidance for deductible mileage

By Jeff Stimpson


The IRS has issued Revenue Procedure 2019-46, which updates the rules for using the optional standard mileage rates in computing the deductible costs of operating an automobile for business, charitable, medical or moving expenses.


The guidance, which reflects changes from the Tax Cuts and Jobs Act, also provides rules to substantiate the amount of an employee’s travel expenses reimbursed by an employer using the optional standard mileage rates. (Taxpayers are not required to use a method described in this revenue procedure and may instead substantiate actual allowable expenses provided they maintain adequate records.)


The TCJA suspended the miscellaneous itemized deduction for most employees with unreimbursed business expenses, but self-employed individuals and certain employees — such as armed-forces reservists, qualifying state or local government officials, educators and performing artists — may continue to deduct unreimbursed business expenses.


The TCJA’s suspension of the deduction for moving expenses also does not apply to an active-duty member of the U.S. Armed Forces who moves because of a military order or a permanent change of station.




Year-end strategies for charitable giving

Consider these 5 tax‐savvy ways to make your giving go further this year.



Key takeaways

  • While charitable donations by check or cash are the most common, giving long-term appreciated securities may have attractive tax benefits.
  • Establishing a donor-advised fund (DAF) can be a particularly effective way to give.
  • A qualified charitable distribution (QCD) from an IRA can be used to satisfy your required minimum distribution (RMD).
  • Before undertaking any strategy, consult your legal, tax, or financial advisor.


As the holidays approach, many people look for ways of combining their desire to help the causes they believe in with their desire to save on taxes.


Generally, if you itemize your deductions, making charitable contributions can decrease your tax bill, and since high‐income earners generally pay tax at higher rates, they may enjoy a particularly large tax benefit from charitable contributions.


Here are 5 strategies to consider that can help you make the most of your giving this year.


1. Give long-term appreciated securities, rather than cash

Donations made by cash or check are, by far, the most common methods of charitable giving. However, contributing stocks, bonds, or mutual funds that have appreciated over time has become increasingly popular in recent years, and for good reason.1


Most publicly traded securities with gains that you have not yet sold may be donated to a public charity. When the donation is made, the donor can claim the fair market value as an itemized deduction on their federal income tax return. The amount deducted can be up to 30% of the donor’s adjusted gross income (AGI). Other types of securities, such as restricted or privately traded securities, may also be deductible, but additional requirements and limitations may apply. No capital gains taxes are owed when the securities are donated, not sold.


2. Consider establishing a donor-advised fund

A donor-advised fund (DAF) is a giving vehicle sponsored by a public charity. It allows donors to make a charitable contribution to the public charity, receive an immediate tax deduction, and then recommend grants from the fund over time. Donors can contribute to the charity as frequently as they like and then recommend grants to their favorite charities whenever it makes sense for them. There are a number of public charities, including Fidelity Charitable®Opens in a new window, that sponsor DAFs. You can then recommend grants to other eligible charities—generally speaking, IRS‐qualified 501(c)(3) public charities—from your DAF.


Establishing a DAF allows you to make a gift and qualify for a charitable deduction immediately without needing to decide, until you're ready, on the charities to support with grant recommendations. It can also be a great way for charitably inclined individuals to offset a year with unexpectedly high earnings, or to address the tax implications of year‐end bonuses.


3. Consider using a charitable donation to offset the tax costs of converting a traditional IRA to a Roth IRA

One way to potentially reduce future taxes is to convert a portion of your traditional IRA assets into Roth IRAs. To help offset the tax cost of a Roth IRA conversion, consider making a charitable contribution. The essential difference between traditional retirement savings vehicles (whether they're IRAs or workplace plans) and the Roth versions is that with traditional IRAs, contributions are usually tax-deductible the year they are made and can grow tax-deferred within the account. The contributions and earnings are then taxed upon withdrawal.


Roth IRA contributions are not tax-deductible. You can make qualified withdrawals from your Roth IRA anytime, tax- and penalty-free, if you meet certain requirements. You may have to pay taxes and/or penalties on nonqualified withdrawals from a Roth IRA that go beyond your accumulated contributions, and that includes withdrawals of converted balances.2


Roth accounts may make sense if you believe your current tax rate is lower than it will be in the years you’ll make withdrawals; however, there are many other factors to consider. (For more on Roth conversions read Viewpoints on Tax-savvy Roth IRA conversions)


Converting in a year in which you can claim a large tax deduction, such as an itemized charitable deduction, can be helpful in offsetting the taxes due to the Roth conversion and may give you an opportunity to give to a charity while also reducing your future taxes.


4. Consider donating complex assets

Donors may also contribute complex and illiquid assets—such as private company stock, restricted stock, real estate, alternative investments, bitcoin, or other long-term appreciated property—directly to charity. The process for making this type of donation requires more time and effort than donating cash or publicly traded securities, but it has distinct advantages. These types of assets often have a relatively low cost basis. In fact, for entrepreneurs who have founded their own companies, the cost basis of their private C-corp or S-corp stock may effectively be zero.


Contributing non-publicly traded assets to charity, however, involves additional laws and regulations, so investors should consult their legal, tax, or financial advisor. Also, not all charities have the administrative resources to accept and liquidate such assets. But many public charities with DAF programs, such as Fidelity Charitable, are able to accept these assets and can work with advisors, providing them with guidance throughout the process. (For more on DAFs, read Viewpoints on Strategic giving: Think beyond cash)


5. Over 70½? Consider a qualified charitable distribution (QCD) from an IRA

If you are at least age 70½, have an IRA, and plan to donate to charity this year, another consideration may be to make a QCD from your IRA. This action can satisfy charitable goals and allows funds to be withdrawn from an IRA without any tax consequences. A QCD can also be appealing because it can be used to satisfy your required minimum distribution (RMD)—up to $100,000 for tax year 2019.


QCDs may be appealing if you have few other deductions or if you are already close to your charitable deduction limitations. Because the tax-free QCD is never reported as a deduction, it is not counted against the charitable limits and does not require itemization to be effective.


Alternatively, if you are subject to an RMD and have a desire to contribute to a charity, you could take the RMD proceeds as a taxable distribution and use them to make a charitable donation. Your IRA distribution would then be reported as income, but the subsequent charitable contribution using the proceeds from the RMD would generally offset the tax consequences—to the extent that the limits allow it.


Tip: DAF sponsors such as Fidelity Charitable are not eligible recipients for QCDs, even though they are public charities. Seek professional advice about QCDs, and visit Fidelity's Learning Center for more on QCDs.


Before undertaking any of these giving strategies, you should consult your legal, tax, or financial advisor. But each of the strategies, properly employed, represents a tax‐advantaged way for you to give more to your favorite charities.




IRS expands in-person tax compliance visits

By Michael Cohn


The Internal Revenue Service is expanding its efforts to ensure businesses and individuals are paying their taxes, particularly payroll taxes, with in-person visits planned by revenue officers to more parts of the country, starting recently in Wisconsin and later this month Texas and Arkansas.


The goal of the visits is to help resolve tax compliance issues by meeting face-to-face with taxpayers who have ongoing tax issues, such as payroll tax compliance for employers. The IRS plans to focus its efforts in areas where there have been a limited number of revenue officers available due to declining IRS resources. Thanks to recent budget increases, the IRS has been expanding its staff and has been on a hiring spree, allowing it to expand its enforcement efforts.


“Over the past several years, the IRS has had to make some tough budget decisions given the reality of the budget that was available for operations, and in some cases that has caused us to reduce our presence in certain areas of the country,” said Darren Guillot, deputy commissioner of collection and operations support in the IRS’s Small Business/Self-Employed (SB/SE) Division, during a conference call Friday with reporters. “But our mission to collect taxes at the most efficient cost to the public does not change. One alternative strategy that we have been pursuing is how we could have a greater presence in the community given that our resources are limited. In some locations, we have few or no revenue officers. Those are the civil enforcement officers who help educate taxpayers as well as collect taxes and conduct civil investigations and civil enforcement. How can we make the best use of those employees?”


The IRS has been identifying areas of the country where it either no longer has an office near taxpayers or where it has no presence at all. The new program will supplement the IRS’s Private Debt Collection program, in which it works with contracted collection agencies who telephone individual taxpayers who owe longstanding tax debts..


“These new visits that we're doing outside involve teams of revenue officers traveling to locations where we have reduced resources or no resources to visit higher-risk cases involving larger balances due and cases that have needed visits from a revenue officer for some time, in some cases years,” said Guillot. “It allows us to create a more level playing field where the IRS has a presence with all taxpayers. It's not just the high balance due taxpayers. These expanded visits we're doing are going to enable us to get into those communities and have that presence established. We think this is going to help us enhance a more balanced and fair administration of the tax laws.”


One of the main focuses will be unremitted payroll taxes. “In many cases business owners have been withholding large amounts of employment taxes from their employees and not [sending] them over to the Treasury,” said Guillot. “It’s an extremely high priority. Our efforts are to try to get them into compliance when we meet with them face to face. We have data that proves this is an effective way of getting them to be compliant, which is the kind of success we want, because if the business becomes compliant, they continue to provide jobs for our citizens, and that's good for everybody.”


At the same time, the IRS is taking steps to safeguard taxpayers from criminals impersonating IRS agents. By announcing general details about the efforts in specific areas, the IRS plans to raise community awareness about IRS activity at a particular time to avoid confusion during a period where IRS scam artists and imposters remain active. When IRS revenue officers visit a taxpayer, the IRS said they will always provide two forms of official credentials. Both IDs will include a serial number and photo of the IRS employee. Taxpayers will have the right to view each of the credentials. The officer will explain the tax liability to the taxpayer. The visits will typically occur after numerous contacts by mail about an existing tax issue, so taxpayers should be aware they have a tax issue when the visits occur. If the person owes an outstanding federal tax debt, the visiting officer will ask for payment but will provide a range of payment options, including paying by check, payable to the U.S. Treasury.


“A significant portion of those cases are going to be business cases and very much also focused on those business cases that involve payroll tax liabilities,” said Hank Kea, director of SB/SE Collection-Specialty Collection Insolvency. “Likewise, individual cases that we go out on are typically going to be the higher-dollar, more complex cases. In these visits, whether we’re sending numbers of revenue officers into a specific area during a specific period of time or just in the normal course of business, as our revenue officers go out and meet with taxpayers face-to-face and work cases individually, these cases are where the taxpayer has had multiple prior contacts from IRS regarding their tax liabilities. While our revenue officers may make unannounced visits, the taxpayer is not getting a surprise contact from IRS. They had multiple attempts by reps to resolve their tax liabilities. So when we send out a revenue officer to meet with them face to face, that is an additional attempt to resolve that tax liability.”


He noted that there will be additional compliance events like this throughout the year. The IRS plans to send around a dozen revenue officers to an area and they will be splitting up to visit multiple taxpayers to resolve high-priority cases.




Donor-advised funds grow in popularity thanks to tax reform

By Michael Cohn


The number of donor-advised fund accounts has tripled in the past four years and grown approximately 150 percent since the passage of the Tax Cuts and Jobs Act at the end of 2017, according to a new report.


The annual report, from the National Philanthropic Trust, the largest national independent donor-advised fund sponsor in the U.S., found that contributions to DAFs grew at a higher rate in the first year since the new tax law began making an impact on tax returns, which is an indicator of donors responding to tax reform and “prefunding” their charitable giving. Other factors included the stock market, millennials, tax reform and emerging DAF-specific technology.


“I think there are two big reasons why we saw the increase,” said Eileen Heisman, president and CEO of National Philanthropic Trust. “One is that the market was so high. The market continued to increase during most of the year. We had a volatile December last year, but during most of the months the market was up and people tend to give appreciated publicly traded securities when it’s up. I think the other reason is that for most of the charities, if not all of them, it was the first year that donors were filing under the new tax law. People weren’t sure sometimes how close they were or not to the new standard deductions. Now, if you’re really wealthy, you don’t worry about it, but if you’re moderately wealthy, you might. I think people were putting money in their donor-advised fund in anticipation that they might not hit the threshold and it would guarantee them to get over for these deductions.”


The doubling of the standard deduction since the passage of the TCJA is figuring into many taxpayers’ planning. “In the old way in which people would file their taxes, they would take all their charitable receipts out in February or March, and they would figure out how many gifts they made, and they would give all these things to their accountants or maybe fill out these things themselves,” said Heisman. “In the new world, after tax reform, you’d have to do all of that in December. Think about that. In order to know how close you were, you’d have to take all your tax receipts out in December and say, ‘Oh, I’m $2,000 short. If I want to go take advantage of going beyond the standard deduction, I’m short.’ Then you’d have to figure out what you want to give. I don’t think too many people did that. I don’t think too many people took all the receipts out in December, but I think what they did was say, ‘I’m going to hedge my bet. I’m going to put some extra money in my donor-advised fund, so just in case this first year, it will help me figure out what to do going forward.’ I think that’s what we were seeing. I think people did that because they knew there were new tax regulations, but they weren’t quite sure how it was going to affect them, so they’d rather be safe than sorry.”


Grants from DAF accounts to qualified charities totaled $23.42 billion in 2018, an 18.9 percent increase compared to $19.70 billion in 2017. This represents the first time grants from DAFs exceeded $20 billion.


Contributions to DAFs totaled $37.12 billion, a 20.1 percent increase compared to $30.90 billion in 2017.


Charitable assets in all DAF accounts totaled $121.42 billion, an 8.3 percent increase compared to $112.10 billion in 2017. DAF assets surpassed the $100 billion mark for the second time and experienced continued growth momentum since 2010.


DAF accounts in the U.S. totaled 728,563, a 55.2 percent increase compared to 469,331 in 2017. DAFs remain the fastest growing giving vehicle in the U.S.


Grant payout rate to qualified charities, however, decreased to 20.9 percent compared to 22.8 percent in 2017. Donor-advised funds continue to have a payout rate nearly four times higher than that of private foundations. The grant payout rate has exceeded 20 percent for every year on record.


The size of DAF accounts averaged $166,653 in 2018, a 30.2 percent decrease compared to $238,857 in 2017. Two years of historic growth in number of DAF accounts resulted in this decrease. Grants from DAFs to qualified charities totaled $23.42 billion in 2018, an 18.9 percent increase over the prior year. Total DAF assets available for grantmaking increased to $121.42 billion, an 8.3 percent year-over-year increase.


Donor-advised funds are even starting to spread to some middle-class taxpayers, especially for taxpayers who are bunching their donations. “Our minimum is $25,000,” said Heisman. “I think we’re seeing some of that. But some of the other sponsors have $5,000 as their minimum, and I think for some of those charities — Schwab and Fidelity both have $5,000 minimums — I think you would see people who would say, 'I’m going to fund my donor-advised fund every other year, so I can get two years of giving out of that one year, and take advantage of getting above the standard deduction and then have two years of giving.' If people can afford to do it, the new tax law would push people into doing this strategy called bunching. They can bunch two or three years and take advantage of that year. In between they can still make grants to their favorite charities, but they do it from their DAFs instead of from their checkbook.”


She is also seeing more of a trend toward payroll contributions to DAFs. “The one thing that’s notable is that for the second year in a row, there was a big rise in the number of donor-advised fund accounts, and it’s attributable to an American charity that was started by a Canadian company that does a lot of workplace giving,” said Heisman. “They’re using payroll deductions to go into what constitutes your own DAF account that’s being funded by your payroll deductions, and I think that might be a trend that we might be seeing more of in the future. It’s like the way United Way would work at a big company, where you would sign up and X amount would be deducted every other week or whatever from your paycheck. It’s the same kind of strategy, but instead of going to United Way or the Jewish Federation or Catholic Charities, it’s going into a donor-advised fund account. I think we might be seeing more of that in the future.”




IRS cracks down on ‘billions’ of tax breaks from land donations

By Laura Davison


Certain land donation deals that get hefty tax deductions will be under tighter scrutiny from Internal Revenue Service auditors, the agency said Tuesday.


The IRS announced a “significant increase” in audits and potential criminal prosecutions for taxpayers and their advisers involved in land donation deals known as syndicated conservation easements, where multiple people can claim tax deductions for donations of land that is protected from future development. The IRS is concerned about cases where the tax breaks exceed that value of the initial contribution.


“We will not stop in our pursuit of everyone involved in the creation, marketing, promotion and wrongful acquisition of artificial, highly inflated deductions based on these aggressive transactions,” IRS Commissioner Chuck Rettig said in a statement Tuesday. “If you engaged in any questionable syndicated conservation easement transaction, you should immediately consult an independent, competent tax adviser to consider your best available options.”


The IRS is investigating billions of dollars of potentially inflated deductions and thousands of investors involved in the deals, the agency said.


The announcement marks the IRS’s most aggressive move to crack down on syndicated conservation easements. The agency noted in 2016 that it was concerned about cases where investors were receiving tax breaks worth at least 250 percent of the amount of the donation — and in some cases much more. There are already 80 cases docketed in the Tax Courts, according to the IRS.


Taxpayers may be able to avoid penalties if they remove the deduction on an amended tax return or ask the IRS to make a change to their tax documents, the agency said.


Supporters of the deals say they are a legitimate investment strategy to conserve land. Lawmakers, however, generally support rigorous auditing of this practice. Senate Finance Chairman Chuck Grassley and Ron Wyden, the top Democrat on the panel, have subpoenaed some investors involved in such land deals.




Carried interest tax rules slated for 2020, official says

By Laura Davison


The Treasury Department is planning to issue regulations restricting how hedge fund managers can claim a valuable tax break early next year, a top Treasury official said.


The regulations will likely bar money managers from using S corporations to take advantage of an exemption to new rules for carried interest contained in President Donald Trump’s tax legislation. The rules are slated for early 2020, David Kautter, Treasury’s assistant secretary for tax policy, said Wednesday at a American Institute of Certified Public Accountants event in Washington.


The regulations would address what some tax policy experts see as a mistake in the 2017 tax law that allows hedge fund managers to exploit a loophole to avoid paying higher taxes on their investments. The Treasury Department issued a statement in early 2018 that they planned to make the change to the carried interest rules.


Carried interest is the portion of an investment fund’s returns that are paid to hedge fund and private-equity managers, venture capitalists and certain real estate investors eligible for lower tax rates.


The tax law increased the time period hedge funds and private equity managers had to hold their investments to three years from one year to get the long-term capital gains rate of 20 percent. Otherwise, they had to pay individual income tax rates, which now top out at 37 percent.


But, tax law exempted corporations from having to hold assets for a longer time period before qualifying for the preferential tax rates. Hedge funds found a way to use that exemption by setting up a series of S corporations and limited liability companies for managers entitled to share carried-interest payouts to be eligible for the lower rates more quickly.


Some experts question whether the IRS has the authority to put this restriction in place through regulation, given that the tax law doesn’t include a limitation on the type of corporations that can access the tax break. A recent U.S. Court of Appeals ruling suggested the same, saying the IRS may struggle to defend the rules in future legal fights.




Tax moves to consider by year-end

Seize the chance to save on taxes by acting before the end of the year.



Key takeaways

  • Consider "bunching" charitable donations or medical expenses if it helps you to deduct more income.
  • To help reduce taxable income, consider increasing your contributions to tax-deferred retirement accounts and a health savings account.
  • If you are age 70½ or older, don't forget required minimum distributions (RMDs) and consider a qualified charitable distribution.
  • To help reduce taxes on capital gains, consider a "tax-loss harvesting" strategy, which offsets realized capital gains on your investments with realized capital losses.


If you're like many people, you may still be adjusting to the new tax laws that went into effect in 2018. While rates went down for many people, many itemized deductions were limited. That means it's all the more important to get an early start to make the most of tax-saving strategies before year-end.


Here are 5 timely tips to help get your 2019 tax prep off to a good start.


1. Bunch deductions

The new tax laws simplified tax filing for many people by increasing the standard deduction and capping many itemized deductions.


But if you're considering itemizing, to make the most of the potential tax deductions that still exist, consider "bunching." That means concentrating deductions in a single year, then skipping 1 or 2 years. This strategy can work well when your total itemized deductions for a single year fall below the new standard deduction. The catch is that this strategy requires having the financial capacity to pack all of your deductions into one year.


Here's how it could work: Instead of making annual charitable gifts, investors may want to give 2, 3, or even 5 years' worth of donations in a single year, then take a few years off. Focusing all donations in a single year can increase the value of deductions beyond the threshold for a single year, and then the larger standard deduction can be taken in the "skip" years.


Consider the hypothetical example below. This couple, in the 35% tax bracket, makes annual $10,000 charitable donations. Including those donations, their mortgage interest, and property taxes, their itemized deductions would total $25,000—$600 over the standard deduction of $24,400 for married taxpayers filing jointly in 2019. Itemizing gives them $210 in tax savings versus the standard deduction on their charitable contribution each year.


But, if they bunch 3 years' worth of charitable contributions into 1 year, they would exceed the standard deduction by $20,600. By doing this they can save a total of $7,210 on taxes—$6,580 more than they would save by taking the standard deduction for 3 years.

This is a hypothetical example for illustrative purposes only. This chart assumes a married filing jointly couple who contribute a cash gift. The tax savings referenced here are specific to the charitable donation made above the $24,400 standard deduction. Information herein is not legal or tax advice.


If you're considering a bunching strategy, a donor-advised fund may be appealing. That way you can contribute several years of charitable contributions in 1 year, making the most of the deduction in that year, but spread your giving over multiple years. A donor-advised fund also lets you keep some control over the way your charitable contributions are distributed.


You can also bunch medical expenses. Medical expenses can be deducted if they exceed 10% of adjusted gross income (AGI).


Bunching may work for people who plan to make annual charitable donations but whose itemized deductions fall close to the new standard deduction. Try our calculator to model the potential impact of bunching in different financial situations.


2. Consider a Roth conversion

The tax law passed in 2018 lowered tax rates and changed the income thresholds for different tax brackets. But those changes are set to expire in 2025. If you saved money in a traditional IRA, you may be able to lock in today's rates by converting part, or all, of your savings to Roth accounts.


You may also be able to convert your 401(k) to a Roth account. Read Viewpoints on Do you earn too much for a Roth IRA?


Because you pay taxes on your conversion amounts up front, rather than when you withdraw money, you'll owe no taxes on future earnings as long as your withdrawals are qualified. If you believe that your future tax rates may go up, either because of legislative changes or because of higher future income, a Roth conversion could save you money. Another potential advantage: Roth IRAs don't have required minimum distributions (RMDs).


One strategy is to convert up to the limit of your tax bracket. For example, in 2019, a couple with taxable income of $125,000 would have a 22% marginal tax bracket (which tops out at $168,400). So they could convert up to $43,400 before maxing out of the 22% bracket.


Of course, it's impossible to predict future tax law, but income tax rates are now near historic lows, so it may be a relatively good time to consider a Roth conversion. An added benefit of a Roth conversion is tax diversification. The ability to take tax-free1 withdrawals in the future may help manage taxes in retirement.

*Chart does not account for the Medicare surtax on high earners. Source: IRS.

3. Reconsider the 529

For parents, grandparents, and anyone else worried about paying for education, 529 accounts are a tax-advantaged way to help pay for education expenses. The accounts allow savings to grow tax-deferred, and avoid taxes on gains if used for tuition, room and board, and other qualified expenses. The tax law passed in 2018 allows 529 accounts for the first time to also be used for up to $10,000 of primary and secondary school tuition expenses each year.


Before withdrawing money from a 529, discuss your situation with a financial advisor. In some cases, allowing the money to grow and compound in the tax-deferred account would produce greater tax savings than tapping it early. And, in some cases, the timing and amount of withdrawals for college, or other qualified uses, can have financial aid and tax ramifications.


