Michigan Association of CPAs
Mark X. Rigotti, CPA
With all this talk about mobile devices like tablets, smart phones, and ultra-portable laptops, you’d begin to think that traditional desktop PCs are going to seem archaic.
Depending on your needs, that can be the case, but desktops aren’t going away anytime soon – and for good reason.
More Powerful Hardware
This has been the case from the very beginning – desktop PCs are capable of more powerful hardware. Desktops don’t need to worry about electricity consumption the same way portable devices do and components don’t need to be shrunk down into a tiny lap-sized chassis. This also allows better heat dispersion. All three factors give desktops the flexibility to utilize the most complex, cutting edge components that aren’t designed for mobility (yet). In other words, computer hardware manufacturers build new components, then work on shrinking those components into mobile sizes. This reason alone will keep the desktop alive - PC gamers, graphic artists, and multimedia buffs will always want high-end desktops.
Of course, you don’t need the newest, cutting edge components to have a blazing-fast PC. You can easily get by with cheaper, previous generation components. Remember a decade ago when a desktop PC could cost thousands of dollars? It’s still possible (and easy for some) to spec out a high-end PC with that kind of price tag, but each additional dollar spent isn’t worth it unless you have VERY specific needs. Also, comparable hardware for a PC is significantly cheaper than similar laptop hardware. If you don’t need the mobility, you can save a pretty decent chunk of money just by sticking with a desktop.
Desktops are Easier to Fix and Maintain
Let’s share a real-world tech scenario. Replacing a part on a desktop is a pretty simple task for a technician. In fact, with a little hand-holding, almost anybody could figure it out. Replacing the motherboard on a laptop, however, is an extremely cumbersome process. Depending on the model, it can involve over two dozen screws and a lot of time. Replacement parts aren’t as affordable as they are for desktops either. For smart phones and tablets, expect to ship those out to the manufacturer.
You Probably Won’t Leave your Desktop at the Airport/Coffee Shop/Hotel
It’s true! If you are lugging around a big PC case, a monitor or two, a keyboard, mouse, and power cables, it’s pretty likely you won’t accidently forget it when you realize how light your luggage has become. All joking aside, because your desktop lives a pretty uneventful life without much movement, it doesn’t endure the little bumps, drops, and spills that laptops, tablets and other mobile devices take. It’s harder to steal too, so there is a little essence of security knowing your data is locked inside a great big aluminum box tethered to your desk with a web of cables.Have you moved on from the desktop PC completely or are you still holding on? Do you even want to go strictly mobile? Let us know and let us answer any questions you have.
BY BRUCE KREISMAN
Receiving a tax notice from the IRS or a state department of revenue may not be what you were hoping for in the day’s mail. But in many cases the notice can be resolved both quickly and painlessly.
A taxing authority such as the IRS or the Illinois Department of Revenue will issue a written notice under various scenarios, some of which are discussed below. (Note that the initial contact is always by mail; if you receive a phone call purportedly from the IRS or other tax authority, it is fraudulent, and you should hang up without revealing any personal information.)
The notice will set forth the reasons for its issuance and, if applicable, the additional tax it asserts is due, often adding interest and penalties to the assessment. The notice typically also sets forth a due date for response from the taxpayer. They may also give a telephone number, but in our experience it’s preferable to respond to most notices in writing, both because of the written record it produces and to avoid long hold times.
An initial step in analyzing a tax notice is to determine its nature. Many propose an adjustment to tax, often an increase, but sometimes a decrease. The most common reason for adjusting tax upward is understatement of income. For example, the IRS may say it received information from a broker or other payor reporting income, which it believes the taxpayer did not pick up on the tax return.
Another frequent occurrence is a mismatch between tax payments on record with the taxing authority and payments reported on the tax return. While this will not change the tax computation, it will affect the refund or payment due. In these cases it’s usually a straightforward analysis as to whether or not the IRS is factually correct. Sometimes they are, sometimes not.
If they are correct, the matter is resolved by paying any amount due. But if the notice is erroneous, the most successful approach to challenging it is to write and submit a clear and succinct response explaining why you are contesting the notice and including supporting documentation backing up our position. That approach frequently succeeds in abating the assessed tax after a single letter. Occasionally the matter is prolonged and results in multiple communications. In the rare case where a satisfactory result isn’t obtained, you can address the available options with your client.
Other notices require a more comprehensive approach. For example, the notice may question the manner in which an item was (or was not) reported, and the response may require discussion of the tax code or regulations or other authority. Again, clarity of response is crucial. If the IRS representative doesn’t understand the position set forth in the response, they are unlikely to change their original assessment.
Still other notices are basically seeking information. For example, the State of Illinois does not receive copies of W-2s from employers, so they may ask for a copy of the W-2 to support the tax withholding claimed on the tax return.
In any event, if your client receive a tax notice it is important that they not disregard it, whatever the nature of the notice may be. They should not panic. If a taxpayer disregards the initial notice and there’s additional tax due, further notices will be issued. As time elapses the notices get more severe in nature, and will eventually result in a notice of lien or an intent to levy. Taxpayers do not want to find themselves in a lien or levy situation, and the best way to avoid those is to promptly address the initial notice.
A recent case in Michigan has created an unexpected twist in the brave new world of taxing software and services online.
The Michigan Court of Appeals has decided against the Michigan Department of Treasury in a case involving the taxation of the sales or use of services provided over the Internet. The case itself has broad application to a number of states that are weighing the taxation of Software-as-a-Service without changing their law to say that they are specifically taxing a service, according to June Haas, tax partner at Honigman Miller Schwartz and Cohn LLP.
The Court of Appeals, in Auto-Owner’s v. Department of Treasury, held that a variety of services provided via the Internet are not subject to sales or use tax. The department had asserted that such services involved the “use” of prewritten, canned software on the basis that the taxpayer was accessing the functionality of the software on the third-party service provider’s network through computers and the Internet, and that such use was taxable. The services included, among other things, data analysis services, information services, secure data transmission, electronic research services, hardware and software maintenance, and Web conferencing.
The Court of Appeals found that the majority of services at issue did not involve the delivery of any prewritten, canned software, Haas indicated. “The case was watched nationally because many states impose sales and use tax only on tangible personal property,” she said. “They have not updated their laws to cover electronic and digital delivery of software. Michigan was trying to tax accessing the functionality of software. They wanted to say that if you access the functionality, then it’s the same thing as buying the software. It transforms Software-as-a-Service into the purchase of tangible personal property that is taxable.”
“In a number of the transactions, the taxpayer merely electronically transmitted data and received back analyzed data. In others, the taxpayer electronically transmitted data to be securely transmitted to a third party,” she said. “In each of these cases, the court held that the taxpayer never had access to any of the third-party vendors’ computer codes, and thus there was no use of prewritten computer software.” The court also rejected the department’s argument that “accessing the functionality” of software constitutes delivery of prewritten software and a taxable use. The court held that sending requests into another’s system does not constitute an exercise of a right or power of control of the vendor’s software incident to ownership of the software that constitutes a taxable use. Thus, the delivery of the results of electronic research services or electronic analysis services that used the software to perform the service was not an exercise of control over the software. Accessing a Web site is not the use of software.
The Court of Appeals held that the evidence proved that the maintenance contracts at issue did not include delivery of prewritten software. In addition, when the taxpayer purchased software and separately purchased software maintenance in transactions where the cost for the maintenance and support were separately stated, the maintenance fees were nontaxable fees for services.
Finally, the court also held that for the transactions where property was delivered, the “incidental to the services” test set forth in the Michigan Supreme Court’s decision in Catalina Marketing must be applied. Under these tests, the court held that these were service transactions and not sales of tangible personal property.
IT STARTED AS PROPERTY …
“The taxation of SaaS is a very hot area right now,” said Peter Stathopoulos, lead partner at the state and local tax practice at Atlanta-based Bennett Thrasher. “For a long time, states have struggled with how to treat SaaS, because state tax laws typically lag behind technology,” he said. “In the late 1970s and in the 1980s, state sales tax codes were designed for the most part to deal with tangible property. When software came along, the question was whether it was tangible property or was it a service. The states decided back then that because software was encoded on a tangible medium, it was tangible personal property.”
“So they had this idea that software is the same as any other piece of tangible personal property because you got it on a disk,” he said. “When technology moved along and people started to download software instead of buying it on a disk, the states split. Some decided if it was not on a floppy disk there was no property, so there was no sales tax. Others went the other way, and decided to do away with the distinction of how the software is delivered. So in the 1990s, if you downloaded from a computer they would treat it as the sale of property. Now that the software stays on the vendor’s computer, states are being asked if there’s really a transfer of tangible personal property.”
A number of states have addressed this issue, according to Stathopoulos: “The Michigan court said there is no transfer of property here. The software stayed on the vendor’s computer, and the user never got to control it like an owner or lessee. Since they had access to the software but never had the right to control it, there was never any taxable sale or use of the software in question.”
Other states have gone a different way, Stathopoulos said: “New York has issued a letter ruling saying that when you get on the Internet, you are getting constructive use of the software. It’s the same as leasing the software, and in New York the sale or lease of software is a taxable transaction.”
“That it the great divide now,” he said. “States will have to decide when there is hosted software or SaaS and it comes as part of a broader service offering, is it being leased to customers. Some will say there is no sale or lease of tangible personal property, while others like New York will say the ability to access the software from a computer is a form of constructive possession, so there is a sale or lease of tangible personal property.”
“Only a handful of states have addressed this,” he said. “Other states are watching. The Michigan decision will probably have a chilling effect on state departments of revenue that are trying to tax these kinds of SaaS transactions.”
Tips to Protect Your Personal Information While Online
The IRS, the states and the tax industry urge you to be safe online and remind you to take important steps to help protect your tax and financial information and guard against identity theft. Treat your personal information like cash – don’t hand it out to just anyone.
Your Social Security number, credit card numbers, and bank and utility account numbers can be used to steal your money or open new accounts in your name. Every time you are asked for your personal information think about whether you can really trust the request. In an effort to steal your information, scammers will do everything they can to appear trustworthy.
The IRS has teamed up with state revenue departments and the tax industry to make sure you understand the dangers to your personal and financial data. Taxes. Security. Together. Working in partnership with you, we can make a difference.
Here are some best practices you can follow to protect your tax and financial information:
Give personal information over encrypted websites only. If you’re shopping or banking online, stick to sites that use encryption to protect your information as it travels from your computer to their server. To determine if a website is encrypted, look for “https” at the beginning of the web address (the “s” is for secure). Some websites use encryption only on the sign-in page, but if any part of your session isn’t encrypted, the entire account and your financial information could be vulnerable. Look for https on every page of the site you’re on, not just where you sign in.
Protect your passwords. The longer the password, the tougher it is to crack. Use at least 10 characters; 12 is ideal for most home users. Mix letters, numbers and special characters. Try to be unpredictable – don’t use your name, birthdate or common words. Don’t use the same password for many accounts. If it’s stolen from you – or from one of the companies with which you do business – it can be used to take over all your accounts. Don’t share passwords on the phone, in texts or by email. Legitimate companies will not send you messages asking for your password. If you get such a message, it’s probably a scam. Keep your passwords in a secure place, out of plain sight.
Don’t assume ads or emails are from reputable companies. Check out companies to find out if they are legitimate. When you’re online, a little research can save you a lot of money and reduce your security risk. If you see an ad or an offer that looks too good, take a moment to check out the company behind it. Type the company or product name into your favorite search engine with terms like “review,” “complaint” or “scam.” If you find bad reviews, you’ll have to decide if the offer is worth the risk. If you can’t find contact information for the company, take your business and your financial information elsewhere. The fact that a site features an ad for another site doesn’t mean that it endorses the advertised site, or is even familiar with it.
