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July

 LARA Issues Scam Alert for Corporations and LLCs 

 

Michigan Department of Licensing and Regulatory Affairs (LARA) issued a warning to Michigan corporations of a non-governmental entity trying to collect a fee to obtain a certificate of good standing. The misleading solicitation implies that a certificate of good standing is required to comply with state requirements and is designed to look like an official document, but it is not. If you need of a certificate of good standing, you may contact the Corporations Division directly at 517.241.6470. The cost is $10.

 

Recent ruling that online gambling accounts are subject to FBAR (Reporting of Foreign Bank and Financial Accounts) reporting

Marc Vojnich  Supervisor - Financial Services Tax at Grassi & Co.

 

“A federal district court judge in California has ruled that FirePay, PartyPoker, and PokerStars online gambling accounts are subject to the foreign financial account reporting rules. If a U.S. taxpayer’s total maximum balances in foreign financial accounts exceed $10,000 at any point during a tax year, he must file FinCEN Form 114, formerly known as the FBAR.

In the case United States v. Hom, the defendant had online gambling accounts with PokerStars, PartyPoker, and FirePay in 2006 and 2007. The defendant acknowledged that the aggregate amount of the funds in these accounts exceeded $10,000 in U.S. dollars during 2006 and 2007. But, he contended that they were not foreign financial accounts.

The judge disagreed. Because FirePay, PokerStars, and PartyPoker all functioned as banks, said the court, they fall within the scope of the definition for a reportable account. The judge granted the IRS’s motion to impose against the taxpayer FBAR penalties of $10,000 per account not reported per year.”

Judgement can be found

at:http://www2.bloomberglaw.com/public/desktop/document/United_States_of_America_v_Hom_Docket_No_313cv03721_ND_Cal_Aug_12

A list of online gambling sites can be found at:http://www.taxabletalk.com/2014/06/22/online-gambling-addresses-updated-for-2014/

 

To C or Not to C

BY BRIAN HARTSTEIN

 

One of the first, and perhaps most important, decisions a business owner initially makes is the type of business entity to select.

            Many closely held businesses have been organized by their owners as subchapter S corporations as opposed to C corporations. While both provide liability protection, there are several important tax and employer benefit considerations unique to each structure.         

Many business owners incorporate as an S corporation to take advantage of the losses a business may initially incur at the individual level. However, arguably the best-known income tax advantage of an S corporation over a C corporation is that the K-1 distribution, or the amount of profit in excess of the W-2 compensation, is not taxable at the corporate level.

Furthermore, the K-1 distribution paid to the shareholders is considered a dividend and therefore not subject to the Medicare tax and other payroll taxes. Another tax advantage of an S corporation is recognized upon the company’s sale, liquidation or ownership transfer to a future generation, as most buyers would prefer an asset sale over a stock sale.

However, there are many benefits of electing a C corporation structure over an S corporation. This type of entity structure should be looked at much more carefully and utilized more frequently by owners of closely held businesses. The principal income tax advantages of a C corporation are the availability of various fringe benefits and deferred compensation programs to the shareholders and employees. There are other advantageous benefits as well.

Invariably, when discussing the advantages and disadvantages of a C corporation, the issue of “double taxation” will almost always be foremost. Proponents of S corporations will point this out as a major reason to avoid utilizing a C corporation. “Double taxation” can occur as profits are first taxed to the C corporation. Then, when they are distributed to shareholders they are considered dividends and taxed again.

The C corporation cannot deduct the dividend payments to shareholders. This is a valid point; however, there are a variety of ways to mitigate this issue. One way is to reduce the amount of income as reported by the corporation as close to zero as possible, and therefore the amount of tax paid will be negligible, as will the issue concerning dividends and “double taxation.”

Other ways to accomplish this task include taking deductions to reduce income via salaries and expenses; having family members on the payroll, as long as they are legitimate employees; borrowing; and leasing goods and equipment via another controlled entity. The use of multiple entity planning to shift and deduct income to another entity for real and substantial business purposes, if possible, can also be an excellent tool. Of course, specific rules must be adhered to when engaging in this type of planning.

Another advantage of a C corporation under the current tax law involves long-term care insurance. Owners of closely held businesses can benefit tremendously from a qualified stand-alone long-term care insurance policy. However, when the business pays the premium for a shareholder-employee who owns more than 2 percent interest of a S corporation, that shareholder-employee can only deduct what is deemed the “age-eligible” premium (defined as a medical expense in Section 231(d)(1) and Section 213(d)(10) of the IRC).

The non-deductible portion of the premium for a long-term care insurance policy is included in that shareholder-employee's gross income. The benefits of the policy are tax-free. In a C corporation the advantage of the business paying the premium is much greater for the more than 2 percent shareholder-employee.

The C corporation pays the premium, 100 percent of which is deductible, and none of it is considered taxable income. The benefits of the policy are tax-free as well. In either scenario the long-term care insurance policy can be offered selectively to the shareholder-employees and non-owner key employees without covering any other employees.

Furthermore, shareholder-employees who own more than a 2 percent interest in a C corporation can possibly exclude up to 40 percent of corporate paid contributions to a Section 79 plan from personable taxable income. A Section 79 plan can offer powerful tools for both the owners and employees. This benefit plan, when funded with permanent life insurance policies as well as group-term life insurance, offers valuable benefits including significant survivor benefits and a source of tax-free retirement income.

The C corporation can offer the additional advantage of being able to utilize a medical reimbursement program as well. The advantage to the business is a full deduction for qualified medical expenses incurred for those eligible to be in the plan. Concurrently, the shareholder-employee who owns more than 2 percent interest or any other employee does not have to recognize that amount as income.

One little known but powerful advantage of a C corporation involves financing a new business or acquiring a business using rollover funds from a retirement account. This is a Rollover as Business Startups (ROBS) Plan, also known as a Business Owners Retirement Savings Account (BORSA).

There is also a system designed for this purpose called an Entrepreneur Rollover Stock Ownership Plan (ERSOP). For those tax, legal and financial advisors who have clients interested in owning their own businesses, and who have a significant amount of assets in retirement accounts, a ROBS can be a powerful tool in financing a new business. There are very specific guidelines that must be followed. A ROBS, and this type of planning, will only work in conjunction with a C Corporation and will not work with other forms of business ownership.

Finally, it has been theorized by some that use of a C corporation will increase the chance of a random general corporate audit by the IRS. There are those in the tax and legal community who are proponents of this thinking and will state that this type of entity is under more scrutiny and therefore has a higher chance of being randomly audited than S corporations.

This cannot be proven and the argument can be made that this is not true. For example, when I spoke with several partners of a major national accounting firm, their opinion was that this is simply not accurate. They stated that no one knows for certain what precipitates a random general corporate audit. They theorize that the business’s SIC (Standard Industrial Classification) code is possibly the overriding factor, in addition to specific areas that the IRS chooses to focus on at different points in time.

The C corporation continues to be a powerful, yet under-utilized, entity. Those looking to form a new business, acquire a business, or currently using a pass-through entity should consider the advantages of a C corporation for their business structure.

Brian D. Hartstein, MSFS, CLU, ChFC serves as CEO and principal of Economic Concepts, Inc. in Scottsdale, Ariz. He concentrates primarily on working with CPAs, financial advisors, successful business-owners and affluent clients in the qualified and non-qualified plan markets, estate planning and financial and investment planning. He is currently on the advisory board of the Phoenix Tax Workshop, a member of the Society of Financial Service Professionals, a member of the Arizona Business Leadership Association, and served as president of the Financial Planning Association of Greater Phoenix.

 

 

IRS Clarifies IRA Rollover Limitation

BY MICHAEL COHN

 

The Internal Revenue Service has partially withdrawn some of the rules it had earlier proposed on limiting rollovers from individual retirement arrangements.

In REG- 209459-78, the IRS noted last week that the partial withdrawal of the proposed regulation will affect individuals who maintain IRAs and financial institutions that are trustees, custodians, or issuers of IRAs. Section 408(d) of the Tax Code governs distributions from IRAs and generally provides that any amount distributed from an IRA is includible in gross income by the payee or distributee. A payee or distributee of an IRA distribution is allowed to exclude from gross income any amount paid or distributed from an IRA that is subsequently paid into an IRA not later than the 60th day after the day on which the payee or distributee receives the distribution. An individual is permitted to make only one nontaxable rollover in any one-year period.

Under proposed regulations dating back to 1981, the rollover limitation would be applied on an IRA-by-IRA basis, and that rule is reflected in IRS Publication 590, “Individual Retirement Arrangements (IRAs).” However, Section 408(d)(3)(B) provides that the exclusion from gross income for IRA rollovers pursuant to subparagraph (A)(i) does not apply “if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in that subparagraph from an individual retirement account or an individual retirement annuity which was not includible in his gross income because of the application of this paragraph.”

Based on the language in that section, a recent Tax Court opinion, Bobrow v. Commissioner, T.C. Memo. 2014-21, held that the limitation applies on an aggregate basis. Thus, under Bobrow, an individual cannot make an IRA-to-IRA rollover if the individual has made an IRA-to-IRA rollover involving any of the individual’s IRAs in the preceding one-year period.

The IRS said it intends to follow the opinion in Bobrow and, accordingly, and is thus withdrawing a paragraph in the proposed regulations and will revise Publication 590.

The IRS added that this interpretation of the rollover rules under Section 408(d)(1)(B) does not affect the ability of an IRA owner to transfer funds from one IRA trustee or custodian directly to another, because such a transfer is not a rollover and, therefore, is not subject to the one-rollover-per-year limitation.