4. Remember municipal bonds

For most people, the new tax rules lowered their tax rates and bills—but not for everyone. For some higher income taxpayers, particularly in high tax states, tax bills are going up. For anyone who is concerned about taxes, now may be a good time to reconsider the role of tax-exempt municipal bonds in their portfolio.


Bond interest is typically taxed at ordinary income tax rates—that's up to 37%, and in some cases there could also be a Medicare surtax of 3.8%. Interest from tax-exempt municipal bonds is generally free from federal income taxes, and in some cases state and local income taxes as well.2


That can make interest from tax-exempt municipal bonds an appealing alternative to traditional bonds in taxable accounts, particularly for higher earners.


5. Remember the fundamentals: retirement, RMDs, and tax-loss harvesting

Many important tax rules were unaffected by the 2018 tax law, including those governing retirement savings accounts, tax-loss harvesting, required minimum distributions (RMDs), and charitable distributions. Here are some reminders:


Max out retirement and health savings accounts: Pre-tax contributions to a traditional 401(k), 403(b), or similar workplace retirement plan can generally reduce current year taxes.


The 2019 contribution limit is $19,000. People over age 50 can contribute an extra $6,000, for a maximum contribution of $25,000. The contribution limit increases to $19,500 for 2020; the catch-up limit rises to $6,500.


Be sure to act quickly if you want to contribute more to your workplace savings plan. The deadline is December 31 for this year's contributions.


A Simplified Employee Pension (SEP) IRA offers potential tax breaks similar to those of a 401(k). The maximum contribution for this year is $56,000 or 25% of eligible income, whichever is less. You'll have until the tax filing deadline, April 15, 2020, to make contributions to a SEP IRA for the 2019 tax year.


Contributions to a health savings account (HSA) reduce taxes too. The IRS maximum annual contribution limit for HSAs in 2019 is $3,500 for those individuals electing single coverage under an HSA-eligible health plan (also known as an HDHP—high deductible health plan), and $7,000 for those electing family coverage. Individuals aged 55 and older may contribute an additional $1,000 (this applies to both single and family HDHP coverage). Family coverage includes any level of coverage other than self-only coverage, if offered by the employer.


The deadline for 2019 contributions to an HSA is April 15, 2020.


Take required distributions and consider a qualified charitable distribution: The deadline for taking a 2019 RMD is December 31, unless you turned 70½ this year, in which case you get a grace period until April 1 of next year to make your first withdrawal. Don't miss it—the penalty for missing your RMD from tax-deferred retirement accounts like a traditional IRA or 401(k) is up to 50% of the shortfall.


Want to donate to charity when age 70½ or older? Consider a qualified charitable distribution (QCD). It's a direct transfer of funds from your IRA custodian and payable to a qualified charity, which counts toward your RMD for the year, up to $100,000. It's not included in gross income and does not count against the limits on deductions for charitable contributions. These can be significant advantages for certain high-income earners, but the rules are complex—be sure to consult your tax advisor.


Capital gains and tax-loss harvesting: A loss on the sale of a security can be used to offset any realized investment gains, and then up to $3,000 in taxable ordinary income annually. You may sell for a loss to offset gains, and then reinvest the proceeds to maintain your investment strategy, but be sure to comply with IRS "wash sale" rules. Tax-loss harvesting needs to be completed by December 31.

Source: Fidelity Investments. For illustrative purposes only. Does not consider state taxes. Capital gains taxes are hypothetical and reflect a 20% capital gains tax and assume that the investment decisions are in accordance with wash sale rules.


Revisit your estate plan: If anything in your life has changed, or if it's been a few years since you last checked, revisit your estate plan and make sure your beneficiaries are up to date.

The bottom line


The end of the year is a good time to check on your financial accounts. The last day of December is sometimes a significant deadline so it can make sense to do some year-end housekeeping, including evaluating tax strategies and making plans for the coming year.


Of course, tax planning is not a one-and-done year-end exercise. To help reduce taxes, it makes sense to be planning throughout the year. Need help? Fidelity advisors can help you build a tax-smart investing plan that works for you.




International tax enforcement chiefs search for crypto tax criminals

By Michael Cohn


Leaders of tax enforcement authorities from the U.S., Australia, Canada, the Netherlands and the United Kingdom met this week to discuss ways to deal with tax crimes and tax evasion, particularly involving cryptocurrency.


The Joint Chiefs of Global Tax Enforcement from the five countries, known as the J5, brought together investigators, cryptocurrency experts and data scientists to discuss how they can track down tax criminals who are using cryptocurrency such as Bitcoin.


“The goal of the week was to remove some barriers and work together collaboratively to identify the most egregious tax offenders in the world,” said Ryan Korner, executive special agent in charge of the Los Angeles Field Office of IRS Criminal Investigations, which hosted the challenge this year. “Cybercrimes and the cybercriminals who commit them don’t have any borders and it’s imperative that we work together to protect the global financial system and the integrity of each nation’s tax system.”


The event, dubbed “The Challenge,” was hosted last year by the Netherlands’ Fiscal Intelligence and Investigation Service in Amsterdam. This year, which was the second year of the Challenge, officials from the five agencies met in Los Angeles to talk about those individuals who are the most egregious tax offenders across the globe. While last year’s meeting in Amsterdam focused on enablers of tax evasion, this year the Challenge meeting focused on cryptocurrency.


“The J5 is made up of the best and brightest of each of our countries so it makes sense to host events like the Challenge where we can get together, cut through red tape, and make real investigative strides,” said IRS Criminal Investigation Chief Don Fort in a statement. “This is not an exercise dealing with hypothetical scenarios. These are real investigators, using real data, finding real criminals through leads generated this week.”


The group made progress this week in sharing information and technology. “I want to emphasize that this week was not just a hypothetical training exercise,” Korner said during a conference call with reporters Friday. “All of the participants from the J5 countries rolled up their sleeves and worked together using real data to identify real criminals. One thing was really clear this week and that’s the J5 countries are committed to identifying and holding accountable tax cheats and other criminals who attempt to use the dark web and cryptocurrency as an underground economy.”


Experts from each country talked about ways to leverage various open and investigative sources, including offshore account information. Using various analytical tools, members of each country split into teams with the goal of generating leads and finding tax offenders using cryptocurrency based on the new data available to them through the challenge. Real data sets from each country were brought to the challenge to make connections where current individual efforts would take years to make those same connections.


“We brought together not only technical experts again to work on algorithms and other platforms where we could collaboratively share information, but also our cyber experts,” said IRS-CI special agent Chris Hueston, who is J5 project lead for the United States. “We spent a good period in the J5 runup making sure of level setting with our cyber investigators and making sure we were all on the same pages. Then today and earlier this week the collaboration on the international level has been at a level that we really haven’t seen before. We’re using the J5 as a force multiplier, bringing together the leading experts from each country and their toolsets and toolkits to collaboratively target those transnational actors who are tax evaders and the financers of transnational criminal organizations. From our perspective, this is a new and emerging area in the digital currency with respect to tax evasion and illicit actors and we’re looking to stay ahead of that curve and to let those actors know that we’re out there and we will find you.”


At the conclusion of the Challenge, each country’s tax investigators had developed a number of leads, trends, methodologies and investigations encompassing all of their countries. The information will be used to advance existing and future investigations.


“Being able to come together and share expertise, which hasn’t been done before, we can develop new platforms that we can each take back to our respective countries, importing the data that we each have to be able to data map, utilizing these new tools and develop new leads that we previously would not have known about prior to this challenge,” said Brooke Tetzlaff, a supervisory special agent at the IRS Criminal Investigation division and a U.S. participant in the Challenge.




The IRS agenda for the end of 2019

By Roger Russell


The Internal Revenue Service is planning an extensive cyber awareness campaign beginning immediately after Thanksgiving, according to Stephen Mankowski, national tax chair of the National Conference of CPA Practitioners: “The campaign will emphasize to practitioners and taxpayers the potential dangers they face during the holiday shopping season and the filing season ahead.”


“National Tax Security Awareness Week 2019 is slated to begin on Cyber Monday and run from Dec. 2 through Dec. 6,” he explained. “This is the heaviest period of time when people are online and when phishing is most common. The IRS is planning a kickoff to coincide with Cyber Monday. YouTube videos will be updated. Practitioner groups are encouraged to help get the message out to members and taxpayers. In particular, taxpayers are urged to buy only from known vendors, and to check their bank statements.”


Mankowski recently met with government officials in Washington, D.C., to assess the latest thinking on issues affecting tax practitioners.


“During the recent Tax Forums, the IRS noted that a lot of people still are not aware of the basics of data security,” he said. “The IRS has been making some headway, but much more is needed.”

Mankowski also spoke to officials about the Taxpayer First Act of 2019.


“The act was designed to expand and strengthen taxpayer rights, as well as focus on cybersecurity and identity theft,” he said. “There is significant latitude on the reorganization addressed by the act, and people at the IRS are looking forward to the changes.’


“The IRS is planning listening sessions and town hall meetings with IRS employees as well as practitioners to learn what is needed and how to achieve their goals," Mankowski added. "Customer service, training, and reorganization are areas of the bill for which the [Taxpayer First Act Office] is responsible.”


“Overall, there are 45 provisions, with an implementation timeline that is aggressive, but attainable,” he said. “The TFAO will ultimately be responsible for the entire bill.”

There will also be funding issues that affect the timing of the implementation, according to Mankowski. “The TFAO will be focusing on low-income areas where English is a second language. And the IRS is reaching out to other taxing authorities for comments and feedback on what they are experiencing.”


Form 1040-SR, the U.S. Tax Return for Seniors, has been formulated with a larger, easier-to-read font, Mankowski observed. “It includes a standard deduction chart on its face without the need to access instructions, although Schedule A is still available.”


Taxpayers 65 and older have the option to use this form, which uses the same building block approach as Form 1040. Retirement is not a requirement to use the form.


The IRS also posted a second early-release draft of Forms 1040, 1040-SR and Schedule 1, Mankowski noted: “If the taxpayer is not required to file Schedule 1and had no virtual currency, then Schedule 1 is not required. Schedule 1 asks the taxpayer to answer whether at any time during 2019, did they receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency.”


“For Form 1040, the IRS has engaged stakeholders, reviewed studies and received much input that it implemented into draft 1040,” noted Mankowski. Some of the changes include:


  • Elimination of health coverage check box;
  • Movement of the signature box to page 2 to eliminate changes to second pages, while adding telephone numbers and email;
  • Separating IRS and pension distributions on Line 4; and
  • Adding line for capital gains without Schedule 1 on Line 6.


“Several lines and several schedules were combined, and Schedule 6 was eliminated,” he said.

In putting together audit guides on virtual currency, the IRS is reaching out to industry experts and practitioner groups, Mankowski said. “One of the first questions to be aware of is what was the intent of the taxpayer: Did they buy it as an investment or receive it as payment for a service? If I receive 100 Bitcoin for preparing a return, I need to make sure it gets recorded as income on Schedule C or on my corporate tax return,” he said. “But if a financial advisor tells me to buy it as an investment, it’s not income at that time.”




Report of IRS Criminal Interest in Captive Insurance Shelters (11/17/19)

by Jack Townsend


It is reported that the IRS is looking to make criminal referrals to CI in § 831(b) captive insurance cases.  Jay Adkisson, IRS Suggests Criminal Referrals To Be Made In Abusive 831(b) Captive Tax Shelter Cases (Forbes 11/17/19), here.  The article cites as its source an article written by Aysha Baghi in Bloomberg's Tax Management Weekly Report™ which in turn cites SB/SE Commissionier Eric Hylton at a conference.

Adkisson notes the potential targets:


1. Promoter (captive manager) who could have been subject to promoter examination and continued to market the product even after Notice 2016-66.

2. Actuaries who provided studies making “unsupportable predictions about claims and losses, i.e., so-called ‘whore actuaries’.”

3. The captive owners who continued to take deductions after the Notice.

Adkisson speculates that, while referral to CI is one thing, as to referral from CI to DOJ Tax, the target environment is “ not so rich since DOJ-TAX would have to prove tax fraud beyond a reasonable doubt, which is a much higher standard than that something is a mere tax shelter.”  Adkisson notes:

Here, it would likely be a captive manager and their client who was caught fabricating claims after-the-fact so as to try to justify the premiums paid to the captive, or the IRS had audio tapes or other evidence of the captive manager selling the captive as a tax shelter but then later falsely testifying that there were no tax motivations for the arrangements.

Adkisson notes that the IRS may seek promoter injunctions, but that “the forecast for a criminal injunction before 2020 is probably pretty low.”  I think he means criminal prosecution rather than criminal injunction.




Citing Legal Issues, Ohio Suspends Crypto Tax Payment Program

Kelly Phillips Erb


Last year, Ohio made news as the first state in the nation to accept tax payments using cryptocurrency. Less than a year later, the program has been suspended after accusations that it wasn’t properly vetted.


The program was initially hailed as a model for the rest of the country. Under the terms of the program, if you operated a business in the State of Ohio, you could register at to pay your taxes. The cryptocurrency payments were processed by a third-party payment processor, BitPay, and immediately converted to dollars before being deposited into a state account. 


That system, according to a new opinion from State Attorney General Dave Yost, was part of a number of potential failings with the program, including a failure to bid it out.


Today, the website at remains shuttered. A notice advises: (It reads: OhioCrypto is currently suspended. More information can be found by clicking here. If you have questions, please email


Clicking through leads you to back to the Treasurer’s Office’s site, which offers further details on the takedown.


The program was touted as a game-changer by former Treasurer Josh Mandel. Mandel was elected Ohio Treasurer in 2010. He ran an unsuccessful Congressional campaign against Senator Sherrod Brown in 2012. He was reelected as Treasurer in 2014, and made plans to again challenge Brown in 2018. He abruptly pulled out of that race last year and left the Treasurer’s office after his term ended in January 2019. 


His successor, Robert Sprague, asked the Ohio Attorney General for a formal opinion on whether the payment method facilitated by the program’s third-party processor constitutes a “financial transaction device” under Ohio law. If it did, then by law (Ohio Revised Code §113.40), the contract for the processor must go through a formal procedure that includes approval from state officials and a request for bids from at least three financial institutions. 


The Attorney General did take a look at the program. He found that met the legal definition of a “financial transaction device.” Yost also found that the use of the program was not permitted, claiming that existing state law doesn’t extend to Yost said the process was basically akin to a currency exchange, finding, “The Treasurer’s use of a payment processor to convert cryptocurrency into dollars for the payment of taxes is not authorized, expressly or impliedly, by statutes allowing the receipt of electronic payments.”


Sprague said, about the findings, “It is vital that Ohio explores innovative, new technologies and processes that continue to drive Ohio into the future. However, we must make sure any new processes that are implemented, such as, are established in accordance with Ohio law.”


Sprague also noted that the program had not been popular: The state accepted fewer than ten payments.


Mandel has not commented on the suspension of the program. Earlier this year, without comment, Mandel deleted all posts on his Twitter and Facebook accounts. He also set his Twitter account to private.  




IRS Followed Bitcoin Transactions, Resulting In Takedown Of The Largest Child Exploitation Site On The Web

Kelly Phillips Erb


The largest dark web child pornography site in the world has been taken down. That was the word today from the U.S. Attorney’s Office for the District of Columbia, the Justice Department’s Criminal Division, the IRS Criminal Investigation (IRS-CI), and U.S. Immigration and Customs Enforcement’s Homeland Security Investigations (HSI), together with the National Crime Agency of the United Kingdom and Republic of Korea at a joint press conference announcing arrests and forfeitures. 


According to the IRS-CI, agents became aware of Welcome to Video, the largest child sexual exploitation market by volume of content, because of their work on previous dark web marketplaces. The dark web, also referred to as “Darknet,” refers to content that you don’t typically access through regular internet browsing activities.


IRS-CI was able to trace bitcoin transactions on the site to people all over the world who were uploading and downloading this material, as well as find the location of the site administrator. By analyzing the blockchain and de-anonymizing bitcoin transactions, the agency was able to identify hundreds of predators around the world - even though those users thought that they could remain anonymous.


As a result of the investigations, Jong Woo Son, 23, a South Korean national, was indicted by a federal grand jury in the District of Columbia for operating the site. Son has also been charged and convicted in South Korea and is currently in custody in South Korea. The operation resulted in the seizure of approximately 7.5 terabytes of child pornography videos, the largest of its kind: that’s more than 10,000 CDs full of imagery that are no longer in the hands of child pornographers. The images, which are being analyzed by the National Center for Missing and Exploited Children (NCMEC), contained over 250,000 unique videos; 45% of the videos contain images that have not been previously known to exist.


According to the indictment, on March 5, 2018, agents from the IRS-CI, HSI, National Crime Agency in the United Kingdom, and Korean National Police in South Korea arrested Son and seized the server that he used to operate a Darknet market which advertised child sexual exploitation videos. The site, Welcome To Video, offered these videos for sale using the cryptocurrency bitcoin: the site boasted over one million downloads of child exploitation videos by users. 


The website is among the first of its kind to monetize child exploitation videos using bitcoin. Here’s how it worked: each user received a unique bitcoin address when the user created an account on the website. Those accounts could be used to pay to download the videos. An analysis of the server revealed that the website had more than one million bitcoin addresses, signifying that the website had the capacity for at least one million users.  


The data from the seized server was shared with law enforcement agencies around the world. This has resulted in leads sent to 38 countries. In addition to Son, 337 site users residing in 23 states (Alabama, Arkansas, California, Connecticut, Florida, Georgia, Kansas, Louisiana, Maryland, Massachusetts, Nebraska, New Jersey, New York, North Carolina, Ohio, Oregon, Pennsylvania, Rhode Island, South Carolina, Texas, Utah, Virginia, and Washington State) and Washington, D.C. ,as well as the United Kingdom, South Korea, Germany, Saudi Arabia, the United Arab Emirates, the Czech Republic, Canada, Ireland, Spain, Brazil and Australia have been arrested and charged. Two users of the Darknet market committed suicide after the execution of search warrants.


The complaint alleges that law enforcement was able to trace payments of bitcoin to the Darknet site by following the flow of funds on the blockchain. The virtual currency accounts identified in the complaint were allegedly used by 24 individuals in five countries to fund the website and promote the exploitation of children. An unsealed forfeiture complaint seeks to recover these funds as part of efforts to assist victims of the crime.


In addition to arrests and seizures, the operation is also responsible for the rescue of at least 23 minor victims residing in the United States, Spain and the United Kingdom, who were being actively abused by the users of the site.


“Children around the world are safer because of the actions taken by U.S. and foreign law enforcement to prosecute this case and recover funds for victims,” said U.S. Attorney Jessie K. Liu. “We will continue to pursue such criminals on and off the Darknet in the United States and abroad, to ensure they receive the punishment their terrible crimes deserve.”


“Through the sophisticated tracing of bitcoin transactions, IRS-CI special agents were able to determine the location of the Darknet server, identify the administrator of the website and ultimately track down the website server’s physical location in South Korea,” said IRS-CI Chief Don Fort. “This large-scale criminal enterprise that endangered the safety of children around the world is no more.”


Chief Fort noted that some might call it an odd pairing for the IRS to work on this type of investigation. But, he explained “our unique and singular focus in following the money made this a logical next step after playing key roles in dismantling Silk Road, BTC-E, Mt Gox and other crimes perpetrated in the shadows of the dark web.”


He further explained, “Our agency’s ability to analyze the blockchain and de-anonymize bitcoin transactions allowed for the identification of hundreds of predators around the world.”


Whether the funds are fiat or virtual, Chief Fort said, “IRS-CI’s expertise is in tracing money all around the world.” Today, IRS-CI is the only federal agency that devotes 100% of resources to investigating financial crimes. IRS-CI is also the only agency with jurisdiction over federal tax crimes. (For more about IRS-CI, click here.)


Chief Fort had an additional message for criminals around the world. “You used to hide by laundering your money through shell companies around the country, but we traced you. You took your money offshore and hid around the world, but we found you. You went on the dark web thinking that your actions were anonymous, but they weren’t, and we again found you. You now deal in crypto-currency, again thinking this will make you anonymous, but our agents have once again proved that there is nowhere you can hide.” He added, “We will not stop in our pursuit.”




What You Need to Know About Taxes and Filling Out Your FAFSA

Kelly Phillips Erb


My daughter has been sending me steady reminders about filling out the Free Application for Federal Student Aid (FAFSA) form. If you–or your child–plan to attend college or grad school between July 1, 2020, and June 30, 2021, the FAFSA form became available for filing on October 1, 2019. The form is used to apply for financial aid for college or grad school and must include income documentation, including federal tax information. Here’s what you need to know.


The easiest way to complete a FAFSA form is online (be sure to head directly to the official site here–other sites may charge you money and may not keep your information secure). If you’re new, just click on “Start here” to begin your application.


The FAFSA will first ask for your FSA ID. An FSA ID is a username and a password that you use to log in to the U.S. Department of Education websites. Students and parents each need a separate FSA ID to sign the FAFSA form online. You can create an FSA ID here.


The FAFSA requires personal information like your name and address as well as your Social Security number. If you don't have a Social Security number and you are entitled to one, you should take steps to get one (more about taxpayer ID numbers here). If you don’t have a Social Security number because you’re not entitled to one, you cannot complete the FAFSA. If you have a Social Security number but can’t find it or your card, you can apply for a replacement card (more on that here).


The FAFSA also requires financial information, including filing status and which tax form you file. The easiest way to provide your tax information is to use the Internal Revenue Service Data Retrieval Tool (IRS DRT). With the IRS DRT, eligible students and parents can transfer their 2018 federal income tax information into the 2020-2021 FAFSA form. And, if you’re worried about privacy (remember those attempted hacks?), you can rest a little easier: according to the IRS, additional security and privacy protections have been added to the IRS DRT. The tool is now, they claim, “the fastest, most accurate way to input your tax return information into the FAFSA form.”


There’s no separate website to use the tool: you access the IRS DRT from the online FAFSA form by clicking “Link to IRS.” You'll log in by providing your name and other information exactly as you provided it on your tax return. Once you’re authenticated with the IRS, you can either transfer your information from the IRS or choose to return to the FAFSA.


It’s important to note that if you use the IRS DRT to transfer your tax return information from the IRS, the specific tax information will not show up on your onscreen version of the FAFSA. For your protection, the answer to each question is replaced with “Transferred from the IRS.”


Most folks are eligible to use the IRS DRT if they’ve already filed their taxes. However, some taxpayers cannot use the tool, including those taxpayers who have filed an amended tax return, called a federal form 1040X, Amended U.S. Individual Income Tax Return (downloads as a PDF). Other taxpayers who are not eligible to use the tool include those filing Married Filing Separately or Head of Household, and those who filed a Puerto Rican tax return, a foreign tax return or a form 1040-NR/1040-NR-EZ. Additionally, the tool is not available for students whose parents’ marital status is “Unmarried and both legal parents living together.”


If you filed a federal income tax on extension (the deadline for taxpayers on extension is October 15), you may need to enter your tax information manually. You should generally allow up to three weeks for electronically filed returns, or 11 weeks for mailed returns, to allow the IRS to process and enter that information. If you can’t wait that long, you will need to manually enter their tax return information.


If you are a dependent student, you will also be asked to provide information about your parents, including their federal income tax information. Don’t simply rely on the IRS’ definition of dependency–there are separate standards for FAFSA, though there is some overlap.


You can view a specific list of questions used to determine whether or not you’re a dependent for FAFSA purposes here.