Don’t overshare on social media – Do a web search of your name and review the results. Mostly likely, the results while turn up your past addresses, the names of people living in the household as well social media accounts and your photographs. All of these items are valuable to identity thieves. Even a social media post boasting of a new car can help thieves bypass security verification questions that depend on financial data that only you should know. Think before you post!
Back up your files. No system is completely secure. Copy important files and your federal and state tax returns onto a removable disc or a back-up drive, and store it in a safe place. If your computer is compromised, you’ll still have access to your files.
Save your tax returns and records. Your federal and state tax forms are important financial documents you may need for many reasons, ranging from home mortgages to college financial. Print out a copy and keep in a safe place. Make an electronic copy in a safe spot as well. These steps also can help you more easily prepare next year’s tax return. If you store sensitive tax and financial records on your computer, use a file encryption program to add an additional layer of security should your computer be compromised.
To learn additional steps you can take to protect your personal and financial data, visit Taxes. Security. Together. You also can read Publication 4524, Security Awareness for Taxpayers.
Each and every taxpayer has a set of fundamental rights they should be aware of when dealing with the IRS. These are your Taxpayer Bill of Rights. Explore your rights and our obligations to protect them on IRS.gov.
The Individual Shared Responsibility Provision and Your 2015 Income Tax Return
The Affordable Care Act requires you, your spouse and your dependents to have qualifying health care coverage for each month of the year, qualify for a health coverage exemption, or make an Individual Shared Responsibility Payment when filing your federal income tax return. If you had coverage for all of 2015, you will simply check a box on your tax return to report that coverage.
However, if you don’t have qualifying health care coverage and you meet certain criteria, you might be eligible for an exemption from coverage. Most exemptions are can be claimed when you file your tax return, but some must be claimed through the Marketplace.
If you or any of your dependents are exempt from the requirement to have health coverage, you will complete IRS Form 8965, Health Coverage Exemptions and submit it with your tax return. If, however, you are not required to file a tax return, you do not need to file a return solely to report your coverage or to claim an exemption.
For any months you or anyone on your return do not have coverage or qualify for a coverage exemption, you must make a payment called the individual shared responsibility payment. If you could have afforded coverage for yourself or any of your dependents, but chose not to get it and you do not qualify for an exemption, you must make a payment. You calculate the shared responsibility payment using a worksheet included in the instructions for Form 8965 and enter your payment amount on your tax return.
Whether you are simply checking the box on your tax return to indicate that you had coverage in 2015, claiming a health coverage exemption, or making an individual shared responsibility payment, you or your tax professional can prepare and file your tax return electronically. Using tax preparation software is the best and simplest way to file a complete and accurate tax return as it guides individuals and tax preparers through the process and does all the math. Electronic filing options include IRS Free File for taxpayers who qualify, free volunteer assistance, commercial software, and professional assistance.
Determine if you are eligible for a coverage exemption or responsible for the Individual Shared Responsibility Payment by using our Interactive Tax Assistant on IRS.gov.
For more information about the Affordable Care Act and filing your 2015 income tax return, visit IRS.gov/aca. If you need health coverage, visit HealthCare.gov to learn about health insurance options that are available for you and your family, how to purchase health insurance, and how you might qualify to get financial assistance with the cost of insurance.
Tax-related fraud isn’t a new crime, but tax preparation software, e-filing and increased availability of personal data have made tax-related identity theft increasingly easy to perpetrate. The IRS is taking steps to reduce such fraud, but taxpayers must play their part, too.
How they do it
Criminals perpetrate tax identity theft by using stolen Social Security numbers and other personal information to file tax returns in their victims’ names. Naturally, the fake returns claim that the filer is owed a refund — and the bigger, the better.
To ensure they’re a step ahead of taxpayers filing legitimate returns and employers submitting W-2 and 1099 forms, the thieves file early in the tax season. They usually request that refunds be made to debit cards, which are hard for the IRS to trace once they’re distributed.
IRS takes action
The increasing rate of tax-related fraud — not to mention the well-publicized 2015 IRS data breach — has spurred government agencies and private sector businesses to act. This past June, a coalition made up of the IRS, state tax administrators, tax preparation services and payroll and tax product processors announced a new program with five initiatives:
1. Taxpayer identification. Coalition members will review transmission data such as Internet Protocol numbers.
2. Fraud identification. Members will share fraud leads and aggregated tax return information.
3. Information assessment. The Refund Fraud Information Sharing and Assessment Center will help public and private sector members share information.
4. Cybersecurity framework. Members will be required to adopt the National Institute of Standards and Technology cybersecurity framework.
5. Taxpayer awareness and communication. Members will increase efforts to inform the public about identity theft and protecting personal data.
Your role in preventing fraud
But the IRS and tax preparation professionals can’t fight fraud without your help. Be sure to keep your Social Security card secure, and if businesses (including financial institutions and medical providers) request your Social Security number, ensure they need it for a legitimate purpose and have taken precautions to keep your data safe. Also regularly review your credit report. You can obtain free copies from all three credit bureaus once a year.
If you’ve accumulated many bank, investment and other financial accounts over the years, you might consider consolidating some of them. Having multiple accounts requires you to spend more time tracking and reconciling financial activities and can make it harder to keep a handle on how much you have and whether your money is being invested advantageously.
Start by identifying the accounts that offer you the best combination of excellent customer service, convenience, lower fees and higher returns. Hold on to these and consider closing the rest, keeping in mind the bank account amounts you’ll be consolidating. The Federal Deposit Insurance Corporation generally insures $250,000 per depositor, per insured bank. So if consolidation means that your balance might exceed that amount, it’s better to keep multiple accounts. You should also keep accounts with different beneficiaries separate.
When closing accounts, make sure you stop automatic payments or deposits and destroy checks and cards associated with them. To prevent any future disputes, obtain letters from the financial institutions stating that your accounts have been closed. Closing an account generally takes several weeks.
BY SUZANNE WOOLLEY
Last year's income tax season was marked by an explosion of refund theft. Will this year be any different?
Increased protections may cut down on fraud but will likely draw out the wait for your money. Changes will be visible when you use tax preparation firms and filing software, with warnings akin to those from your bank if you try to log in from a new device or change account information. Less visible will be broader changes, such as revamped fraud-sniffing programs used by the IRS, states, and the tax prep industry, as well as new information-sharing agreements among all three.
Whether theses measures will make it appreciably harder for someone to use your identity to claim your refund isn't clear. One of the best consumer defenses against refund fraud is to file as early as possible, starting Jan. 19, beating would-be thieves who depend on your procrastination. But the best defense is to set your deductions ahead of time so that you get no refund at all.
Here's what taxpayers can expect this season:
More Identity Verification
Yes, this means wider use of those multiple-choice questions about where you lived 30 years ago if you're filing electronically. It also means "a lot more reactive warnings to users that something has been changed, and making sure it was them that changed it," said JoAnn Kintzel, chief executive of Tax Act, a tax software firm. "If an e-mail address changes, a message will go both to the new e-mail and the old e-mail."
Taxpayers will also get a notice if bank deposit information or their home address is changed, said Julie Miller, a spokesperson for tax software company TurboTax, and companies will check to see if more than one account is using the same Social Security number.
Leading tax prep and software companies, as well as payroll and tax financial payment processors, working with states and the IRS, have all agreed to a set of minimum security measures. Companies and states may put in place additional measures, as Alabama did this year, requiring anyone filing electronically in that state to provide information from a driver's license or state ID card.
Though complex passwords are commonplace on other consumer and bank websites, the tax industry has finally joined the club. The passwords must now include a lowercase letter, an uppercase letter, a symbol, and a number (for example, #H8This). A new timed lockout feature will kick in after repeated failed login attempts.
The IRS launched a consumer education and awareness campaign this past November about security basics. They include not using the same password for multiple accounts, using anti-virus protection, and encrypting sensitive data.
Looser Refund Timing
There will be less certainty about when taxpayers can expect state refund checks, said Verenda Smith, deputy director of the Federation of Tax Administrators. "In the past, there was a political imperative to get refunds out the door, and that has certainly changed," she said. “You may have a perfectly fine return, but the state will take just a little longer to confirm that it’s you who is filing it.”
More Paper Checks
There may also be more refunds that come in paper checks, even for those who request direct deposit. That may prove particularly true for first-time filers, said Smith.
Last year, many fraudsters changed a taxpayer's preferences in favor of direct deposit to a prepaid debit card account created before filing the false return. So this year, Utah will directly deposit a refund only into a bank account or prepaid debit card issued by a taxpayer's financial institution. Alabama also changed its policy so that its Department of Revenue can send paper checks to your mailbox even if a taxpayer requested direct deposit, which will be done on a case-by-case basis.
"Prepaid cards are the currency of criminals,'' IRS Commissioner John Koskinen told 60 Minutes in 2014. "Our problem is you can't distinguish the number of a prepaid card from a legitimate bank account."
Tips to Keep Your Tax Records Secure; Protect Yourself from Identity Theft
If you’re still keeping old tax returns and receipts stuffed in a shoe box stuck in the back of the closet, you might want to rethink that approach.
The IRS has teamed up with state revenue departments and the tax industry to make sure you understand the dangers to your personal and financial data. Taxes. Security. Together. Working in partnership with you, we can make a difference.
You should keep your tax records safe and secure, whether they are stored on paper or kept electronically. The same is true for any financial or health records you store, especially any document bearing Social Security numbers.
You should keep always keep copies of your tax returns and supporting documents for several years to support claims for tax credits and deductions.
Because of the sensitive data, the loss or theft of these documents could lead to identity theft and have an economic impact. These documents contain the Social Security numbers of you, your spouse and dependents, old W-2 income and bank account information. A burglar could easily turn your old shoe box full of documents into a tax-related identity theft crime.
Here are just a few of the easy and practical steps to better protect your tax records:
·Always retain a copy of your completed federal and state tax returns and their supporting materials. These prior-year returns will help you prepare your next year’s taxes, and receipts will document any credits or deductions you claim should question arise later.
·If you retain paper records, you should keep them in a secure location, preferably under lock and key, such as a secure desk drawer or a safe.
·If you retain you records electronically on your computer, you should always have an electronic back-up, in case your hard drive crashes. You should encrypt the files both on your computer and any back-up drives you use. You may have to purchase encryption software to ensure the files’ security.
·Dispose of old tax records properly. Never toss paper tax returns and supporting documents into the trash. Your federal and state tax records, as well as any financial or health records should be shredded before disposal.
·If you are disposing of an old computer or back-up hard drive, keep in mind there is sensitive data on these. Deleting stored tax files will not remove them from your computer. You should wipe the drives of any electronic product you trash or sell, including tablets and mobile phones, to ensure you remove all personal data. Again, this may require special disk utility software.
The IRS recommends retaining copies of your tax returns and supporting documents for a minimum of three years to a maximum of seven years. Remember to keep records relating to property you own for three to seven years after the year in which you dispose of the property. Three years is a timeframe that allows you to file amended returns, or if questions arise on your tax return, and seven years is a timeframe that allows filing a claim for adjustment in a case of bad debt deduction or a loss from worthless securities.
The Individual Shared Responsibility Provision – The Basics
The individual shared responsibility provision requires that you and each member of your family have qualifying health insurance, a health coverage exemption, or make a payment for any months without coverage or an exemption when you file. If you, your spouse and dependents had health insurance coverage all year, you will indicate this by simply checking a box on your tax return.
Here are some basic facts about the individual shared responsibility provision.
What is the individual shared responsibility provision?
The individual shared responsibility provision calls for each individual to have qualifying health care coverage – known as minimum essential coverage – for each month, qualify for an exemption, or make a payment when filing his or her federal income tax return.
Who is subject to the individual shared responsibility provision?
The provision applies to individuals of all ages, including children. The adult or married couple who can claim a child or another individual as a dependent for federal income tax purposes is responsible for making the shared responsibility payment if the dependent does not have coverage or an exemption.
