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Fact Sheet: Social Security And Medicare Trustees Report

WASHINGTON - Today the Social Security and Medicare Boards of Trustees issued their annual financial review of the programs. Social Security's retirement and disability programs have dedicated resources sufficient to cover benefits for the next 20 years, until 2033.  After 2033, it is expected that the income from the dedicated payroll tax will be sufficient to finance about three quarters of scheduled benefits through 2087. 

The Medicare Hospital Insurance Trust Fund will have sufficient funds to cover its obligations until 2026, two years later than was projected last year, and nine years later than was projected in the last Report issued prior to passage of the Affordable Care Act.

Social Security

Taken in combination, the Old Age, Survivor's and Disability Insurance (OASDI) Trust Funds are projected to be exhausted in 2033, at which point annual revenues from the dedicated payroll tax will be sufficient to fund three quarters of scheduled benefits through 2087. Taken independently, the Old Age and Survivor's Insurance (OASI) trust fund is projected to reach exhaustion in 2035, and the Disability Insurance trust fund is expected to reach exhaustion in 2016. Beyond these dates, dedicated payroll tax from each trust fund will be sufficient to pay more than three quarters of scheduled retirement benefits and 80 percent of scheduled disability benefits across the 75-year window. 

While legislation is needed to address all of Social Security's financial imbalances, the need has become most urgent with respect to the program's disability insurance component.


The Medicare Hospital Insurance (HI) Trust Fund will have sufficient funds to cover its obligations until 2026, two years later than was projected last year, and nine years later than was projected in the last report issued prior to passage of the Affordable Care Act.
After 2026, the share of HI costs that could be financed with dedicated payroll tax revenues would decline slowly from 87 percent in 2033 to about 70 percent in 2050 and later.

Part B of Supplementary Medical Insurance (SMI), which pays doctors' bills and other outpatient expenses, and Part D, which provides access to prescription drug coverage, are both projected to remain adequately financed into the indefinite future because current law automatically provides financing each year to meet the next year's expected costs. However, the aging population and rising health care costs cause SMI projected costs to grow steadily from 2.0 percent of GDP in 2012 to approximately 3.3 percent of GDP in 2035, and then more slowly to 4.0 percent of GDP by 2087. Roughly three-quarters of these costs will be financed from general revenues and about one-quarter from premiums paid by beneficiaries.  



The Marriage Penalty

The marriage penalty occurs under the current tax system when a married couple pays more federal income tax when filing jointly than they would if they had remained single and each filed as an individual taxpayer. Historically,Congress has taken steps and passed legislation to provide relief from the marriage penalty. However, the 2010 Affordable Care Act (Affordable Care Act) and the American Taxpayer Relief Act of 2012 (2012 Taxpayer Relief Act) increased the marriage penalty for some high-income couples. Let’s take a look at how this legislation adversely impacts married taxpayers.

The Affordable Care Act brought about the 3.8% net investment income tax (3.8% NIIT) and additional 0.9% Medicare tax. These taxes are sometimes referred to as “Medicare Taxes.”

The 3.8% NIIT is generally assessed on investment income (interest, dividends, annuities, royalties, rents, and capital gains). The tax is 3.8% of the lesser of net investment income or modified adjusted gross income (MAGI) over an applicable threshold. The thresholds are $250,000 for a married couple filing jointly and $200,000 for a single filer. So a married couple with MAGI of $400,000, all of which is investment income would pay a surtax of 3.8% on $150,000 ($400,000 – $250,000) or $5,700. If that couple was not married, filed as single taxpayers, and each had $200,000 of income subject to the 3.8% NIIT, they would each have an exclusion of $200,000 available and, therefore, neither would owe this surtax.

The additional 0.9% Medicare tax is assessed on employment and self-employment earnings above the same thresholds. Therefore, a married couple with joint employment earnings of $400,000 would pay the additional 0.9% Medicare tax on $150,000 ($400,000 – $250,000) or $1,350. Once again, if the individuals were not married, each had $200,000 in earnings, and filed as single taxpayers, they each would have the $200,000 exclusion available and neither would owe the tax. When added to the 3.8% NIIT, that’s a $7,050 ($5,700 + $1,350) marriage penalty resulting from the Affordable Care Act.

The 2012 Taxpayer Relief Act added new 39.6% ordinary income and 20% capital gains rates for some high-income taxpayers. Once again, these new rates potentially increase the marriage penalty. Both rates apply to married couples filing jointly with taxable income above $450,000 and single taxpayers with taxable income above $400,000.

Married individuals with taxable income of $800,000 filing jointly, will pay 39.6% on $350,000 (800,000 – $450,000) of that income. In contrast, if the couple were not married, had $400,000 of taxable income each, and filed as two single taxpayers, their marginal tax rate (rate on the last dollar of income) would be 35%. So, they would not pay 39.6% on any of their income, but would top out in the 35% bracket. This would make quite a difference in their overall tax bill. In a similar fashion, a married couple filing jointly with $800,000 in long-term capital gains would have $350,000 ($800,000 – $450,000) subject to the new 20% capital gains rate. Once again, if they were not married with $400,000 each in long-term capital gains and filed as two single taxpayers, the maximum rate on their gains would be 15%.