  • If you answered yes to any of the questions on the list, you are not considered a dependent for FAFSA purposes and typically need not provide your parents’ financial information on the form. Exceptions do exist. Specifically, health profession students and law school students may be required to provide parent information no matter their dependency status.
  • If you answered no to any of the questions on the list, you are considered a dependent student and must provide information about your parents. This is true even if you do not live with your parents. It’s also true even if your parents refuse to help you with the FAFSA and do not pay your expenses.


If your parents don’t wish to help you complete the FAFSA, just say so on the form when it asks whether you can provide information about your parents (select the “I am unable to provide information about my parent(s)” option). You can only make this notation online: the option is not available on the paper version.


If you have special circumstances, you’ll need to take some extra steps. If, for example, your parents are incarcerated, you don’t know where your parents live, or you’ve left home due to an abusive situation, fill out the FAFSA and indicate that you have unique circumstances (find out more here). You’ll be allowed to finish the FAFSA without entering parent information, but your FAFSA will not be fully processed. It’s your responsibility to get in touch with the financial aid office at your school as soon as possible to find out the next steps.


The IRS DRT isn’t the only tool that can be used to complete the FAFSA. The information needed to complete the FAFSA can be found on a previously filed tax return. If you don’t have a copy of a tax return that you need, ask your preparer. You can also order a tax transcript directly from the IRS using the “Get Transcript” tool at, by calling 1-800-908-9946 to order a copy, or using a federal form 4506-T, Request for Transcript of Tax Return (downloads as a PDF).


If you’re on the fence or having trouble, don’t put it off: Deadlines apply. I know it’s confusing, but each state and school sets its own deadline. You’ll have to check with the school directly for those dates, but you can check the FAFSA deadlines by state here. For federal purposes, the online FAFSA form must be submitted by 11:59 p.m. Central time (CT) on June 30, 2021.

If you still need help, give the folks at the Department of Education a buzz at 1-800-4FED-AID (1-800-433-3243). You can also chat or send an email via the Web.




Self-Directed IRA Guide: How to Expand Your Retirement Investment Options with a SDIRA

by Anthony Gardner, CPA


If you’re looking for something more than stocks, bonds and mutual funds, a SDIRA might be for you.


Individuals seeking alternative investment options with their retirement account funds should consider opening a Self-Directed IRA (SDIRA) with a qualified custodian. Unlike traditional IRAs where you may be limited to investments in stocks, bonds, or mutual funds, a SDIRA allows you to take advantage of investing in alternative assets such as limited partnerships, LLCs, gold, real estate, notes and more.


Getting Started with a Self-Directed IRA

Once you decide that you would like to have the added investment options of a SDIRA, your first step is to choose a qualified custodian. There will be custodian fees that vary depending on the chosen custodian; all fees should be considered during the process of deciding to open an SDIRA.


Once the custodian is identified, you’ll want to rollover or transfer funds into the account. If you already have an existing traditional or Roth IRA account, you could simply transfer all or part of the account funds into the newly opened SDIRA. You could also rollover all or part of the funds from a 401(k) account with a prior employer.


After it’s set up, you will be able to contribute funds annually to the SDIRA account just like any other IRA, subject to the same traditional and Roth IRA contribution limits set annually by the IRS; the combined annual contribution limit for all of your traditional and Roth IRA accounts for 2019 is $6,000, or $7,000 if you’re age 50 or older. (Roth IRA contributions are subject to a further limitation based on your modified AGI for the year.)


There are additional options for rolling over SIMPLE and SEP IRA accounts into an SDIRA. Business owners who are otherwise eligible for a SIMPLE or SEP account and are interested in the benefits of an SDIRA should consult with a tax advisor on the specifics of this process.


Managing Self-Directed IRA Investments

Once your SDIRA account is funded, you are free to choose your investments and direct the account custodian to send funds. The most convenient way to invest through an SDIRA is to create a SDIRA LLC and then direct the SDIRA funds into the LLC checking account. Creating an SDIRA LLC gives you, as the account owner, checkbook control of the retirement account funds allowing for maximum freedom in making qualified investment decisions on behalf of the IRA.


You should hire an experienced legal professional to manage the creation of the LLC. It can be a relatively complicated process and there are many potential traps for the unwary. Once the entity is created, you will be responsible for tracking the investments made through the LLC.


Prohibited Self-Directed IRA Investments

While the SDIRA gives you significantly more freedom to invest than traditional retirement accounts, there are still some limits on what you can do with the funds.


There are many prohibited transactions that the account owner needs to be aware of when creating an SDIRA and subsequently investing the funds of the account. The majority of prohibited transactions stem from the involvement of a disqualified person in a self-dealing transaction.


Disqualified persons are defined as:

  • The account owner
  • A beneficiary of the IRA
  • Your spouse
  • Your lineal ascendants/descendants and their spouses
  • Plan service providers and fiduciaries
  • An entity in which anyone described above owns at least 50% of the voting stock/capital or profits interest, directly or indirectly
  • An officer, director or a 10% or more shareholder or partner of an entity described above

Types of prohibited transactions between an IRA and a disqualified person include:

  • Extension of credit or cash loans
  • Yielding a commission/fee for the purchase, sale, or exchange of assets
  • Transfer of IRA income or assets to, or for use by or for the benefit of, a disqualified person
  • Executing renovations/repairs on property owned by the account
  • Paying a salary or fee for service
  • Retaining account earnings
  • Covering account expenses


The above list of prohibited transactions is not all-inclusive. The best policy when it comes to SDIRA transactions is to verify with an experienced professional that it is not prohibited before acting. Once you execute a prohibited transaction, the IRS can declare that the account ceased to be an IRA as of the first day of that year and the IRA is treated as distributing all assets to the IRA owner at FMV. The account owner would be subject to income taxes and penalties as applicable.


Self-Direct IRA and UBIT: Is a SIDRA Subject to Unrelated Business Income Taxes?

There are some situations where the SDIRA may be annually subject to unrelated business income tax (UBIT). There are two principal situations where UBIT would apply:


  • The SDIRA invests in a business, either directly or through a partnership or LLC, that generates trade or business income
  • The SDIRA invests in a debt-financed investment property. The investment income included in UBIT is proportionate to the debt on the property


If one of these situations arises, the account will need to file an IRS Form 990-T and any applicable state tax return(s) to remit taxes due on the income. If either of these circumstances apply to your SDIRA, Freed Maxick could be engaged to identify and meet any income tax filing requirements. The implication of any required tax filings and taxes due on the SDIRA transactions is a very important preliminary consideration.


The increased flexibility and benefits of a SDIRA may be a great option for your retirement investing needs. However, creating an SDIRA also leads to increased responsibility and risk for the account owner.



Year-End Tax and Financial To-Do List for Individuals

With the dawn of 2020 on the near horizon, here’s a quick list of tax and financial to-dos you should address before 2019 ends:


Check your Flexible Spending Account (FSA) balance. If you have an FSA for health care expenses, you need to incur qualifying expenses by December 31 to use up these funds or you’ll potentially lose them. (Some plans allow you to carry over up to $500 to the following year or give you a 2½-month grace period to incur qualifying expenses.) Use expiring FSA funds to pay for eyeglasses, dental work or eligible drugs or health products.


Max out tax-advantaged savings. Reduce your 2019 income by contributing to traditional IRAs, employer-sponsored retirement plans or Health Savings Accounts to the extent you’re eligible. (Certain vehicles, including traditional and SEP IRAs, allow you to deduct contributions on your 2019 return if they’re made by April 15, 2020.)


Take required minimum distributions (RMDs). If you’ve reached age 70½, you generally must take RMDs from IRAs or qualified employer-sponsored retirement plans before the end of the year to avoid a 50% penalty. If you turned 70½ this year, you have until April 1, 2020, to take your first RMD. But keep in mind that, if you defer your first distribution, you’ll have to take two next year.


Consider a qualified charitable distribution (QCD). If you’re 70½ or older and charitably inclined, a QCD allows you to transfer up to $100,000 tax-free directly from your IRA to a qualified charity and to apply the amount toward your RMD. This is a big advantage if you wouldn’t otherwise qualify for a charitable deduction (because you don’t itemize, for example).


Use it or lose it. Make the most of annual limits that don’t carry over from year to year, even if doing so won’t provide an income tax deduction. For example, if gift and estate taxes are a concern, make annual exclusion gifts up to $15,000 per recipient. If you have a Coverdell Education Savings Account, contribute the maximum amount you’re allowed.


Contribute to a Section 529 plan. Sec. 529 prepaid tuition or college savings plans aren’t subject to federal annual contribution limits and don’t provide a federal income tax deduction. But contributions may entitle you to a state income tax deduction (depending on your state and plan).


Review withholding. The IRS cautions that people with more complex tax situations face the possibility of having their income taxes underwithheld because of changes under the Tax Cuts and Jobs Act. Use its withholding estimator (available at to review your situation.

If it looks like you could face underpayment penalties, increase withholding from your or your spouse’s wages for the remainder of the year. (Withholding, unlike estimated tax payments, is treated as if it were paid evenly over the year.)

For assistance with these and other year-end planning ideas, please contact us.


Greece to require digital transactions to fight tax evasion

By Kay Bell


Every day, more Americans go digital, at least partially, when comes to their finances.

We pay via our smartphone features and apps. Our paychecks or gig earnings are directly deposited. Even the Internal Revenue Service is nudging (and sometimes shoving) us to handle our tax tasks electronically.


But we are nowhere near where Greece is going.


That Mediterranean country, the one that's been on the financial edge or over it for years, now is forcing its residents to use electronic transactions equal to around a third of their yearly income.

If they don't, Greek consumers will be hit with a hefty fine.


Unpaid taxes prompt new collection efforts: Taxes are the rationale for the change in spending. Specifically, tax evasion. Even more specifically, to stamp it out.


Greece is regularly listed among the world's largest shadow economies. The Institute for Applied Economic Research's 2017 found that Greece had the largest in the world, being equivalent to 22 percent of gross domestic product.


Unpaid taxes were estimated in 2016 to cost the Greece up to €16 billion ($17.8 billion U.S.) every year, largely through fraud on the value added tax (VAT) on purchases or income tax.

Greeks, both individually and as business owners, say they are enticed to under report earnings and avoid taxation due to the nation's high tax rates and cumbersome bureaucracy.


Whatever the reason they're not being paid, those lost taxes have contributed to Greece's financial woes, leading to repeated bailouts by the European Union (EU).


The government has struggled over the years to counter the revenue shortfalls and catch tax cheats. Greek officials even considered at one point having tourists act as revenue spies.

Now is the latest creative collection effort is increased digital transactions.


30 percent digital spending requirement: Prime Minister Kyriakos Mitsotakis has proposed legislation that would require many payments for goods and services be made via electronic means, such as credit cards, online, e-banking and the like.


While the Greek government isn't being specific about the kinds of payments, it has set a number on the amount. The digital transactions must come to at least 30 percent of a person's annual income.


The reason? This type of commerce leaves a trail that tax auditors and collectors can easily follow.


If Greek residents fail to meet the one-third target, they will face a 22 percent tax on the shortfall.

For example, if an individual spends just 20 percent of their income through electronic means, they would face a 22 percent tax on the remaining 10 percent.


Or, in euros (U.S. dollars), if a Greek earned €1,000 ($1,112) per month and only paid 15 percent of their income electronically, they would pay a fine of around €400 ($445) every year.


Solution or more problems? Some worry that the electronic transaction tax will simply force more people into the underground cash economy.


That's a possibility since many Greek workers are paid in cash and they tend to use that real money to pay rent and other bills.


Also, Greece has one of the lowest internet usage rates, 72 percent, in the EU. Perhaps they should look into Africa's popular and expanding M-pesa.


Still, the Greek government is going to give the new tax plan, which also calls for a corporate tax cut from 28 percent to 24 percent, a shot. If things go as hoped when it's implemented next year, it's estimated to raise around €500 million ($556 million) a year.

Or not.


Another Greek idea to go global? If the Greek digital transaction requirement (and tax) works, could other countries follow suit?




I think of one of my favorite movies, My Big Fat Greek Wedding (still 76 percent fresh), and how Toula's father Gus constantly and proudly announced Greece as the world's birthplace.


OK, so it's words with Greek roots that Gus is talking about. But, still, never underestimate love, especially love of one's country, and the power of electronic ease.


We'll have to wait to see if Greek's new digital transaction tax does indeed work well enough within its borders to become a global way of monetary life.


In the meantime, Greece's 30 percent digital transaction requirement to avoid a tax penalty is this week's By the Numbers honoree.




Pump the Brakes Before Donating That Vehicle to Charity

Many people might consider donating their vehicles to charity at year end to start the new year. Why not get a fresh ride and a tax deduction, eh? Pump the brakes — this strategy doesn’t always work out as intended.


Donating an old car to a qualified charity may seem like a hassle-free way to dispose of an unneeded vehicle, satisfy your philanthropic desires and enjoy a tax deduction (provided you itemize). But in most cases, it’s not the most tax-efficient strategy. Generally, your deduction is limited to the actual price the charity receives when it sells the car.


You can deduct the vehicle’s fair market value (FMV) only if the charity 1) uses the vehicle for a significant charitable purpose, such as delivering meals to homebound seniors, 2) makes material improvements to the vehicle that go beyond cleaning and painting, or 3) disposes of the vehicle for less than FMV for a charitable purpose, such as selling it at a below-market price to a needy person.


If you decide to donate a car, be sure to comply with IRS substantiation and acknowledgment requirements. And watch out for disreputable car donation organizations that distribute only a fraction of what they take in to charity and, in some cases, aren’t even eligible to receive charitable gifts. We can help you double-check the idea before going through with it.




Regs proposed on compensation deductions

By Jeff Stimpson


The Treasury and the IRS have proposed regulations to reflect changes from the Tax Cuts and Jobs Act on the deductibility of officers’ compensation by publicly held corporations.


Section 162(m) disallows the deduction by any publicly held corporation for compensation paid in any taxable year to a covered employee that exceeds $1 million. The proposed regulations update the definitions of covered employee, publicly held corporation and applicable employee compensation.


Notice 2018-68 provided initial guidance on this deduction limitation.

The TCJA also provided a transition, or “grandfather” rule, for certain outstanding compensatory arrangements. TCJA changes don’t apply to compensation to a covered employee under a written binding contract that was in effect on Nov. 2, 2017, and was not modified on or after that.


The proposed regs explain the grandfather rule, including when a contract will be considered materially modified so that it’s no longer “grandfathered.”


The TCJA changes apply to tax years beginning after Dec. 31, 2017, except to the extent the grandfather rule applies.




A simple fix for family spending gripes

Focusing on happiness can enhance family financial conversations.



Key takeaways

  • Spending money on others—especially close friends and family—tends to create happiness.
  • Certain types of spending on ourselves—including paying for experiences and time-saving services—also foster happiness.
  • Couples should aim for alignment on spending that provides value to each partner, without needing to have an opinion on the particulars of each other's purchases.
  • Consider setting an annual budget for spending on items that make you happy, then check in on your progress every 3 to 6 months.


Family spending conversations can be hard to navigate. They present lots of opportunities for misunderstandings or resentment, in part because an expense that seems frivolous to one family member may be meaningful to another.


Focusing on happiness may help you take the sting out of family spending talks.


Consider asking whether the items in your budget really make you and your family members happy, and whether spending in other ways may make you even happier. Building the discussion around happiness can establish a shared goal for your spending and make money conversations more productive.


Of course, people can't always predict what kinds of spending will create the most happiness for them. But psychologists and economists who have studied the issue have learned a lot about the relationship between spending and happiness—and what they've learned may change the way you and your loved ones talk about spending.


The spending-happiness connection


You may have a gut sense about the possessions and experiences that bring you joy. Perhaps you think you'd get a dopamine boost if you bought a flashy new car, or took a weekend shopping trip with close friends. But would doing those things really add value to your life?


"We tend to get stuck on what researchers call a hedonic treadmill," says Andy Reed, PhD, Fidelity's Vice President for Behavioral Science. "We adapt quickly to good things that happen in our lives, so the happiness we experience can be relatively fleeting. And we start looking for shortcuts back to happiness, including spending our way there. But the reality is that material things don't provide the best bang for your buck in terms of happiness, even if they're big-ticket purchases. In fact, you could be much happier by spending less money if you spend it on the right things."


Researchers have found that using money in the following ways tends to create happiness:


Spending money on others has an especially powerful impact when you do it on behalf of close family and friends rather than acquaintances. Treating your best friend to coffee, for instance, is likely to make you happier than buying the same latte for someone you don't know as well.


Another form of spending on others is charity. Researchers have found that people tend to derive the most satisfaction from charitable giving when they can see a positive, tangible impact. In one experiment, researchers randomly asked participants whether they would like to donate to an organization that works toward broad charitable goals or one that makes a specific impact (in this case, purchasing a bed net for a child in Africa as a way to fight malaria). Those who donated to the second organization reported greater happiness.


"Helping is most likely to lead to happiness when helpers know they have assisted another person in a meaningful way," the researchers wrote.1


Spending money on ourselves—in certain ways. It's now well known that spending on experiences—vacations, outings, performances and the like—is more rewarding than buying objects. Experiences connect us to other people, especially to loved ones, and help to shape and reinforce our identities. And when we spend money on an experience rather than a material purchase, we're less likely to second-guess the decision or to compare it to the choices made by our friends and neighbors.


In a similar vein, time-saving expenditures, such as hiring a housecleaning service, create greater happiness than spending money on material objects. Researchers who studied adults in 4 countries found that time-saving purchases produced happiness at consistent rates across income levels.2


And while material purchases don't generally produce happiness, there are some exceptions. For instance, one study found that introverts derive more happiness from buying books and that extroverts are happier when going to a bar.3 Taking this finding to its logical conclusion, someone who straddles the introvert/extrovert line might find particular happiness in buying a book and reading it at a bar.


Putting theory into practice


You may be inspired to shift how you think about your family's spending. But bear in mind that real life is considerably more complex than scientific experiments, which by design focus on just 1 or 2 variables. By contrast, spending decisions within families can be complex, involving tradeoffs, compromise, and sometimes conflict.


"Often, we aren't in the habit of stepping back and thinking about how our personal spending affects other people," says Tobias Donath, who leads Fidelity's Center for Family Engagement. "So you end up arguing about a particular purchase. Another option is to share your wishes so you can deepen your understanding of each other."


Donath suggests that couples aim for alignment around wishes, rather than agreement about purchases. Doing so can help each partner understand and value the spending that makes the other happy, without needing to have an opinion about the particulars. For instance, a couple might set aside a certain annual budget for their individual spending that they only revisit if one of them has a desire to exceed it.


"Knowing you are supporting each other in fulfilling a wish creates closeness," Donath says. "You go from arguing over a new golf wedge or handbag to being genuinely happy for each other."


Consider having that high-level conversation annually, with a check-in every 3 to 6 months. In the interim, you might use a cash management tool to track your spending. Such an arrangement may free you from getting mired in tit-for-tat disagreements about specific purchases and instead keep the focus where it belongs: on using your money to produce greater happiness.

Looking for someone to help you align your spending with what makes you and your loved ones happy? A Fidelity professional can help.




Blockchain snuck up on us

By Ranica Arrowsmith


During the past year, blockchain went from the buzziest word in the tech world to a hot potato no one wanted to hold, in terms of marketing. If you’ve noticed less talk about blockchain this year from technology product makers, that’s on purpose: Companies have realized big promises without flashy results makes consumers suspicious.


But that doesn’t mean blockchain hasn’t delivered on those promises. The thing is, what blockchain does best is done quietly. A blockchain is basically a growing list of records that are resistant to modification, and therefore extremely secure. It makes whatever actions, transactions, and activities that occur upon it safe and reliable. And “reliable” isn’t sexy — it’s just something we need, especially in the accounting profession. Ideally, if it’s working well, we won’t even notice it.


And that’s what’s been happening. For instance, Veem, a payments app that debuted in 2014 and has been successful since, allows business users to send payments with no upper limit across borders instantly. In other words, the app can be used to send $2 or $22 million, and that is only possible because the payments are sent on a blockchain. But Veem doesn’t plaster the word “blockchain” across its PR or advertising, because it doesn’t need to. The app just works.


And that’s what we all want from our technology — it should do what we need it to do, and it should be easy. After that? No questions!


Payments are the obvious first step, in the accounting and finance world, for blockchain application. Providing immutable distributed ledger entries establishes trust and security for the exchange of funds. Veem is in good company with several other payments platforms, like Circle and Airfox, both based in Boston, and Ripple, which like Veem is based in San Francisco. And these have proved to be the first step to getting blockchain into accounting software itself — for instance, Veem integrates with NetSuite (and has achieved “built for NetSuite” status), essentially embedding blockchain capabilities right into NetSuite, ready for use now.


Another accounting software company, which by request shall remain unnamed, has been trying to build a blockchain platform to underlie its accounting software product, and to thereby provide a product for lenders to assess the credit risk of the businesses using that accounting software (with their permission). This credit assessment and loan activity would be facilitated by cryptocurrency tokens that the company itself issues. The company has stopped advertising its planned blockchain capabilities because it’s simply been taking far longer than it anticipated to build.


“Currently the market is a very pessimistic environment for the blockchain space, and that’s the biggest challenge,” the founder of the company in question said. “They’re not so responsive. We’ve reached out to between 10 to 15 crypto exchanges, and barely anyone responded. We might have to go on a second tier exchange.”


Secondly, and also tellingly, it’s been hard to find the right talent. “Our other biggest challenge had been finding the talent that we need to deliver on this kind of project,” the founder said. “It’s one thing to come up with a great idea, but you need a great team of developers to deliver.”

Issues around retaining top talent are not new in tech. Cybersecurity experts, for instance, are in extremely high demand, and firms have difficulty retaining them without top salaries and attractive project opportunities. And market skepticism is what has led to blockchain companies to stop the hype, keep their heads down, and work to perfect their product before making big promises.


If you’re interested in the application of blockchain for accountants, be patient. It’s coming, and it will be here before you know it. In fact, it already is.




A flurry of Microsoft news, and other tech stories you may have missed

By Gene Marks


The middle market pursues growth through technology, better banking for small businesses, and seven other things that happened in technology this past month and how they’ll impact your clients and your firm.


1. The Good News: Microsoft is bringing Gmail, Google Drive, and Calendar to Outlook


Microsoft has started testing their integration of Gmail, Google Drive, and Google Calendar into their web mail client on certain accounts. Users will be able to link their Google Account to any account and then Google Calendar, documents in Google Drive, and Gmail will immediately be shown inside The integration with Google Drive will support files and documents from Google’s service, allowing users to swiftly attach them to emails in both Gmail and Outlook. The integration will also make it easier for individuals who use G Suite email for work and for those who utilize their Outlook account for personal use. (Source: The Verge)

Why this is important for your firm and clients: For those of us who can remember the days of Windows or nothing at all, this type of news continues to be a revelation. It’s all part of Microsoft’s ongoing plan to help its customers be more productive in the cloud, and that may not necessarily mean using all of Microsoft’s applications to do it. The end result? If you’re an Office 365 user, but you prefer Gmail or Google Drive, then now you have options. (My company, The Marks Group PC, is a Microsoft Partner.)


2. The Bad News: Microsoft will be dropping its Invoicing, Outlook Customer Manager, and Skype Translator bot products


Microsoft has announced that it will be phasing out and discontinuing three of its small-business products over the next year: Microsoft Invoicing, Outlook Customer Manager, and Skype Translator. Microsoft Invoicing and Outlook Customer Manager are likely being phased out due to low usage, while Microsoft’s new Translated Conversations feature will be replacing Skype Translator. Microsoft started letting customers of both Customer Manager and Invoicing know recently that the products would be discontinued in the first half of the new year. Customers impacted by the changes will be given offers to replace the apps. (Source: ZDNet)

Why this is important for your firm and clientsIs Microsoft abandoning small businesses? By getting rid of these tools you might think so, but I don’t believe that’s happening. As I write here, instead of dealing directly with difficult smaller customers, Microsoft has politely punted the obligation to its partners — and that’s OK.