How do I get a health coverage exemption?
You can claim most exemptions when you file your tax return. There are certain exemptions that you can obtain only from the Marketplace in advance. You can obtain some exemptions from the Marketplace or by claiming them on your tax return. You will claim or report coverage exemptions on Form 8965, Health Coverage Exemptions, and attach it to Form 1040, Form 1040A, or Form 1040EZ. You can file any of these forms electronically. For more information on Form 8965, see the instructions. For any month that you or your dependents do not have coverage or qualify for an exemption, you will have to make a shared responsibility payment
What do I need to do if I am required to make a payment with my tax return?
If you have to make an individual shared responsibility payment, you will use the worksheets found in the instructions to Form 8965, Health Coverage Exemptions, to figure the shared responsibility payment amount due. You only make a payment for the months you did not have coverage or qualify for a coverage exemption.
To learn more, visit the Reporting and Calculating the Payment page on IRS.gov/aca, or use our interactive tool, Am I Eligible for a Coverage Exemption or Required to Make an Individual Shared Responsibility Payment?
What happens if I owe an individual shared responsibility payment, but I cannot afford to make the payment when filing my tax return?
The IRS routinely works with taxpayers who owe amounts they cannot afford to pay. The law prohibits the IRS from using liens or levies to collect any individual shared responsibility payment. However, if you owe a shared responsibility payment, the IRS may offset that liability against any tax refund that may be due to you.
By Michael Cohn
Rep. Tom Reed, R-N.Y., has proposed to require nonprofit colleges and universities to dedicate 25 percent of their annual endowment income to financial aid. If they don’t, they could lose their tax-exempt status.
Under the plan, nearly 100 endowments with assets over $1 billion would have to give that percentage to decrease college costs for middle- and low-income students, according to Bloomberg. If the schools fai to comply for three consecutive years, they risk losing tax-exempt status.
Fred Slater, a tax practitioner at MS 1040 LLC in New York City, called Reed’s plan “an amazing proposal.”
“There are some many obvious conflicts before you even consider the proposal and then the actual proposal has obvious flaws,” said Slater. “First, simple question: If you are a member of Congress, did you go to one of these Ivy schools that charge $40K+ and have a large endowment. Is that not a conflict? Explain how you are going to take away the exemption from a state school.”
He suggested some easier fixes. For example, Sen. Elizabeth Warren, D-Mass., has pointed out the interest rate on the student loans could and should be under 1 percent, but many banks are diverting the lower rates to other uses. “Government needs to use a carrot instead of the threats of penalties, fines and taxes,” said Slater. “Current government strategies are all about more penalties, more criminal acts and less about fixing the problem.”
The Minnesota Society of Certified Public Accountants recently surveyed its CPA members in public accounting on the most outrageous tax deductions clients tried to take on their tax returns. The resulting list shows that, more often than not, clients just don’t know which deductions are allowed.
We all like to look nice, especially for business purposes. But you’re expected to arrive to work fully clothed (looking nice is a bonus).
A client, who was a humanities professor, thought he could deduct a piano. Unless the professor was providing lessons as part of a small business, this was not an acceptable deduction.
Unfortunately for one client, gambling losses didn’t qualify as a charitable donation to casinos or the Minnesota State Lottery.
Not stinking up the office doesn't qualify as a tax write-off.
One client wanted to depreciate the cost of a large boat because it was used occasionally for client entertainment. You better set sail on that idea.
Unfortunately, amusement parks don’t qualify for a day care deduction.
Your cats may be used to keep mice out of the barn, but their bare necessities aren’t deductible. In general, pet expenses aren’t deductible.
A client wanted to deduct part of his wedding costs because more than half the guests were business-related contacts.
Botox, tanning, nails and the like do not qualify as acceptable deductions.
You can get mileage reimbursement either through your work (if offered) or the government for mileage incurred while on the clock and for business purposes, but driving to and from work is not going to stick.
BY MICHAEL COHN
A pair of reports from the Government Accountability Office found serious problems with the Internal Revenue Service’s processes for determining which individuals and businesses should be audited.
In one report, on the IRS’s Small Business/Self-Employed Division, the GAO found the IRS needs to strengthen certain internal controls for the audit. The GAO noted that the SB/SE division uses over 30 methods, called workstreams, to identify and review tax returns that may merit an audit. The returns were initially identified through seven sources which include referrals; computer programs that run filters, rules, or algorithms to identify potentially noncompliant taxpayers; and related returns that are identified in the course of another audit.
For fiscal year 2013, IRS reported that SB/SE's primary workstream for field audits identified approximately 1.6 million returns as potentially most noncompliant. About 77,500 returns (5 percent) were selected for audit, a much smaller pool of returns than was initially identified.
The GAO noted the SB/SE division has control procedures for safeguarding data and segregating duties across the overall selection process, among others, but it has not implemented other key internal controls. “The lack of strong control procedures increases the risk that the audit program's mission of fair and equitable application of the tax laws will not be achieved,” said the report.
The GAO gave some examples of internal control deficiencies, such not clearly defining the concept of “fairness.”
“Fairness is specified in SB/SE's mission statement and referenced in IRS's procedures for auditors,” said the report. “However, IRS has not defined fairness or program objectives for audit selection that would support its mission of treating taxpayers fairly. GAO heard different interpretations of fairness from focus group participants. Not having a clear definition of fairness can unintentionally lead to inconsistent treatment of taxpayers and create doubts as to how fairly IRS administers the tax law. Further, the lack of clearly articulated objectives undercuts the effectiveness of SB/SE's efforts to assess risks and measure performance toward achieving these objectives.”
In addition, the report found the IRS’s procedures for documenting and monitoring selection decisions are not consistent.
The GAO recommended that IRS take seven actions to help ensure that the audit selection program meets its mission, such as establishing and communicating program objectives related to audit selection and improving procedures for documenting and monitoring the selection process. In commenting on a draft of this report, IRS agreed with the recommendations.
“In the SB/SE Examination sphere, the concept of fairness has both a collective and individual component,” wrote IRS Deputy Commissioner for Services and Enforcement John M. Dalrymple in response to the report. “The IRS takes into account the responsibilities and obligations that all taxpayers share. We pursue those individuals and businesses who fail to comply with their tax obligations to ensure fairness to those who do and to promote public confidence in our tax system, and we discharge these important responsibilities with a focus on taxpayer rights, as embodied in the Taxpayer Bill of Rights (TBOR) and formally adopted by the IRS.”
Wage and Investment Division Audits
The other GAO report issued Wednesday examined the returns selected for auditing by the IRS’s Wage and Investment Division. The report suggested the division should define its audit objectives and refine other internal controls.
Three offices in the W&I division are responsible for selecting returns for audit, according to the report. Most returns are selected via computer systems that automatically send notices to taxpayers based on certain criteria, such as the validity of dependents, according to the report. W&I program officials annually review the criteria and apply updates to the following filing season's returns. In 2014, approximately 59 percent of all W&I audits—more than 516,000—were selected with a specialized computer tool called the Dependent Database, while the remainder was selected through a combination of referrals and manual selection methods.
The report found the W&I division generally has established a positive environment for internal controls but could improve several areas in its audit selection procedures to support its mission. The GAO found several procedures that establish a positive environment for promoting internal controls, such as ethics training. In addition, the IRS has guidance to help ensure that decisions about updates to audit selection criteria are correctly implemented in its automated systems. However, the W&I division does not have established objectives for its audit selection process, and existing performance measures focus on audit results rather than audit selection. In addition, the division has not defined key terms such as “fairness and integrity,” as required by internal control standards. Documented objectives and key terms would help W&I hone the measures it uses to assess its audit selection efforts and bring a consistent understanding of “fairness and integrity” to audit selection staff.
The GAO also found that not all elements of the selection process were appropriately documented. For example, W&I does not have clear documentation about how the three offices that select the majority of returns W&I audits interact with one another. Additionally, one guidance document notes that returns with the highest audit potential should be marked, but it does not describe how audit potential is determined or any related internal controls. W&I also did not provide support showing that changes to automated audit selection processes and procedures were appropriately implemented in a timely manner. The documentation indicates the division conducts an annual—rather than continuous—review of its audit selections and results as part of an annual three-day working session.
“Strengthening controls in these areas would help provide greater assurance that W&I is fulfilling its mission to select tax returns with fairness and integrity,” said the report. “In addition, the absence of a fully documented selection process may make it difficult for W&I to defend against accusations that it is not appropriately following its processes and procedures.”
The GAO recommended, among other things, that the IRS establish program objectives and definitions of key terms such as “fairness” that apply to audit selection and use those definitions in assessing its selection performance; document selection processes more thoroughly; and document that changes to procedures are done in a timely manner. The IRS generally agreed with all seven recommendations.
“We are pleased that the Government Accountability Office has recognized the positive environment for internal controls fostered within W&I,” wrote Dalrymple in response to the report. “We believe the current audit selection process, existing internal controls, and enhancement planned for implementation in 2016 provide more than reasonable assurance that audit selections are fair and are made with integrity.”
However, two of the Republican leaders of Congress’s main tax-writing committee, the House Ways and Means Committee, expressed concern about the GAO’s findings in the two reports about the IRS’s audit selection process, suggesting that the flaws mean the IRS could continue to unfairly target American taxpayers based on their political beliefs and other First Amendment protected views.
“In December, Congress passed into law regulations to ensure that the IRS can no longer target American taxpayers for their political beliefs,” said House Ways and Means Committee chairman Kevin Brady, R-Texas, in a statement. “GAO has now exposed serious weaknesses in the IRS’s auditing process and confirmed that Americans remain at risk of political targeting. Ways and Means members will hold the IRS accountable for quickly implementing GAO’s recommendations and finally treating all American taxpayers fairly.”
House Ways and Means Subcommittee on Oversight chairman Peter Roskam, R-Ill., called on the IRS to immediately take action to address the GAO’s findings. “The American people deserve better,” he said. “We must do more to ensure the IRS treats all Americans fairly, holds employees responsible for these abuses accountable, and implements procedures to prevent this abuse from ever happening again.”
After the committee members learned that the IRS had targeted conservative groups applying for tax-exempt status, they were concerned that this could be happening in other divisions within the agency, particularly audit selection.
As a result, the committee asked the GAO to review each business unit within the IRS to determine whether there were protections in place to ensure that audits are selected fairly and without bias. Last July, the GAO released itsfirst report on the Tax Exempt/Government Entities division and the Oversight Subcommittee held a hearing on this report. The two GAO reports released Wednesday confirmed serious problems at both the Small Business/Self Employed unit and the Wage & Investment unit, according to the lawmakers.
BY JENNIFER EPSTEIN AND MARK NIQUETTE
Hillary Clinton is calling for a 4 percent tax surcharge on Americans making more than $5 million annually, a move that would lead to the highest top U.S. income tax rate in 30 years.
Proposing the 4 percent surcharge, which would apply to just one-fiftieth of 1 percent of Americans, based on 2013 federal data, kicked off an effort by Clinton this week to unveil measures aimed at ensuring the wealthy pay a higher effective tax rate than the middle class.
With the surcharge, that small group of the highest earners would pay as much as 43.6 percent in federal income tax on income from wages. A spokesman for Clinton’s leading rival for the Democratic presidential nomination, Senator Bernie Sanders of Vermont, called it “too little too late."
“Now she can say she is going after the wealthy," said Steven Bankler, a CPA in San Antonio, Texas, who has analyzed presidential tax returns for more than 20 years. "And what industry is big at $5 million salaries? Wall Street and CEOs, which is one of the things that Sanders has been hitting her on."
Clinton’s push comes as Sanders has gathered strength in key early-state polls. He also wants to raise taxes on the wealthy; he has hinted that he’ll propose a large increase in the top marginal income-tax rate, now 39.6 percent. Sanders plans to release a detailed tax plan before the Feb. 1 Iowa caucuses.