In response to comments expressing concern over implementation of the rollover limitation as interpreted in Bobrow, the IRS released an announcement in March, Announcement 2014-15, addressing the application to individual retirement accounts and individual retirement annuities of the one-rollover-per-year limitation and providing transition relief for owners (see IRS Offers Transition Relief for IRA Owners). The IRS said it would not apply the Bobrow interpretation of Section 408(d)(3)(B) to any rollover that involves a distribution occurring before Jan. 1, 2015.

David Waddington, a partner at Friedman LLP and managing partner of Friedman’s Benefits 21 LLC pension division, suggested in an Accounting Today Unaudited podcast last week that accountants are going to have to advise clients to apply the aggregate rule (see Changes in IRA Rollover Rules). “In my practice, it’s pretty unusual for people to actually take money out of their IRAs,” he said. “We’re geared as accountants towards wanting people to keep their money in their IRAs, and then under the 72(t) minimum distribution rules at age 70 ½, they have to start withdrawing these moneys. Most people want to keep the money there.”

 

 

IRS Finalizes Regulations on Truncated Taxpayer Identification Numbers

BY MICHAEL COHN

The Internal Revenue Service has issued final regulations on truncated taxpayer identification numbers, or TTINs, to safeguard against identity theft.

Where not prohibited by the Tax Code or other regulations or guidance, the final regulations allow use of a TTIN in lieu of a taxpayer’s Social Security Number (SSN), individual taxpayer identification number (ITIN), IRS adoption taxpayer identification number (ATIN), or employer identification number (EIN) on payee statements and certain other documents.

The TTIN displays only the last four digits of a taxpayer identifying number. Either asterisks or Xs replace the first five digits of the identifying number. The regulations affect persons that furnish or receive payee statements and other documents that the Tax Code, regulations, or other published guidance requires to be furnished to another person to the extent that a TTIN may appear in lieu of the SSN, ITIN, ATIN, or EIN of the payee or document recipient.

The IRS issued proposed regulations in January of last year in an effort to control the growing problem identity theft-related tax fraud (see IRS Proposes Truncated Taxpayer Identification Numbers to Curb Identity Theft).

The goal is to reduce the risk of identity theft that may stem from the inclusion of a taxpayer’s entire identifying number on a payee statement or other document. Concerned about the risks of identity theft, including its effect on tax administration, the IRS established a pilot program allowing filers of information returns who met certain requirements to truncate an individual payee’s identifying number on paper payee statements (Forms 1098,1099, and 5498) for calendar years 2009 and 2010. The IRS subsequently extended the pilot program for payee statements for calendar years 2011 and 2012, and modified the program by removing the Form 1098-C from the list of eligible documents on which a TTIN can be used because it is an acknowledgement under Section 170(f)(12) rather than a payee statement.

Certain other forms were also excluded such as Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipts of Certain Foreign Gifts, and Form 3520A, Annual Information Return of Foreign Trust With a U.S. Owner (Under Section 6048(b)) despite the request of a commenter on the proposed regulations. 

The IRS explained that taxpayer identifying numbers on returns and statements filed with the IRS are necessary for the IRS to determine compliance with the tax laws and to validate the information provided. Therefore, the final regulations retain the rule in the proposed regulations that TTINs may not be used on a return filed with the IRS.

However, the regulations were revised to list the circumstances where use of a TTIN is not permitted. A TTIN may not be used (1) where prohibited by statute, regulation, other guidance published in the Internal Revenue Bulletin, form, or instructions; (2) where a statute, regulation, other guidance published in the Internal Revenue Bulletin, form, or instructions, specifically requires use of an SSN, ITIN, ATIN, or EIN; or (3) on any return or statement required to be filed with, or furnished to, the IRS. Further, a person may not truncate its own taxpayer identification number on any tax form, statement, or other document that person furnishes to another person. For example, an employer cannot use a TTIN in place of its EIN on a Form W-2, Wage and Tax Statement, that the employer furnishes to an employee; and a person may not use a TTIN in place of its TIN on a Form W-9, Request for Taxpayer Identification Number and Certification.

 

 

 

Tips on Travel While Giving to Charity

Do you plan to donate your services to charity this summer? Will you travel as part of the service? If so, some travel expenses may help lower your taxes when you file your tax return next year. Here are five tax tips you should know if you travel while giving your services to charity.

1. You can’t deduct the value of your services that you give to charity. But you may be able to deduct some out-of-pocket costs you pay to give your services. This can include the cost of travel. All out-of pocket costs must be:

• unreimbursed,

• directly connected with the services,

• expenses you had only because of the services you gave, and

• not personal, living or family expenses.

2. Your volunteer work must be for a qualified charity. Most groups other than churches and governments must apply to the IRS to become qualified. Ask the group about its IRS status before you donate. You can also use the Select Check tool on IRS.gov to check the group’s status.

3. Some types of travel do not qualify for a tax deduction. For example, you can’t deduct your costs if a significant part of the trip involves recreation or a vacation. For more on these rules see Publication 526, Charitable Contributions.

4. You can deduct your travel expenses if your work is real and substantial throughout the trip. You can’t deduct expenses if you only have nominal duties or do not have any duties for significant parts of the trip.

5. Deductible travel expenses may include:

• air, rail and bus transportation,

• car expenses,

• lodging costs,

• the cost of meals, and

• taxi or other transportation costs between the airport or station and your hotel.

For more see Publication 526, Charitable Contributions. You can get it on IRS.gov or by calling 800-TAX-FORM (800-829-3676).

 

 

 

74% of Americans Worried about Retirement Income

BY MICHAEL COHN

Three-quarters of Americans are worried about having enough money for retirement, according to a new survey that found three out of 10 Americans are not saving for later years.

However, 69 percent of the 2,286 adults surveyed by the Harris Poll say planning for retirement is a key priority to them. Only 35 percent say they have faith in Social Security being there when they retire. That figure drops to 27 percent of Millennials and 30 percent of Gen Xers.

These are some of the results of The Harris Poll® of 2,286 adults surveyed online between May 14 and 19, 2014.

While 39 percent of Millennials indicated they are saving for retirement, 62 percent of Gen Xers and Baby Boomers say they are.  Millennials are also more likely then the three older generations to be saving money for a car purchase (24 percent vs. 11 percent, 10 percent and 15 percent) and a home purchase (24 percent vs. 7 percent, 4 percent and 3 percent).

About 69 percent of Americans say they are currently putting money toward any savings. One reason for those who aren’t may be that 46 percent of unretired U.S. adults say they live paycheck to paycheck and can't afford to put money in savings. Among those saving, the top goals are rainy-day funds for unexpected costs (65 percent) and retirement (52 percent). Those who are saving are also doing so for other reasons, with 31 percent saving for a vacation.

Health care is another worry for Americans, with 67 percent saying they worry about being able to afford unexpected health care costs. Among those who are not yet retired, 70 percent of the respondents said they worry about being able to pay for their health care costs when they retire.

Asked about what they would do if a sudden windfall of $100,000 came their way, 57 percent said they would use the money to pay off an existing debt and/or loans, while 42 percent would put the money into a rainy day fund and save for unexpected expenses. One-third (33 percent) of Americans would invest toward their retirement while over one in five would go on vacation (23 percent) or buy a car (21 percent).

Smaller numbers of U.S. adults said they would treat themselves to something they would not normally spend money on (16 percent), donate to charity (16 percent), buy a house (15 percent), pay for their kids' college (10 percent) and go back to school (6 percent).

 

 

 

IRS phone scam warning

The IRS has issued a warning about a pervasive phone scam. The Treasury Inspector General for Tax Administration (TIGTA) called it the largest scam of its kind. It has received reports of over 20,000 contacts related to this scam, and thousands of victims have paid over $1 million to fraudsters claiming to be from the IRS.

In this scam, the thief poses as an IRS agent and makes an unsolicited call to the target. The caller tells the victim that he or she owes taxes to the IRS. The caller demands that the victim pay the money immediately with a preloaded debit card or wire transfer. The caller often threatens the victim with arrest, deportation, or suspension of a business or driver’s license. In many cases, the caller becomes hostile and insulting. Thieves who run this scam often:

      Use common names and fake IRS badge numbers.

      Know the last four digits of the victim’s Social Security Number.

      Make caller ID appear as if the IRS is calling.

      Send bogus IRS e-mails to support the bogus calls.

      Call a second time claiming to be the police or department of motor vehicles. The caller ID again appears to support their claim.

You should know that the IRS usually first contacts people by mail, not by phone, about unpaid taxes. Most importantly, an IRS agent will never ask for:

      PINs, passwords, or similar confidential information for credit card, bank, or other accounts.

      Payment using a prepaid debit card or wire transfer.

      A credit card number over the phone.

If you get a call from someone who claims to be with the IRS asking you to pay back taxes, hang up.

If you owe or think you might owe federal taxes, call the IRS at (800) 829-1040 or call us for help. If you don’t owe taxes, call and report the incident to the TIGTA at (800) 366-4484.

 

 

Getting around the $25 deduction limit for business gifts

Sometimes doing business entails making gifts to customers, clients, employees, and other business entities and associates. For numerous reasons, such gifts often make perfect business sense. Unfortunately, the tax rules limit the deduction for business gifts to a less-than-generous $25 per person per year — a limitation that hasn’t been raised in decades. When this limit was added into law back in 1962, the $25 gift deduction limit wasn’t really an issue for any but the most extravagant taxpayers. After all, the price of a first class stamp at the time was 4¢ and a 100% wool men’s suit could be had for $45 or less.

Fifty-two years later, the $25 limit is unrealistically small in many business gift-giving situations. Fortunately, there are a few exceptions to this rather restrictive limit. When one of these exceptions applies, you typically have no limit (or at least, a much higher limit) on the deduction for business gifts.

Here’s a quick rundown of the major exceptions to the $25 limit.