3. Better News: Microsoft Teams is getting Outlook integration, tasks support, and more

Last month, Microsoft also announced several new features for clients using Microsoft Teams.

One of the most prominent features being added is the Outlook integration, which will make it possible for users to share and move an e-mail — including all of the attachments — into a specific chat channel. In addition to the Outlook integration, Microsoft Teams will now provide some more vital improvements through a task pane that will include the ability to see and monitor personal and team tasks, customize charts, lists, schedules, and more. (Source: The Verge)

Why this is important for your firm and clients: Microsoft is clearly going after rival Slack here. So which is better for your business? The answer is actually not too difficult and I give my reasons here.


4. Middle-market companies are boosting their tech upgrades to help drive growth

According to a new survey, investing in technology is becoming more and more of a priority for middle-market companies, who are now putting a stronger emphasis on computer software and hardware upgrades. The survey revealed that 92 percent of business leaders in the middle market felt that investing in technology would be critical in order for them to attract new customers and retain current ones. Sixty-eight percent of the participants also confirmed that investing in technology allowed their businesses to grow in the previous 12 months. The survey also pointed out the fact that skilled employees — coupled with an investment in technology — are key when it comes to providing high-quality customer service and overall business performance. (Source: ABL Advisor)

Why this is important for your firm and clients: Does this come as a surprise? Hopefully not. But if you’re running a small business it’s important to recognize the priority that’s being given to technology by middle-market companies. Are you doing the same?


5. BlueVine raised $102.5M more for banking services for small business

Financial Service startup BlueVine, which provides financing, among other banking services to small businesses, announced a massive round of funding in order to address the need to provide small and midsized businesses with more specified banking service support. The startup has raised $102.5 million from a combination of notable strategic investors as well as financial investors. With the funding, BlueVine plans to create and offer a more complete array of options in order to retain users and become a stronger competitor for banks that are providing full services to small businesses but at a higher cost. (Source: Tech Crunch)

Why this is important for your firm and clients: BlueVine has been changing the way people think about accounts receivable factoring, and as a result is providing way more options for small businesses looking for financing. I write more about them here.


6. Small-business banking customers are finally embracing mobile, and customer satisfaction has surged

A new study released by J.D. Power has revealed that 61 percent of small-business customers are actively using the mobile apps for their banks, which is a significant increase from the 53 percent of users who used banking mobile apps last year. The study also detailed that banking customers who use their bank’s mobile app are happier with their banks, compared to those who choose not to use their bank’s mobile app. Additionally, small business customers who use their banking mobile apps are 67 percent more likely to stay with their bank for future transactions, in contrast with 53 percent of small-business customers who do not use mobile services offered by their banks. (Source: Yahoo Finance)

Why this is important for your firm and clients: This is not a surprise. But what is a surprise is how many smaller, independent and community banks are not keeping up. As I wrote here: “They’re still behaving as they did decades before. They’re way, way behind in adopting the fintech tools — like the ones I’ve mentioned above — that could make a life-or-death difference to a small company. Many of my clients are starting to realize this and are frustrated that their own banks don’t provide them with these tools like their competitors get from their larger counterparts.”


7. Adobe digital experience platform is adding small-business offerings

Adobe is making improvements to its marketing software offerings that include Magento Commerce, Marketo Engage, Adobe Analytics Foundation, Adobe Sign for Small Business, Creative Cloud for Teams and more. The addition of each of these products will allow for small and midsized businesses to be more flexible and agile, and to scale more efficiently while saving time and money. (Source: Search Customer Experience).

Why this is important for your firm and clients: These applications were previously mostly suitable for much larger companies, even though many small businesses have the same needs (but not the same budgets) for these tools. The good news it that companies like Adobe are waking up to this opportunity.


8. A startup is making customized harassment training software

Software startup Ethena is making it easier to customize sexual harassment training for employees. The company is aiming to make the delicate topic of sexual harassment training more engaging and less uncomfortable for both employees and executives. Ethena will cater the training to be presented in short segments that will be customized based on what employees already know about workplace sexual harassment. Once the software is more widely distributed, the startup plans to make training customizable based off of specific industries as well. (Source: Tech Crunch)

Why this is important for your firm and clients: In response to the #MeToo movement, states like California and New York are now requiring employers to provide training on discrimination and harassment, and I expect this trend to expand nationwide. Many of my clients are looking for training resources and technologies like the software offered by Ethena to help them better handle these situations. I’m betting more applications like this will be hitting the market over the next year.


9. Google is planning to give slow websites a new badge of shame


Google will be experimenting with slow-loading websites in Chrome by providing them with a badge of shame. For the experiment, Chrome will be identifying sites that routinely load slow or fast with a clear badge in the future. The tech giant plans to play around with a few different versions in order to decide which is the most beneficial for users. Through the experiment, Google will be looking at historical data to find out which sites typically run slow, flag them, and provide a badge that will appear, detailing the poor performance of the site. (Source: The Verge)

Why this is important for your firm and clients: One of the many mistakes small-business owners like myself make with our websites is not checking their performance. For years, Google has been penalizing sites that load slowly or perform poorly by pushing them down in search results. This recent experiment is escalating the issue further. So what to do? See how fast your site loads by using tools from Google and read this great how-to guide from SEO firm Moz. Then work with your web developers to identify what is causing your site to slowdown and fix. Because it’s all about being found, right?


10. Spotify will give you podcast recommendations in a daily playlist


Music service Spotify has announced that they are rolling out a new feature titled "Your Daily Podcasts" that will recommend new shows to listen to for users. The new feature will follow a similar algorithm that its Daily Mix and Discover Weekly use, and will generate playlists for users by frequently refreshing lists of recommended podcast episodes and shows that are based off of the listening habits the user has built up over time. Spotify is making Your Daily Podcasts available to both free and premium users. (Source: Engadget)

Why this is important for your firm and clients: If you’re a podcast listener (like me) and a Spotify customer (like me) this opens up the opportunity to find more business-related podcasts to help make us better. If you like to do podcasts, make sure yours is listed on Spotify or you could be missing out on potential listeners … like me!

Note: Some of these stories also appeared on




When to collect sales tax or use tax in Michigan

By Gail Cole


Michigan has enacted House Bills 4542 and 4543, which codify the Michigan Department of Treasury’s existing economic nexus rule. House Bills 4540 and 4541, which require marketplace facilitators to collect and remit sales or use tax on behalf of third-party sellers, have also been enacted.


HB 4542 and HB 4543 are substantially the same, as are HB 4540 and HB 4541. However, HB 4540 and HB 4542 pertain to sales tax while HB 4541 and HB 4543 pertain to use tax. And this begs the question: When should a seller collect sales tax and when should a seller collect use tax?


The answer depends largely on nexus, the connection between a business and state that enables the state to impose a tax obligation on the business. Nexus can be established in a variety of ways: through physical presence in a state, economic activity in a state (economic nexus), ties to affiliates in the state (affiliate nexus), and more.


A seller or marketplace facilitator that has sales tax nexus with Michigan must collect, remit, and report sales tax on its taxable retail sales to consumers in Michigan. However, if ownership of the property is transferred outside of The Great Lakes State, the tax must be collected, remitted, and reported as use tax.  


A seller or marketplace facilitator that doesn’t have nexus with Michigan but voluntarily collects and remits tax on sales delivered into Michigan must collect, remit, and report use tax on its sales into the state.


Whether sales tax or use tax is collected shouldn’t make a difference to consumers, because Michigan sales tax rates and Michigan use tax rates are the same. Nonetheless, sales and use tax must be properly reported.


Michigan economic nexus recap

Effective October 1, 2018 (or after September 30, 2018), a remote seller is required to collect sales or use tax in Michigan if, in the previous calendar year, it:

  • Has more than $100,000 in taxable and non-taxable sales in Michigan; or
  • Completes 200 or more separate transactions of taxable and non-taxable sales in Michigan.


New collection requirement for marketplace facilitators

Starting January 1, 2020, a marketplace facilitator that has nexus with Michigan must collect and remit the tax due on all taxable sales made directly by the facilitator or made by the facilitator on behalf of a third-party seller. The tax must be collected and remitted regardless of whether the marketplace seller has nexus with Michigan.


The bills specifically exclude referrers from the definition of “marketplace facilitator.” In addition to listing tangible personal property for sale on behalf of a marketplace seller, a facilitator must directly or indirectly collect payment from customers and transmit that payment to the marketplace seller.


In signing the bills, Michigan Governor Gretchen Whitmer criticized the fact that the purchasers are prohibited from bringing a class action suit against a marketplace facilitator “if it is ‘in any way related to an overpayment’ of sales or use tax.” She called this “an anti-consumer provision that could allow online operators to overcharge Michiganders under the guise of collecting sales tax by depriving consumers of an effective remedy.”


To learn about how a business can trigger nexus in Michigan and other states, see our seller’s guide to nexus laws and sales tax collection requirements




IRS steps up passport restriction enforcement

By Jim Buttonow


New IRS Letter 6152: “Notice of Intent to Request U.S. Department of State Revoke Your Passport”

In December 2015, Congress gave the IRS a new enforcement capability to collect on tax debtors:  passport restrictions.  The new law allowed the IRS to target US taxpayers who had seriously delinquent tax debt (SDTD) by initiating passport restriction actions with the State Department.   It took the IRS until February 2019 to start to implement the new section 7345 of the Internal Revenue Code. 


However, it did not take long for the IRS to take passport restrictions to the next level.  On August 8th, 2019, the IRS stepped up its enforcement and use of passport restrictions to collect on back tax debtors.


2015 to 2019:  From law to enforcement

This 2015 law required the IRS to “certify” US passport holders (to the State Department) who owed more than $52,000 in overdue tax debt (the amount to qualify as having SDTD, adjusted annually for inflation) and were not in an agreement on the back debt.  In turn, the State Department had the authority to deny a passport application, revoke a passport, or not renew a passport.  The IRS started sending certification letters to taxpayers in February 2019, giving taxpayers 90 days to get right with the IRS.  Taxpayers who did not get in good standing with the IRS would have their name sent to the State Department for possible passport restrictions. 

Since February 2019, most State Department activity has been reported to be mainly denial of passport applications and renewals.   The State Department has been silent on their enforcement of section 7345, only mentioning on their website that new passport applications will be denied and the possibility that the State Department will revoke a passport.

State Department website with limited passport restriction insight


The IRS gets more serious

On August 8th, 2019, the IRS issued an Information Release that explained two changes to the IRS passport restriction enforcement procedures.  The first change highlights the intention of the IRS to go after taxpayers with SDTD.


Change #1:  The IRS wants the State Department to take more aggressive actions on seriously-seriously delinquent debtors

Taxpayers with SDTD are already subject to passport restrictions.  However, it appears that the IRS wants the State Department to do more.

Starting in July, 2019, IRS procedures state that the IRS may request the U.S. Department of State to consider revoking a U.S. passport of a certified individual. Prior to this request to the State Department, the IRS will issue Letter 6152, Notice of Intent to Request U.S. Department of State Revoke Your Passport, advising the taxpayer of the IRS’ intent, and allowing the taxpayer 30 days (90 days if outside the U.S.) to contact the IRS to resolve their tax liability.

The guidance states that the IRS will consider asking the U.S. Department of State to revoke a passport under the following circumstances:

  • To protect the integrity of the legislation (such as when a taxpayer obtains a decertification based on a promise to pay and fails to act as agreed).
  • If revocation is needed to encourage payment of the tax by incentivizing taxpayers with offshore activities or interests to resolve their liabilities.
  •  In other instances where the facts and circumstances indicate that revocation would facilitate payment of tax.


The IRS makes it clear in the Information Release and in their procedures that the State Department has the sole authority to deny, revoke, or limit a passport to a certified taxpayer.  However, it appears that the IRS is not happy with their limited authority and the possible limited impact to SDTD certified taxpayers.   In the months to come, we may find out the true reason that the IRS is nudging taxpayers and the State Department to take more action on certified taxpayers.  Most believe that just limiting applications and renewals is not enough enforcement presence to have a real impact on debt collection.  We should expect more aggressive enforcement by both the IRS and the State Department in the future.


The second change updates taxpayers on how to obtain expedited relief from passport restrictions – and, it may be a sign that we should expect more passport enforcement activity.


Change #2:  Updates to the expedited decertification procedures

Taxpayers who are certified as having SDTD (and subject to passport restrictions) will first need to get into good standing with the IRS to qualify for decertification.   For most taxpayers, good standing is likely paying the IRS in full or entering into a collection agreement with the IRS that will “decertify” their debt.  In normal circumstances, the IRS will issue a decertification letter to the taxpayer and notify the State Department in 30 days.   However, taxpayers in urgent situations, may not be able to wait the 30 days.


Taxpayers can request expedited decertification if three conditions exist:

  1. The taxpayer gets in good standing (that is, meets the qualifications for decertification)
  2. The taxpayer has foreign travel scheduled within 45 days or less and can provide proof of travel OR the taxpayer lives outside the US, and
  3. The taxpayer has a pending application or a passport or renewal and has been denied by the State Department.  The taxpayer must be able to provide the State Department denial letter.

Taxpayers residing outside the US may have an urgent need for a passport without having imminent travel plans.  In these cases, the taxpayer will self-identify the urgent need and can request expedite decertification.


The expedite process will reduce the normal 30-day decertification to 9-16 days.


The big change in the expedite procedures is the IRS requirement for proof of travel and a denial letter in order to request decertification.  However, the implied message here is likely a prelude to the Change #1:  more taxpayers are likely going to need expedited treatment as more taxpayers are likely to be impacted by increased enforcement of passport restrictions.  More enforcement is likely going to be implementing  active revocation of existing passports on taxpayers with SDTD.


Next steps for taxpayers

Taxpayers who are certified as having SDTD should work quickly to get into an agreement with the IRS.


Taxpayers who are targeted by the IRS for passport revocation enforcement by the State Department (i.e.  receive the new IRS Letter 6152) need to understand that they are on the IRS’ radar.  Taxpayers who receive Letter 6152 should contact the IRS and start making a good faith attempt to resolve the issue within 30 days of the letter.  The IRS has stated that it will not recommend passport revocations for taxpayers who are making a good-faith effort to resolve their debts.


One thing is clear:  the IRS wants to get the full benefit from its newly implemented passport restriction enforcement capabilities.  Taxpayers who owe the IRS need to take action and get into good standing.   Taxpayers in good standing on past debts will have full travel privileges.  Taxpayers with certified SDTD will not only face these new passport enforcement actions but future enforcement activity as the IRS leverages its new passport restriction enforcement capabilities.




As new withholding looms, IRS launches tool to help small businesses

By Jeff Stimpson


A new online “assistant” from the IRS helps employers determine the right amount of federal income tax to withhold from workers’ pay.

The spreadsheet-based “Income Tax Withholding Assistant for Employers” helps navigate the redesigned withholding system (no longer based on withholding allowances) that goes into effect Jan. 1, 2020, for employees who fill out the redesigned W-4.

The assistant is designed to help employers who would figure withholding manually using a worksheet and either the percentage method or the wage bracket tables in Publication 15-T, “Federal Income Tax Withholding Methods.” The tool creates a profile for each employee and calculates federal income tax withholding. The tool can also help employers withhold from employees who still have a request on file using a past W-4.


Employers who already use an automated payroll system won’t need the assistant.




Trump helped nix electric car tax measure sought by Tesla, GM

By Bloomberg News


The expansion of a tax credit for electric vehicles isn’t likely to appear in a broad deal being negotiated by House and Senate leaders, and backers of the popular tax break say President Donald Trump is to blame.


“There has been extreme resistance from the president,” said Senator Debbie Stabenow, a Michigan Democrat who has championed the $7,500 tax credit for consumers who purchase an electric car. She said Monday it was unlikely to be expanded.


“I don’t know why the White House would want to stop jobs and the future of the auto industry,” she said.

The credit is a legislative priority for automakers such as Tesla Inc. and General Motors Co.


White House officials warned lawmakers that if they tried to expand the electric vehicle credit as part of a compromise spending bill, it could tank the measure, according to two people familiar with the matter. The issue is particularly heated in the West Wing and among conservatives who view the credit as mainly benefiting rich Californians and Tesla.


The tax break has been credited with helping to launch the electric vehicle market, but it has long been in the crosshairs of Republicans who dismiss it as welfare for wealthy liberals. Trump has repeatedly proposed ending the credit in his budget requests, and House Republicans unsuccessfully sought to eliminate it in 2017.


Under a proposal championed by Stabenow as well as Republican Senators Lamar Alexander of Tennessee and Susan Collins of Maine, the credit, which drops in value once a manufacturer sells 200,000 of the vehicles, would be expanded. Specifically, the proposal would grant automakers a $7,000 tax credit for an additional 400,000 vehicles after they reach the 200,000 vehicle cap.


House and Senate leaders are in the midst of negotiating a broad package of tax breaks to include in a must-pass government spending bill likely to move this week.


Tax credits for biofuels as well as wind and solar power remain in negotiation.


“President Trump is fighting to protect middle-class taxpayers by opposing this welfare program for the wealthy,” said Tom Pyle, president of the American Energy Alliance, a free-market advocacy group. “The Senate Republican leadership would be wise to follow his lead.”


— Ari Natter, with assistance from Laura Davison, Colin Wilhelm and Jennifer A. Dlouhy




Taxpayers more likely to use DIY tax software, but less satisfied with results

By Michael Cohn


Taxpayers are more than twice as likely to use DIY tax preparation software as an accountant to do their taxes, but they’re 38 percent less satisfied with the results, according to a new survey.

The survey, from tax practice management software provider Canopy, polled more than 500 taxpayers across the country.


The report found that just over half (51 percent) of the DIY software users surveyed made the switch from self-service to hiring an accountant, mainly because their tax situation became more complex, they needed more personalized service, they wanted better accuracy, the accountant found more deductions, or just to save time.

Conversely, the study also revealed that 55 percent of the accountant clients surveyed citing the following top reasons for switching to a DIY software solution, based on priority: cost savings, time savings, their tax situation became less complex, their accountants found more deductions, and better accuracy.


“The truth is, no one can escape taxes, and increasingly, we’re seeing digital automation impacting all facets of the accounting industry,” said Canopy chief revenue officer Jordan Ray in a statement. “More Americans will use DIY software to file their taxes than tax accountants, but taxpayers have also shared powerful insights on how accounting professionals can come out ahead of technology.”


The company suggested several ways accountants can win DIY software users as clients:

  • Provide tax legal advice.
  • Have a deep understanding of their personal tax situation.
  • Offer free or discounted services if audited.
  • Help with investment advice.
  • Partner with additional service providers: attorneys, financial advisors, insurance agents etc.

For a copy of the report, click here.


Last year, Canopy began developing and testing its own cloud-based professional tax preparation software, but after a series of layoffs and a change in management, it has since decided to focus on its practice management software and delay plans to launch the professional tax prep product (see Canopy cancels brand-new Tax Prep product, offers full refunds).




IRS reports the cost of tax noncompliance: $441 billion a year

Bu Jim Buttonow


The IRS released its recent tax gap study for the years 2011-2013. The “tax gap” is the annual amount of taxes lost to the US Treasury due to noncompliance (that’s right- “annual” amount lost due to noncompliance). It measures how much taxpayers cost the government each year due to noncompliance in three areas:


  • Underreporting income or overstating deductions/credits
  • Underpayment of taxes owed
  • Not filing


The bottom line for the most recent IRS tax gap study: the US Treasury loses $441 billion a year to tax noncompliance.


IRS: The total gross tax gap for 2011-2013 is $441 billion a year


Just three years earlier, the IRS reported that the tax gap was $458 billion a year (measured 2008-2010 years) – however, in this 9/2019 Tax Gap Report, the IRS revised their 2008-2010 estimate, based on new measurement methodology, to reflect a new tax gap of $394 billion for 2008-2010.


Based on the Report, from 2010 to 2013, the tax gap has grown by $47 billion a year.


In the past, as the economy expanded and the amount of tax revenues increased annually, so has the tax gap: the annual tax revenues for 2011-2013 increased by $2.2 trillion as compared to the 2008-2010 tax years -and according to IRS revised numbers for 2008-2010 and the new estimates for 2011-2013, the tax gap has exploded by $ 47 billion a year.


The revised numbers also suggest that the tax gap decreased by $78 billion in 2008-2010 (from the previous study for 2006 returns. However, the IRS quickly points out that estimation models may have skewed the true tax gap numbers in years past.


IRS Tax Gap Measurements for 2001-2013


The IRS explains that the increase in the tax gap goes hand-in-hand with growth in tax revenues:


IRS: More tax revenues equals more uncollected tax revenues


The voluntary compliance rate

The cornerstone of the US tax system is the fact that most Americans voluntarily file, report, and pay their taxes. The IRS puts a grade on American taxpayer overall compliance – it is called the voluntary compliance rate or “VCR.”


Over the years, the IRS’ measure on the VCR has given Americans a “B” compliance grade (on a 10-point grade scale). And that rate has stayed the same since first measurements in 1985. The new VCR holds compliance steady at 83.6%.



Voluntary Compliance Rate (Tax Gap)








83.7% ($345 billion)


82.3% ($472 billion)


83.8% ($394 billion)


83.6% ($441 billion)


The components of the tax gap

The three components of the tax gap – underreporting, underpayment, and non-filing are the focus of IRS compliance initiatives. The 2013 measurement, like all previous measurements, shows that underreporting – that is, taxpayers filing inaccurate tax returns – is the big problem to solve for the IRS to close the tax gap.


80% of the tax gap is underreporting (filing inaccurate tax returns)


The compliance target: Small businesses

Like the other tax gap studies, the main issue to solve is underreporting. There are two ways to solve underreporting: rely on information return matching (i.e. W-2s and 1099s) or audit.

The IRS has the information return matching compliance programs (like the CP2000 program) down to an art. In 2018, the IRS issued 3 million CP2000 notices. The compliance effect of a W-2 and 1099 cannot be understated- according to the tax gap study, wage earners are 99% compliance because their income is reported directly to the IRS.


In sharp contrast is the small business owner. IRS estimates that this population gets an “F” for compliance – with a 55% misreporting rate costing the US Treasury $68 billion a year.


However, there are little resources at the IRS to audit more small businesses. Revenue agents (IRS auditors that are assigned many small business audits) and other IRS auditors are decreasing each year:


The decline in IRS auditors


And as a result, so are audits:


The steady decline in IRS audits from 2010 -2018


The strategy:  leverage taxpayers motivations to comply

The tax gap study revealed that individual taxpayers are the problem. $314 billion out of $441 billion tax gap – or 71% – is attributable to individual tax noncompliance. To close the tax gap, the IRS must get more compliance out of its #1 noncompliant taxpayer: the 1040 filer.


But the IRS cannot audit its way out of the tax gap. It has limited resources and many audits equal high taxpayer burden. After all, the number one motivator for compliance is that taxpayers want to do the right thing. But what about the rest of the taxpayers who need a little push to comply?


The answer lies in IRS surveys that show a significant motivating factor behind compliance is the fear of an IRS audit. The reality is that most interactions with the IRS are not audits- but the IRS can remind taxpayers that they are always there by sending them a notice. And, since 2001, the IRS has used the high touch notice approach to remind taxpayers that there is still an “IRS” monitoring compliance.