Clinton has also endorsed "the Buffett Rule," a proposal named for billionaire investor Warren Buffett that would set a minimum tax rate of 30 percent for those whose incomes top $2 million. Buffett endorsed her in December. Together, the Buffett Rule and Clinton’s 4 percent surtax would have the effect of significantly raising top earners’ taxes on capital gains, which are now taxed at a 23.8 percent top rate. (The rate was 28 percent when Clinton’s husband, Bill, took office in 1993. Congress cut it to 20 percent during his presidency.)
“Right now, we’re behind and we have to get the wealthy and the corporations to pay their fair share,” Clinton said at a campaign rally in Waterloo, Iowa.
The surcharge would raise $150 billion over a decade and would be imposed on two out of every 10,000 taxpayers, said a Clinton campaign official who asked not to be named.
As tax policy, the surcharge idea runs counter to most fundamental tax-overhaul proposals, which "aim to broaden the tax base as a means to lower marginal rates," said Kyle Pomerleau, the director of federal projects at the Tax Foundation, a non-partisan tax research organization based in Washington.
Also, attaching high new rates to investment income raises the cost of capital and can be a drag on the economy, he said.
"It would raise more revenue and have a smaller impact on the economy if Clinton instead limited itemized deductions for high-income taxpayers," Pomerleau said.
What distinguishes Clinton’s proposal is setting the surcharge’s threshold at $5 million—a level that few Americans can relate to, said Tim Steffen, director of financial planning at Robert W. Baird & Co.
“Because so few would be affected by this, it will probably get a high level of support,” Steffen said.
The proposed surcharge could bring the combined federal, state and local taxes on high earners to more than 50 percent in some regions, meaning “at that high level of income, the government keeps more of your income than you do,” he said.
While Clinton has said a tax code that favors nurses and truck drivers over hedge fund managers could pay for job, infrastructure and health-research initiatives, Sanders said the plan isn’t bold enough.
“At a time of grotesque income and wealth inequality and when trillions of dollars have been transferred from the middle class to the top one-tenth of 1 percent over the last 30 years, Secretary Clinton’s proposal is too little too late,” Sanders campaign spokesman Michael Briggs said in a statement.
Internal Revenue Service data show that the top 400 taxpayers who made an average income of $265 million in 2013 paid a 22.9 percent federal income tax rate, up from 16.7 percent in 2012. Clinton’s surcharge would build on increases sought by the Obama administration that took effect in 2013, said New York University law professor and Clinton adviser David Kamin.
“This tax helps respond to the fact that the highest income taxpayers often pay low effective rates, in part because of the tax gaming and planning that is unique to those at the very high end,” Kamin said.
Daniel Shaviro, a tax professor at New York University School of Law, said Clinton’s proposal on its own doesn’t affect high-income taxpayers’ ability to shelter or otherwise legally understate their true "economic" incomes for tax purposes. Still, he said, that doesn’t mean it wouldn’t have an effect.
“I wouldn’t call this a radical proposal,” Shaviro said. “Keep in mind that, pre-1986, rates well above this used to apply to people starting at much lower income levels, even adjusting for inflation.”
Even if Clinton wins the presidency, her plan isn’t going to be approved “unless there are some tectonic shifts in Congress,” said Alex Raskolnikov, professor of tax law at Columbia Law School.
The Republican presidential field, in contrast to the Democrats, is largely opposed to raising taxes.
During a Monday speech in his home state, Florida Senator Marco Rubio charged that Clinton’s “answer to every problem is to raise taxes and create a new government program,” according to prepared remarks. And he said some Republicans—including Senators Ted Cruz and Rand Paul—back the introduction of a value-added tax.
“It’s not just her, or the avowed socialist running against her," Rubio said. "Believe it or not, multiple Republican candidates for president support new taxes on the American people."
Republican front-runner Donald Trump said Saturday in Iowa, “Wall Street has caused tremendous problems for us. We’re going to tax Wall Street.”
Millionaire Clinton supporter Bernard Schwartz would be hit by the surcharge. He said he doesn’t mind.
“I’m in favor of it,” said Schwartz, 89, a former chief executive officer of the satellites company Loral Space & Communications and now a private investor. Last year he gave at least $1 million to Priorities USA Action, a super-political action committee supporting Clinton, he said. “Can people in the highest levels of income in this country afford to pay more taxes than they do now? Of course they can. It’s unquestionable.”
—With assistance from Lynnley Browning, Max Abelson, Margaret Collins and Billy House.
BY MICHAEL COHN
Republican presidential candidate and famed neurosurgeon Ben Carson has released a flat tax plan as he aims to revive his candidacy.
Carson’s campaign underwent a shakeup in recent days as three of his top aides announced their resignations.
On Monday, he released the flat tax plan that he has referred to in recent Republican debates. The plan would replace the tax code with a true flat tax with no deductions, tax shelters or loopholes. Carson’s plan would also tax all income at a uniform 14.9 percent rate. To protect those rising from poverty, Carson’s plan would apply the flat tax only to income above 150 percent of the Federal Poverty Level, or FPL. A family of four would not pay the 14.9 percent tax on their first $36,375 of income, according to a description on Carson’s website.
“Treat everyone in America as citizen-owners and require those whose income is at or below 150 percent of the FPL to make a de minimis tax payment annually,” said the plan.
The plan would also tax income only once, to avoid double taxation of capital gains, dividends and interest income at the personal level.
Carson’s plan would also eliminate deductions for home mortgage interest, charitable giving and state and local taxes, with his campaign claiming the overwhelming majority of Americans do not benefit from these itemized deductions.
In addition, the plan would eliminate the Alternative Minimum Tax. Under the current tax system, Carson’s campaign noted, the AMT forces middle-class Americans to calculate their tax liability twice and punishes them by requiring them to pay the larger of the two tax bills.
The plan would also abolish the “death tax,” that is, the estate tax, in its entirety.
“My flat tax plan will increase our existing anemic 2.2 percent economic growth rate by an additional 1.6 percent, resulting in nearly 4 percent growth annually,” Carson said in a statement. “I am confident that over the first 10 years of my plan, this surge in growth will increase our real gross domestic product by more than 16 percent. This expanded growth will result in more than 5 million new jobs over the coming decade and an increase in wages of nearly 11 percent during the same period.”
Who Can Represent You Before the IRS?
Many people use a tax professional to prepare their taxes. Tax professionals with an IRS Preparer Tax Identification Number (PTIN) can prepare a return for a fee. If you choose a tax pro, you should know who can represent you before the IRS. There are new rules this year, so the IRS wants you to know who can represent you and when they can represent you. Choose a tax return preparer wisely.
Representation rights, also known as practice rights, fall into two categories:
· Unlimited Representation
· Limited Representation
Unlimited representation rights allow a credentialed tax practitioner to represent you before the IRS on any tax matter. This is true no matter who prepared your return. Credentialed tax professionals who have unlimited representation rights include:
· Certified Public Accountants
Limited representation rights authorize the tax professional to represent you if, and only if, they prepared and signed the return. They can do this only before IRS revenue agents, customer service representatives and similar IRS employees. They cannot represent clients whose returns they did not prepare. They cannot represent clients regarding appeals or collection issues even if they did prepare the return in question. For returns filed after Dec. 31, 2015, the only tax return preparers with limited representation rights are Annual Filing Season Program Participants.
The Annual Filing Season Program is a voluntary program. Non-credentialed tax return preparers who aim for a higher level of professionalism are encouraged to participate.
Other tax return preparers have limited representation rights, but only for returns filed before Jan. 1, 2016. Keep these changes in mind and choose wisely when you select a tax return preparer.
Each and every taxpayer has a set of fundamental rights they should be aware of when dealing with the IRS. These are your Taxpayer Bill of Rights. Explore your rights and our obligations to protect them on IRS.gov.
Taxing Pursuits: Advising Clients on Hobby vs. Business
BY JEFF STIMPSON
Clients often think that because their passion automatically equals a business -- but tax authorities are sticklers for precise terminology.
“Passion,” said Enrolled Agent Laura Strombom of All About Numbers in Stockton Calif., “is not one of the elements of defining a business.”
EA Laurie Ziegler at Sass Accounting in Saukville, Wis., does a lot of returns for shop-at-home businesses such as Mary Kay, Pampered Chef and Tastefully Simple. “One of the key distinctions between a hobby and a legitimate business is the intent to make a profit,” Ziegler said. “If a client says, ‘I’m basically in it to get the merchandise at cost,’ that’s a hobby and there are limitations to what can be deducted. On the other hand, I have clients who work the business and are very successful at it. There is definitely a difference on how those two situations are handled on a return.”
“A lot of taxpayers get involved with business ventures with the allure of doing what they enjoy and making money,” said Patrick O’Hara, an EA in Poughkeepsie, N.Y. “These ventures provide them information about what to write-off and the taxpayer gets upset when they find out these things are not exactly true.”
“Anything [clients] take on with a business purpose in mind feels like a business to them,” said Geni Whitehouse, a CPA and “countess of communication” at Brotemarkle, Davis & Co. in St. Helena, Calif. “We have to help them understand the difference between what makes logical sense and how the IRS views the world. It is not always easy.”
‘No one factor’
In making the distinction between a hobby or business activity, take into account all facts and circumstances with respect to the activity, the IRS says: whether the client carries on the activity “in a businesslike manner, whether the time and effort indicate the client’s intent to make it profitable and whether income from the activity constitutes a client’s livelihood, among other conditions.
“All of the rules and the potential violation of them are more like paint strokes,” said EA Juan Macias, of Fourlane in Austin, Texas. “Once all of the strokes have been identified, you have to step back and look at the painting as a whole. That’s when the IRS will say that is a hobby versus a business. Some of the strokes: Do you have other employment? How much time do you put into the side business? And how dependent are you on this business?
“As long as your intent from the beginning is to run a full-function profitable business, you will have an easier time defending the business,” Macias said.
“As Tax Court cases have shown time and again, anything can be a legitimate business. It all is how you document your operations and show your profit motive,” said California-based EA Crystal Stranger, author of The Small Business Tax Guide.
Business from hobby?
“I actually have had a few clients who took a personal passion and tried to make it a business, and I had to explain that it is not necessarily the amount of money made, but the process that you follow,” said Morris Armstrong, registered investment advisor at Armstrong Financial Strategies, in Danbury, Conn. “After all, even really big businesses lose money year after year and no one would think to call them a hobby.”
The important details, according to Armstrong: a business plan, target audience, professional consultants and good recordkeeping. “Some people think that you must show a profit in two of five years, but that seems to be more an aphorism than reality,” he added.
“Ultimately, many small businesses start out as hobbies,” said John Dundon, an EA at Taxpayer Advocacy Services in Englewood, Colo. “The No. 1 issue is timing the specific date when a hobby becomes a business to take full advantage of the tax advantages. Many taxpayers don’t realize, for example, that startup costs are an amortizable deduction. Still others don’t recognize the steps to go through to officially form a business compliant with the laws of their state.”
“I ask [clients] a series of detailed questions. I explain the ‘acting as a business’ and I talk about what they are going to do in regards to this new endeavor,” said Jeffrey Schneider, an EA in Port St. Lucie, Fla. “I haven’t had a client argue with me when I make a determination that the endeavor is really is a hobby. What I have to make them understand is that the income is reportable, even if it’s not from a business. When I tell them that their expenses can bring their gross income to zero, though they cannot claim a loss, they’re fine with that.”
Along with the brashness and blind optimism that can drive a client to believe that their hobby will someday make millions, they can also often arrive full of mistaken tax notions – often fueled by bad past advice.
“Often they think that they, the hobbyist, are given the same tax treatment [as a business] and when they learn different, they believe that all the tax breaks are for everyone else but them,” said Kerry Freeman, an EA at Freeman Income Tax Service in Anthem, Ariz. “It’s hard to change their mind when they’ve heard bits and pieces for different sources that they believe.”