Gifts to a business entity vs. an individual. The $25 limit only applies to gifts directly or indirectly given to an individual. Thus, gifts given to a company for use in the business aren’t subject to the limit. For example, a gift of a $200 reference manual to a company for its employees to use while doing their jobs would be fully deductible because it’s used in the company’s business. 

Gifts to a husband and wifeIf you have a business connection with both spouses and the gift is for both of them, the $25 limit doubles to $50.

Only direct costs are limited. The incidental costs of making a gift aren’t subject to the limit. Thus, the costs of custom engraving on jewelry and the costs of packing, insuring, and mailing a gift are deductible over and above the $25 limit for the gift itself.

Gifts to employees. Although employee gifts have their own limitations and may be treated as compensation, an employer is allowed to deduct the full cost of gifts made to employees.

Gifts vs.entertainment expenses. Entertainment expenses are normally only 50% deductible and gifts, of course, are typically 100% deductible, but only up to the first $25 of cost per donee per year. In some situations related to gifts of tickets to sporting and other events, a taxpayer may choose whether to claim the deduction as a gift or as entertainment. The gift deduction is a better deal for lower-priced tickets, but once the combined price of the gifted tickets exceeds $50, claiming them as an entertainment expense is more beneficial.

As you can see, there are several exceptions to the $25 rule, so many businesses will be able to meet at least one of them. To the extent your business qualifies for any of these exceptions, it’s important that the qualifying expenses be tracked separately (typically by charging them to a separate account in your accounting records) so that a full deduction can be claimed.

Also, to obtain any deduction for a business gift, even the miserly $25 gift deduction, you must retain documentation supporting the following: (1) the gift’s cost and a description of it, (2) the date it was acquired, (3) the business purpose of the gift, and (4) the business relationship to the taxpayer of the person receiving the gift.

If you have any questions regarding the types of gifts or gift-giving situations that may qualify for a full deduction or how to properly isolate and account for them in your records, please call us so we can help you get to the right answers.

 

 

Comparing taxable vs. tax-exempt investment yields

With rising tax rates, some taxpayers are considering allocating at least a portion of their investments to tax-exempt investments. After all, interest earned on tax-exempt investments not only escapes ordinary income tax rates that can be as high as 39.6%, but also the 3.8% net investment income tax (NIIT).

There are lots of things to consider when making an investment, but when comparing taxable investments to tax-exempt investments, one important factor is the after-tax return. A fairly straightforward formula can be used to compare yields for taxable vs. tax-exempt investments if you know your income tax bracket.

Say you are in the 43.4% federal income tax bracket (including NIIT), so an additional dollar of taxable income would cost you 43.4 cents in additional tax. You have learned of an investment opportunity that offers a 3% tax-exempt yield. You want to know how this compares effectively with your taxable investment opportunities.

1.   Subtract your tax bracket from 1. This equals 0.566 (1 - 0.434).

2.   Divide the tax-exempt yield (3%) by the figure arrived at above (0.566).

The result is 5.3%. This means that you would need to earn 5.3% on your taxable investment to equal the 3% you would earn on the tax-exempt one.

If you know the taxable yield, but seek a comparable tax-free yield, the computation is even easier. Simply subtract your tax bracket from 1 and multiply the result by the taxable yield. That is, if you are in the 43.4% bracket, you will keep 56.6% of your income. Thus, a taxable 4% yield translates into an after-tax yield of 2.26% (4% × 0.566).

Of course, these computations only take the federal income tax into consideration. If your income is subject to state or local taxation that the tax-exempt income avoids as well, you would have to use your total effective tax rate in your calculations to arrive at a more precise result. There may be other adjustments to make as well, so if you seek greater precision, give us a call and we will run some more exact numbers for you.

 

 

 

Do you need to adjust your federal income tax withholding amount?

With over half the year already gone, now is a good time to check to see if you are on track to have about the right amount of federal income tax withheld from your paychecks for 2014. The problem with not having the correct amount of taxes withheld for the year is that:

      If your taxes are significantly underwithheld for the year, you risk being hit with a nondeductible IRS interest rate penalty.

      If your taxes are significantly overwithheld for the year, you are basically making an interest-free loan to the government when you could be putting that money to work for you.

Neither situation is good. The simplest way to correct your withholding is by turning in a new Form W-4 (“Employee’s Withholding Allowance Certificate”) to your employer. Taking this action now will adjust the amount of federal income tax that is withheld from your paychecks for the rest of 2014.

Specifically, you can adjust your withholding by increasing or decreasing the number of allowances claimed on your Form W-4. The more allowances claimed, the lower the withholding from each paycheck; the fewer allowances claimed, the greater the withholding. If claiming zero allowances for the rest of the year would still not result in enough extra withholding, you can ask your employer to withhold an additional amount of federal income tax from each paycheck.

While filling out a new Form W-4 seems like something that should be quick and easy, it’s not necessarily so — because the tax rules are neither quick nor easy. Fortunately, there is an online Form W-4 calculator on the IRS website at www.irs.gov that can help to make the job simpler. From the IRS home page, click on the “More …” link under “Tools.” Then click on the “IRS withholding calculator” link. You will see the entry point for the online calculator. It’s pretty easy to use once you assemble information about your expected 2014 income and expenses, plus your most recent pay stub and tax return.

Please understand that the IRS calculator is not perfect. (Remember, it’s free, and to some extent, you always get what you pay for.) However, using the calculator to make withholding allowance changes on a new Form W-4 filed with your employer is probably better than doing nothing, especially if you believe you are likely to be significantly underwithheld or overwithheld for this year.

Of course, if you want more precise results, we would be happy to put together a 2014 tax projection for you. At the same time, we can probably recommend some planning strategies to lower this year’s tax bill. Contact us for details.

 

Tax Strategy

Health care reform tax issues for 2014

BY GEORGE G. JONES AND MARK A. LUSCOMBE

Since the Affordable Care Act became law in 2010, many of the tax provisions of that law have slowly been coming into effect. From the beginning, we had expanded medical deductions for children up to age 27 and a small-business credit to encourage employers to offer health insurance. Some tax provisions will not come into effect until a few years down the line. The penalty for employers failing to provide health insurance has been delayed until at least 2015. The excise tax for overly generous "Cadillac" health plans will not come into effect until 2018.

The year 2013 saw the beginning of the additional 0.9 percent tax on earned income in excess of $200,000 for single filers and $250,000 for joint filers. 2013 also saw the beginning of the new 3.8 percent tax on the lesser of net investment income or adjusted gross income in excess of those same thresholds. 2013 also saw the medical expense deduction threshold increase to 10 percent of adjusted gross income for those under age 65 (it will increase to 10 percent for those age 65 and over in 2017).

The year 2014 brings some additional significant tax provisions associated with health care reform.

 

THE INDIVIDUAL MANDATE

A penalty, otherwise known as a shared responsibility payment or individual mandate, will be imposed on applicable individuals who fail to obtain minimum essential health insurance coverage. The amount of the penalty is equal to the lesser of the amount of the national average premium for qualified health plans that offer a "Bronze" level of coverage (the basic level of coverage) or the sum of the monthly penalty amounts for the year. The monthly penalty amount is equal to one-twelfth of the greater of a flat dollar amount (the sum of the applicable dollar amounts for the individuals in the household not covered up to a maximum of 300 percent of the applicable dollar amount). The penalty amount is the greater of 1 percent of the taxpayer's household income for 2014 or the applicable dollar amount of $95 ($95 per adult and $47.50 per child, up to a family maximum of $285 -- 300 percent of $95). In 2015, the percentage increases to 2 percent and the applicable dollar amount increases to $325. In 2016, the percentage increases to 2.5 percent and the applicable dollar amount increases to $695.

There are a number of categories of exemption from the application of the penalty, such as a low-income exemption, a hardship exemption, a short-term lapse exemption, a non-U.S. residency exemption, and religious exemptions. Further, the Internal Revenue Service is limited in its ability to enforce the penalty. It can basically only offset the penalty against tax refunds due in the current or future years.

Individuals who do not qualify for an exemption had until March 31, 2014, to get minimum essential coverage in place to avoid the penalty. A later date may apply if an individual experiences a change of circumstances that makes them no longer exempt from the requirement. Possible changes in circumstances include marriage, the birth of a child, or relocation to another state. The law permits only a three-month short-term lapse in minimum essential coverage during a year that the taxpayer is otherwise subject to the penalty.

 

PREMIUM ASSISTANCE CREDIT

2014 also saw the introduction of a premium assistance credit to assist lower-income taxpayers in affording health insurance obtained on the state exchanges. Many taxpayers may have already received the benefit of an advance credit when they applied for health insurance on an exchange based on the prior-year tax information. The credit is available to household incomes between 133 and 400 percent of the federal poverty level. The beginning percentage may be 100 percent in states that have not adopted expanded Medicaid coverage. The credit is based on a percentage of the household income, ranging from 2 percent at 133 percent of the federal poverty level to 9.5 percent at 300 to 400 percent of the federal poverty level. Household incomes up to and in excess of $90,000 could potentially qualify for this refundable premium assistance credit.

On the tax return for 2014, the correct amount of the premium assistance credit will be determined. Taxpayers who received too large an advance credit will owe some additional tax or have their tax refund reduced, and taxpayers who received too small or no advance credit will claim the credit on their tax return. The premium assistance credit is a refundable credit.

 

SMALL-BUSINESS CREDIT

2014 also brings changes to the small-business health insurance credit. From 2010 through 2013, the credit had been a maximum of 35 percent of the employer's premium expenses, with eligibility phasing out when the number of full-time employees reached 25 or average annual wages reached $50,000. The credit is available to small employers who cover at least 50 percent of the cost of single health care coverage for each employee.