In 2001, the IRS sent 30 million notices to taxpayers- in 2018, they sent over 219 million notices. Only 1 million of the 2019 notices were audit notifications. However, taxpayers did not know it was not an audit- just the action of getting a letter reaffirms their fear and cements compliance.

To this end- the strategy for the IRS is to let taxpayers know that they are there. The result is proven in the 2018 IRS compliance enforcement results: they collected the highest amount of enforcement revenue ever: $59.4 billion.





The myths of international investing

Do you hold any of these common misconceptions about international stocks?



The real story

  • In any given year, the best performing stock market is usually outside the US.
  • International diversification has historically improved risk-adjusted returns.
  • History suggest that actively managed funds may offer potential outperformance in international markets.


The long-term rally in US stocks has benefited many investors. However, it's also led some investors to have more of their portfolio devoted to US stocks than they may have intended. Overexposure to a single geography breeds diversification risk in a portfolio, leaving it vulnerable to a downturn in that geography and underexposed to a rally in other parts of the world. With that in mind, investors may want to re-examine the global mix of their stock allocations, and consider increasing their international exposure.


There are powerful reasons to invest outside the US, such as enhanced diversification, the potential for better risk-adjusted portfolio returns, and a larger opportunity set, among others. Nevertheless, many investors still lack international exposure, often due to misperceptions about the asset class. Here are 4 myths that investors might cite for not investing overseas, contrasted by what Fidelity believes are more realistic perspectives about the asset class.


Investors who lack international exposure miss out on the world's best-performing stock markets.


The world's top-performing developed stock markets, from 2005 to 2018 (calendar year returns in USD)

Investors who held only US stocks missed out on the world's best-performing equity markets.


Source: FactSet, MSCI country indexes, as of Dec. 31, 2018. Past performance is no guarantee of future results. It is not possible to invest directly in an index. All indexes are unmanaged. Please see footnotes for important index information.


Myth 1: The US is the world’s best-performing stock market


Reality: Not true. While US stocks have had higher returns than overseas stocks in aggregate for the past several years, the best-performing stock market in 6 of the last 8 years has been located outside the US (The graphic above shows the best-performing developed stock market during the past dozen years). Historically, developed market international and US stock performance is cyclical: One typically outperforms the other for several years until the cycle reverses (see chart). Timing these rotations is difficult, though, which is why it’s important to have both US and non-US exposure in an equity portfolio. Investors underexposed to foreign stocks could miss significant gains when overseas markets rally, or suffer losses when US stocks decline.

History suggests that given their cyclical nature, international stocks will likely eventually make a comeback and outperform their US peers.

Given their cyclical nature, international stocks will likely eventually make a comeback and outperform their US peers.

MSCI EAFE Index vs. S&P 500 Total Return Index. Source: FactSet, as of Dec. 31, 2018. Past performance is no guarantee of future results. It is not possible to invest directly in an index. All indexes are unmanaged. Please see appendix for important index information.


Myth 2: International investing is too risky

Reality: International stocks in combination with US. stocks have historically lowered long-term risk in a stock portfolio, compared with an all-US portfolio. That's because historically, the performance of US and international stocks has not typically been perfectly correlated,1 which thereby reduces risk. Fidelity’s research on strategic allocation indicates that a range of between 30 to 50% exposure to international markets, as a percentage of total equity, can help provide an appropriate level of diversification and enhanced portfolio risk-adjusted returns in a multi-asset class portfolio. Also, the absolute return of the globally balanced portfolio is almost level with that of the all-US portfolio, despite the recent multiyear rally in US stocks. And given the cyclicality of US and foreign stock returns, history suggests their relationship could revert to its historical norms at some stage.

International equity exposure may decrease portfolio risk over the long term

1950 to 2019

US Portfolio

International Portfolio

Globally Balanced Portfolio 70% US/30% Int'l

Annualized returns




Standard deviation




Sharpe ratio




Hypothetical "globally balanced portfolio" is rebalanced annually in 70% US and 30% foreign stocks. US equities: S&P 500 Total Return Index; Internationalequities: MSCI ACWI ex-USA Index. Source: Bloomberg Finance L.P., Fidelity Investments (AART), as of April 30, 2019. Past performance is no guarantee of future results. It is not possible to invest directly in an index. All indexes are unmanaged. Please see disclosures for index definitions.


Myth 3: US multinationals provide adequate international diversification

Reality: The stocks of large US companies with operations overseas (multinationals) are sometimes highly correlated to the performance of the overall domestic stock market. Highly correlated stocks in a portfolio may indicate a lack of diversification. Therefore, US multinationals are not always good replacements for international stocks for diversification purposes. The table below compares the average correlations of several US multinationals to their foreign counterparts with US-listed shares. The non-US stocks shown have had lower correlations to the S&P 500 over the past 3 years, which typically signals better diversification benefits.

International stocks can provide more diversification benefits than US multinationals

3-year correlations with the S&P 500, 2016 to 2019

Consumer staples

General Mills (US)


Unilever (U.K.)



General Motors (US)


Honda (Japan)



Oracle (US)


SAP (Germany)


Source: Morningstar, as of September 30, 2019. Company names shown here are for illustrative purposes only, are not representative of all companies, and are not a recommendation or an offer or solicitation to buy or sell any securities. Past performance is not a guarantee of future results.


Myth 4: One needs to hedge currency to improve international stock returns

Reality: Actually, history shows that hedging currency returns doesn't improve international stock returns—at least not over the long term. Currency hedging (holding a stock denominated in a foreign currency and an equal but opposite short position in the currency itself) is intended to prevent currency fluctuations from hurting the stock price. While it sounds good in theory, the time and cost it takes to hedge currency has not paid off over time. Since 1973, currency hedging has detracted from returns in 50% of quarters, and contributed to returns in 50% of all quarters (see chart).


Timing currency movements is extremely difficult, even for professional investors. Plus, currency tends to be a relatively small component of returns over time, especially compared to earnings growth and price-to-earnings ratio expansion.


Historically, hedging currency has hurt returns as often as it’s helped them.

Historically, hedging currency has hurt returns as often as it’s helped them.

Quarterly returns of MSCI EAFE USD Index vs. MSCI EAFE Local Currency Index, 1973 to 2019. Source: Morningstar, Fidelity Investments, as of March 31, 2019. Past performance is no guarantee of future results. Please see appendix for important index information.


For each of the past 30 years, the best-performing stock markets have been located outside the United States. That means investors who were focused solely on US stocks missed out on attractive opportunities for growth and diversification. So consider increasing your allocation to international stocks. It could make a world of difference in your portfolio.




How to cut tax bills in the final weeks of 2019

By Laura Davison


Republicans pledged that their 2017 tax overhaul would eliminate loopholes and make filing taxes as simple as filling out a postcard. That hasn’t exactly panned out, but there are still several ways to minimize 2019 tax bills before the end of the year.


Accountants and tax lawyers have had two full years to analyze how all the changes contained in the tax overhaul affect their clients. Tax professionals have found a slew of ways to reduce taxable income and take full advantage of new tax breaks to keep payments to the Internal Revenue Service as low as possible.


The main goal of any year-end strategy is to increase the number of tax credits and deductions you can claim, while lowering the amount of income that is subject to tax. Here are some last-minute strategies to cut your tax bill that will come due in April.


Maximize the small business tax break

If you’re self-employed or a small business owner you may be eligible for a 20 percent deduction off your business income. But it can be subject to lots of limitations depending on your field, the amount you invest in equipment, or how much you pay employees. If you’re below certain thresholds — $321,400 for a couple or $160,700 for an individual in 2019 — you automatically get the tax break.


For people above those limits, there are several ways to legally reduce your taxable income to get under the caps, which is particularly important for doctors, lawyers and accountants who can’t claim the deduction at all if they are above those levels.


Of course, make sure you’re maxing out any tax-deferred retirement accounts and health savings accounts, if possible.


Self-employed individuals can also reduce their taxable income by as much as $225,000 if they make contributions to a defined benefit retirement plan.


“The next three weeks are really, really key to getting those plans drafted,” said Ed Reitmeyer, a regional partner at accounting firm Marcum.


Business owners could also increase employee wages by paying one-time bonuses to boost their payroll levels enough to qualify for the 20 percent deduction, said Grethell Anasagasti, a principal at accounting firm MBAF. If the company is structured as an S corporation, a closely held company, those bonuses can also be paid to the officers (or owners) of the company, she said.


Divide businesses into two

If you’re in a field that doesn’t qualify for the 20 percent small business deduction — including health, law, consulting, athletics, financial and brokerage services — there are still ways to potentially claim the deduction on some of your earnings.


If part of your income stems from sources that do qualify for the deduction, separate that potion of the business into a new entity to put a barrier between the profits that can get the tax break and those that can’t.


For example, an optometrist won’t qualify for the tax break from the work they do seeing patients, but profits from selling glasses and contact lenses would qualify. Ditto for a technology consultant who also sells hardware.


Donate (after consulting a tax adviser)

Tax professionals are seeing a large uptick in the use of donor-advised funds — tools that allow people to give money, deduct the donation up front, and distribute the funds to charity later.


The 2017 tax law increased the standard deduction to about $24,000 for a couple and limited some deductions, including one for state and local taxes. The result is that many people have to donate much more than in the past to get above that $24,000 limit and file an itemized return. But the right timing of the donations can lead to big tax savings.


“It’s really tough for people to get over that $24,000 hurdle,” said Brad Sprong, head of Family Office and Private Client Services at accounting firm KPMG. He’s advising clients to bunch all their donations to a donor-advised fund in one year to get the tax benefit for those contributions, and then take the standard deduction for the next few years.


What you donate also matters, Sprong says. He advises clients to look for alternatives to cash, such as appreciated securities, because the deduction amount is what the asset is worth, not necessarily what you paid for it. And in a low-interest rate environment, donating borrowed money can also have benefits if the tax breaks outweigh the loan costs.


Those who are 70 1/2 and older must start taking distributions from their individual retirement accounts, which generate a tax bill for the recipient. However, those taxpayers can donate as much as $100,000 directly from their IRAs in lieu of a distribution — avoiding the tax on that money.


Estate tax preparation

The 2017 tax law approximately doubled the estate tax exemption, which gives wealthy taxpayers some time to make plans for their assets when they die. The lifetime exclusion for 2019 is $11.4 million for an individual or twice that for a married couple, and the annual gift tax limit is $15,000.


The IRS has said it won’t make those gifts taxable if a future Congress votes to lower the estate tax limit. But still, it’s smart to make those gifts now, said Karen Goldberg, a principal in the Private Wealth Advisory Group at EisnerAmper. This doesn’t have to be done by the end of 2019, but waiting beyond the 2020 election risks the political mood shifting in favor of estate taxes.


“If a new administration comes in and changes the law, you don’t want to wait until the last minute,” she said.


Opportunity zone deadline

A key deadline for opportunity zones — an incentive including in the 2017 tax law for taxpayers to invest capital gains income into distressed areas — runs out at the end of the year.


Taxpayers can defer the tax bill on their investment until the end of 2026, or whenever they sell. Additionally, if they invest by the end of this year, they can get a 15 percent “basis step up,” meaning that they are only taxed on 85 percent of their investment. If they invest after this year, they have to pay tax on 90 percent of the money they contributed.


Additionally, that money grows tax-free while invested in the fund, giving investors another reason to consider opportunity zones. Investors have 180 days from the time they sell stock or a business to put that money into an opportunity zone fund.


Mortgage tax break workaround

The 2017 tax law also restricted the mortgage interest deduction to loans equal to or less than $750,000. The result is that some taxpayers buying expensive homes are finding other ways to finance their purchases, Sprong said.


Instead of taking out a mortgage for the full amount, some taxpayers are taking out a mortgage up to the $750,000 limit, and then in a separate transaction borrowing the additional funds through a regular loan.


Taxpayers can still get some benefits from this deal, especially if interest rates remain low, Sprong said. The interest from that loan can be deducted against investment income. If that financing was part of the mortgage, there wouldn’t be any tax breaks for that interest.

“If they are really tax savvy, they are doing this,” he said.




A work-from-home policy is no longer an option

By Gene Marks


Earlier this year, the company controller at a client of mine missed six full weeks of work because she had to get knee surgery. Actually, she didn't miss the entire six weeks. She missed just one week. The other five weeks she was productive — probably more productive than usual. Why?


Because she worked from home.


So let's put aside the myth about remote working not being as effective as working in the office. It certainly can be — particularly for anyone in accounting, human resources and finance. Resisting this trend is a dumb thing to do, particularly when so many employees today are demanding more flexibility, freedom and independence from their employers. Not responding to this demand is a great way to lose great people.


Sure, a lot depends on the employee. My controller-friend is a pretty disciplined person. She doesn't watch “The View.” She's not caring for a crying baby or a yapping dog. She gets a full night's sleep and isn't prone to afternoon naps. Some people aren't like this, of course. Some people need other humans around them or are more predisposed to checking up on what Judge Judy's up to.


But none of this should stop your firm or office from having a work from home policy. In fact, you better. Why? Because it’s 2019, and if you don't believe me, just look at a recent report from tech firm Zapier.


According to that report, 95 percent of the surveyed "knowledge workers" — those who work primarily in a professional setting and use a computer (which pretty much sounds like anyone working in an accounting or finance department) — said that they want a work-from-home option at their jobs, and almost three-quarters of them said they'd be willing to quit their current job for an employer that offers the option.


In this low-unemployment economy, where every employer's No. 1 concern is finding and keeping good people, this is a big deal. A work-from-home policy should be offered alongside health insurance, a retirement plan, and paid time off as a standard employee benefit. If you’re not doing that, then you’re likely losing out.


This doesn't mean that having a work-from-home policy is right for every employee … or company. Some firms, like IBM and Yahoo, have in the past few years rescinded such policies because their executives feel that an office environment encourages collaboration, teamwork and a closer culture.


I can't argue with that point of view. My company has been "virtual" for over a decade and even though I'm saving on overhead, my employees rarely get to hang out with each other. There’s less chit-chat, but because of this I think we're missing out on potential opportunities and ideas that would come about just through the conversations that happen when people are bumping into each other at the copier and the Keurig.


But it has to be tried — and the companies I know that have most succeeded with their work-from-home policies have figured out few straightforward rules.

These rules require that their employees are as available as if they were in the office, and to minimize, if not eliminate background noises (and yes, you know what they are). They require employees to appear presentable on video calls. They expect reasonable response times. For their part, these same employers commit to providing good technologies — cloud-based applications and hardware — as well as continuous feedback to make sure their remote people are in the loop.

All of this should be in writing and made available to those workers whose jobs can be done remotely. One other tip: Don't make things permanent, at least not just yet. Include in your policy a 90-day "trial period" where either party can call the arrangements quits for whatever reasons. Trust me, there will be reasons.


The controller at my client is back in the office and yes, it's good to have her around. But it's also nice to know that if she can't be around, she can still get her job done from home. Up until her absence, my client was against this kind of benefits perk. Now they realize it’s no longer a perk. It’s a necessity.




IRS Criminal Investigation expects to hire more agents, pursue more crypto cases

By Danielle Lee


The Internal Revenue Service’s Criminal Investigation division identified $1.8 billion in tax fraud in 2019, with a 91.2 percent conviction rate for all financial crimes, according to the division’s 100th annual report released Thursday, which also highlighted a continued focus on employment tax, cryptocurrency and cybercrime.


This year’s report, which marked the agency's 100th anniversary, continued a general downward trend of investigations and prosecutions for CI over the last few years. In a conference call with reporters, CI chief Don Fort attributed the trend to fewer special agents, as many retire and those who remain in service devote time to inheriting those cases and training new agents. Fort estimated that 130 to 150 agents retire every year, and that the time between onboarding new agents and completion of their first case averages two to three years.


The overall number of CI investigations initiated in 2019 was 2,485, down from 2,886 in 2018 and 3,019 in 2017. Meanwhile, $4.4 billion in proceeds from other (non-tax fraud) financial crimes were identified in 2019, 1,726 warrants were executed, and 1.24 petabytes of digital data were seized.


“We are in a hiring posture now,” Fort explained. “I’m very hopeful we’ve reached the bottom in terms of staffing. We end the year with 2,000 special agents, which puts us at 1970s levels.” Fort expects to onboard more in-depth special agents over the next year. “I’m really excited about that, and hopeful it’s not a one-time event. We have the support for a number of years of robust hiring, to get the numbers back up."


Overall, Fort characterized the past year, his third as chief, as “exciting times” as CI ramps up hiring, continues to take advantage of technology like data analytics, and collaborates with other agencies to combat newer threats related to cryptocurrency and cybercrime.


“We’ve had tremendous cases represented by every field office in every state; a lot of positive momentum there,” Fort said. “As we’ve been challenged in the manpower perspective for the last five to six years, we have used that time wisely. We’ve made investments in cyber, cyber investigations in tax and non-tax, working in data analytics with the Nationally Coordinated Investigations Unit [which became an official CI section this year]. The success we’ve seen there, we’ve invested wisely in the last few years. With the investment in those areas, we’re seeing the fruits of our labor.”


Another area of momentum for CI has been in employment tax enforcement, one of the few areas where the unit saw an upswing in investigations initiated (250), prosecution recommendations (104), informations/indictments (73), those sentenced (50) and the incarceration rate (84 percent), all an increase over 2018.


“In particular, employment tax, we made that a point of emphasis for CI and the IRS as a whole,” Fort said. “The time spent on employment tax has gone up considerably. There is a tremendous amount of noncompliance in that area. It’s a huge part of what funds the federal government. We’ve absolutely made that a point of emphasis. It’s the goal of field officers to work a balanced program area. All noncompliance tax threats in a particular area, as well as money laundering and bank secrecy threats. I can confirm employment tax will continue to be an area of emphasis for us.”


Abusive return preparer program enforcement also experienced some positive shifts in 2019. While the number of investigations in the category were down this year, at 163, the number of prosecution recommendations (203) and sentencings (154) were up slightly over last year, keeping the incarceration rate at a flat 78 percent.

In terms of collaboration with outside agencies, Fort identified the Joint Chiefs of Global Tax Enforcement, or J5, formed in 2018 among CI and its counterparts in four other countries to battle international tax evasion, as one recent success.


Other examples of interagency successes, though acknowledged by Fort to be more dated, were the shutdowns of darknet markets Silk Road and AlphaBay, in 2013 and 2017, respectively, “a great example of multi-agencies, under the Department of Justice, helping to solve crimes.”


“The most recent success in cryptocurrency was the Welcome to Video case, the child exploitation case,” Fort said, referring to what the DOJ called the “largest dark web child porn marketplace” when it took down the website in October. The use of bitcoin on the site led to CI’s involvement in tracking the cryptocurrency.


Fort anticipates that this kind of collaboration will continue in the years ahead.


“The next wave of crime, in front of our eyes, requires us to employ new ways of investigation in solving these crimes. The crimes are money- and greed-based, conducive to our work in following the money. We all have our own skills and capabilities. We have a lot of initiatives underway to partner with federal agencies and collaborate internationally.”


CI has also been partnering with academia to deepen its expertise in data analytics, working with universities and colleges that are utilizing the technology in innovative ways.


In the next year, Fort expects CI to help take down more dark web marketplaces and create more of a tax focus on cryptocurrency. Fort emphasized that CI currently has many open cases related to cryptocurrency and cybercrime that the agency hopes to make public by the end of this fiscal year.




IRS issues new guidance on per diem rates for business travel

By Michael Cohn


The Internal Revenue Service updated its guidance Tuesday for business travelers and their employers on the per diem rates for substantiating expenses, in light of the changes in the Tax Cuts and Jobs Act.


Revenue Procedure 2019-48 updates the rules for utilizing the per diem rates to substantiate the amount of ordinary and necessary business expenses paid or incurred while traveling away from home. Taxpayers aren’t required to use a method described in the revenue procedure, however, the IRS noted. Instead they can substantiate the actual allowable expenses, as long as they maintain adequate records.


While the 2017 tax law suspended the miscellaneous itemized deduction that workers can take for unreimbursed business expenses, self-employed people and certain employees, such as members of the Armed Forces Reserves, fee-basis state or local government officials, eligible educators and qualified performing artists, who deduct unreimbursed expenses for travel away from home can still use per diem rates for meals and incidental expenses, or incidental expenses only.

The revenue procedure clarifies that the Tax Cuts and Jobs Act amended the older rules to disallow a deduction for expenses for entertainment, amusement, or recreation paid or incurred after Dec. 31, 2017. But otherwise, the allowable meal expenses are still going to be deductible if the food and beverages are bought separately from the entertainment, or if the cost of the food and beverages is broken out separately from the cost of the entertainment.


The IRS traditionally issues guidance every year providing updated per diem rates; Notice 2019-55 provides the rates that have been in effect since Oct. 1, 2019.


The new revenue procedure provides the rules for using per diem rates, rather than actual expenses, to substantiate the amount of expenses for lodging, meals, and incidental expenses for travel away from home. Use of a per diem substantiation method is not mandatory. Taxpayers who use per diem rates to substantiate the amount of travel expenses under Rev. Proc. 2019-48 can use the federal per diem rates published annually by the General Services Administration. Rev. Proc. 2019-48 permits certain taxpayers to use a special transportation industry rate or to use rates under a high-low substantiation method for certain high-cost localities. The IRS announced the rates and the rate for the incidental expenses only deduction in its annual notice.




6 things you should always do in a CP2000 notice or mail audit response

By Jim Buttonow


In 2018, the IRS questioned the accuracy of about 6 million tax returns.  The most often method is through a CP2000 – underreporter- matching notice.  About 3 million CP2000 notices were sent in 2018.  In second place is the IRS mail audit- with about 750,000 mail audits being conducted in 2018.


Common CP2000 and Mail Audit Problems

Taxpayers experience many issues with CP2000s and mail audits.  No one person is assigned to your mail audit or CP2000 response at the IRS – your response goes into a queue at the IRS to be worked by the next tax examiner.  Many times, the response is not reviewed before IRS computer systems send out a certified letter that proposes additional taxes, penalties, and interest.   This leads to frustration and a question of what to do next.


One of the most frequent questions I get is how to undo the results of an IRS mail audit or CP2000 response.   One instance occurs if the IRS prematurely accesses additional taxes, penalties, and interest before considering the information supplied in the response.  In these cases, audit or CP2000 reconsideration is often provided by the IRS to adjust the assessment based on the information and documents provided.


The second instance is even more frustrating to taxpayers and tax professionals.   What happens if a taxpayer sends in their information on time, but IRS notice systems and automation seem to ignore the response and send out the assessment letter (called a “statutory notice of deficiency” or “SNOD”) prematurely?   IRS representatives are trained to tell taxpayers that their only recourse is respond to the SNOD by petitioning the US Tax Court within 90-days of the letter date.   Taxpayers can follow that route, but it brings them into the possibly expensive option of filing a petition with the Courts and arguing the case for months, if not years.  Ultimately, the IRS treats it as an audit or CP2000 reconsideration and corrects many of the premature assessments.


6 must-do’s when responding to a CP2000 or a Mail Audit

Want to know how to streamline this process and make sure that the IRS considers your response without having to deal with the courts?