“The biggest misconception is that they actually have a business,” said Eva Rosenberg, an EA and founder of the TaxMama.com blog. “I have had the hard talk with many clients over the years who have shown thousands of dollars’ worth of losses for several years, telling them that they had to stop. Not only did they have no real expectation of ever showing a profit, they were sinking a substantial portion of badly needed family funds into these enterprises.”
“On the other hand, someone who really loves doing whatever it is and doesn't mind the losses is operating a hobby,” added Rosenberg, whose soon-to-be-released book Deduct Everything will include a chapter on hobbies. “Then I have to explain how we must report the income in full but the deductions must be itemized and will face three limitations (they must raise total itemized deductions above the standard deduction threshold, they cannot deduct more of their expenses than the income from the hobby and even those expenses must be reduced by 2% of their AGI).”
“Clients often listen to third parties who are not tax professionals,” Strombom noted, and “often think that any multi-level-marketing business is a legitimate business. Unfortunately, many of the promoters of these businesses will give examples of things people can write off such as business use of home, cell phone, car purchases, meals and travel. People will spend more in these categories with the misunderstanding that a $100 tax deduction does not equal $100 in taxes saved. They will then often have very little income with thousands of dollars in losses, [not understanding] that selling product or recruiting new members is not automatically a business.”
Among the popular misconceptions of clients:
· They get an automatic three years of losses to claim and do not need to prove the pastime is a business until then.
· An occasional small profit qualifies the activity as a business.
· That income from a hobby is reported on the 1040 and the expenses are deducted on Schedule A – if they do not qualify to itemize, they do not get the deductions.
“The biggest misconception is that because they have a desire to convert their hobby into a real business all the expenses should be able to be written off against income to produce a loss,” said Marilyn Heller Ayers, a CPA in Brick, N.J.
Added O’Hara, “Most are told they can deduct travel expenses and deduct the cost of a car because they put a sign on it.”
“Many folks don’t understand that the biggest difference is the ability to show a loss that offsets other income, as with a legitimate business, or to simply offset the gross income, not offsetting other income by creating a loss by expenses exceeding income,” Debra James, an EA at Genesis Accounting & Management Services, in Lorain, Ohio.
“I usually bring the differences up when a new businessperson says that they heard it’s good to show a loss in the first few years,” James added. “My response is, ‘No, it’s never good to lose money.’ I explain the ways to lay the groundwork for proving profit motive. If they get to year three without profit, I get more serious with the discussion and … ask them to seriously consider what they are doing. After all, who would continue to pursue a losing proposition?”
Stranger advises clients to make or reconstitute a spreadsheet that lists on a daily basis business activities and the time involved. “This also is a great way,” said Stranger, “to determine if that business activity is profitable, or has potential to be, and is therefore worth continuing.”
Getting Ready to File Your Tax Return: Health Coverage Reporting Requirement
It’s always a good idea to prepare early to file your federal income tax return. Like last year, certain provisions of the Affordable Care Act affect your federal income tax return when you file this year.
Here are two things you should know about the health care law’s coverage and reporting requirements that will help you get ready to file your tax return.
You or your tax professional should consider preparing and filing your tax return electronically. Using tax preparation software is the easiest way to file a complete and accurate tax return. There are a variety of electronic filing options, including free volunteer assistance, IRS Free File for taxpayers who qualify, commercial software, and professional assistance.
Apple May Be on Hook for $8 Billion in Taxes in Europe Probe
BY ADAM SATARIANO
Apple Inc. may be facing a hefty tax bill in Europe.
The world’s largest company could owe more than $8 billion in back taxes as a result of a European Commission investigation into its tax policies, according to an analysis by Matt Larson of Bloomberg Intelligence. Apple, which has said it will appeal an adverse ruling, is being scrutinized by regulators who have accused the iPhone maker of using subsidiaries in Ireland to avoid paying taxes on revenue generated outside the U.S.
The probe dates back to 2014 and a decision could come as soon as March.
The European Commission contends that Apple’s corporate arrangement in Ireland allows it to calculate profits using more favorable accounting methods. Apple calculates its tax bill using low operating costs, a move that dramatically decreases what the company pays to the Irish government. While Apple generates about 55 percent of its revenue outside the U.S., its foreign tax rate is about 1.8 percent. If the Commission decides to enforce a tougher accounting standard, Apple may owe taxes at a 12.5 percent rate, on $64.1 billion in profit generated from 2004 to 2012, according to Larson, a litigation analyst for Bloomberg Intelligence.
Apple is perhaps the highest-profile case of U.S. companies facing scrutiny from officials in Europe. Starbucks Corp., Amazon.com Inc. and McDonalds Corp. also have had its tax policies questioned.
Several senators came to the defense of U.S. companies on Friday. In a letter to U.S. Treasury Secretary Jack Lew, bipartisan members of the Senate Finance Committee asked the administration to make sure that European regulators won’t impose retroactive penalties like those that would hit Apple. The senators said the companies may be facing "discriminatory taxation" and that the U.S. government should consider retaliatory measures if European tax authorities follow through with their actions against Apple and others.
"Predictable tax policy fosters a fair and stable environment for business and investment," the senators wrote in a letter to Lew. "Going back in time to penalize taxpayers under a new law, or a new interpretation of an existing law without notice, runs counter to that objective."
In October, Apple listed scrutiny of its taxes as a risk factor to investors. In addition to European regulators, the U.S. Internal Revenue Service has also examined the company’s tax returns, Apple said. Were the tax rates to change, Apple’s "financial condition, operating results and cash flows could be adversely affected," the company said in its financial statement for fiscal 2015.
Apple Chief Executive Officer Tim Cook has denied that the company uses tricks to avoid paying taxes. In a recent interview on CBS Corp.’s "60 Minutes," he called the criticism the company has faced from U.S. lawmakers "political crap." He said the tax system is outdated and needs to be updated for a digital economy.
Kristin Huguet, a spokeswoman for Apple, declined to comment. Ricardo Cardoso, a European Commission spokesman, declined to comment.
Inspector General on 'High Alert' for Tax Scams
BY MICHAEL COHN
The Treasury Inspector General for Tax Administration is urging taxpayers and practitioners to be on “high alert” about a massive telephone fraud scam being committed by criminals impersonating Internal Revenue Service employees.
TIGTA also announced additional outreach efforts to prevent taxpayers from falling victim to criminals who pretend to be IRS and Treasury employees this filing season.
“The phone fraud scam has become an epidemic, robbing taxpayers of millions of dollars of their money,” said TIGTA Inspector General J. Russell George in a statement. “We are making progress in our investigation of this scam, resulting in the successful prosecution of some individuals associated with it over the past year.”
He noted that over the summer, a ringleader in the scam was sentenced to more than 14 years in federal prison. “However, this is still a matter of high investigative priority,” said George.
TIGTA said it continues to receive reports of thousands of contacts every month in which individuals fraudulently claiming to be IRS officials make unsolicited calls and “robocalls” to taxpayers and demanding that they send them cash, he said.
“As the tax filing season begins, it is critical that all taxpayers continue to be wary of unsolicited telephone calls and e-mails from individuals claiming to be IRS and Treasury employees,” said George. “This scam has proven to be the largest of its kind that we have ever seen. The callers are aggressive and relentless. Once they have your attention, they will say anything to con you out of your hard-earned cash. We will be very aggressive in pursuing those perpetrating this fraud. In the meantime, we need to do even more to warn taxpayers not to fall for it.”
TIGTA’s expanded outreach initiative includes video Public Service Announcements in English and in Spanish that warn taxpayers about the scam. In addition, TIGTA is working with its partners in the public and private sector to help get the word out, both through traditional law enforcement channels and through direct outreach to associations, nongovernmental organizations, and the media.
TIGTA said it has received reports of roughly 896,000 contacts since October 2013 and has become aware of over 5,000 victims who have collectively paid over $26.5 million as a result of the scam, in which criminals make unsolicited calls to taxpayers fraudulently claiming to be IRS officials and demanding that they send them cash via prepaid debit cards, money orders or wire transfers from their banks.
"The number of people receiving these unsolicited calls from individuals who fraudulently claim to represent the IRS is growing at an alarming rate," said George. "At all times, especially around the time of the tax filing season, we want to make sure that taxpayers are alerted to this scam so they are not harmed by these criminals. Do not become a victim. This is a crime of opportunity, so the best thing you can do to protect yourself is to take away the opportunity. If someone unexpectedly calls claiming to be from the IRS and uses threatening language if you do not pay immediately, that is a sign that it is not the IRS calling, and your cue to hang up. Again, do not engage with these callers. If they call you, hang up the telephone.”
George said the scam has hit taxpayers in every state. Callers claiming to be from the IRS tell intended victims they owe taxes and must pay using a pre-paid debit card, money order or a wire transfer. The scammers threaten those who refuse to pay with being charged for a criminal violation, a grand jury indictment, immediate arrest, deportation or loss of a business or driver’s license.
The IRS generally first contacts people by mail, not by phone, about unpaid taxes, TIGTA pointed out. The IRS will not ask for payment using a prepaid debit card, a money order or wire a transfer. The IRS also will not ask for a credit card number over the phone.
The callers who commit this fraud often utilize an automated robocall machine. They frequently use common names and fake IRS badge numbers. The scammers may know the last four digits of the victim’s Social Security Number. They often make caller ID information appear as if the IRS is calling; aggressively demand immediate payment to avoid being criminally charged or arrested.
Scammers may threaten taxpayers that hanging up the telephone will cause the immediate issuance of an arrest warrant for unpaid taxes. They may send bogus IRS e-mails to support their scam. They may also call a second or third time claiming to be the police or department of motor vehicles, and the caller ID again supports their claim.
If taxpayers get a call from someone claiming to be with the IRS asking for a payment, here’s what to do. If they owe federal taxes, or think they might owe taxes, they should hang up and call the IRS at 800-829-1040 FREE. IRS workers can help answer payment questions.
If they do not owe taxes, they should fill out the “IRS Impersonation scam” form on TIGTA’s website,https://www.treasury.gov/tigta/, or call TIGTA at (800) 366-4484 FREE.
They can also file a complaint with the Federal Trade Commission at www.FTC.gov. Add “IRS Telephone Scam" to the comments in the complaint.
TIGTA is encouraging taxpayers to be alert to phone and e-mail scams that use the IRS name. It stressed that the IRS will never request personal or financial information by e-mail, text, or any social media. They should forward scam e-mails to email@example.com. But they should not open any attachments or click on any links in those e-mails.
Taxpayers should also be aware that there are other unrelated scams (such as a lottery sweepstakes winner) and solicitations (such as debt relief) that fraudulently claim to be from the IRS.
Six Tips about Individual Shared Responsibility Payments
For any month during the year that you or any of your family members don’t have minimum essential coverage and don’t qualify for a coverage exemption, you are required to make an individual shared responsibility payment when you file your tax return.
Here are six things to know about this payment:
In most cases, the shared responsibility payment reduces your refund. If you are not claiming a refund, the payment will increase the amount you owe on your tax return.
IRS Issues Nine Out of 10 Refunds in less than 21 Days
IRS YouTube Videos
WASHINGTON — The Internal Revenue Service today reminded taxpayers that it issues 90 percent of refunds in less than 21 days. The best way to check the status of a refund is online through the “Where’s my Refund?” tool at IRS.gov or via the IRS2Go phone app.
"As February approaches, more and more taxpayers want to know when they can expect their refunds," said IRS Commissioner John Koskinen. "There aren't any secret tricks to checking on the status of a refund. Using IRS.gov is the best way for taxpayers to get the latest information."