In 2014, the percentage increases to 50 percent; however, to qualify for the credit, the health insurance was to have been purchased through a state exchange, and the employer can claim the credit for only two years. The IRS has been concerned that too few small businesses had been claiming the credit. There has also been concern that states were so focused on getting their individual exchanges up and operating that the exchanges for small business, the so-called "SHOP" exchanges, were getting pushed aside to be focused on later. The opening of the SHOP exchanges has therefore been delayed until Nov. 15, 2014. Small businesses can still claim the 50 percent credit for 2014 but will have to set up coverage outside of a SHOP exchange for 2014 and then utilize the SHOP exchange for 2015.

A small business eligible to use the SHOP exchange generally must have fewer than 100 employees, although it may be fewer than 50 employees in some states. Many small businesses that already had health insurance coverage in place for their employees can also qualify for the credit. These small businesses may have been entitled to a credit going back to 2010 and can file amended returns to claim the credit for any open years if they had not already done so.

 

INFORMATION REPORTING

Final regulations on information reporting of health care coverage were issued in March 2014, and delayed once again some of the health insurance information reporting requirements. The regulations address reporting of minimum essential coverage by health insurance issuers, some employers and others providing minimum essential coverage and reporting of health care coverage by applicable large employers. The final regulations apply to calendar years beginning after Dec. 31, 2014, and thus apply to reporting in 2015 for the 2014 calendar year. However, the regulations specify that no penalties will apply if a reporting entity first reports beginning in 2016 for calendar year 2015.

 

EMPLOYER PENALTY

Also postponed until 2015 is the penalty on any employer failing to provide minimum essential coverage. Employers who have 50 or more full-time equivalent employees are subject to the penalty. Final regulations issued in February, however, limit the employer mandate in 2015 to "larger" employers (employers with 100 or more employees). Furthermore, for 2015, larger employers need only provide coverage to 70 percent of their full-time employees (rather than 95 percent, which will be applicable in 2016). Employers with 50 to 99 employees do not have to comply with the employer mandate until 2016, although employers in this category must report on their workers and coverage for 2015.

The penalty, when it does apply, is generally applicable if any of those employees are certified to the employer as having enrolled in a qualified health plan and receive a premium assistance tax credit or cost-sharing reduction. The annual penalty is equal to $2,000 per full-time employee, assessed monthly, but there is a 30-employee exclusion. Employers and their tax advisors should spend 2014 anticipating how they will address these potential penalties in 2015. Some employers may decide that paying the penalty may make more business sense than providing the required coverage.

 

SUMMARY

As the provisions of health care reform continue to become effective, more and more tax provisions come into effect. 2014 will be another significant year in the roll out of the tax provisions of health care reform. Taxpayers and their advisors have a number of issues related to health care reform to address in 2014. Individuals must address obtaining minimum essential coverage and the possible credit available to help pay for that coverage or face possible penalties. Businesses must address the decision of whether to provide minimum essential coverage and the possible tax credit available to help pay for that coverage, or whether to risk possibly being subject to penalties starting in 2015.

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

 

 

LARA Alerts of Telephone Scam Targeting Michigan Businesses; Do Not Respond

 

The Michigan Department of Licensing and Regulatory Affairs (LARA) Director Steve Arwood today warns Michigan corporations not to give out their business information to callers identifying themselves as representatives from the State of Michigan Corporations Division. They are not. Michigan business owners are receiving telephone calls from an individual who says that they are a representative from the State of Michigan Corporations Division. The caller is requesting the business address and indicating that the information is required by the State of Michigan Corporations Division in order to complete an annual update. These calls are not legitimate; do not respond. The number (882-014-0325) has been linked to similar scams in numerous other states. Legitimate notices and mailings to Michigan businesses from LARA's Corporations Division are mailed to the resident agent at the registered office address on record. If you are not sure about an inquiry you've received, please contact the LARA Corporations, Securities and Commercial Licensing Bureau at 517.241.6470.

 

 

IRS Tip Sheet on Gambling Income and Losses

Whether you like to play the ponies, roll the dice or pull the slots, your gambling winnings are taxable. You must report all your gambling income on your tax return. If you’re a casual gambler, odds are good that these basic tax tips can help you at tax time next year:

1. Gambling income.  Gambling income includes winnings from lotteries, horse racing and casinos. It also includes cash prizes and the fair market value of prizes like cars and trips.

2. Payer tax form.  If you win, you may get a Form W-2G, Certain Gambling Winnings, from the payer. The IRS also gets a copy of the W-2G. The payer issues the form depending on the type of game you played, the amount of your winnings and other factors. You’ll also get the form if the payer withholds taxes from what you won.

3. How to report winnings.  You must report all your gambling winnings as income. This is true even if you don’t receive a Form W-2G. You normally report your winnings for the year on your tax return as ‘other income.’

4. How to deduct losses.  You can deduct your gambling losses on Schedule A, Itemized Deductions. The amount you can deduct is limited to the amount of the gambling income you report on your return.

5. Keep gambling receipts.  You should keep track of your wins and losses. This includes keeping items such as a gambling log or diary, receipts, statements or tickets. 

 

 

 

Avoid Summertime Tax Scams

Ah, summertime! Warm days, rest and recreation and…tax scams. Thieves don’t stop victimizing unsuspecting taxpayers with their scams after April 15. Identity theft, phone and phishing scams happen year-round. Those three top the IRS’s ‘Dirty Dozen’ list of tax scams this year. Here’s some important information you should know about these common tax scams:

1. Identity Theft.  Identity thieves steal personal and financial information to commit fraud or other crimes. This can include your Social Security number or bank information. An identity thief may file a phony tax return to claim a fraudulent refund.

 The IRS has a special identity protection page on IRS.gov. It has many resources you can use to reduce your risk of becoming a victim. The page can also tell you what steps to take if you are a victim of identity theft and need help. This includes how and when you should contact the IRS Identity Protection Specialized Unit.

2. Phone Scams.  In these scams, thieves pose as the IRS and call would-be victims with one goal in mind: to steal their money. Callers will tell you that you owe taxes and demand immediate payment. They will tell you that you must pay the bogus tax bill with a pre-loaded debit card or wire transfer. The callers are often abusive and threaten arrest or deportation. They may know the last four digits of your Social Security number. They also rig caller ID to falsely show that the call is from the IRS.

 Keep in mind that if a person owes taxes, the IRS will first contact them by mail, not by phone. The IRS doesn’t ask for payment with a pre-paid debit card or wire transfer. If you owe, or think you might owe federal taxes and you get one of these calls, hang up. Call the IRS at 800-829-1040. The IRS will work with you to pay what you owe. If you don’t owe taxes, call and report the incident to the Treasury Inspector General for Tax Administration at 800-366-4484.

3. Phishing Scams.  Criminals use the IRS as bait in a phishing scam. Scammers typically send emails that purport to come from the IRS. They often lure their targets with a false promise of a refund or the threat of an audit. They may also set up a phony website that looks like the real IRS.gov. These phony sites often have the IRS seal and other graphics to make them appear official. Their goal is to get their victim to reveal personal and financial information. They use the information they get to steal identities and commit fraud.

 The IRS doesn’t contact people by email about their tax account. Nor does the agency use email, social media, texting or fax to initiate contact or ask for personal or financial information. If you get an email like this, do not click on a link or open any attachments. You should instead forward it to the IRS atphishing@irs.gov. For more on this topic visit IRS.gov and select the ‘Reporting Phishing’ link at the bottom of the page.

Don’t let tax scams take the fun out of your summer. Be alert to phone and phishing email scams that use the IRS as a lure. Visit the genuine IRS website, IRS.gov, for more on what you can do to avoid becoming a victim and how to report tax fraud.

 

 

 

Art of Accounting: Hot Shot Sales Manager Is Not Such a Hot Shot

A client decided that to grow her business she needed a top-tier sales manager and recruited someone from a much larger competitor.

The negotiations went well, but the asking salary and commission structure seemed out of line. The client wanted me to see if I could come up with a counter package that back-loaded the benefits based on performance, with the understanding that if my client had to cut the relationship her losses would be minimized.

The client arranged for a meeting in her office where I would lay out the offer, and then we would discuss it over lunch as well as the business strategies going forward. On the way to lunch we passed an ATM, and the prospect asked if she could stop for a minute so she could get some cash. She withdrew $40.00.

At lunch I seemed to be much tougher than my client and I decided beforehand, but we made a deal and at much better terms than we planned on. Afterwards the client asked me why I changed so much. I explained that the $40.00 withdrawal indicated that the sales manager was not such a big-picture hot shot as she implied, and she didn't seem to manage her own finances as well as she should. I explained that we made the right deal, understanding that this was the only prospect my client had.

The takeaway here is to be observant of details. When negotiating, use everything at your disposal. You cannot have too much information, and the right information is precious.

 

Edward Mendlowitz, CPA, is a partner in WithumSmith+Brown, PC, CPAs. He has authored 20 books and has written hundreds of articles for business and professional journals and newsletters plus a Tax Loophole article for every issue of TaxHotline for 27 years. Ed also writes a blog twice a week that addresses issues his clients have at www.partners-network.com. He is the winner of the Lawler Award for the best article published during 2001 in the Journal of Accountancy. He has also taught in the MBA graduate program at Fairleigh Dickinson University, and is admitted to practice before the U.S. Tax Court. Ed welcomes practice management questions and he can be reached at WithumSmith+Brown, One Spring Street, New Brunswick, NJ 08901, (732) 964-9329, emendlowitz@withum.com.

 

 

 

IRS: Now is the Time for a Mid-Year Premium Tax Credit Checkup

If you have insurance through the Health Insurance Marketplace, you may be getting advance payments of the premium tax credit. These are paid directly to your insurance company to lower your monthly premium. Changes in your income or family size may affect your premium tax credit. If your circumstances have changed, the time is right for a mid-year checkup to see if you need to adjust the premium assistance you are receiving. You should report changes that have occurred since you signed up for your health insurance plan to your Marketplace as they occur.