  1. Respond timely: a complete, timely response that addresses all issues and questioned items is the starting point.   If you respond timely, you have the right to have your information considered before the SNOD.
  3. Send your response certified to the IRS: this is your proof of a timely response.  Evidence of timely mailing is usually required – so send it certified with tracking.
  5. In the response, protect your appeal rights: CP2000s and mail audits follow IRS deficiency procedures – that is, the IRS must generally provide you the right to an appeal within the IRS Office of Appeals on any adverse determination.   In your response, include the statement, “If you disagree, this response serves to request a hearing with the IRS Office of Appeals.”  This will provide you the foundation for undoing the SNOD and avoiding the need to go to court to dispute the findings.
  7. Don’t respond with a 1040X: if you respond to a CP2000 or mail audit with a Form 1040X, expect the IRS to issue a premature SNOD.  Why?   CP2000s and mail audits are handled by IRS compliance units- a 1040X is a tax return, handled by the people at the IRS who process tax returns (Accounts Management in this case).  Many 1040X responders to CP2000s and mail audits receive premature SNODs because the IRS does not associate a tax return as a response to a compliance inquiry.
  9. Contest penalties in a response: many CP2000s and mail audits come with 20% accuracy penalties.  Many taxpayers never contest the penalty and often find themselves wanting to contest the penalty after it has been assessed.  The time to question penalties is BEFORE the penalty is assessed (again, these are IRS deficiency procedures).  You should state your facts, law, and position to argue the assessment of the penalty with the response.  Arguing after the penalty has been assessed is essentially begging the IRS for CP2000 or audit reconsideration.  Also, you forego your appeal rights within the IRS if you do not argue with a timely CP2000 or audit response.
  11. If get a premature SNOD, request reconsideration and/or contact the taxpayer advocate’s office: if you have responded timely and receive a premature proposed assessment, you can request the Taxpayer Advocate Service (“TAS”) to intervene.  It is fairly common for taxpayers to request the TAS to intervene (it is #10 on the most common issues faced in TAS).  TAS can help reverse premature assessment and ensure that the taxpayer has access to IRS appeals if they timely requested.  If you did not respond timely, you can also request “reconsideration” of the CP2000 or mail audit SNOD (or even after the tax is assessed).   Reconsideration is common for CP2000s and for mail audits as the IRS often does not hear back from taxpayers on time or processes adjustments without getting all of the facts from the taxpayer.

A response that addresses all of the issues along with these 6 things will help you avoid a lot of headaches and time with the IRS trying to “undo” an incorrect CP2000 or mail audit assessment.




IRS New Hire Numbers Are Going Up

Kelly Phillips Erb


Hear that noise? It’s the collective sighs of tax professionals around the country upon learning that the Internal Revenue Service (IRS) is in the midst of a hiring spree.


According to IRS Commissioner Charles Rettig, the IRS is hiring thousands of new employees—the most in almost a decade. Rettig says that the IRS hired nearly 10,000 people during the 2019 fiscal year and plans to hire more than 5,000 additional workers. 


Speaking at the American Institute of CPAs (AICPA) conference in Washington, D.C., Rettig touted the good news. Rettig has made staffing a priority, noting earlier this year that the agency “essentially lost an entire generation of IRS employees” from 2011 through 2018. During that time, the IRS dropped about 20,000 employees, largely due to budget cuts.


While the IRS budget has increased slightly this year, the overall budget remains lower than over a decade ago. The result? A significant reduction in the number of full-time employees.


IRS Criminal Investigation (CI) chief Don Fort noted that CI has also felt the pinch in recent years. Fort, speaking at New York University’s Tax Controversy Forum in June, explained that CI had lost about 1,000 agents over past years to retirement but only hired about 250 replacements. But that, too, is changing. “By the time this fiscal year is over, we will have hired probably about 150 agents,” said Fort. “That sounds like a decent number compared to 2,000 agents, but you have to recognize that we also lost about 140 or 150 to retirement every single year.” Noting that the numbers are slated to finally go up, he says, “That’s great news.”


But it’s not all about enforcement. Rettig noted that, “We’re looking to balance enforcement and service. But I really use the term enhancement rather than services. Enhancing your relationship and your interactions with us is where we want to be.”


Under the Taxpayer First Act, the IRS has been tasked with improving the taxpayer experience. Practitioners are hopeful that includes better service for tax pros, too. Rettig, a former tax attorney, told the AICPA audience, “I’m respectful of the struggles that you have.” If you have suggestions, the IRS is seeking feedback; you can email


But it really boils down to funding: That seems to be on the way up. When Rettig took office, he managed an IRS staff of about 80,000 employees and a budget of approximately $11 billion.

(To find out more about available IRS jobs, click here.)




IRS 36-month, 72-month, and 84-month payment plans

By Jim Buttonow


Millions of taxpayers each year set up an IRS payment plan when they cannot pay when the file their return.  Most taxpayers use one of the three simple payment plans offered by the IRS (IRS statistics show that over 90% use one of these payment plans).


3 simple IRS payment plans

The simplest IRS payment plans to setup are:

  • 36-month payment plan: Guaranteed Installment Agreement (GIA)
  • 72-month payment plan: Streamlined Installment Agreement (SLIA)
  • 84-month payment planStreamlined Processing Payment Plan Pilot Program for amounts owed between $50,000 – $100,000

Why are they simple?

Taxpayers who owe less than $100,000 and meet the terms and conditions can get into one of these plans that can be setup in as little as one phone to the IRS.  These plans are a lot less paperwork too.  Taxpayers do not have to file financial information with the IRS or prove their ability to pay.  Also, taxpayers do not have to liquidate or borrow against assets.


There are two caveats to these plans:

  1. All required tax returns must be filed: At least the past 6 years need to be filed (if required) in order to enter into any installment agreement.  See IRS Policy Statement 5-133.
  2. The number of months to pay may be limited:   The number of months may be limited if the collection statute expiration date (CSED) is less than the months allowed for payment.  For example, a SLIA is limited to 72-months or the CSED, whichever is shorter. If a taxpayer has amount owed that is more than 4 years old, they should research their account and determine the CSED.

Here is a summary of these three simplified IRS payment plans:



Terms and Conditions

Guaranteed Installment Agreement (GIA)

(36-month agreement)

Streamlined Installment Agreement (SLIA)

(72-month agreement)

Streamlined Processing Agreement Pilot Plan:  $50K-100K owed

(84-month agreement)

Maximum payment terms

36-months (or before the expiration of the collection statute, whichever is earlier)

72-months (or before the expiration of the collection statute, whichever is earlier)

84-months (or before the expiration of the collection statute, whichever is earlier)

Maximum unpaid balance

Total balance owed is $10,000 or less

Assessed balance owed is $50,000 or less

Total balance owed is between $50,000- $100,000

Financial disclosure required?


Only if balance is between $25,000 and $50,000)

Only if taxpayers do not agree to automatic payments.

Automatic payments required?


Yes, if the balance owed is between $25,000-$50,000

No.    Taxpayers can avoid financial disclosure (i.e. filing Collection Information Statement) if they agree to direct debit payments.

IRS files Notice of Federal Tax Lien?




Asset liquidation required




Other terms

No prior installment agreements in past five years

Can include amounts owed for other assessments, such as a trust fund recovery penalty assessment

Pilot program began on 10/1/2016.  As of 1/1/2019, this pilot program is still in effect.


Other options

If taxpayers cannot meet the terms of these agreements or cannot pay the payment plan amount, they have other alternatives, such as an ability to pay installment agreement.  Ability to pay installment agreements require the taxpayer provide financial information to the IRS to prove how much they can pay each month (called “monthly disposable income” or MDI).   Taxpayer who need an ability to pay agreement may also need to liquidate or borrow against assets to pay down or satisfy their tax debt.


If the taxpayer has no MDI and is experiencing financial hardship, other options such as currently not collectible (temporary payment deferral) or an offer in compromise (a tax settlement with he IRS for less than the amount owed) may be more appropriate.




Steps to take after a family health crisis

After Dad's death, the Houser family was better prepared to help Mom.



Key takeaways

Engage your family with these 5 key questions:

  • Who will be the financial caregiver?
  • Who can handle the short-term, day-to-day medical needs and caregiving?
  • What are the housing options?
  • How will we communicate as a family?
  • How will we navigate the eventuality of death?


David Houser's father, Robert, died suddenly in his sleep. "Dad was 77, but he hadn't been ill. He was always up by 5:30 a.m. to go on his road bike ride with his buddy," says Houser. "But when my mom went in to wake him up that morning, he had gone quietly in his sleep—the way we all dream of."


That was nearly 3 years ago, and, while Robert's passing may have been peaceful, his death was a jolt for the family. There was, however, an upside: It opened the door for a family conversation about the next chapter of Houser's mother's life.


David, a Shell Oil executive based in Naperville, Illinois, and his 2 siblings wanted to be sure that their mother, 77, who lives in Palm Desert, California, was cared for from a financial and physical standpoint in the years to come—without disrupting her lifestyle.


Houser and his siblings sat down with their mom in the days following the funeral, and began a series of sobering discussions. Of course, every family is different and has to find the right time and place to talk about what they would do if a family member had a severe health event stemming, for example, from a car accident, heart attack, stroke, or stage 4 cancer diagnosis.

Planning and managing a new life


"Dad's death forced us to get to the place where we knew we needed to have that conversation," says Houser. "Mom was good with the discussion only because we had several recent deaths in the family. That gave us the impetus and catalyst to get going and be able to put into place what Mom really wanted done, including where she would live and who would take over managing her financial caregiving," he recalls.


With their mother in good health, the siblings had some lead time to make thoughtful decisions. So, if the call came that their mother had been hospitalized and was unable to make decisions for herself, everyone knew what needed to be done.


Five key questions


Tip: When a health event happens to a parent, in-law, or spouse, it can have a ripple effect across the entire family. Ideally, parents, siblings, and financial advisors can work together to plot out everyone’s roles and responsibilities ahead of time, so there are no surprises when emotions are running high.


To mobilize your family after a major health event, put your team together now and ask these 5 questions:


1. Who will be the financial caregiver?

Houser was chosen by his mother and siblings to take the financial reins. Investing and finances are his passion. "I am into stocks and have the experience," admits Houser. "I was a trader in one of my jobs, and I understand the financial markets, but I don't have the time to actively manage her investment accounts."


After consulting with their estate planning professional, the first thing the family did was review and tweak the mother's will and establish a trust, so their mother could leave an inheritance for her kids and her 4 grandkids. She also wanted to put a Do Not Resuscitate (DNR) legal order in place.


Houser's mother hired a local elder care attorney to obtain and sign a power of attorney (POA) so her son could legally monitor her finances and make key investment decisions. Many financial institutions and brokerages also have documents that must be signed by the account holder before the institution will offer account authorization to anyone other than the account holder.

At the same time, she signed a health care proxy, or a living will, giving her eldest son the authority to make life-and-death medical decisions on her behalf if she isn't able to do so for herself.


Taking financial inventory

Next, Houser reviewed his mother's bank and investment accounts, insurance policies, and credit cards. While his mother "was fine with bill paying at the time, she wasn't very involved with investments," he says. “Her way was to put money in the savings account and CDs and kind of let it ride. The old-school way."


When he drilled into the investment accounts, he discovered that his parents had multiple IRAs. In the meantime, his mother had recently inherited funds from her deceased sister's estate. "Honestly, she really didn't know what she had," says Houser. "We literally had to go through everything to figure out what she had because she lost track of all that."


Once that was straightened out, Houser's primary financial objective was to be certain that his mother had a smart monthly income strategy. "My Fidelity financial advisor in Naperville helped me explore the myriad of options and tradeoffs," he says. "We explored options that would generate income but weren't too risky because we needed to make sure the money my mom had in various accounts would last for her lifetime," Houser recalls.


In the end, Houser's mother ended up with a simple but well-thought-out approach that generates a target income, which automatically transfers to her bank account. And because he has POA, Houser can keep an eye on the accounts for her.


2. Who can handle the short-term, day-to-day medical needs and caregiving?

Houser's younger brother currently lives with his mother and is lined up to handle any immediate or emergency medical needs.


All families need a person living nearest to the parent or loved one, who can be on call. That individual should have a handle on what insurance will cover and what outside support he or she might need if there's a medical crisis that requires in-house care for a period of time.


The family should have a single point of contact for medical matters. In general, medical professionals don't want to deal with multiple family members. Ask: Who in the family has the most experience dealing with medical issues? Who is the best communicator? Can you tap into community resources offered by local religious and civic groups to provide services for basics like meals and transportation?


3. What are the housing options?

If the time comes when their mother can no longer live independently in her home where she now lives with her youngest son, the Housers have decided, with their mom's approval, that she will sell her home and move to northern California to live with her daughter. The house proceeds, an estimated $350,000+, will then be rolled into her trust to help cover expenses.


Mother and daughter already talk 3 times a day, so both are on board with the future arrangement. "My relationship with my mom is more transactional," says Houser. "We have a neat combination of who is playing what role for her and it works. The biggest reward for the family is that we put this in a stable place that is trusting and predictable, so there is no uncertainty about what is going on."


For those who have a different family story from the Housers or who might not have family members that can willfully take on these challenges, engage the support of a trusted friend or financial advisor to help you sort through these complex decisions.


4. How will we communicate as a family?

Family communication strategies are vital when there's a major medical event. You have to have a plan for who gets the phone call from the hospital. Who will be in charge of getting the word out in terms of what everyone needs to know? Is there a family phone tree in place for who calls whom? Is text, email, or phone the best way to communicate with a local family member and those far away?


That said, don't wait for a crisis to start talking. Get the communication lines up and running during the time when you're gradually taking over care for your aging parent, as the Housers are doing. "I communicate constantly with my siblings about what is going on from a financial perspective," says Houser. "I'm really lucky because Mom granted us permission up front to get involved, and my sister and brother have a great deal of confidence and trust in me. That is a backdrop that really matters."


Tip: Make connecting a priority. Once you have a caregiving and health event plan of action formulated, commit to follow-up conversations. Keep the momentum going and schedule as many get-togethers as you need—and revisit your plans at least annually, to make sure they still make sense.


The Houser siblings, for instance, have a quarterly meeting where they talk by phone, go online, and look at their mother's Fidelity financial and investment statements together. "I have had to work with my siblings to establish that financial trust. But we all make the effort to keep the lines of communication open," says Houser.


5. How will we navigate the eventuality of death?

This is a conversation families may be reluctant to have, but it's important to understand last wishes and what your loved ones want toward the end of their life. 'We call it 'Mom's transition' and we've pushed ourselves to talk about it—delicately, but practically," says Houser.


"The best part is that she's confident we have delivered on her goals, and we got along in the process, plus it's strengthening our relationships," he says. "And when she goes, we're going to need those relationships the most. She would like to know that we are there for each other."




Government Announces Settlement With Liberty Tax To Resolve Fraud & Refund-Related Allegations

Kelly Phillips Erb


The Justice Department has announced a settlement with Franchise Group Intermediate L 1 LLC, (Liberty), the national franchisor and owner of Liberty Tax Service stores. The settlement, if approved by the court, would resolve a complaint filed with a U.S. District Court in Norfolk, Virginia, by the Justice Department against Liberty.


Liberty is one of the largest tax preparation service providers in the country. According to its annual report filed with the SEC in 2019, Liberty has more than 2,800 franchise and company-owned tax return preparation offices in the United States (Liberty also markets services in Canada). Between 2015 and 2019, Liberty filed approximately 1.3 to 1.9 million tax returns each year through its stores, claiming billions in federal tax refunds on behalf of its customers.


According to the complaint, Liberty failed to maintain adequate controls over tax returns prepared by its franchisees. The company reportedly did not take steps to prevent the filing of potentially false or fraudulent returns prepared by franchisees, despite notice of fraud at some of its franchisee stores.


The government reports that between 2013 and 2018, 10 separate civil law enforcement actions were filed in U.S. District Courts throughout the United States against 12 franchisees of Liberty Tax, or their owners, former owners, or former managers. Judgments were entered in favor of the government in nine of those cases; the tenth, United States v. Doletzky et al., Case No: 8:18-cv-00780-CEH-CPT (M.D. Fla.), is pending.


Where did those franchisees go wrong? At many, the problems were tied to the Earned Income Tax Credit (EITC). Since the EITC allows some taxpayers to get a refund in excess of any tax paid into the system, it’s long been associated with fraud: the Internal Revenue Service (IRS) estimates that about a quarter of all EITC refunds are improperly issued.


Liberty Tax franchise and company-owned stores filed a lot of returns for taxpayers claiming the EITC. According to the complaint, for the tax years from 2012 to 2018, approximately 41% of federal income tax returns that Liberty Tax electronically filed with the IRS included an EITC claim, more than double the rate of other returns electronically filed during that period. Those Liberty EITC refunds exceeded $12 billion. 


And remember those court actions mentioned earlier? From 2010 to 2016, employees at those stores claimed false EITC refunds by reporting income that did not exist and ignoring due diligence requirements.


In some cases, the government alleges that Liberty Tax franchisees recruited customers, including the homeless, and then prepared fraudulent federal income tax returns on their behalf. To boost income, they reported fake wages earned from household work (HSH) like housekeeping, babysitting, or gardening.


For example, in 2015, a Liberty Tax Service franchise owned and operated by Kone prepared over 1,000 tax returns that claimed HSH Income and the EITC. The fraudulent tax returns included over 350 tax returns that reported the same amount of HSH Income ($6,400) and over 300 tax returns that each reported precisely $7,200 of HSH Income. 


The government claims that Liberty either knew or should have known about the EITC fraud at its franchise locations, but didn’t try to stop it. Notably, in January of 2014, the company and its CEO at the time, John T. Hewitt, received complaints that franchisees had prepared tax returns with potentially false EITC claims linked to HSH income. Nonetheless, the number of returns claiming HSH income increased. 


The government also says that when the company identified specific EITC violations, it didn’t take steps to curb the abuse. In 2016, Liberty Tax conducted an onsite compliance review of one franchisee and found errors in over 80% of the EITC files. The company gave the franchisee a failing EITC compliance grade but did not terminate him until the government initiated a civil enforcement action in 2018. 


Other improper acts include erroneous dependent claims, false claims for expenses, and fraudulent claims for refundable education credits. There were also reported violations of federal Preparer Tax Identification Number (“PTIN”) regulations, including stores which allowed employees to share PTINS so that employees without PTINs could prepare tax returns.


In 2019, Liberty admitted in its annual report that it "did not maintain effective internal control over financial reporting” and “[t]he control environment, risk assessment, control activities, information and communication, and monitoring controls were not effective.” Still, the government says that the company failed to take sufficient measures to prevent fraud and errors at its stores. In many cases, the complaint alleges that Liberty only terminated franchisees after the United States or other law enforcement agencies took action.


How bad was it? According to the complaint, for tax years from 2012 to 2016, the IRS assessed over 25,000 separate penalties against tax return preparers for tax returns prepared at Liberty franchises and company-owned stores. For tax years from 2012 to 2017, 20,000 of the 28,000 audits of Liberty customer tax returns resulted in changes to correct false or incorrect items reported on each return - a whopping 70%.


Under the settlement, Liberty would be required to take steps to identify and curb abuse going forward. Those steps include a ban on employing the company’s founder and former CEO, John T. Hewitt; Hewitt would also not be allowed to hold an interest in or serve on the board of directors of any Franchise Group of the company.


Liberty would also be required to establish enhanced compliance measures, including training programs and additional resources to monitor, detect, and report non-compliance. The company must also take steps to ensure effective quality control throughout their stores, including conducting onsite compliance reviews and using mystery shoppers. Additionally, the settlement mandates disclosure of any potential violations to the government. 


The high-profile complaint and settlement is an acknowledgement that return preparer fraud is a serious problem - so much so that the IRS included it in its Dirty Dozen Tax Scams for 2019. To protect yourself, use care when choosing a preparer and remember that taxpayers should use only preparers who sign the returns they prepare and enter their IRS Preparer Tax Identification Numbers (PTINs). For hints on finding a tax preparer, click here. For more information about return preparer fraud, check out IR-2019-32.




Man Loses Home After Failing To Pay $8.41 In Property Taxes

Kelly Phillips Erb


$8.41. That was how much 83-year-old Uri Rafaeli, a retired engineer, in Michigan underpaid his property taxes by in 2014. That was all it took for him to lose his house.


Rafaeli bought a 1,500-square-foot Southfield home in 2011. He paid $60,000 for the property, and the deed was recorded by the Oakland County Register of Deeds on January 6, 2012. He put additional money into the home, too, as he intended to use the rental income from the property to fund his retirement.


Rafaeli believed that he was paying his property taxes on time and in full, but in 2012, he received notice that he had underpaid his 2011 tax bill by $496. He paid up in 2013 but made a mistake figuring the interest (interest also accrued while his check was in the mail): He was short by $8.41. 


In response, Oakland County seized his property and put it up for sale. The home netted just $24,500 at auction; according to Zillow, the property is now estimated to be worth nearly $130,000.


The County kept the overage from the auction: $24,215 in profits, or 8,496% of the actual tax, penalties, and interest due (the debt had grown to $285 with penalties, interest, and fees).


It was all legal. 


Under Act 123 of 1999, Michigan allows its county treasurers a great deal of authority to handle unpaid taxes, including rushing the tax foreclosure process. Under the Act, the property is considered delinquent if taxes aren’t paid in the previous year. If the outstanding taxes, fees and penalties remain unpaid after two years, the County can foreclose on the property; that’s much more quickly than before, when the average timeframe to move a foreclosure was five to seven years. Shortly after foreclosure, the former owner loses the right to buy back the property, and the County becomes the owner. At sale, the funds belong to the County. There’s no requirement to refund any of the proceeds to the owner even if the overage far exceeds the amount owed.


Rafaeli—and his lawyers—think that’s wrong. They took the matter to the U.S. District Court for the Eastern District of Michigan. The court found that Rafaeli—and a similarly situated plaintiff—suffered “a manifest injustice that should find redress under the law” but dismissed the claim for lack of jurisdiction. 


Rafaeli tried again. He didn’t argue that he didn’t owe tax, penalties, interest and fees. But he did object to the County taking the excess. The County argued that Rafaeli had no rights to the equity because the General Property Tax Act does not expressly protect it. And that’s the reason that Rafaeli keeps losing: The courts have sympathy for his plight but have found that the law does not prevent the County from keeping it.


He’s not alone. Tens of thousands of properties in Detroit have been subject to the same kind of treatment. Many of those who owe taxes understand that they have a debt, but they don’t necessarily understand how to navigate the process or what the failure to pay on time can mean. As with Rafaeli, even something as simple as miscalculating the interest due, can have serious consequences.


Today, Rafaeli is represented by the Pacific Legal Foundation (PLF). PLF was founded in 1973 by members of then-governor Ronald Reagan’s staff as the first public interest law firm dedicated to the principles of individual rights and limited government. PLF is taking the case to the Michigan Supreme Court, arguing that keeping the funds is an unjust taking. If he wins, Rafaeli—and other landowners in similar situations—may be entitled to compensation.


According to PLF, the entire process, as it is happening now, is nothing more than government-sanctioned theft. “Predatory government foreclosure particularly threatens the elderly, sick, and people in economic distress,” PLF argued on its website. “It could happen to your grandparents. It could happen to you.”




IRS continues fight for virtual currency information

By Michael Cohn


The Internal Revenue Service is seeking information from more taxpayers who hold virtual currency like Bitcoin, but in a ruling last week, a judge ordered the IRS to limit its summons for information from one cryptocurrency exchange, Bitstamp.


The case involves a taxpayer who filed an amended return asking for a $15,475 tax refund for taxes he had already paid on his crypto transactions. The IRS audited him and discovered an unreported transaction on Bitstamp in 2016, according to Bloomberg Tax. The IRS filed a summons with Bitstamp to learn further information about the taxpayer, but he petitioned in June to block it, prompting the IRS to move to enforce the summons.


Judge John Coughenour said the IRS summons was too broad. “The summons requests information that is irrelevant to the IRS’s stated purpose of auditing Petitioner’s 2016 amended return,” he wrote in an order. “The summons is therefore overbroad.” He gave the IRS 14 days to amend its summons.