Many taxpayers are eager to know precisely when their money will be arriving, but checking "Where's My Refund" more than once a day will not produce new information. The status of refunds is refreshed only once a day, generally overnight.
"Where’s My Refund?" has the most up to date information available about your refund. Taxpayers should use this tool rather than calling.
Taxpayers can use “Where’s My Refund?” to start checking on the status of their return within 24 hours after IRS has received an e-filed return or four weeks after receipt of a mailed paper return. "Where’s My Refund?" has a tracker that displays progress through three stages: (1) Return Received, (2) Refund Approved and (3) Refund Sent.
The IRS2Go phone app is another fast and safe tool taxpayers can use to check the status of a refund. In addition, users can use the app to find free tax preparation help, make a payment, watch the IRS YouTube channel, get the latest IRS news, and subscribe to filing season updates and tax tips. The app is free for Android devices from the Google Play Store or from the Apple App Store for Apple devices.
Users of both the IRS2Go app and “Where’s my Refund” tools must have information from their current, pending tax return to access their refund information.
The IRS reminded taxpayers there's no advantage to calling about refunds. IRS representatives can only research the status of your refund in limited situations: if it has been 21 days or more since you filed electronically, more than six weeks since you mailed your paper return, or "Where’s My Refund?" directs you to contact us. If the IRS needs more information to process your tax return, we will contact you by mail.
The IRS continues to strongly encourage the use of e-file and direct deposit as the fastest and safest way to file an accurate return and receive a tax refund. More than four out of five tax returns are expected to be filed electronically, with a similar proportion of refunds issued through direct deposit.
The IRS Free File program offers free brand-name software to about 100 million individuals and families with incomes of $62,000 or less. Seventy percent of the nation’s taxpayers are eligible for IRS Free File. All taxpayers regardless of income will again have access to free online fillable forms, which provide electronic versions of IRS paper forms to complete and file. Both options are available through IRS.gov.
Exemptions and Dependents: TopTen Tax Facts
Most people can claim an exemption on their tax return. It can lower your taxable income. In most cases, that reduces the amount of tax you owe for the year. Here are the top 10 tax facts about exemptions to help you file your tax return.
1. E-file Your Tax Return. Easy does it! Use IRS E-file to file a complete and accurate tax return. The software will help you determine the number of exemptions that you can claim. E-file options include free Volunteer Assistance, IRS Free File, commercial software and professional assistance.
2. Exemptions Cut Income. There are two types of exemptions. The first type is a personal exemption. The second type is an exemption for a dependent. You can usually deduct $4,000 for each exemption you claim on your 2015 tax return.
3. Personal Exemptions. You can usually claim an exemption for yourself. If you’re married and file a joint return, you can claim one for your spouse, too. If you file a separate return, you can claim an exemption for your spouse only if your spouse:
4. Exemptions for Dependents. You can usually claim an exemption for each of your dependents. A dependent is either your child or a relative who meets a set of tests. You can’t claim your spouse as a dependent. You must list the Social Security number of each dependent you claim on your tax return. For more on these rules, see IRS Publication 501, Exemptions, Standard Deduction, and Filing Information. Get Publication 501 on IRS.gov. Just click on the Forms & Pubs tab on the home page.
5. Report Health Care Coverage. The health care law requires you to report certain health insurance information for you and your family. The individual shared responsibility provision requires you and each member of your family to either:
Visit IRS.gov/ACA for more on these rules.
6. Some People Don’t Qualify. You normally may not claim married persons as dependents if they file a joint return with their spouse. There are some exceptions to this rule.
7. Dependents May Have to File. A person who you can claim as your dependent may have to file their own tax return. This depends on certain factors, like total income, whether they are married and if they owe certain taxes.
8. No Exemption on Dependent’s Return. If you can claim a person as a dependent, that person can’t claim a personal exemption on his or her own tax return. This is true even if you don’t actually claim that person on your tax return. This rule applies because you can claim that person as your dependent.
9. Exemption Phase-Out. The $4,000 per exemption is subject to income limits. This rule may reduce or eliminate the amount you can claim based on the amount of your income. See Publication 501 for details.
10. Try the IRS Online Tool. Use the Interactive Tax Assistant tool on IRS.gov to see if a person qualifies as your dependent.
ACA and Employers: Why Size of Your Workforce Matters
The Affordable Care Act contains several tax provisions that affect employers. Under the ACA, the size and structure of your workforce – small or large – helps determine which parts of the law apply to your organization.
The number of employees you had during the prior year determines whether your organization is an applicable large employer for the current year. This is important because two provisions of the Affordable Care Act apply only to applicable large employers. These are the employer shared responsibility provision and the employer information reporting provisions for offers of minimum essential coverage. The vast majority of employers fall below the workforce size threshold on which ALE status is based and therefore are not subject to these provisions.
Your organization’s size is determined by the number of your employees.
To determine your workforce size for a year, you add the total number of full-time employees for each month of the prior calendar year to the total number of full-time equivalent employees for each calendar month of the prior calendar year. You then divides that combined total by 12.
TaxAct Detects Data Breach and Suspends Customer Accounts
BY MICHAEL COHN
Tax preparation software developer TaxAct disclosed a data breach, leading the company to suspend the accounts of more than 9,000 customers.
The Cedar Rapids, Iowa-based company, part of Blucora Inc., said the data breach affected a small percentage of its customers.
“TaxAct recently suspended a small number of accounts—less than 0.25 percent (less than ¼ of 1 percent)—after identifying instances of suspicious activity,” said a company spokesperson contacted by Accounting Today. “The attacker did not gain access to income tax returns for the vast majority of the suspended accounts. Of those accounts suspended, a very small number, less than 5 percent of the ¼ of 1 percent, involved returns being accessed.”
Criminals may have stolen tax information from approximately 450 of TaxAct’s customers, according to The Wall Street Journal. The company sent a letter to 450 of its customers notifying them of a data breach occurring between Nov. 10 and Dec. 4, 2015, warning that their names, Social Security Numbers and tax returns may have been accessed.
The company said it was able to limit the damage from the hackers, however.
“As a result of TaxAct’s existing processes, the team identified the issue early and prevented any further data from being compromised,” said a company spokesperson. “TaxAct then partnered with a leading forensic specialist firm to further investigate. This led to the conclusion that the incident was not the result of a security breach of TaxAct systems. Rather, the team believes usernames and passwords for a small number of account holders were obtained from sources outside of TaxAct’s own systems.”
The IRS has been working with tax software vendors, major tax prep chains and state tax authorities this year to improve the security of their software to safeguard against identity theft this tax season (see IRS Kicks Off Tax Season). They are sharing more than 20 data elements to help authenticate tax returns.
There will also be new procedures this tax season to help prevent fraudsters from taking over the accounts of taxpayers. New password standards to access tax software will require a minimum of 8 characters with upper case, lower case, alpha, numerical and special characters. A new timed lockout feature and limited unsuccessful log-in attempts will be part of tax prep software, along with the addition of three security questions. There will also be “out-of-band verification” for email addresses, which is sending an email or text to the customer with a PIN, a practice used throughout the financial sector.
“TaxAct has industry-standard security protocols in place and is taking additional measures to further protect its data from external threats,” said the company spokesperson. “TaxAct continues to proactively identify the best and most secure technology to safeguard its customers’ information.”
Public Says License, Test Preparers: Survey
BY JEFF STIMPSON
Most members of the public want tax preparers tested and licensed -- and want maximum transparency in preparers' fees, according to a survey from the Consumer Federation of America.
In the wake of four states enacting paid preparer reforms, the licensing and regular testing of preparers and proposals for upfront fee disclosure, and with similar rules having been proposed and considered at the state and federal level, the CFA surveyed slightly more than 1,000 American adults "to better understand the public's support for these policies."
Among the findings of the survey:
Google Agrees to Pay $185 Million in U.K. Tax Settlement
BY BRIAN WOMACK
Google parent Alphabet Inc. has agreed to pay 130 million pounds ($185 million) in a tax settlement with U.K. authorities, setting off a backlash as opposition politicians questioned the government’s handling of the case.
Google will adopt a new approach for U.K. taxes, and the settlement covers taxes going back to 2005, the company said Friday in an e-mailed statement. Alphabet, which owns the Google search engine, has been criticized for paying a fraction of the taxes due on sales in the U.K. For example, the tech giant paid $16 million in U.K. corporation tax from 2006 to 2011 on $18 billion of revenue, according to a panel in 2013.
The pact divided politicians in the U.K. While Chancellor of the Exchequer George Osborne said on Twitter that it was a “victory” for the government’s policies, Shadow Chancellor John McDonnell told the BBC that the bill was “derisory” and looked like a “sweetheart deal,” and that he would call for it to be investigated by the public sector watchdog.
Alphabet has faced sharp rebukes from critics and regulators in Europe for using innovative tools to keep its tax rates lower in some regions. Separately, Apple Inc. is facing a European tax investigation that could force the iPhone maker to pay more than $8 billion in back taxes. European officials have accused the company of using subsidiaries in Ireland to avoid paying taxes on revenue generated abroad.
“We have agreed with HMRC a new approach for our U.K. taxes and will pay 130 million pounds, covering taxes since 2005,” Google said Friday in a statement, referring to the British tax authority. “We will now pay tax based on revenue from U.K.-based advertisers, which reflects the size and scope of our U.K. business.”
Google has avoided billions of dollars of income taxes around the world by using a pair of shelter strategies known to lawyers as the “Double Irish” and “Dutch Sandwich,” as reported by Bloomberg in October 2010.
Her Majesty’s Revenue and Customs said it enforces tax rules impartially—regardless of a company’s size.
“The successful conclusion of HMRC inquiries has secured a substantial result, which means that Google will pay the full tax due in law on profits that belong in the U.K.,” HMRC said in a statement. “Multinational companies must pay the tax that is due and we do not accept less.”
As a result of the disclosures, Parliament’s Public Accounts Committee summoned Google and the tax authority to explain their practices and the settlement to lawmakers.
“We were shocked to learn of workarounds of the tax system that were considered normal behavior by big corporations but which appalled the individual taxpayer,” Meg Hillier, the Labour Party lawmaker who leads the committee, said in an e-mailed statement. HMRC “is effectively admitting it pulled in too little tax from Google for nine out of ten years. This is not a great success rate.”
—With assistance from Simon Kennedy.
IRS Warns of Tax Preparers Exploiting Obamacare Mandate
BY MICHAEL COHN
The Internal Revenue Service is urging taxpayers to choose their tax preparer carefully, warning that some unscrupulous preparers are pocketing their individual health coverage payments under the Affordable Care Act.
“In some cases, these preparers were instructing their clients to make individual shared responsibility payments directly to that preparer,” said the IRS in an email alert Tuesday. “In some cases, this was happening even though the taxpayer had Medicaid or other health coverage. Under this circumstance, the taxpayer didn’t need to make the shared responsibility payment at all. In some parts of the country, unscrupulous return preparers were targeting taxpayers with limited English proficiency and, in particular, those who primarily speak Spanish.”
The IRS pointed out that most taxpayers don’t owe the payment at all because they have health coverage or qualify for a coverage exemption. However, if they owe a payment, they should remember that it should be made only with your tax return or in response to a letter from the IRS. The payment should never be made directly to an individual or a tax return preparer.
The IRS said tax preparers who inappropriately ask for direct payment use a variety of invalid reasons, such as telling individuals that they must make an individual shared responsibility payment directly to the preparer because of their immigration status, promising to lower the payment amount if the client pays it directly to the preparer, and demanding money from individuals who are exempt from the individual shared responsibility payment.
Taxpayers who are not U.S. citizens or nationals, and are not lawfully present in the United States, are exempt from the individual shared responsibility provision, also known as the individual mandate, and do not need to make a payment, according to the IRS. For this purpose, an immigrant with Deferred Action for Childhood Arrivals (DACA) status is considered not lawfully present and therefore is exempt. They may qualify for this exemption even if they have a Social Security Number.