            Changes in circumstances that you should report to the Marketplace include, but are not limited to:

·         an increase or decrease in your income

·         marriage or divorce

·         the birth or adoption of a child

·         starting a job with health insurance

·         gaining or losing your eligibility for other health care coverage

·         changing your residence

Reporting the changes will help you avoid getting too much or too little advance payment of the premium tax credit. Getting too much means you may owe additional money or get a smaller refund when you file your taxes. Getting too little could mean missing out on premium assistance to reduce your monthly premiums.

            Repayments of excess premium assistance may be limited to an amount between $400 and $2,500 depending on your income and filing status. However, if advance payment of the premium tax credit was made but your income for the year turns out to be too high to receive the premium tax credit, you will have to repay all of the payments that were made on your behalf, with no limitation. Therefore, it is important that you report changes in circumstances that may have occurred since you signed up for your plan.

            Changes in circumstances also may qualify you for a special enrollment period to change or get insurance through the Marketplace. In most cases, if you qualify for the special enrollment period, you will have sixty days to enroll following the change in circumstances. You can find Information about special enrollment at HealthCare.gov.

 

More Information

Find out more about the premium tax credit and other tax-related provisions of the health care law atIRS.gov/aca.

 

 

 

IRS.gov has information about the health care law and its effect on your taxes

 There is a lot of information in the news and online about the health care law and its effect on your taxes. For the most current answers to questions you may have, visit IRS.gov/aca.http://www.irs.gov/uac/Affordable-Care-Act-Tax-Provisions-Home

            From the individual shared responsibility provision to the definition of minimum essential coverage, the IRS website covers a wide range of health care topics and how they relate to your taxes.

            The IRS knows that many taxpayers want to know how the health care law will affect them when filing their taxes next year. When questions come up, IRS.gov is a great place for taxpayers to begin finding the answers they need – when they need them.

            This information is especially important for individuals because several provisions of the law went into effect this year, such as the premium tax credit and the requirement for individuals to have minimum essential coverage. The IRS will continue to post information that is relevant and helpful to you as you get ready to prepare and file your 2014 tax return.

            At IRS.gov/aca, you’ll find frequently asked questions, legal guidance, and links to other useful sites. You can also access valuable information about specific topics, including the premium tax credit for individuals, rules and responsibilities for employers, as well as tax provisions for insurers, tax-exempt organizations and other businesses.

            Aside from IRS.gov, we also post new guidance and information about the health care law on the official IRS Twitter,  Tumblr   and Facebook  accounts. You can also access a Web-based IRS flyer, Health Care Law Online Resources,  for links to other federal agencies that also have a role in the health care law.

 

More Information

 Find out more about the tax-related provisions of the health care law at IRS.gov/aca

 

 

 

 

Special Tax Benefits for Members of the Armed Forces

Special tax benefits apply to members of the U. S. Armed Forces. For example, some types of pay are not taxable. And special rules may apply to some tax deductions, credits and deadlines. Here are ten of those benefits:

1. Deadline Extensions.  Some members of the military, such as those who serve in a combat zone, can postpone some tax deadlines. If this applies to you, you can get automatic extensions of time to file your tax return and to pay your taxes.

2. Combat Pay Exclusion.  If you serve in a combat zone, certain combat pay you get is not taxable. You won’t need to show the pay on your tax return because combat pay isn’t included in the wages reported on your Form W-2, Wage and Tax Statement. Service in support of a combat zone may qualify for this exclusion.

3. Earned Income Tax Credit.  If you get nontaxable combat pay, you may choose to include it tofigure your EITC. You would make this choice if it increases your credit. Even if you do, the combat pay stays nontaxable.

4. Moving Expense Deduction.  You may be able to deduct some of your unreimbursed moving costs. This applies if the move is due to a permanent change of station,

5. Uniform Deduction.  You can deduct the costs of certain uniforms that regulations prohibit you from wearing while off duty. This includes the costs of purchase and upkeep. You must reduce your deduction by any allowance you get for these costs.

6. Signing Joint Returns.  Both spouses normally must sign a joint income tax return. If your spouse is absent due to certain military duty or conditions, you may be able to sign for your spouse. In other cases when your spouse is absent, you may need a power of attorney to file a joint return.

7. Reservists’ Travel Deduction.  If you’re a member of the U.S. Armed Forces Reserves, you may deduct certain costs of travel on your tax return. This applies to the unreimbursed costs of travel to perform your reserve duties that are more than 100 miles away from home.

8. Nontaxable ROTC Allowances.  Active duty ROTC pay, such as pay for summer advanced camp, is taxable. But some amounts paid to ROTC students in advanced training are not taxable. This applies to educational and subsistence allowances.

9. Civilian Life.  If you leave the military and look for work, you may be able to deduct some job hunting expenses. You may be able to include the costs of travel, preparing a resume and job placement agency fees. Moving expenses may also qualify for a tax deduction.

10. Tax Help.  Most military bases offer free tax preparation and filing assistance during the tax filing season. Some also offer free tax help after April 15.

 

 

 

Top Ten Tax Facts if You Sell Your Home

Do you know that if you sell your home and make a profit, the gain may not be taxable? That’s just one key tax rule that you should know. Here are ten facts to keep in mind if you sell your home this year.

1. If you have a capital gain on the sale of your home, you may be able to exclude your gain from tax. This rule may apply if you owned and used it as your main home for at least two out of the five years before the date of sale.

2. There are exceptions to the ownership and use rules. Some exceptions apply to persons with a disability. Some apply to certain members of the military and certain government and Peace Corps workers. For details see Publication 523, Selling Your Home.

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

4. If the gain is not taxable, you may not need to report the sale to the IRS on your tax return.

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

6. Generally, you can exclude the gain from the sale of your main home only once every two years.

7. If you own more than one home, you may only exclude the gain on the sale of your main home. Your main home usually is the home that you live in most of the time.

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

9. If you sell your main home at a loss, you can’t deduct it.

10. After you sell your home and move, be sure to give your new address to the IRS. You can send the IRS a completed Form 8822, Change of Address, to do this.

 

 

More Small Business Employees Getting Raises

BY MICHAEL COHN

Employees of U.S. small businesses saw their average paychecks rise for the first time this year, according to online payroll provider SurePayroll.

The July 2014 edition of the SurePayroll Small Business Scorecard indicated that the average paycheck rose 0.2 percent in July, after being flat or down throughout 2014.

The average paycheck increase comes on the heels of a profitable first half of the year for small businesses. The Scorecard optimism survey found in June that 62 percent of small businesses were profitable in the first half. Close to seven in 10 (68 percent) also say they're optimistic about the small business economy.

 “Small business owners have done a great job maximizing their resources ever since the recession, and as they reap the profits from that, it appears they're starting to reward employees with some extra cash,” said SurePayroll general manager Andy Roe in a statement.

SurePayroll’s former president and CEO, Michael Alter, departed in May to become CEO of Tie Bar, a necktie retailer based in Chicago.

Small businesses have used a variety of tactics to strengthen themselves since the recession, according to the latest optimism survey by SurePayroll, a wholly owned subsidiary of Paychex. The top tactics that small business owners said were most important included increased marketing efforts, key hires, a leaner staff, using technology to streamline business and save cash, and planning around an environment of slow growth.

“Ultimately, what we want to see for the economy is more hiring, more growth and more people spending on Main Street,” said Roe. “In the meantime, it’s encouraging to see the boost in the average paycheck, whether that's from more opportunities for overtime, bonuses or raises.”

After being flat in June, hiring slipped 0.2 percent in July nationwide. Regionally, it was flat in South; down 0.4 percent in Midwest and Northeast; and down 0.1 percent in the West. The average paycheck was up across the board regionally: 0.4 percent in the Midwest; 0.2 percent in the South; and 0.1 percent in the Northeast and West. The percentage of independent contractors working for small businesses nationwide grew 0.02 percent to 6.59 percent.

 

 

GAO Finds It Easy to Fake Applications for Health Insurance Premium Tax Credits

BY MICHAEL COHN

Undercover investigators working with the Government Accountability Office found it was easy to falsify information when applying for Premium Tax Credits to help pay for health insurance.

As part of a “secret shopper” investigation, the GAO said in a preliminary report that it created 18 fictitious identities to apply for premium subsidies through the federal health insurance exchange by telephone, online at HealthCare.gov and in-person. With only one exception, the GAO investigators were able to get Premium Tax Credits and health insurance with fake information through telephone and online applications, according to a preliminary report requested by Republicans on the House Ways and Means Oversight Subcommittee, which held a hearing on the matter Wednesday (see Congress Probes Legitimacy of ACA Premium Tax Credits). 

 

Out of the 12 applications with false information for the federal exchanges, 11 were approved, Republicans on the committee noted. The total amount of credits was $2,500 per month or $30,000 per year and is currently being paid out for insurance policies for these fictitious individuals.

Investigators provided fake documents, such as Social Security Numbers and proof of income and citizenship, which proved to be no barrier to getting taxpayer-funded credits. In addition, investigators found that federal contractors made no effort to authenticate documents applicants provided.

The GAO made six in-person attempts to sign up for federal subsidies, Republican lawmakers noted. The GAO was unable to obtain assistance in five of those attempts for a range of reasons including one navigator stating assistance was not available because HealthCare.gov was down and another declining to provide assistance. The assisters have received tens of millions of dollars in federal grants to provide services to applicants.

“We are seeing a trend with Obamacare information systems: under every rock, there is incompetence, waste, and the potential for fraud,” said House Ways and Means Committee chairman Dave Camp, R-Mich. “Last month, we found that the administration was unable to verify income or eligibility for insurance subsidies. Now, we learn that in many cases, the exchange is unable to screen out fake identities or documents.”