The IRS has been cracking down on cryptocurrency users who may be evading taxes, sending warning letters after receiving information from another major cryptocurrency exchange, Coinbase, which fought a long court battle with the IRS after the IRS sent a John Doe summons seeking information on all of its customers. That information request was also limited somewhat by the courts before Coinbase ultimately turned over information.


The IRS also recently released long-awaited guidance on the taxation of cryptocurrency, following up on a 2014 notice, along with a draft tax form. (See IRS issues more guidance on cryptocurrency and IRS revises Form 1040 schedule to ask about cryptocurrency.)


But the new guidance didn’t go far enough for many taxpayers: “I think that this addresses some issues that hadn’t been addressed by prior guidance, but based on what I’m hearing, there’s still a lot of questions,” said Rochelle Hodes, a principal in the Washington National Tax Office at Crowe LLP, in a recent interview. “There’s also interest in the form of the guidance that came out. It’s really a form that doesn’t provide binding guidance that taxpayers can rely on. It’s rather a form of guidance that states the IRS position. In some respects some of the really hard questions were not answered. In other respects, the positions that the IRS took were not informed by input from the public. From practitioners, from folks who are in the industry, and from the taxpayer perspective there is a lot of dissatisfaction with the guidance that’s come out.”


Hodes also pointed to the guidance on so-called “hard forks” and “airdrops.”


“In the revenue ruling, for instance, on the hard fork, the question about how the amount of the new coin received as a result of a hard fork should be treated is a complex question,” she said. “The government position put forth in the revenue ruling is it’s income the second you get it, and you measure the value of that income on the date and time of when you get it. So you’ve got this recognition event. They did provide some rules that sound like the Section 451 receipt concept talking about dominion and control.”


However, Hodes noted that the IRS is now dealing with the cases it has developed from the John Doe summons and the letters it has sent out to the taxpayers whose information came back from Coinbase in response to the summons.


“They’ve got cases in the pipeline,” said Hodes. “They’ve got all of the cases that they’ve developed from the Coinbase summons. They’ve got whatever the responses that are coming back to the 10,000 letters. They have cases in enforcement now and this is showing you what position they are taking, and that’s all well and good, but as far as determining what’s the best or right tax answer, and what’s best for tax administration, getting specific public input and putting out an answer would have been helpful. The answer in the FAQs, for instance, they have an example of an exchange in one virtual currency for another is going to be treated as income for any delta in the value at the point in time of the transaction. While they didn’t say it, that’s premised on the decision by the government that trading one virtual currency for another is not a like-kind exchange. We all know a like-kind exchange got removed in the TCJA, but at the time of the hard forks and prior to TCJA, like-kind exchange was something that a lot of folks were looking at as far as is this the proper tax treatment. It would have been nice if they had some input on that topic.”


She also objected to the IRS guidance on airdrops, which doesn’t match up with industry practice. “The whole concept of an airdrop following a hard fork is a unicorn,” said Hodes. “That’s not how it happens. Perhaps public discourse could have provided an ability for the IRS to be more accurate. Based on information that I’ve gleaned, it appears that the airdrop concept is really the IRS’s label for when somebody gets the new coin. But all of that noise about the incorrectness I think takes away from the position that’s being put forward and the discussion about what are the right answers.”


IRS chief counsel Michael Desmond reportedly indicated at two recent tax conferences that he is open to reconsidering the guidance to align it more with industry practice on airdrops and hard forks, according to Cointracker. But Hodes thinks that it may be too late for many taxpayers.


“It would have been nice to hear all of this before the guidance came out in a form that is not binding, can’t be relied upon and basically is putting the IRS’s marker on how they’re going forward on enforcement,” she said.


Hodes added that she would also like to see the IRS offer something like a voluntary compliance program, as it did with its crackdown on foreign bank accounts, to help taxpayers come into compliance: “Voluntary compliance is an important piece of the overall compliance puzzle.and that’s missing,” said Hodes. “The other piece that is missing is acknowledging that taxpayers had viable positions to take prior to the date of this guidance for not reporting the gains, losses, etc., so it appears that the only tax way the IRS has for people to come into compliance for prior years is to file an amended return and take into account all of that income based on their rules today."


"There is no relief," she continued. "There is no acknowledgment that today the value of the coins that they have could be significantly lower than at the time they had a potential recognition event. There’s nothing. There’s no safe harbor. Getting people to come into compliance in tax administration is a multipronged exercise. One part of that exercise is strong enforcement, and where appropriate, making a big stink about the criminal cases. There are going to be far fewer criminal cases, but when those are made an example, that serves a lot for deterrence, and also to get everybody else to pay attention and realize that this is what they should be doing, and then strong enforcement so that people don’t feel like suckers if they comply. But that’s not the only tool. The other tools are education and outreach.”




Tax Evasion and Tax Cheaters

Tax evasion has long been a problem for the IRS. Tax cheats cost both federal and state governments hundreds of billions of dollars per year. It is estimated that the collective cost of tax evasion over the last decade amounts to $3.09 trillion. Ever since the creation of the IRS, the government has continually employed measures to combat tax evasion by attempting to close off loopholes and administer penalties to tax offenders. Learn about the history of the IRS and history of taxes in the United States.


Income tax has made more liars out of
the American people than golf.   Will Rogers


Recently, tax evasion cases have become more and more public. Numerous states, such as California and New York (as well as many municipalities), compile public lists of the biggest tax evaders in their states.


High-Profile Cases of Tax Evasion in the United States

  • Fitness guru Richard Simmons owes the IRS about $24,000 covering Tax Years 2007-2015. 
  • Cornell Iral Haynes Jr. (AKA rapper Nelly) owes the IRS more that $2.4 million. Though his fans try to get him out of debt by streaming his songs online, the IRS is considering another option: use the ticket sales he collects from his latest tour to pay off the debt. 
  • Reality TV start Michael "The Situation" Sorrentino served eight months in federal prison for filing fraudulent tax returns with his brother and not paying taxes on $8.9 million earned between 2010 and 2012. They created nonexistent business to exploit Sorrentino' celebrity status.
  • William Leonard Roberts II (AKA record executive and rapper Rick Ross) paid the IRS over $4 million to settle a 2012 tax debt. The IRS The IRS sent him a notice in 2016 about the debt, demanding him to pay the debt or they would seize his assets.
  • Singer-rapper Trey Songz received a tax lien from the IRS on October 8, 2015 over taxes he did not pay for his 2013 income. He paid $750,000 to the IRS on October 28 to cover his $748,870.08 debt. 
  • Actor Dustin Diamond of "Saved by the Bell" fame owes Wisconsin $93,768 in back taxes.
  • In 2014, the IRS filed a $369,249 tax lien against singer-actress Vanessa Williams for unpaid 2011 taxes.
  • H. Ty Warner, creator of the famous 90s plush toy Beanie Babies, pled guilty in January 2014 to tax evasion of $25 million using Swiss bank accounts, but was able to avoid a prison sentence. Warner was given leniency by the judge for his philanthropic activity and charity donations. He agreed to serve two years’ probation, perform 500 hours of community service, and pay $27 million in back taxes and interest. He also agreed to pay a civil penalty of more than $53 million.
  • In 2008, former businessman William Berroyer was settling a repayment deal with the IRS for his $60,000 tax bill when he tripped and fell over a telephone cord in a Haup­pauge, NY IRS office. He spent 17 days in hospitals and rehab clinics for his injuries, and sued the IRS for $10 million (claiming that the injuries prevented him from enjoying his favorite activities). A judge ruled in favor of Berroyer in 2014, but reduced his payment to $862,000. In addition, Berroyer's tax bill was waived.
  • Rapper Lil Wayne has three separate tax liens against him: $1.13 million in December 2010 for Tax Years 2004, 2005, and 2007; $5.6 million in 2011 for Tax Years 2008 and 2009; and $7.72 million, which he paid at the end of 2012. He currently has a $12,155,084.46 tax bill.
  • Lauryn Hill, a 90’s Grammy-winning singer, was convicted in May 2013 of failing to pay nearly $1 million in taxes. She served her sentence and was released on October 2013 from her three-month sentence at a federal prison in Connecticut. The singer was allegedly unable pay her taxes due to during a period of time when she was inactive as a musician.
  • In 2013, the Pennsylvania Department of Revenue filed a $39,000 tax lien against former reality TV star Jon Gosselin for taxes he did not pay in 2009.
  • Legendary R&B singer Dionne Warwick filed for bankruptcy in 2013 after she battled the IRS for years over $10 million worth in tax debt dating back to 1991.
  • Former NFL player O.J. Simpson has found himself in hot water numerous times. He was accused of murder, acquitted, but then found liable in a civil suit. In 2008, he was sentenced to 33 years in prison for the robbery and kidnapping of a sports memorabilia salesman. In addition, he hasn't paid any taxes since 2007 according to the IRS, and he reportedly owes almost $180,000. The IRS filed a second lien in early 2013, covering $17,015.99 in income taxes for 2011.
  • The IRS has filed two tax liens on comedian Katt Williams: one in 2012 for failing to pay $3.2 million for 2008 and $829,352 for 2009, and another in 2010 for failing to pay $284,000.
  • In 2012, the IRS filed a tax lien on legendary singer/songwriter Lionel Richie for $1.1 million in unpaid taxes from 2010.
  • Krystle Marie Reyes fraudulently filed an Oregon state tax return in 2012 that reported $3 million in earnings. She managed to receive $2.1 million in tax refunds through state-issued refund debit cards. Then, she proceeded to go on a shopping spree, spending her fraudulently obtained refund money at a rate of tens of thousands of dollars per week. This case is considered to be one of the largest instances of tax fraud in the history of Oregon.
  • Plaxico Burress, a Super Bowl champion wide receiver, had a federal tax lien filed against him in 2012. The IRS said he and his wife did not pay income taxes in 2007 and 2009, leaving an outstanding bill of $98,064.76. He was also the target of a New York state lien, alleging he owed $59,241 in unpaid income tax for 2007.
  • Stephen Baldwin, who made his name in movies and reality TV, was arrested in December 2012 and charged with failing to pay more than $350,000 in New York state income taxes. In addition, he reportedly did not file tax returns for 2008, 2009, and 2010. By pleading guilty to one count of repeated failure to file and paying $100,000 to New York in restitution, he avoided prison time. He submitted his final payment of $100,000 in April 2014.
  • The IRS seized actress Lindsay Lohan's bank accounts due to her unpaid tax debt. Fortunately, the IRS released her from a tax lien in 2012 when she was able to pay off her 2009 using a $100,000 check actor Charlie Sheen gave to her. However, debts from 2010 and 2011 remain, but her business manager reportedly said he is working on a settlement to pay off the six figure balance.
  • In 2009, professional race car driver Hélio Castroneves was charged with filing years of false tax returns and evading $80 million in income taxes. His defense attorney does not deny the charges, but says that the racer is not to blame due to a brain injury which had compromised his decision-making abilities.
  • In 2009, Floyd Mayweather Jr. , a successful boxer with a history of tax problems, was given a $5.6 million bill by the IRS for unpaid taxes. He has agreed to pay them since then.
  • Actor Nicolas Cage failed to pay $6.2 million in taxes on the $24 million he earned in 2007. He claimed that his accountant made mistakes. In the end, he had to sell several of his houses, a castle, and comic books to obtain the money to pay back the IRS.
  • Walter Anderson is known for attempting to rescue Russia's Mir Space Station by turning it into a tourist attraction. However, he was charged with hiding about $365 million from businesses he led through corporations in Panama and the British Virgin Islands. In 2006, he pleaded guilty, was sentenced to nine years in prison, and was ordered to pay $200 million to the IRS.
  • Wesley Snipes, an actor who starred in several movies in the 90's and early 2000's, failed to pay taxes from 1999 to 2004. He tried to make the claim that he was a resident alien of the United States (he failed to realize that they have to pay taxes too). Naturally, because he was born in Florida, the IRS didn’t accept his claim and he was sentenced to three years in prison. He managed to get out on bail, but he still owes the IRS $23.5 million in taxes after the IRS denied his offer in compromise to pay 4% of his debt (about $850,000) twice. 
  • Ron Mix, a Pro Football Hall of Fame member, is facing up to three years in prison after pleading guilty to a Missouri tax fraud charge. He agreed to pay the IRS about $50,000 for one count of making false statements on a tax return. The statements are related to illegal payments he submitted as a San Diego lawyer to a non-lawyer for client referrals. Mix donated about $155,000 over a three-year period to a charity the non-lawyer operated, and Mix reported the payments as charitable deductions.
  • Busta Rhymes, a rapper who rose to fame in the mid-90's, is facing two tax liens from the Department of Treasury: $611,000 for 2008 and $178,000 for 2012. Altogether, he owes the IRS nearly $800,000 in unpaid taxes.
  • Popular R&B singer R. Kelly gained his fame in the 90’s and early 2000’s and sold an estimated 50 million records worldwide, earning him a great fortune. However, he failed to pay his taxes between the years 2005 and 2010 and reportedly owes $4.8 million for that time period. In addition, he owes nearly $1.4 million for 2011.
  • American skier Lindsey Vonn and her estranged husband reportedly owed $1,705,437 in back taxes from 2010, the year she won the gold medal during the Vancouver winter Olympics.
  • Kevin Federline, the ex-husband of famous pop star Britney Spears, faces a $57,615 tax lien filed by the IRS for unpaid taxes in 2009 and 2010.
  • Bronx-born rapper Fat Joe (Joseph Cartagena) faces up to two years in prison, as well as a fine of $200,000 plus IRS penalties and court costs, after pleading guilty to failing to file tax returns in 2007 and 2008, when he made almost $3 million.
  • Ja Rule (Jeffrey Atkins), a moderately successful rapper and actor, was charged with three counts of tax evasion for neglecting to pay his taxes from 2004 to 2006. He served 28 months in prison.
  • Allegedly, Flavor Flav (William Jonathan Drayton, Jr.), frontman of hip hop group Public Enemy, owes $906,250.56 in back taxes from 2004-2006.
  • Pete Rose, a famous baseball player, was accused of betting on baseball games, which he adamantly denied, but was later found guilty. In addition, the IRS accused him of not reporting income from special appearances and autographs, which led to a $50,000 fine and 1,000 hours of community service. In 2003, he was found guilty of not paying taxes again, and had to pay $154,000 and sell his condo in Los Angeles.
  • Famous bounty hunter and reality TV star Duane “Dog” Chapman reportedly owes the IRS $2 million in unpaid taxes dating back to 2002.
  • Daytime TV host and home guru Martha Stewart failed to pay $220,000 worth of taxes on an estate she owned, claiming that she wasn’t there enough, so she shouldn’t pay them. The IRS disagreed and forced her to pay the amount in 2002.
  • Actor and comedian Chris Tucker reportedly owes the IRS over $14 million in unpaid taxes, dating back to 2001.
  • Richard Hatch, a contestant on the popular reality TV show Survivor, neglected to pay income taxes on the $1 million prize he won on the game show in 2000. He was found guilty and sentenced to time in prison. After his release he was sent back to prison, this time for violating the terms of his release by failing to file his income taxes again. He claimed that he was innocent and was being discriminated against because he is gay.
  • Former Washington D.C. mayor (and current council member) Marion Barry was accused of failing to pay his taxes after he left his post as mayor in 1999.
  • Famous real estate investor Leona Helmsley was convicted of tax fraud in 1992 for claiming $2.6 million in ineligible business expenses. Helmsley served 18 months in prison, two months on house arrest, and one online in a halfway house. She reportedly said, “We don’t pay taxes, only little people pay taxes”.
  • Despite selling 50 million records, thanks to his 1990 rap hit "U Can't Touch This," MC Hammer owes the IRS and the state of California a total of $671,000.
  • In 1990, famous country singer Willie Nelson owed the IRS $16.7 million in unpaid taxes. The IRS proceeded to seize most of his possessions, but that wasn’t enough to cover the amount he owed. He released an album specifically to raise money to pay off his tax debt. Interestingly enough, most of his possessions that were seized by the IRS were later bought at auctions by his fans and friends who were more than happy to return them to him. After he paid back the IRS, he sued his accounting firm for an undisclosed amount, blaming them for his troubles.
  • Rock n roll legend Chuck Berry spent most of his time on tour in the 1970’s and was paid in cash for his performances. The IRS charged him with failure to pay taxes on those earnings (totaling $110,000) and he pled guilty in 1979. He was sentenced with 4 months in prison and 1,000 hours of community service, which he fulfilled by performing benefit concerts.
  • Comedian Richard Pryor spent 10 days in jail in 1974 for not paying his taxes. During his trial he told the judge that he forgot to pay them.
  • In 1973, 39th U.S. Vice President Spiro T. Agnew was the second vice president to resign from office after being charged by tax fraud, conspiracy, and bribery. After U.S. attorney George Beall opened an investigation in Baltimore City, which Agnew was rumored to be involved in, Agnew was charge with accepting bribes of more than $100,000. At first, he refused to resigned if he was indicted. However, he agreed to eventually resign. He received three years' probation and was fined for $10,000.
  • IRS commissioner Joseph D. Nunan, Jr. made (and won) a $1,800 bet that Harry Truman would win the presidential election. However, he neglected to report those winnings when filing his taxes. In 1952, his story became public and he was convicted of tax evasion.
  • Famous and ruthless gangster Al Capone ran a bootlegging business during Prohibition, and that brought him incredible profits, but he concealed them from the IRS. When he was captured and put on trial for handgun charges, the IRS was able to prosecute him for tax evasion, and in 1931 he received a sentence of 11 years in jail. He was also charged with $7,692 for court costs, fined for $50,000, and paid $215,000 and interest on his back taxes.


Other Notable Cases of Tax Evasion and Tax Delinquency in the U.S.

  • A man from Philadelphia, PA will spend seven years in prison for filing 1,217 fraudulent federal tax returns between 2008 and 2013. After obtaining names, dates of birth, and Social Security Numbers of children in foster care, he used the information to claim them as dependents on false tax returns for himself and his clients. The IRS lost approximately $7,972,093. 
  • A Las Vegas, Nevada dentist was sentenced to 13 months in federal prison for evading taxes in a nine-year time span (creating a $600,000 tax loss). He admitted to using bank accounts and trusts to hide his income and filed false tax returns for Tax Years 2008-2011. He was ordered to serve three years of supervised release and pay $712,280 in restitution. 
  • In Pittsburg, Pennsylvania, a donut chain owner was charged with filing a fraudulent 2010 tax return and concealing assets from a bankruptcy court. On the return, he reported that he earned $16,000 when he actually earned $194,000. He is also accused of hiding income from the business in a 2011 Chapter 7 bankruptcy filing.
  • A St. Louis, Missouri tax preparer pleaded guilty for overstating business expenses on a client's tax returns. According to an IRS investigation, he also prepared false 1099 forms and check schedules to support the overstatements. The client also pleaded guilty since she agreed to leave the overstatements in her returns. 
  • In New Mexico, a former office manager of a surveillance equipment company was sentenced to 366 days in prison for federal tax evasion. It was related to an indictment filed in September 2014 charging her for not reporting the correct income in her 2009-2012 tax returns. She admitted to writing checks to herself from the company and not reporting the income as compensation on her returns. She was also ordered to pay $170,000 in taxes and a $100,000 fine to the IRS. 
  • New York releases a list of delinquent taxpayers every year, dividing it into individual and business categories. The largest business delinquent taxpayer is a New York City-based company that owes $14.6 million to the state.
  • A New York construction company specializing in home remodeling owes the state around $8.2 million in unpaid taxes.
  • A communications company owes the state of Florida around $2.5 million in unpaid taxes.
  • A donut chain owner in Westchester County, New York reportedly owes the state around $2.2 million in unpaid taxes.
  • Many individual delinquent taxpayers on the New York list are owners of various businesses.
  • A fast food chain franchise operator owes $1.7 million in unpaid taxes. In 2008, he filed for bankruptcy, owing millions to sources other than the state of Florida.
  • There is a man who owes the District of Columbia $1.17 million in unpaid taxes.


Infamous International Tax Evaders

  • In 2019, the Tasmanian supreme court ordered Australian honey farm owners Fanny Alida Beerepoot and Rembertus Cornelis Beerepoot to pay $2.3 million after the owners claimed that everything they own belongs to God and they don't have to pay taxes on their land. The judge disagreed saying the Bible does not include a passage saying "thou shall not pay tax."
  • Spanish prosecutors charged Colombian music artist Shakira in 2018 for not paying 14.5 million euros ($16.4 million) to the Spanish Tax Agency between 2012 and 2014. During that time, she mostly lived in that country when she had an official residence in Panama. Her public relations firm stated that she has fulfilled all her tax obligations for the countries where she worked. 
  • In 2014, Swiss bank Credit Suisse plead guilty to criminal charges of helping wealthy Americans file false U.S. tax returns and hide billions of dollars from U.S. tax collectors into overseas bank accounts. This deed will cost the banking giant $2.6 billion in fines. Credit Suisse is the largest bank in 20 years to admit these charges publicly.
  • Italian fashion designers Domenico Dolce and Stefano Gabbana were sentenced to a prison term of one year and eight months in June 2013 for hiding hundreds of millions of Euros. However, Italian law states that people with sentences of less than two years do not actually have to go to prison to serve their sentence. In October 2014, Italy's highest court overturned the sentences.
  • Famous 80’s movie star Paul Hogan was linked with Australia’s 300 million dollar tax evasion probe which involved 23 companies, including one that he owns. The Australian Taxation Office claimed that he owes as much as 37.5 million Australian dollars in unpaid taxes and banned him from leaving Australia without first paying his taxes. Since then, he has been allowed to leave Australia as part of a deal, and in early 2011 he decided to sue the Australian government over false accusations of tax evasion, which he claimed damaged his reputation. In 2012, the issue was resolved on a "without admission" basis.
  • Octogenarian New York resident and former USB customer Ernest Vogliano was accused of conspiring with the Swiss bank to hide $4.9 million in a foreign account between 2000 and 2002 to avoid paying taxes. He was convicted on five counts of filing false income tax returns and was forced to pay a fine of $940,381.
  • In early 2000’s, former Number 1 German male tennis player Boris Becker was accused of living in Germany while claiming to live in Monte Carlo, and thus not paying 1.7 million Euros in taxes to the German government from 1991 to 1993. He admitted to tax evasion, and received a $500,000 fine and 2 years of probation. He later moved to Switzerland to avoid paying taxes.
  • William H. Millard, founder of 1980's computer retail chain ComputerLand Corp., reportedly owes over $100 million in unpaid taxes to the IRS. After selling the company in the late 1980's he moved to the Northern Mariana Islands, which is a U.S. commonwealth. He never reported his income to the IRS while in the commonwealth, and thus paid no taxes during that period. Soon after he disappeared, and it is reported that he now resides in the Cayman Islands, a notorious tax haven.
  • In 1982, Italian actress Sophia Loren served 18 days in prison for tax evasion.


While some people avoid taxes by not paying them, others go to the court of law to present strange and often incorrect legal and constitutional arguments trying to claim that taxation is illegal. 




Are Income Taxes Unconstitutional or Illegal?

The United State income tax is a legal tax, and if you meet certain requirements, you must pay income taxes. Learn about the history of the US income tax and tax code here.


The legality of the income tax code has been upheld in court time and time again. But many people still try to avoid paying taxes based on what the IRS calls frivolous tax arguments. Many of these are misinterpretations of laws or of the Constitution.


However, the IRS recognizes that taxpayers have rights regarding their tax situations. For details, review the "IRS Taxpayer Bill of Rights" section. 