The IRS has a special form in which taxpayers can complain about their tax preparer, Form 14157, Complaint: Tax Return Preparer. Taxpayers can also use the IRS’s Interactive Tax Assistant tool Am I required to make an Individual Shared Responsibility Payment? to help determine if they qualify for an exemption from the payment or if they owe the payment.
TaxSlayer Experiences Identity Theft Attack
BY MICHAEL COHN
Tax preparation software provider TaxSlayer detected suspicious activity on its servers about a week after another tax software developer, TaxAct, was attacked by identity thieves.
“We saw the attempt, but they didn’t get through," said TaxSlayer chief marketing officer Steven Binder.
TaxAct recently was forced to suspend the accounts of more than 9,000 of its customers and said criminals may have stolen information from about 450 of its customers (see TaxAct Detects Data Breach and Suspends Customer Accounts). TaxAct notified the 450 customers in a letter about the data breach that occurred between Nov. 10 and Dec. 4, 2015 and warned them that their names, Social Security numbers and tax returns might have been accessed.
TaxAct declined to comment on TaxSlayer’s experience. “It’s not our practice to comment on incidents that take place outside of our company,” said a spokesperson.
The recent attempt was far from the first cyberattack that TaxSlayer has experienced.
Binder said TaxSlayer sees about 30 to 40 million hacker attempts each year. He told Accounting Today that the company notified the FBI and the IRS about the recent attack.
A TaxSlayer spokesperson later provided additional information about the incident to Accounting Today after this article was posted: "TaxSlayer detected suspicious activity on its servers about the same time as TaxAct," said the statement. "TaxSlayer’s security incident did not result from any action on the part of TaxAct. TaxAct, while a competitor, is a valued partner in the fight against fraud and we will continue to work with them and the rest of the industry to fight against identity theft. TaxSlayer did not fend off a security attack. While there was no breach of our systems, some data may have been compromised or stolen. We believe the data was accessed as a result of usernames and passwords being compromised from other sources. We are in the process of notifying affected individuals. We had around 8,800 accounts that were subject to suspicious activity. A smaller number, or less than one third of one percent of our database, likely had their tax return data accessed."
Like other tax software vendors, TaxSlayer has been stepping up its security measures as part of an initiative that the IRS established last year in partnership with the tax software industry, the major tax prep chains and state tax authorities.
TaxSlayer has been taking extra measures as it recently won a contract with the IRS to provide software next year for its Volunteer Income Tax Assistance and Tax Counseling for the Elderly programs (see IRS Picks TaxSlayer for VITA and TCE Programs).
“Before we even won the IRS contract, we asked for additional verification if we see someone log in from a different computer,” said Binder. TaxSlayer will be working closely with the IRS on setting up the VITA and TCE sites.
The Evans, Ga.-based, family-owned company has been expanding its outreach to tax preparers. While the vast majority of its customers are taxpayers using the consumer software, particularly through the IRS’s Free File program, TaxSlayer has approximately 8,900 tax prep practices using the professional version of its software, according to Binder. In contrast, TaxSlayer processes more than 1 million returns annually for consumers.
Approximately 30 to 40 percent of that is through the Free File program, which provides free federal software for taxpayers. Like other Free File members, TaxSlayer charges consumers to file their state tax returns, but offers a 50 percent discount for members of the military. It charges an annual fee for its professional software.
TaxSlayer plans to debut a cloud-based version of the professional tax software in March, along with a mobile app. The company also sells bookkeeping software, TaxSlayer Books.
The 5 Biggest Things in Tech You Missed Last Month
BY GENE MARKS
Here are five things that happened in the world of technology this past month and why they’re important for your business (and mine). Did you miss them?
1. Google is testing a new schema to markup your local business data.
From Search Engine Land: “Google added a new structured markup page for providing local business data to Google. The document says that Google is currently piloting this schema and hopes to release it soon. In summary, you can use schema to markup your web pages in order to more efficiently communicate changes to your local business data to Google. Effectively these changes would make it easier for both Google and the local business to show more accurate and real-time data in the Google local knowledge panel that shows up in the search results.”
Why this is important for your business: This is the kind of thing that laymen business owners don’t pay attention to, and yet it has an enormous impact on whether or not your website gets found by prospective customers and the information they see when they find you. Find a good search engine optimization consultant or web developer and work with them to make sure your web pages are using the latest schema from Google to keep your online presence ahead of your competitors. I know I will.
2. A study finds that the leading cause of data breaches is employee error.
From The Wall Street Journal: “‘Employee error’ turns out to be the most common reason for a data breach at companies, according to a new cybersecurity report released by the Association of Corporate Counsel. This means the breach occurred as the result of a mistake the employee made, such as accidentally sending an e-mail with sensitive information to someone outside the company. The report, which contained survey responses from more than 1,000 in-house lawyers in 30 countries, found that 30 percent of breaches this year occurred as a result of employee error. Other common reasons for a breach included unauthorized access by insiders intending to steal company data and phishing attacks, when third parties send spam e-mails designed to trick employees into giving up their personal information.”
Why this is important for your business: Sure, you can spend money on software and technical people to ensure your data is protected. But it’s the common sense and oftentimes innocent mistakes made by your own employees that put you most at risk. So put some money aside for training this year. It may save you a lot in the end.
3. Periscope is named “App of the Year” by Apple.
From USA Today: “If you noticed video updates this year coming from the likes of celebrities Jimmy Fallon and Ellen DeGeneres, presidential candidate Donald Trump, citizen journalists or your friends, well, you’re not alone. The live video-streaming app Periscope took off big-time in 2015; Apple [recently] named it the coveted iPhone App of the Year in its annual year-end ranking of the best in mobile tech. ‘This game-changer made sharing and watching live videos an instant obsession,’ said Apple in offering the nod.”
Why this is important for your business: According to this report, streaming video and audio now account for 70 percent of U.S. broadband usage. The enormous popularity of streaming technologies like Periscope, Google Hangouts, Meerkat and others cannot be ignored by businesses who are looking for new audiences and who want to provide content to their existing communities. And that content will be video.
4. Target unveils a pop-up store in New York that gives us a hint about what’s to come in retail tech.
From Target’s Web site: “Target Wonderland will merge the physical and digital retail experience to reimagine holiday shopping for guests. As guests step into the space, they receive a custom lanyard and digital Radio Frequency Identification key — the same technology we use in our stores! If any of the products featured throughout the journey catch their eye, they can simply use the keys to scan a mini-bullseye tag and add the items to a custom digital shopping list. At the end of the adventure, guests can check out and purchase anything they added to their list.”
Why this is important for your business. Are you or your clients in retail? Then watch Target closely. And if you’re in the New York area, stop by their store. These are the techs that you will be using in the next few years if you intend to stay competitive and grow your business.
5. Twitter is about to enormously increase its advertising audience.
From Re/code: “Twitter announced that it will start showing ads to its ‘logged out’ audience, a group of roughly 500 million people who visit Twitter every month but who don’t have active user accounts. That means if you click on a tweet that appears in a Google search, for instance, you may see ads on that tweet page or on the tweet creator’s profile.”
Why this is important for your business: As explained in the above Re/code piece: “First, it’s important to some advertisers, who don’t think Twitter has enough registered users — especially compared to Facebook — to matter, and also to Wall Street, for the same reasons. But the company has argued for years now that its audience is much bigger than the 320 million people who log in each month, and it has been telling Wall Street that it can make money off people without Twitter accounts. Now it’s finally doing that.” As small businesses look to better target their very limited advertising dollars, this move makes spending on Twitter more attractive than ever.
Besides Accounting Today, Gene Marks writes for The New York Times, Forbes and Inc.com.
Major Business Tax Changes for 2016
BY ROBERT TRINZ
A large number of important tax changes go into effect this year for businesses.
Many were ushered in by the Protecting Americans from Tax Hikes (PATH) Act of 2015, although legislation enacted earlier in 2015 and in 2014 also contributed a fair share. Still other changes are the result of various administrative pronouncements by IRS.
This article reviews the important changes for businesses. The recent legislation responsible for the lion's share of the changed rules for 2016 consists of:
• The Protecting Americans from Tax Hikes (PATH) Act of 2015;
• The Fixing America's Surface Transportation (FAST) Act;
• The Bipartisan Budget Act of 2015;
• The Surface Transportation and Veterans Health Care Choice Improvement Act of 2015;
• The Trade Preference Extension Act of 2015; and
• The Achieving a Better Life Experience Act of 2014 (ABLE Act), part of the Tax Increase Prevention Act of 2014
Business changes include:
Enhancements for Sec. 179 expensing: For tax years beginning in 2014: (1) the dollar limitation on the expensing deduction under Code Sec. 179 was $500,000; and (2) the investment-based reduction in the dollar limitation began to take effect when property placed in service in the tax year exceeded $2 million (the investment ceiling). Under prior law, for tax years beginning after Dec. 31, 2014, the maximum expensing limit was to have dropped to $25,000, and the investment ceiling was to have dropped to $200,000. Up to $250,000 of qualified real property—qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property—was eligible for Code Sec. 179 expensing. Under a carryover limitation for qualifying real property, no portion of disallowed expensing because of the active business taxable income limit in Code Sec. 179(b)(3)(A), could be carried to a tax year beginning after 2014.
Under the PATH Act, the $500,000 expensing limitation and $2 million investment ceiling amount are retroactively extended and made permanent. Additionally, the PATH Act makes other Code Sec. 179 changes.
De minimis expensing safe harbor for taxpayers with no AFS (applicable financial statement) raised to $2,500: The final tangible property regulations permit businesses to elect to expense their outlays for "de minimis" business expenses. If the taxpayer is eligible for the de minimis safe harbor election, and chooses it, an amount paid to acquire or produce any eligible unit of property (or any eligible material or supply) is deducted under Code Sec. 162 in the year paid or incurred.
More building improvements eligible for bonus depreciation: Under prior law, qualified leasehold improvement property qualified for bonus depreciation. Such property included any improvement to an interior portion of a building that was nonresidential real property, if (1) the improvement was made under or pursuant to a lease; (2) the interior building portion was to be occupied exclusively by the lessee or sublessee; (3) the improvement was placed in service more than three years after the date the building was first placed in service by any person (i.e., not necessarily the taxpayer) and (4) the improvement was a structural component of the building. However, qualified leasehold improvement property didn't include any improvement for which the expense was attributable to (a) enlargement of the building, (b) any elevator or escalator, (c) any structural component benefiting a common area, or (d) the internal structural framework of the building.
Under the PATH Act, qualified leasehold improvement property is no longer eligible for bonus depreciation. Instead, for property placed in service after Dec. 31, 2015, "qualified improvement property" is eligible for bonus depreciation.
The PATH Act liberalizes the rules in three ways: (1) building improvements are eligible for bonus depreciation regardless of whether the improvements are property subject to a lease; (2) the improvement need not be placed in service more than three years after the date the building was first placed in service; and (3) structural components of a building that benefit a common area are no longer excluded from the definition of qualified improvements.
Relaxed placed in service rule for claiming bonus depreciation on certain plants: Under the PATH Act, for specified plants planted or grafted after Dec. 31, 2015, and before Jan. 1, 2020, bonus depreciation is allowed when the plant is planted or grafted, rather than when placed in service. A specified plant is one planted or grafted in the U.S., that is, any tree or vine that bears fruits or nuts, or any other plant that will have more than one yield of fruits or nuts and generally has a pre-productive period of more than two years from the time of planting or grafting to the time at which the plant bears fruit or nuts.
Research credit of eligible small business may offset AMT as well as regular tax: For credits determined for tax years that begin after Dec. 31, 2015, eligible small businesses may claim the credit against their alternative minimum tax liability as well as their regular tax liability.