Rep. Joseph Crowley, D-N.Y., suggested during the hearing that it was premature, as the GAO had not completed its investigation and taxpayers have not yet filed tax returns claiming the tax credit. “What is the ultimate benefit to the criminal?” Crowley asked. “Is it a free colonoscopy?”

He noted that there are already substantial penalties for falsifying information under the health care law. Crowley accused Republicans of using the hearing to exploit their dislike of the health care law. “It just another attempt to try to smear the Affordable Care Act,” he said.

Oversight Subcommittee chairman Charles Boustany, R-La., countered that it was important to catch any problems early with the tax credits.

Seto Bagdoyan, acting director of audit services at the GAO’s Forensic Audits and Investigative Service, told lawmakers that the GAO report was not yet investigating the IRS’s role in the process of verifying the tax credits. The GAO report looked at the role of the Centers for Medicare & Medicaid Services.

On Tuesday, a pair of conflicting federal appeals court rulings were issued on the question of whether the IRS is allowed to provide Premium Tax Credits for health insurance purchased on a federal exchange as opposed to the state exchanges (see Obamacare Suffers Blow as Court Bars Federal Exchange U.S. Aid and Employers Won’t Feel Immediate Sting from Federal Court ACA Subsidy Ruling).

The Centers for Medicare & Medicaid Services (CMS) officials told the GAO they have internal controls for health care coverage eligibility determinations. The GAO's undercover testing addressed processes for identity- and income-verification, with preliminary results revealing a number of questions.

For 12 applicant scenarios, the GAO tested "front-end" controls for verifying an applicant's identity or citizenship/immigration status. Marketplace applications require attestations that information provided is neither false nor untrue. In its applications, the GAO also stated income at a level to qualify for income-based subsidies to offset premium costs and reduce cost sharing. For 11 of these 12 applications, which were made by phone and online using fictitious identities, the GAO obtained subsidized coverage. For one application, the marketplace denied coverage because GAO's fictitious applicant did not provide a Social Security number as part of the test.

The Patient Protection and Affordable Care Act requires the marketplace to provide eligibility while identified inconsistencies between information provided by the applicant and by government sources are being resolved through submission of supplementary documentation from the applicant. For its 11 approved applications, the GAO was directed to submit supporting documents, such as proof of income or citizenship; but the GAO found the document submission and review process to be inconsistent among these applications. As of July 2014, the GAO had received notification that portions of the fake documentation sent for two enrollees had been verified.

According to CMS, its document-processing contractor is not required to authenticate documentation; the contractor told us it does not seek to detect fraud and accepts documents as authentic unless there are obvious alterations. As of July 2014, GAO continues to receive subsidized coverage for the 11 applications, including 3 applications where GAO did not provide any requested supporting documents.

For six applicant scenarios, the GAO sought to test the extent to which, if any, in-person assisters would encourage applicants to misstate income in order to qualify for income-based subsidies. However, the GAO was unable to obtain in-person assistance in 5 of the 6 initial undercover attempts. For example, one in-person assister initially said that he provides assistance only after people already have an application in progress. The in-person assister was not able to assist us because HealthCare.gov website was down and did not respond to follow-up phone calls. One in-person assister correctly advised the GAO undercover investigator that the stated income would not qualify for subsidy.

A key factor in analyzing enrollment is to identify approved applicants who put their policies in force by paying premiums. However, CMS officials stated that they do not yet have the electronic capability to identify such enrollees. As a result, CMS must rely on health insurance issuers to self-report enrollment data used to determine how much CMS owes the issuers for the income-based subsidies. Work is underway to implement such a system, according to CMS, but the agency does not have a timeline for completing and deploying it.

The GAO said it is continuing to look at these issues and will consider recommendations to address them.

 

 

Obamacare Suffers Blow as Court Bars Federal Exchange U.S. Aid

BY ANDREW ZAJAC

 (Bloomberg) President Barack Obama’s health-care overhaul suffered a potentially crippling blow as a U.S. appeals court ruled the government can’t give financial assistance to anyone buying coverage on the insurance marketplace run by federal authorities.

The decision, if it withstands appeals, may deprive more than half the people who signed up for Obamacare the tax credits they need to buy a health plan.

The government will immediately seek review of the court’s decision and in the meantime nothing has changed for people getting premium tax credits, Justice Department spokeswoman Emily Pierce said. A White House official said the U.S. will seek a review by the full appeals court, where seven of the 11 judges were nominated by Democratic presidents, including four by Obama. The judges didn’t grant the plaintiff’s request for a suspension of the tax credits, the official said.

The way Congress wrote the Patient Protection and Affordable Care Act makes clear that the subsidy is available only to consumers who bought plans on state-run exchanges, the U.S. Court of Appeals in Washington ruled today, rejecting a rule by Internal Revenue Service setting up that system.

The law “unambiguously forecloses the interpretation embodied in the IRS rule and instead limits the availability of premium tax credits to state-established exchanges,” U.S. Circuit Judge Thomas Griffith wrote for the majority of a three- judge panel.

 

‘With Reluctance’

The judges reached their conclusion “with reluctance,” Griffith, an appointee of Republican President George W. Bush wrote. He was joined by A. Raymond Randolph, who was nominated by President George H. W. Bush, also a Republican.

“Our ruling will likely have significant consequences both for millions of individuals receiving tax credits through federal exchanges and for health insurance markets more broadly. But high as those stakes are, the principle of legislative supremacy that guides us is higher still,” Griffith wrote.

U.S. Circuit Judge Harry Edwards, an appointee of Democratic President Jimmy Carter, dissented, calling the decision a “not-so-veiled attempt to gut” Obamacare.

Only 14 states and the District of Columbia have opted to set up their own marketplaces, making delivery of tax credits via the federal exchange crucial to meeting the health-care plan’s goal of broadening coverage in the U.S.

 

Bigger Pool

The plan’s success hinges on enlarging the pool of the insured, including those of modest means who need financial aid, to subsidize insurance costs for those who are ill.

Of the more than 8 million people who picked an insurance plan on the exchanges from October through April 19, 5.4 million selected one from the federal marketplace, according to a report by the U.S. Department of Health and Human Services.

According to the report, 85 percent of those picking a plan qualified for subsidies that reduce their premiums.

At least three other challenges to the health-care tax credits are percolating in federal courts in Virginia, Oklahoma and Indiana.

Arguments on an appeal of a ruling against opponents of the tax credits in Virginia were held May 14 in Richmond, Virginia.

 

No Division

The full circuit court in Washington will reverse the decision and the appeals court in Richmond, Virginia, will do the same, said Timothy Jost, a law professor at Washington & Lee University who has tracked implementation of Obamacare.

“There’s not going to be a division of the circuits, ultimately,” he said.

The health-care overhaul was signed into law by Obama in March 2010 after passing Congress with no Republican votes.

It’s been under political and legal assault ever since, while plagued by computer failures that impeded sign-ups on state and federal exchanges.

In June 2012, the law was narrowly upheld by the U.S. Supreme Court, which ruled that Congress has the power to make Americans carry insurance or pay a penalty. The high court didn’t rule on, or consider, the question of whether the law allows subsidies for plan buyers on the federal exchange.

The Supreme Court on June 30 ruled that closely held companies can claim a religious exemption from the requirement that they offer birth-control coverage in their worker health plans. That case, involving the craft-store chain Hobby Lobby Stores Inc. was among dozens of suits spawned by Obamacare’s contraceptive mandate.

 

Insurane Marketplace

Today’s ruling applies to a portion of the law making financial aid available to income-qualified people who buy their health insurance on a marketplace “established by the state.”

The government contends that when considered with other parts of the law, this language covers marketplaces set up by states themselves and by the federal government when it acts in place of states.

The IRS in May 2012 issued a rule making that point explicit. Financial aid, in the form of tax credits, would be available to taxpayers who obtain coverage on the federal exchange because that “is consistent with the language, purpose and structure” of the Affordable Care Act, according to the regulation.

The government argued to the appeals court that limiting the credits to the 14 state exchanges makes no sense because it flies in the face of the law’s aim of reducing the number of uninsured.

Further, according to government lawyers, many sections of the Affordable Care Act anticipate the issuance of tax credits through federal exchanges.

 

IRS Information

For example, the law obligates exchanges to report tax information to the IRS, a requirement that would serve no purpose “if federal exchanges were not authorized to deliver tax credits,” government lawyers wrote court papers filed at the appeals court.

Opponents of Obamacare, including those who brought the Washington case, argued that the court is bound by the language of the law limiting the tax credits to customers of state exchanges. The language was deliberately chosen to induce states to set up exchanges, lawyers for opponents told the appeals panel.

The lawsuit was brought by four individuals and three businesses from six states that didn’t set up exchanges.

They contend they’re being financially harmed by the requirements either to buy insurance or to offer it to their employees.

The case is Halbig v. Sebelius, 14-5018, U.S. Court of Appeals for the District of Columbia (Washington). The Virginia case is King v. Sebelius, 14-1158, U.S. Court of Appeals for the Fourth Circuit, (Richmond, Virginia).

 

Another Court Upholds Health Care Law

Financial aid to buy health insurance under President Obama’s health-care overhaul can be provided to people using the federal as well as state-run marketplaces, a U.S. appeals court in Virginia ruled, hours after an appeals court in Washington reached the opposite conclusion.

The court, preserving a key element of the administration’s plan, turned aside the argument of Obamacare opponents that Patient Protection and Affordable Care Act only allows assistance for buyers on the state exchanges, who represent fewer than half of those who bought health-care coverage under the plan.

The ruling, which upholds a lower court, is the third decision affirming the Obama administration’s contention that tax credits are intended for customers of state and federal exchanges alike.