Top 5 Unsuccessful Arguments against Income Taxes


So many people try to argue against paying taxes every year and fail. The IRS releases an annual report of frivolous tax arguments, and there are many. We compiled a list of the top 5 most absurd arguments ever put fourth, all of which have been argued in court and have been struck down.


Taxation is taking property, so it is a violation of the 5th Amendment.

Supporters of this claim assert that tax collection is taking of property without the due process of law, which is unconstitutional. They cite the 5th Amendment of the Constitution, which states that no person shall be “deprived of life, liberty, or property, without due process of law".


Why it's frivolous: While the 5th Amendment of the Constitution does protect against unlawful seizure of property, the Constitution itself grants the federal government the power to tax (learn more about the history of taxes, including taxation in the United States). Having the 5th Amendment prohibit taxation would create a contradiction; so therefore, taxation is not considered a violation of the 5th Amendment. Brushaber v. Union Pac RR upheld this. In addition, the Supreme Court has upheld the constitutionality of the Internal Revenue Code in Phillips v. Commissioner in 1931. 


Filing an income tax return is voluntary.

Some people claim that filing an income tax is voluntary because, according to their interpretation, the IRS said so itself. They rely on the fact that the 1040 Form instructions say that filling out the form is voluntary. In addition, they state that the 1960 Supreme Court case Florida v. United States stated that our “system of taxation is based upon voluntary assessment and payment, not upon distraint”. There have been multiple cases that involved this reason for not filing and paying taxes, including United States v. Tedder in 1986 and United States v. Gerrads in 1994.


Why it’s frivolous: It is true that both the Supreme Court Case Florida v. United States and the IRS instruction manual use the word “voluntary”. However, this is used in reference to the ability of the tax payer to calculate and file the appropriate returns instead of having the federal government determine the returns from the start. There is no mention of the income tax return being voluntary anywhere in the IRS tax code.


Learn more about the history of the IRS 1040 Form and see its evolution through time.


Taxation is slavery, and thus a violation of the 13th Amendment.

As mentioned above, taxation is compulsory, not voluntary. Some people claim that compulsory taxation is a form of slavery, and thus illegal. They cite the 13th Amendment, which outlawed slavery in the United States. 


Why it’s frivolous: The 13th Amendment does protect all people in the United States from any form of involuntary servitude or slavery, unless it’s done as a punishment for a crime. However, the courts have repeatedly ruled that taxation does not qualify as involuntary servitude or slavery as banned by the 13th Amendment. 


Federal Reserve notes are not income. 

People who advance this argument claim that Federal Reserve notes (those green bills in our wallets) are not real currency because they cannot be exchanged for gold or silver. They bring up Article I Section 10 of the Constitution, which grants the federal government the exclusive power to create and regulate money. More specifically, they claim that Section 10 limits all legal currency exclusively to gold and silver. 


Why it’s frivolous: Article I Section 10 does grant exclusive power to Congress and the federal government to create and regulate money, including gold and silver, but there is no explicit or implicit limitation on declaring another form of legal tender. Therefore, Federal Reserve notes are considered income because they are a form of legal tender. Numerous court cases have upheld this notion, including United States v. Riffen.


The United States only consists of the District of Columbia and US territories.

Some contend that the United States only consists of the District of Columbia, federal territories like GuamPuerto RicoNorthern Mariana Islands, and various other islands in the Pacific Ocean and Caribbean Sea, as well as federal enclaves like military bases and Native American reservations. According to them, anyone outside of that territory is not a resident of the United States and instead a resident of the state that they live in, which according to them is sovereign.


Why it’s frivolous: The United States consists of 50 states as well as District of Columbia, federal territories and federal enclaves. When the Constitution was ratified, it unified the states under a strong federal government, reserving some powers for the states and leaving some for the federal government. It in no way implies the sovereignty of any state. Several court cases, including United States v. Collins and Brushaber v. Union Pacific RR upheld this, both stating that the 16th Amendment gives the federal government the power to tax anywhere that is under the federal umbrella, which includes the 50 states.




Strange & Unusual Taxes Throughout History


Throughout history there have been many strange, unusual, and weird taxes (read about the history of taxes). Many of them were implemented to raise additional revenue, while the purpose of others was to promote social change. Here are some of the strangest ones:

Ancient Taxes from Around the World


  • In Ancient Egypt, cooking oil was taxed, and on top of that, people had to buy their taxed cooking oil from the Pharaoh’s monopoly, and were prohibited from reusing previously purchased oil.
  • Pecunia non olet or Money doesn't stink! is a Latin saying. During the 1st century AD, Roman emperor Vaspasian placed a tax on urine. The buyer(s) of the urine paid the tax. The urine from public urinals was sold as an essential ingredient for several chemical processes e.g. it was used in tanning (not exactly sure how), and also by launderers as a source of ammonia to clean and whiten woolen togas etc. Therefore, those who obtained valuable urine from collectors were charged a tax.
  • In Ancient Rome, it was not uncommon for slave owners to free their slaves after a certain number of years of work, and/or the payment of a certain fee. Slaves could pay that fee because many of them had the opportunity to work in several places, and thus could earn the money used to obtain their freedom. The Roman government required the newly freed slave to pay a tax on his or her freedom.
  • During the Middle Ages, European governments placed a tax on soap. It remained in effect for a very long time. Great Britain didn't repeal its soap tax until 1835.
  • In 1705, Russian Emperor Peter the Great placed a tax on beards, hoping to force men to adopt the clean-shaven look that was common in Western Europe.
  • The French had a salt tax called the gabelle, which angered many and was one of the contributing factors to the French Revolution.
  • In 1885 Canada created the Chinese Head Tax, which taxed the entry of Chinese immigrants into Canada. The tax lasted until 1923 when a law was passed banning Chinese people from entering Canada altogether with a few exceptions.
  • Japan imposed a tax on whiskey which is based on the percentage of alcohol by volume, so Japanese whiskey manufacturers began diluting their product with water to avoid the tax. European whiskey manufacturers were prohibited from doing so; therefore, Japanese whiskey had an advantage in Japan.


Taxes From England

  • King Henry I allowed knights to opt out of their duties fight in wars by paying a tax called “scutage”. At first the tax wasn't high, but then King John came to power and raised it to a rate of 300%. Some claim that the excessive tax rate was one of the things that contributed to the creation of the Magna Carta, which limited the king’s power.
  • Oliver Cromwell placed a tax on Royalists, who were his political opponents, taking one tenth of their property. He then used that money to fund his activities that were aimed against the Royalists.
  • Playing cards were taxed as early as the 16th century, but in 1710, the English government dramatically raised taxes on playing cards and dice. This led to widespread forgeries of playing cards to avoid paying taxes. The tax was not removed until 1960.
  • In 1660, England placed a tax on fireplaces. The tax led to people covering their fireplaces with bricks to conceal them and avoid paying the tax. It was repealed in 1689.
  • In 1696, England implemented a window tax, taxing houses based on the number of windows they had. That led to many houses having very few windows in order to avoid paying the tax. Eventually this became a health problem and ultimately led to the tax’s repeal in 1851.
  • In the 1700’s, England placed a tax on bricks. Builders soon realized that they could use bigger bricks (and thus fewer bricks) to pay less tax. Soon after, the government caught on and placed a larger tax on bigger bricks. Brick taxes were finally repealed in 1850.
  • In 1712, England imposed a tax on printed wallpaper. Builders avoided the tax by hanging plain wallpaper and then painting patterns on the walls.
  • England introduced a tax on hats in 1784. To avoid the tax, hat-makers stopped calling their creations "hats", leading to a tax on any headgear by 1804. The tax was repealed in 1811.
  • In 1789, England introduced a tax on candles. People were forbidden from making their own candles unless they obtained a license and then paid taxes on the candles they produced. The tax was repealed in 1831, leading to a more widespread popularity of candles.
  • In 1795, England put a tax on the aromatic powders that men and women put on their wigs. This led to a dramatic decline in the popularity of wigs.
  • Salt was a very popular thing to tax because consuming it is necessary to humans. The British placed a tax on salt, and the salt tax gained worldwide attention when Gandhi staged nonviolent protests against it.
  • England has a tax on televisions. If you own a television in your home, you must pay an annual fee, formally called a television license, for each television you own. This money is used to finance programming on the BBC. Color televisions are taxed at a higher rate than black and white televisions. Interestingly enough, if a person is blind an owns a TV in his or her home, he or she still has to pay the tax, but only half of it. Failure to pay this fee is subject to criminal penalties. There were 155,000 convictions and fines in 2012 alone.


State Taxes

  • Johnstown, Pennsylvania was devastated by a flood that killed nearly 2,000 people in the late 19th century, and in 1936 another flood damaged the town. That led to the state of Pennsylvania passing a tax on alcohol, the proceeds of which would be used to rebuild the city. By 1942, enough money was raised to rebuild Johnstown, yet the tax exists to this day, and brings in around $200 million a year for Pennsylvania.
  • New York City places a special tax on prepared foods, so sliced bagels are taxed once as food and again as prepared food, thus creating a sliced bagel tax.
  • Maine has special tax on blueberries, a valuable state resource.
  • Pennsylvania has a tax on coin-operated vacuum machines at gas stations.
  • Pittsburgh has a 5% amusement tax on anything that offers entertainment or allows people to engage in entertainment.
  • States like Iowa, Pennsylvania, and New Jersey exempt pumpkins from a sales tax but only if they will be eaten and not carved.
  • In 2005, Tennessee began requiring drug dealers to anonymously pay taxes on any illegal substances they sold.
  • Despite marijuana being illegal on a federal level and in most states, many states impose taxes on the sale of marijuana.
  • In Arkansas, body piercings, pet grooming, and gutter cleaning are all subject to a 6% sales tax.
  • In California, snuff tobacco is taxed differently depending on its type. Dry snuff is taxed at 256% of its price if it’s $1.70 or more. Moist snuff is taxed at 170% of its price if it’s $1.70 or more.
  • In Chicago, candy that is prepared with flour is taxed as food at 1%, while candy that is prepared without flour is taxed as candy at 6.25%.
  • In Florida, a sales tax holiday was created that included items like fanny packs, bowling shoes, school supplies, vests, and seemingly randomly assembled list of other items.
  • Numerous states charge a tax on admissions to racetracks and casinos.
  • In California, fresh fruit bought through a vending machine is subject to a 33% tax.
  • In Oregon, double amputees get a $50 tax credit.
  • In West Virginia, there is an additional tax on sparklers.
  • Kentucky levies a sales tax on thoroughbred stud fees (whether the horses were in the Derby or not).
  • In Texas, Christmas tree decoration services are subject to a tax only if the decorator provides the decorations and ornaments. In addition, there is a tax on holiday-themed pictures that are meant to be placed on windows.
  • Many cities and states levy a "jock tax" on any income earned by entertainers and athletes while working in that city. Therefore, athletes have to pay taxes on a portion of their income in any place they play.
  • Wisconsin is one of the few states that levies a tax on internet access. When dial-up was a popular method of getting online, there was double taxation occurring because phone calls were also taxed.
  • In Colorado, essential food items are tax-free, but straws and cup lids are subject to sales tax because they are considered to be nonessential food items.
  • In New Mexico, people over 100 years old are tax-exempt, but only if they are not dependents.
  • In many states there are “occupancy taxes” for anyone who books a room in a hotel. For example, in Texas, occupancy of any room costing over $15 is taxed at 6% of the room fee.
  • In 2004, Maryland imposed a tax on residents whose houses are hooked up to sewers leading to treatment plants. Proceeds go to protect the polluted Chesapeake Bay.
  • The City of Chicago taxes soda bought in a bottle at a rate of 3%, and taxes soda from fountains at a rate of 9%.
  • In Tennessee, there is a tax on all litigation. The amount varies case-by-case but it can be as low as $1 for a parking violation case. The tax tends to discourage frivolous lawsuits.
  • In Minnesota, there is a special tax on fur.
  • In the state of Kansas, untethered hot air balloon rides are exempt from sales tax because they are considered a legitimate form or air transportation. Tethered hot air balloon rides, on the other hand, are considered to be an amusement ride and therefore are subject to sales tax.
  • In 2007 Texas lawmakers imposed a $5 tax on establishments that host live nude shows and also allow alcohol consumption on their premises. Since strip clubs are the businesses that are affected by it, the tax was nicknamed the "pole tax". The revenue from the tax goes to help help sexual assault victims and provide health insurance for the poor. The tax was challenged in the Texas Supreme Court on First Amendment grounds, but was upheld in 2011.


Other Unusual Taxes

  • The IRS taxes stolen property. The 1040 instructions say that you should report it as stolen property. However, doing that would be self-incrimination, from which we are protected by the Constitution; therefore, one has the option of reporting it as "other income".
  • In 2012 there was a controversy after the London Summer Olympic Games about the tax treatment of foreign athletes competing in Great Britain. According to the British tax code, foreign athletes competing in the UK have all their endorsement income taxed, even income originating from other countries, and the income is taxed proportionally to the time spent in the UK. This is different from the way many other countries, including the United States, tax foreign athletes. In the United States only endorsement income of foreign athletes originating from US sponsors is taxed by the IRS. The law was waived by the British government for the duration of the Olympic Games, but it kicked back in after the conclusion of the games. A number of high profile athletes have spoken out against this tax, stating that their tax bill may be bigger than any prize they may receive by winning the competition. The law is often cited by athletes as a reason for choosing to avoid attending competitions in Great Britain.
  • In 2014, the hit Netflix show, House of Cards, halted filming in the State of Maryland as film tax credits were expected to run out. The show received $11.6 million for its first season and $15 million for its second season. Filming resumed in June 2014. The production team placed House of Cards on hold while waiting for the outcome of two separate bills in the Maryland Legislature. According to the Maryland Film Industry Coalition, film production in the state has a “$400 million impact” on the economy.


Tax provisions in appropriations bills include extenders and repeals

By Peter J. Scalise


Last Friday, President Trump signed into law two appropriations bills that extend government funding while also dealing with several of the tax extender provisions and repealing some Obamacare taxes.


Both H.R. 1158, Consolidated Appropriations Act, and H.R. 1865, Further Consolidated Appropriations Act, averted a government shutdown that would have commenced on Dec. 21, 2019 without this sweeping $1.4 trillion spending package being passed into law. Most of the new Act outlines how the government will appropriate the federal budget funding across numerous departments and programs, including the Treasury Department.


Scope of the retroactive and prospective tax extenders

The most broadly applicable tax law changes in the new Act are in connection to the tax extenders provisions. Historically, individual-level and business entity-level tax extenders have normally been extended for only one-year or two-year durations dating back over 30 years. However, over time some of the temporary tax incentives have been made permanent (e.g., the R&D Tax Credit was made permanent under the Protecting Americans from Tax Hikes Act of 2015 after being a temporary provision within the Tax Code since its inception via the Economic Recovery Tax Act of 1981.) The new Act reinstates many of the previously expired tax incentives that were not addressed under the Bipartisan Budget Act of 2018 or the Tax Cuts and Jobs Act of 2017, for a three-year duration term, making them retroactively effective for 2018 and 2019 while prospectively extending them through the end of 2020.


Individual tax extenders

Just a few of the more popular individual tax extenders include the reduction in the adjusted gross income floor for medical and dental expense deductions from 10 percent to 7.5 percent; the above-the-line deduction for tuition and fees; the treatment of mortgage insurance premiums as deductible qualified resident interest, and the exclusion of qualified residence indebtedness from gross income. In addition, this new Act will encompass retirement plan funding, distribution and administrative changes to individual retirement accounts and 401(k) plans.


Business tax extenders

Some of the more popular business entity tax extenders relate to the recovery or expensing of business income investments, including the special expensing rules for film, television and live theatrical performances that have all been extended through 2020, retroactive to 2018. In addition, the New Markets Tax Credit program and the incentives for investments in empowerment zones have all been extended through 2020. The New Markets Tax Credit program was not scheduled to expire until the end of 2019, so only the empowerment zone incentives needed to be retroactively extended.


Moreover, a diverse array of energy tax incentives were retroactively reinstated and/or prospectively extended. For instance, several energy tax incentives requiring regular extension, such as the Carbon Dioxide Sequestration Credit, along with the energy tax credits for energy production from certain solar, fuel cell or wind property, were previously extended beyond 2020 by the Bipartisan Budget Act of 2018. However, other energy tax credits expired after 2017 as they were not addressed in the Tax Cuts and Jobs Act of 2017. The new Act extends most of those credits, including credits for nonbusiness energy property, qualified fuel cell vehicles, alternative fuel vehicle refueling property, and energy-efficient commercial buildings through 2020. The new Act also extends energy tax incentives for biodiesel and renewable diesel through 2022. All are retroactively reinstated back to 2018.


A spotlight on Sections 179D and 45L

Perhaps the most popular energy tax incentives over the past decade can be found under Sections 179D and 45L of the Tax Code, which have been retroactively reinstated for projects placed in service between Jan. 1, 2018 through Dec. 31, 2020.


As enacted under The Energy Policy Act of 2005, the section 179D energy tax deduction for building envelope efficiency encourages building owners to “build green” to not only save money by reducing their utility bills on a carry-forward basis, but also to reduce their tax liability on their tax returns as well.


Under Section 179D, eligible commercial building owners can take a federal-level tax deduction of up to $1.80 per square foot of the building’s envelope if they install property that reduces energy and power costs. These installations need to be a part of the building’s interior lighting systems (i.e., up to $0.60 per square foot); heating, ventilation and air conditioning systems (i.e., $0.60 per square foot for newly installed HVAC equipment); or building envelope (i.e., $0.60 per square foot for windows, doors, roofs or insulation).


Under Section 45L, eligible contractors can take a federal tax credit of $2,000 for each energy-efficient dwelling unit, which can certainly have substantial value in the aggregate. Some of the attributes that need to be adhered to in order to qualify for this incentive require a three-story building above grade or less (not including below-grade parking) and some energy-efficient features, such as wall insulation R-13 thru R-19+; roof insulation R-38+; double- and triple-pane windows; vinyl low E windows; insulated exterior doors; reflective roofing materials; extra insulated foundations and slabs; air conditioning with SEER ratings 13+; 80 percent + efficiency gas furnaces; or hydronic heating systems.


The new Act successfully addressed many tax incentives that were not properly addressed or extended within the Bipartisan Budget Act of 2018 and the Tax Cuts & Jobs Act of 2017. The IRS will certainly be updating tax filing forms and instructions in the coming weeks to reflect these tax law changes as tax season 2020 officially kicks off. To properly ascertain the scope and application of these newly passed tax laws and their effect on your client base, you can read the bills in their entirely at




MetLife to pay $10M over internal control failures


MetLife Inc. agreed to pay a $10 million fine to settle U.S. Securities and Exchange Commission allegations that the insurer violated accounting rules in setting reserves for its annuities business.


For over 25 years, MetLife followed a policy of assuming customers had died or couldn’t be found if they didn’t respond to two mailings made five and a half years apart, the SEC said in a Wednesday statement. The practice boosted MetLife’s profits because it allowed the firm to free up money that had been set aside to cover claims.


MetLife, which didn’t admit or deny the SEC’s allegations, later determined that its policy was insufficient to justify the release of reserves. To correct its error, MetLife increased reserves by $510 million in 2017, the SEC said.


“MetLife’s insufficient internal controls caused longstanding accounting errors,” said Marc Berger, head of the SEC’s New York office.


The SEC also found that MetLife overstated its reserves and understated income related to its variable annuity business. To correct that error, MetLife reduced reserves by $896 million at the end of 2017.


“Our focus since we self-identified these issues has been to improve our processes to deliver better service to our customers,” MetLife said in an emailed statement. “We successfully remediated both material weaknesses associated with this settlement as of December 2018.”




A new appreciation for bonus depreciation

By Roger Russell


Under the Tax Cuts and Jobs Act, bonus depreciation now applies to both new and used property, and includes rental real estate. This change encourages more real estate investments, as well as investments in used equipment, according to Tom Wheelwright, a CPA and CEO of WealthAbility.


“And it means that much property can now be written off completely in the year the property was acquired, even if the property is not new,” he said. “Unlike the Section 179 deduction, there is no income limitation on bonus depreciation.”


The TCJA increased the bonus depreciation deduction for real estate investments from 50 percent to 100 percent for qualified property that is acquired and placed in service after Sept. 27, 2017, and before Jan. 1, 2023, he noted.


For Section 179, the TCJA increased the maximum deduction from $500,000 to $1 million, increased the phaseout threshold from $2 million to $2.5 million, and expanded the scope to include certain improvements to non-residential properties after the date that the property was first placed in service, Wheelwright observed.


“Along with equipment such as computers and machinery, the Section 179 deduction has expanded to include roofs, HVAC units, and fire alarms and security devices for non-residential properties,” he said. “These purchases are all deductible when purchased rather than depreciated over many years. Instead of deducting them through normal depreciation, taxpayers are now able to deduct 100 percent of the cost for the year they were added to the property.”


There is some confusion over bonus depreciation versus the Section 179 deduction, according to Wheelwright. “The application of bonus depreciation to real estate is confusing to practitioners because this is a new concept,” he said. “Bonus depreciation now includes new and used equipment, furniture, fixtures and most land improvements. Historically, it has only applied to new equipment, so previously practitioners have relied on the Section 179 deduction for used equipment.”


“For 2018 tax returns, I rarely saw real estate investors or business owners use the Section 179 deduction,” Wheelwright commented. “If there’s a choice between bonus depreciation and Section 179, bonus depreciation tends to be better, especially since there is no recapture if the property is converted to personal use.”


“Here’s where it can apply to any real estate investment,” he said. “Let’s say you’re renting the real estate or use the real estate in your business. As long as you bought it after Sept. 27, 2017, you can use bonus depreciation for new or used property.”


Cost segregation is a necessity, Wheelwright cautioned: “I’ve been shocked that there are practitioners who actually think that cost segregation is aggressive. If you read Code Sections 167 and 168, they say a cost segregation study is technically required. It’s actually always required, because you are supposed to reduce your cost basis in your asset by ‘allowed or allowable’ depreciation. So if you didn’t take full depreciation, you technically should reduce your basis by the amount that would have been allowed if you did a cost segregation and and had taken full depreciation.”


When you buy real estate, you’re actually buying four things: the land, the building, the land improvements and the contents, Wheelwright explained: “Bonus depreciation can apply to anything that has a useful life of less than 20 years. Land improvements have five-, seven-, and 15-year depreciation periods, so they are all subject to bonus depreciation in the first year.”


The potential savings are significant. “For example, your client buys a fourplex for $1 million. Typically, as much as 30 percent of the price would qualify for bonus depreciation,” he said. “This means they could end up with a $300,000 deduction the very first year. Consider the fact that their down payment was in the neighborhood of $200,000 — suddenly, real estate is a whole different animal as far as investing than it used to be.”


The passive loss limitation is the biggest question that comes up for bonus depreciation on real estate, Wheelwright noted. “So if you have a passive loss from real estate, you have to create passive income,” he said. “For example, your client owns an S corporation that is their primary source of income. They are probably active in that business. Let’s say that same client owns investment real estate which is a passive investment. All that means is that we now need to convert the active income to passive income.”


“Whether income from a business is active or passive depends on the activity of the owner in that business,” he continued. “If a child or a parent owned a portion of that S corporation and owned a portion of that real estate, the income from the S corporation would now be passive to the child or the parent and the real estate loss would be passive to the child or the parent. Now we can offset the loss from the real estate against the income from the business.”

“Always guard against the thought that passive losses are not deductible. Remember that they are deductible — against passive income,” Wheelright concluded.



Disclaimer: This article is for general information purposes only, and is not intended to provide professional tax, legal, or financial advice. To determine how this or other information in this newsletter might apply to your specific situation, contact us for more details and counsel.


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