Research credit of qualified small business may offset payroll tax: For tax years that begin after Dec. 31, 2015, qualified small businesses may elect to claim a portion of their research credit as a payroll tax credit against their employer FICA tax liability, rather than against their income tax liability.
Liberalized rules for food inventory enhanced deduction: A taxpayer engaged in a trade or business is eligible to claim an enhanced deduction for donations of food inventory. The enhanced deduction equals the lesser of (a) basis plus half of the ordinary income that would have been recognized if the property were sold at fair market value at the contribution date, or (b) twice the property's basis. A contribution of food inventory that is apparently wholesome food—i.e., meant for human consumption and meeting certain quality and labeling standards—qualifies for the enhanced deduction. For a taxpayer other than a C corporation, the aggregate amount of contributions of apparently wholesome food that may be taken into account for the tax year can't exceed 10 percent of the taxpayer's aggregate net income for that tax year from all trades or businesses from which those contributions were made for that tax year. A corporation's deductions for charitable contributions can't exceed 10 percent of its taxable income as specially computed.
The PATH Act retroactively and permanently extended the apparently wholesome food contribution rules. Additionally, for tax years beginning after Dec. 31, 2015, the PATH Act also liberalized the rules for such contributions.
More employers eligible for differential wage payment credit: Eligible small business employers that pay differential wages—payments to employees for periods that they are called to active duty with the U.S. uniformed services (for more than 30 days) that represent all or part of the wages that they would have otherwise received from the employer—can claim a credit. This differential wage payment credit is equal to 20 percent of up to $20,000 of differential pay made to an employee during the tax year. Under prior law, an eligible small business employer was one that: (1) employed on average less than 50 employees on business days during the tax year; and (2) under a written plan, provides eligible differential wage payments to each of its qualified employees. A qualified employee is one who has been an employee for the 91-day period immediately preceding the period for which any differential wage payment is made.
The PATH Act not only retroactively and permanently extended the credit (which had expired at the end of 2014), but liberalized it as well. For tax years beginning after Dec. 31, 2015, the credit applies to employers of any size (i.e., the less than 50 employee average no longer applies).
Work Opportunity Tax Credit expanded: The Work Opportunity Tax Credit allows employers who hire members of certain targeted groups to get a credit against income tax of a percentage of wages. The WOTC varies by targeted group.
The PATH Act retroactively extended the WOTC for five years so that it applies to eligible veterans and non-veterans who begin work for the employer on or before Dec. 31, 2019. Additionally, effective for individuals who begin work for an employer after Dec. 31, 2015, the WOTC also applies to employers who hire workers who are members of a new targeted group—qualified long-term unemployed individuals (i.e., those who have been unemployed for 27 weeks or more).
Live theatrical productions qualify for expensing: Under the PATH Act, for productions beginning after Dec. 31, 2015 and before Jan. 1, 2017, the Code Sec. 181 expensing election for qualified film and TV productions is expanded to also apply to any "qualified live theatrical production," which is defined as a live staged production of a play (with or without music) that is derived from a written book or script and is produced or presented by a commercial entity in any venue which has an audience capacity of not more than 3,000, or a series of venues, the majority of which have an audience capacity of not more than 3,000. In addition, qualified live theatrical productions include any live staged production which is produced or presented by a taxable entity no more than 10 weeks annually in any venue which has an audience capacity of not more than 6,500.
Moratorium on medical device excise tax: Under the PATH Act, the 2.3 percent excise tax imposed on the sale of medical devices will not apply to sales during calendar years 2016 and 2017.
Related party loss rules tightened: Under the Code Sec. 267(a) related party loss rules, no deduction is generally allowed for losses from sales or exchanges of property (except in corporate liquidations), directly or indirectly, between certain related persons. Under Code Sec. 267(d), if a taxpayer acquires property by purchase or exchange from a transferor who sustained a loss not allowed because of the related taxpayer rules, any gain realized by the taxpayer on a sale or other disposition of the property is recognized only to the extent that the gain exceeds the amount of the loss that is properly allocable to the property sold or otherwise disposed of by the taxpayer.
Under the PATH Act, for sales and exchanges of property acquired after Dec. 31, 2015, the general rule of Code Sec. 267(d) doesn't apply to the extent gain or loss on property that has been sold or exchanged is not subject to federal income tax in the hands of the transferor immediately before the transfer, but any gain or loss on the property is subject to federal income tax in the hands of the transferee immediately after the transfer. Thus, the related party loss rules are modified to prevent losses from being shifted from a tax-indifferent party (e.g., a foreign person not subject to U.S. tax) to another party in whose hands any gain or loss with respect to the property would be subject to U.S. taxation.
Alternative tax rate for corporate timber gains: Effective for tax years beginning in 2016, the PATH Act provides that a corporation is subject to a 23.8 percent alternative tax rate on the portion of its taxable income that consists of qualified timber gain (or, if less, the net capital gain) for a tax year. Qualified timber gain means the net gain described in Code Sec. 631(a) and Code Sec. 631(b) for the tax year, determined by taking into account only trees held more than 15 years.
Robert Trinz is a senior analyst at Thomson Reuters Checkpoint within the Tax & Accounting business of Thomson Reuters.
How the U.S. Corporate Tax Code Became a Legal Maze
BY STEPHEN MIHM
Perhaps the only consensus in U.S. politics is that the Byzantine and loophole-riddled corporate tax code needs reform.
Hillary Clinton wants to curb the ability of companies to use overseas subsidiaries to shield profits from taxes, and such tax-avoidance strategies have been denounced by other candidates in the 2016 presidential election, including Donald Trump, Bernie Sanders and Jeb Bush, as well as by President Barack Obama.
They join a long line of would-be reformers who tried to put an end to such practices, largely without enduring success. This record of failure reflects the U.S.'s jury-rigged way of taxing overseas profits, which has become so complex that it is easily exploited by savvy corporations.
To understand why an arcane and inefficient system decried from all sides has resisted all efforts at improvement, it’s necessary to grasp the origins of the U.S. corporate tax, which was designed around the peculiar idea that corporations and shareholders are separate and distinct entities when it comes to taxation. This feature, arguably more than any other aspect of corporate taxation, accounts for the mess that reformers now confront.
The corporate income tax can trace its roots to the Civil War, when the Union imposed a levy on, among other things, the income that individuals realized from dividends and interest paid by corporations.
But unlike today, this arrangement treated the corporation and the individual shareholders as a unified entity. It did not tax the corporation on its profits and then impose another tax when it distributed those profits to shareholders. This reflected the idea that corporations were aggregations of individuals that had no existence independent of the shareholders.
The tax was repealed in 1871. But in 1894, Congress passed an overt tax on corporations that also effectively integrated shareholders and the corporation into a single taxable entity.
For example, the law imposed a 2 percent tax on the net income of corporations as well as on any undistributed corporate income. But shareholders who received dividends did not have to pay taxes on those profits. The tax historian Ajay Mehrotra has described this method as “essentially a crude form of withholding—a remittance method for taxing shareholder wealth.” Put differently, the corporation was merely a “pass-through entity” for its shareholders.
But as Mehrotra has observed, a very different idea of corporations had begun to emerge at the state level. Even as the federal law made shareholders liable for corporate taxes, a growing number of states began to tax corporations directly. Although there was considerable variation among states, the adoption of these laws reflected a new understanding of the corporation. A growing number of states began to treat them as people—artificial persons, to be sure, but ones whose earnings could be taxed. In this formulation, the corporation was an artificial entity given life by the state. It could therefore be regulated as well.
Some legal historians believe that this notion of the corporation as independent of the individuals who ran or owned it was derived from German legal thinkers such as Otto von Gierke and their English-speaking translators, most notably the German-born Ernst Freund, who later became a legal scholar at the University of Chicago. Freund, following von Gierke, argued that the corporation was greater than the sum of its parts—the shareholders. In his 1897 treatise, "The Legal Nature of the Corporation," Freund laid out the "real entity" theory of the corporate form. In this formulation, the corporation was its own thing: an entity that deserved separate consideration in the eyes of the law. (A mutation of this "real-entity theory" became a hot issue more recently when the Supreme Court ruled in the Citizens United campaign-finance case that companies had the same free-speech rights as people.)
Such ideas likely provided a way of understanding—and regulating—the corporate behemoths that began to dominate in the U.S. at the end of the 19th century. Unlike the family-owned businesses of the past, these gigantic enterprises divorced owners from day-to-day management, which gave corporations an autonomous status that had previously only been attributed to individuals.
While the notion of corporate personhood has often been used to protect corporations, here it became a means to control them via taxation. In 1909, when the federal Bureau of Corporations surveyed the ideological foundations of corporate taxation, it found that a consensus had emerged that "each person, natural or artificial, should contribute to governmental support according to his ability to pay.”
That same year, Congress passed the first law that enshrined this doctrine on the federal level: the Tariff Act of 1909. It imposed a “special excise tax with respect to the carrying on of doing business.” It was levied on corporations with net incomes of more than $5,000, and was described by President Howard Taft as “an excise tax upon the privilege of doing business as an artificial entity.”
In 1913, after the individual states ratified a constitutional amendment permitting an income tax, Congress passed the Revenue Act of 1913. It drew a formal distinction between corporate income taxes on the one hand and personal income taxes on the other. Nonetheless, the law still viewed corporations and shareholders as linked because corporate income could only be taxed once, either on the level of the corporation or the individual shareholder.
In succeeding years, however, the shareholders and the corporation drifted further apart in the eyes of the law. Then, in 1936, with the economy still mired in the Great Depression, President Franklin Roosevelt and his congressional allies sought to abolish the corporate income tax, replacing it with a punitive tax on undistributed corporate profits. As the legal scholar Steven Bank recounted, this provoked profound resistance from businesses.
In the end, a settlement was reached: The business community defeated the proposed tax in exchange for allowing “double taxation” —retaining the corporate income tax as well as a tax on dividends. This “ill-fated compromise,” as Bank described it, formally enshrined the idea that the same income could be taxed more than once. But it also formally divided the corporation from its shareholders when it came to taxation.
This idea that the corporation and shareholders can be treated as separate and distinct entities for purposes of taxation is at the root of the uproar in the campaign over so-called corporate inversions.
That's because it was fundamentally incompatible with another doctrine codified in the 1913 Revenue Act: the principle of worldwide taxation, which stipulated that American citizens and corporations would be taxed on their income, no matter where it was earned.
But as savvy tax lawyers quickly realized, the two doctrines offered a means of deferring the payment of taxes. That’s because a foreign corporation owned by American interests was considered a separate entity from the shareholders. At the same time, that same foreign corporation fell outside the purview of worldwide taxation. So long as the foreign corporation kept its profits offshore—deferring their repatriation home—taxes could be postponed.
This has led to innumerable deferral mechanisms that allow companies to park profits in overseas entities rather than bringing them home where they would be taxed. These include the much-publicized "inversions," which allow companies to nominally transfer their headquarters to low-tax countries by acquiring or merging with companies in those nations—paper marriages that change little in reality but enable profits to accumulate within a foreign corporate “person” that lives beyond the reach of worldwide taxation.
Such evasions have been the target of a series of would-be reformers, most recently among this year's presidential candidates. None has been successful.
The biggest problem may be that policy makers have taken a piecemeal approach instead of revisit the deeper history of corporate taxation and addressing the underlying contradiction at the heart of the U.S. system. Success would mean abandoning the cherished principle of worldwide taxation—an unpalatable option for many reformers.
Or they could focus on the conceit that corporations are artificial people who exist outside the flesh-and-blood shareholders who own them.
Regardless, if history is any guide, there is little reason to believe that the next president will be any more successful than his or her predecessors in peeling away the layers of a system developed over more than a century that has been protected from reform by its complexity and an industry of tax lawyers, accountants and lobbyists who thrive on gaming it.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners, nor of Accounting Today.
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