The court said while the language of the law is ambiguous and subject to multiple interpretations, the IRS is entitled to deference in interpreting it to write regulations implementing the program.

“We uphold the rule as a permissable excercise of the agency’s discretion,” the three-judge panel said.

—With assistance from Alex Wayne in Washington.

 

 

Five Basic Tax Tips for New Businesses

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

1. Business Structure.  As you start out, you’ll need to choose the structure of your business. Some common types include sole proprietorship, partnership and corporation. You may also choose to be an S corporation or Limited Liability Company. You’ll report your business activity using the IRS forms which are right for your business type.

2. Business Taxes.  There are four general types of business taxes. They are income tax, self-employment tax, employment tax and excise tax. The type of taxes your business pays usually depends on which type of business you choose to set up. You may need to pay your taxes by making estimated tax payments.

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

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

5. Employee Health Care.  The Small Business Health Care Tax Credit helps small businesses and tax-exempt organizations pay for health care coverage they offer their employees. A small employer is eligible for the credit if it has fewer than 25 employees who work full-time, or a combination of full-time and part-time. Beginning in 2014, the maximum credit is 50 percent of premiums paid for small business employers and 35 percent of premiums paid for small tax-exempt employers, such as charities.

For 2015 and after, employers employing at least a certain number of employees (generally 50 full-time employees or a combination of full-time and part-time employees that is equivalent to 50 full-time employees) will be subject to the Employer Shared Responsibility provision.

 

 

 

 

The Top 10 Retirement Issues

Financial planners and thought leaders from the PFP Section of the American Institute of CPAs recently held a thought leadership seminar to determine the top issues related to retirement planning and aging that are facing Americans (and their advisors) – and how they’re changing due to demographic, financial and social factors.

From rising health care costs to changes in the critical factors changing estate planning, it’s a handy guide to the new landscape of retirement.

More information, as well as resources for financial planners, are available at the PFP section site.

 

Higher Health Costs

An estimated 10,000 Baby Boomers turn 65 every day. Higher-income individuals are often in better health at retirement and will face higher lifetime health costs as they live longer. Planning for these higher costs will be challenging, but very important.

 

Longer Life Expectancy

New research on asset sufficiency is challenging some of the standard retirement planning rules of thumb, such as the 4% safe withdrawal rate. A 65-year-old married couple retiring today will likely see at least one spouse live longer than the 30 years.

 

Balancing Risk and Return

Developing a proper asset allocation in a portfolio requires balancing many factors including risk tolerance, cash flow needs, time horizon and return requirements. Planners want to reduce risk as much as possible in the portfolio while still achieving a sufficient return to achieve the client’s financial goals – an even more challenging task in light of current low interest rates on cash and bonds.

 

Enjoying Retirement

While it is important to come up with a retirement withdrawal rate that is sustainable, it should also allow clients to enjoy their retirement. Planners and clients often focus on not running out of money, but clients also don't want to die with too much money left over.

 

Withdrawal Strategy

It can be very difficult to move from a lifetime of spending what comes in to drawing down on a portfolio. Coming up with an amount to keep in cash reserve -- and maintaining it -- is critical. Many people might find a bucket strategy helps them compartmentalize what they are spending in order to not stress about market fluctuations. Managing the tax impact of withdrawals and understanding how each piece of income is taxed is also very important.

 

Monitoring Expenses

Expenses are often much different in retirement than they are during working years, but they are still incredibly important to the overall plan. Often, clients will spend more in the early years of retirement, see expenses dip in the middle, then rise as the near the end of their lives and medical expenses climb. Also, not all expense categories grow at the same rate of inflation, and this needs to be considered when forecasting long-term expenses.

 

Social Security Uncertainty

The role of Social Security in the retirement planning process is changing as concerns grow over the availability of benefits for future generations. According to the Annual Report of the Board of Trustees, the reserves for Social Security will be fully depleted in 2033, which is not too far away. While it's impossible to predict what will happen to the system, planners and their clients need to consider the impact of potential reductions to payments.

 

When to File for Social Security

There are various Social Security claiming strategies that help to maximize the benefits for an individual or couple. The breakeven age where you would be better off delaying benefits typically occurs between your late 70s and early 80s, depending on how long you wait and some other factors. The 8% per year increase from full retirement age to age 70 is powerful, and once a client crosses that breakeven age, the benefit grows exponentially. Strategies such as “file and suspend” can be used to fully maximize Social Security benefits, especially for married couples.

 

Estate Planning

While estate planning is less important for federal estate tax reasons with the increase in the exemption amounts to over $5 million per person, the non-financial aspects of estate planning are still critical. Making sure clients have a power of attorney updated and in place, and addressing the need for health care documents like a health care power of attorney and advance directive can be very important. Trustee designations and naming the proper beneficiaries are often missed or not changed when life circumstances change.

 

Long-Term Care Needs

Long-term care costs are increasing -- as is the percentage of the population that will need this kind of care at some point in their lives. Looking broadly at how to fund these costs is important, whether that means self-insuring if you have enough assets or buying some form of LTC insurance.

 

 

 

Democrats Target Corporate Inversion Tax Deals in Hopes of Reviving Romney Weakness

BY RICHARD RUBIN, DEREK WALLBANK, DREW ARMSTRONG AND ZACHARY R. MIDER

(Bloomberg) Washington is buzzing this summer about inversions, and the chatter has nothing to do with the weather.

This week, Treasury Secretary Jacob J. Lew and Senate Majority Leader Harry Reid became the latest to press for a crackdown against corporate inversions. These are when U.S. companies switch their addresses to low-tax nations like Ireland, often through a takeover of a smaller company, reducing their tax bills while typically keeping their headquarters and listings in the U.S.

Democratic lawmakers were coalescing yesterday around their resistance to these deals, as a possible election-year rallying point. Reid, of Nevada, called for comprehensive rules against such changes of address. A handful of bills working through Congress already include language aimed at cracking down on the practice. White House Press Secretary Josh Earnest said President Barack Obama will discuss the issue more in coming weeks.

Senate Finance Chairman Ron Wyden, who will chair a hearing next week on international taxes and inversions, has also hardened his stance. The Oregon Democrat, who had until recently preferred putting retroactive limits on inversions as part of tax-code changes that could be a year or more off, said yesterday he was exploring how the “inversion loophole” could be plugged sooner, a move that is meeting Republican objections.

The day’s flurry came after Lew called for Congress to prevent companies from “effectively renouncing their citizenship to get out of paying taxes.” The Treasury has previously said that blocking inversions would prevent $17 billion from escaping the U.S. tax system over the next decade.

 

Campaign Weapon

Democrats are seizing on this potential campaign weapon ahead of their midterm-election bids to defend their control of the Senate in the face of foreign policy crises, a slow economic recovery and sagging popularity of Obama’s health-care law. Any Democratic campaign that targets tax-skirting corporations, and the lawmakers who back them, could echo successful efforts in the last presidential race to portray Republican candidate Mitt Romney as sheltering his wealth in trusts without paying his fair share.

“I’m hearing from businesses that are competing against people who are talking about inverting that will make it very difficult for them to compete, and who are going to be compelled themselves to invert,” said Representative Steny Hoyer of Maryland, the second-ranking House Democrat. “It’s going to very substantially undermine our country, and we need to act.”

 

Lower Taxes

Republicans generally shrugged off the challenge as a misguided effort to treat a symptom of what they see as a broader disease. The party’s leaders want a new tax code, with lower corporate tax rates than the current 35 percent—the highest in the industrialized world—to keep companies from bolting to lower-cost venues in a bid to stay competitive.

“The administration runs a risk—I mean, here we are well into the president’s second term and he continues to blame others for his own economic failures and underperformance,” said Representative Peter Roskam, an Illinois Republican, in an interview.

Passage of any Democratic-backed tax legislation in Congress will face hurdles amid legislative deadlock. Because Republicans control the House and can block Democratic proposals in the Senate, Republicans have the power to stop Congress from acting on inversions and press instead for revisions to the tax code. They’ve shown no sign of changing their position.

 

Government Contracts

Democrats led by Connecticut Representative Rosa DeLauro have sought to prevent companies that move their addresses overseas for tax purposes from accessing U.S. government contracts.

An amendment blocking contracts for companies that switched addresses to the Cayman Islands or Bermuda has been tacked on to four House spending bills so far this year. DeLauro plans to expand her focus beyond the island haven nations, she said yesterday in an interview.

“My view is to go whole hog: You’ve got Ireland, you’ve got the U.K., you’ve got the Netherlands,” she said. “We should shut down the opportunity for people to do this. It is un-American.”

 

Inversion Wave

The controversy over inversions has emerged from obscurity in little over a year, as the number and size of the deals have grown. At least seven companies and counting, including Medtronic Inc., Applied Materials Inc. and Mylan Inc., are working on plans to become foreign. Giants including Walgreen Co., Pfizer Inc., and Monsanto Co. have flirted with the idea this year. In all, some 41 U.S. companies have adopted foreign addresses for tax purposes since 1982.

U.S. lawmakers thought they had clamped down on inversions a decade ago, when they passed a law treating the companies as domestic for tax purposes. But an exception to the 2004 law for companies buying foreign competitors has spawned a second wave of inversions.

In most cases, as Bloomberg News reported earlier this year, the companies’ executives continue to live and work in the U.S.; one is even the chairman of his regional Federal Reserve Bank.

Meanwhile, as another Bloomberg News report showed, a section of the 2004 law meant to punish executives of inverting companies has backfired, in some cases providing new financial windfalls for these managers.

 

Ineffective Laws

Another set of laws meant to keep government contracts away from inverted companies has also been largely ineffective. Two days after a Bloomberg News report on the matter this month, the Republican-controlled House surprised DeLauro by endorsing new language targeting contracts for inverted companies.

The U.S., unlike most major economies, taxes the worldwide income of American-based companies. After those U.S.-based companies pay taxes to governments overseas for income earned elsewhere, they can defer residual U.S. taxes until they repatriate the money.

That system has created an incentive for companies to find ways to book profits in low-tax jurisdictions and leave them there. U.S. companies such as Apple Inc. have come under scrutiny from lawmakers for assigning profits to subsidiaries in low-tax or no-tax jurisdictions.

U.S. companies have accumulated nearly $2 trillion in profits around the world that haven’t been taxed by the U.S., led by General Electric Co.’s $110 billion.

 

Failed Measures

Congress and the IRS have been trying for decades to discourage inversions through tax policy. IRS rules to limit the tax benefits of inversions in the 1980’s and 1990’s failed to prevent a wave of them around the end of the millennium.

By 2002, as big companies including Ingersoll-Rand Co. and Stanley Works took steps to shift addresses to Bermuda, the issue captured Congress’s attention. The ranking Senate Finance Committee members from both parties pledged to pass a law to end inversions.

The legislation, which became law in 2004, meant that companies that simply shifted their addresses out of the country would remain domestic for tax purposes. However, there were several exceptions, including if they had “substantial” business in their new home, or if they merged with a foreign company whose shareholders ended up owning at least 20 percent of the combined firm.

By last year, a new group of companies, especially drugmakers, were using takeovers to adopt foreign addresses, with tax-friendly Ireland the new preferred corporate home. Drug companies are well positioned to benefit because they can shift profits to their tax homes by placing patents in subsidiaries there.

 

Pharmaceutical Inversions

Among the pharmaceuticals announcing inversions this year is Canonsburg, Pennsylvania-based Mylan Inc. Minneapolis-based Medtronic has reached a merger plan with Dublin-incorporated Covidien Plc, which has a clause allowing the companies to walk away if Congress changes the tax law. Pfizer Inc., based in New York, attempted to move its tax address to the U.K. by seeking to purchase London-based AstraZeneca Plc.

The Obama administration and congressional Democrats, including Wyden, are calling for legislation that raises the 20 percent threshold to 50 percent, meaning a U.S. firm couldn’t get a foreign tax address through a purchase of a smaller firm. Lew said at a conference in New York yesterday that the federal government doesn’t have regulatory options to limit inversions, and needs Congress to act.

 

Competitive Edge

Companies that invert gain a competitive advantage. Drug company chief executive officers have said that when a rival moves its legal address abroad, its lower tax rate can translate into higher earnings that in turn attract investors. With more cash and more freedom to use it, the rival gains an edge over the U.S. competitor in buying desirable assets. As more and bigger companies pursue inversions, these CEOs have said, the remaining firms are vulnerable and less competitive.

“We’re the last in our sector to have announced an inversion or to be domiciled outside the U.S.,” Mylan CEO Heather Bresch said on July 14. With a deal to buy Abbott Laboratories’ generic drugs line, her company will move its legal tax address abroad, as Actavis Plc did last year. “We were the last Mohican.”

Bresch, the daughter of U.S. Senator Joe Manchin, a Democrat from West Virginia, said she didn’t want to make the move.

“The loser in this is our country,” she said in an interview in May, two months before announcing a deal for Mylan to change addresses. “It’s unfortunate that corporate America leaves because Congress couldn’t find it within themselves to make our country competitive.”

 

Hot Issue

Tax avoidance has the potential, in theory, to be a hot midterm election issue. According to a Gallup poll conducted in April, 66 percent of Americans think corporations are paying too little in taxes, compared with 20 percent who think they are paying their fair share and 8 percent who think they are paying too much.

A focus on corporate transactions may have a limited populist appeal because the issue can be too complex for the campaign trail, said John Pitney, a professor of politics at Claremont McKenna College in Claremont, California. It might find a receptive audience in areas with significant job losses, he said.

Republicans could still loosen their opposition to legislation against inversions if they believe their chances of gaining the Senate majority are threatened because of this issue, said Terry Haines, a policy analyst with ISI Group LLC. With most races turning on local issues—such as fracking in Colorado or coal regulations in Kentucky—that may not be likely, he said.

“I don’t think the Republicans are feeling any heat on it at all,” Haines said in an interview yesterday. “It’s very much an open question as to whether they will.”

Unless inaction on inversions threatens to cost Republicans in the midterm elections, they have an incentive to wait until 2015, when they could control both houses of Congress and push tax policy in their direction.

 

 

 

Pulling IRS Into Your Business Dispute Might Not Be Such A Good Idea

People can get in a lot of trouble for not sending out all the 1099s they should.  I worry about that from time to time.  What I have not thought about much, until now, is the hazard of sending out a 1099.  The danger comes from Internal Revenue Code Section 7434 which provides for civil damages for the fraudulent filing of information returns.  Basically, if the person who you sent the 1099  can convince the court that the 1099 is wrong and that you were willful, they can get damages from you.  The minimum amount is $5,000, but what with attorneys fees and the like it will probably turn out to be more than that.  It was the case of David Shiner V Bernard I. Turnoy , that brought this new thing to worry about to my attention.  Here is the story.

The Dispute

According to the decision, Mr. Turnoy and Mr. Shiner had an agreement to equally divide the commissions on the sale of certain life insurance policies.  The policies were issued in November 2012.  Mr. Turnoy claimed that the commissions totaled $298,119.81.  Mr. Shiner believed that there was more.  Mr. Turnoy issued a check in the amount of $149,059.91 to Mr. Shiner in December of 2012.  It doesn’t seem that rounding the half cent in his favor made Mr. Shiner happy.  He was upset about something else.

The check bore a restrictive endorsement that indicated that acceptance of it would constitute full satisfaction of the disputed debt.  Mr. Shiner was not going for that.  Mr. Shiner started a lawsuit and returned the check.  By that time Mr. Turnoy had already issued him a 1099.

Was The 1099 Right?

The judge found that the 1099, was not right, so I guess it wasn’t, but otherwise I might not be so sure.  Here is some of the analysis.

For purposes of a return of information, an amount is deemed to have been paid when it is credited or set apart to a person without any substantial limitation or restriction as to the time or manner of payment or condition upon which payment is to be made, and is made available to him so that it may be drawn at any time, and its receipt brought within his own control and disposition.

Whether there is a condition upon which payment is to be made is essentially the same question as whether the creditor has the legal right to refuse to accept that payment (see Bones v. Comm’r, 4 T.C. 415, 420 (1944)). Normally creditors do not have the right to refuse or delay their acceptance of a check for tax purposes, and so they are in constructive receipt from the time they receive the check. When there is a dispute over the underlying debt for which a check purports to be in full satisfaction, however, the placement of a restrictive endorsement on that check imposes a condition upon its acceptance and gives the creditor a legal right to reject the condition by refusing the check. In such situations receiving a check with a restrictive endorsement does not constitute constructive receipt, and no payment will be considered as having been made unless and until the check is actually accepted.

The thing that I find just a bit confusing is the precise timing.  Mr. Turnoy was advised by his CPA that he needed to send the 1099 out by January 31.  He sent it on January 25.  He received notice of the lawsuit on January 30.  The decision does not discuss Form 1096, which is the transmittal of the 1099 to the IRS which is due at the end of February.

The Court was rather harsh in its analysis of Mr. Turnoy’s willfulness.

Turnoy contends that he “at the very least had a good-faith belief that he satisfied his debt to Plaintiff with the Check” .  In other words, Turnoy takes the position that by sending a check containing a restrictive endorsement he was both making a payment and fully satisfying a disputed debt — regardless of whether the check was accepted. That preposterous argument is no better than an attempt to have his proverbial cake and eat it too: conditioning the check by inserting a restrictive endorsement, thus expecting to use Shiner’s acceptance of the check as protection from future liability, while simultaneously insisting that the check itself constituted payment to Shiner regardless of whether it was actually accepted. (Emphasis added)

 

 What About Damages?

The Court has not yet determined damages and that is where things seem a little odd.  The most common practice I have seen when you have a 1099 that you think is wrong is to include it in the return and then back it out, possibly with an explanatory statement.  That way the return will not generate a document mismatch.  Since very few returns are ever audited, that will likely be the end of the story.  For whatever reason, this particular case, flew through the system with this decision coming less than a year after it was filed.  Oddly enough, that makes it rather impractical to say whether the “bad 1099″ really did any harm, since there is still plenty of time for Mr. Shiner’s return to get audited – or, as may be more likely, not.

 

Maybe That Restrictive Endorsement Was Not Such A Hot Idea

Somehow I doubt that creating tax drama will help settle a business dispute.  When I think about how Mr. Turnoy is supposed to handle his own 2012 return, I get a headache.  Assuming he is on the cash basis, does he still have a good argument for deducting the  $149,059.91 that it has now been ruled he can’t say he paid?  Some sort of agency argument.  Assuming the deduction is not good, will he be able to use “claim of right” when he ultimately does pay?  Interestingly the judge in this case is not inclined to let the matter slide. One of the footnotes reads:

As a corollary of this opinion’s holding, Turnoy necessarily underpaid his own 2012 income taxes. Because the IRS would have no knowledge of that underpayment without being apprised of this opinion, a copy is being transmitted to the Chicago office of that agency.

I also have to wonder whether the 1099 lawsuit was worth the trouble. If Mr. Shiner’s goal is to collect money from Mr. Turnoy, possibly not.  On the other hand, if he is seeking to make his life miserable he may have succeeded.

 

 

 

 

 

Disclaimer: This article is for general information purposes only, and is not intended to provide professional tax, legal, or financial advice. To determine how this or other information in this newsletter might apply to your specific situation, contact us for more details and counsel.

 

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