There you have it. The marriage penalty is alive and well when it comes to high-income taxpayers. Please contact us to discuss the appropriate strategies to reduce your tax bill.


New In-plan Roth Rollover Provision

A provision in the recently enacted American Taxpayer Relief Act of 2012 permits an individual to transfer any portion of their balance in an employer-sponsored tax- deferred retirement plan account into a Roth IRA account under that plan. This transfer option for retirement plans is only available if the employer plan includes this feature (i.e., in-plan Roth) in the plan. Prior to the Act, only eligible retirement plan distributions could be rolled over to an in-plan Roth IRA.

The catch under the new Roth transfer provision is that the transfer will be fully taxed, assuming the conversion is being made with pretax dollars (money that wasn’t taxed to an employee when contributed to the qualified employer-sponsored retirement plan). The taxable amount will also include any earnings on those pretax dollars.

The provision is effective for post-2012 transfers, in tax years ending after December 31, 2012. Conditions and restrictions apply.




Tax Impact of Investment Strategies

Higher 2013 income and capital gains rates and the new 3.8% net investment income tax (3.8% NIIT) may cause high-income investors to reexamine their investment strategy. The type of account, taxable or tax deferred (e.g., qualified retirement plan), could affect the investment strategy in a number of ways. Qualified retirement plans, because of their tax-deferred nature, tend to favor the following strategies:

1.      More frequent turnover (securities transactions within the portfolio) can be tolerated. Recognition of gains is not an issue in a qualified plan account; therefore, a strategy that allows frequent buying and selling (turnover) of the underlying investments would not have a detrimental effect because of associated tax liabilities.

2.      More active management might be appropriate for a qualified plan, whereas passive investments such as index funds, might be held in taxable accounts.

3.      Large-cap investments, which are more likely to be dividend-paying companies, may be better suited for qualified plan accounts because the income is not currently taxed.

4.      Portfolio rebalancing (e.g., shifting funds from small cap to large cap stocks) is better accomplished using assets in a qualified plan to minimize the recognition of taxable income.

Taxable accounts tend to favor the following strategies:

1.      Buy-and-hold strategies are appropriate to limit gain recognition and to limit gains to assets that qualify for preferential long-term gain treatment.

2.      Passive investments, particularly index funds that have minimal taxable distributions, are more appropriate for taxable accounts.

3.      International funds, which frequently have associated foreign tax payments, are more appropriate for taxable accounts so the foreign tax credit can be claimed.

4.      Small-cap growth stocks are more appropriate because of the minimal dividend income generally associated with these types of investments.

A topic of continuing discussion among investment professionals is where to hold fixed-income investments and where to hold equity investments. Generally, sufficient fixed-income investments need to be in taxable accounts to provide liquidity. Those investments could be, for example, either tax-free or taxable bonds, depending on the after-tax yield as determined by your marginal tax rate. The need for current income will also affect whether additional fixed-income investments are held outside of qualified plans. Beyond the liquidity amount and provision for current income, the remainder of the fixed-income portfolio can be held in a qualified plan.

Similarly, for stocks, that part of the portfolio that is intended to be long-term, low-turnover, passively managed investments can be held in the taxable accounts. More aggressive parts of the portfolio that call for active management and potentially high turnover can be held in qualified plans.



Residential Energy Credit

One way to control the cost of home energy use is to make your home more energy efficient. Better still when those energy-saving improvements qualify for a federal tax credit. Fortunately, individual taxpayers are allowed a personal tax credit for energy-efficient improvements to their principal residence. The Nonbusiness Energy Property Credit (Residential Energy Credit) has been available since 2006 and was recently extended through 2013.

The Residential Energy Credit equals 10% of certain qualified expenditures plus 100% of certain other qualified expenditures, subject to a maximum overall credit of $500. That’s pretty modest, and the $500 cap must be reduced by any credit claimed in an earlier post-2005 year. This restriction will cause some taxpayers to be ineligible for 2013. Still, for those who are eligible, $500 is a lot better than nothing.

The good news is the credit, when allowed, covers a broad range of energy-saving expenditures for a taxpayer’s principal U.S. residence (including a manufactured home). Plus, it’s available against alternative minimum tax (AMT) and there are no income restrictions. However, expenditures for vacation homes and foreign residences are ineligible.

The Residential Energy Credit equals the sum of (a) 10% of the amount paid for qualified energy-efficient improvements (i.e., building envelope components meeting certain requirements) installed during the tax year (no more than $200 of which could be for new windows), and (b) the amount of any residential energy property expenditures (i.e., $50 for each advanced main air circulating fan; $150 for each qualified natural gas, propane, or oil furnace or hot water boiler; and $300 for qualified energy-efficient property, including heat pumps, water heaters, and central air conditioners) paid during the tax year. Expenditures for site preparation, assembly, and installation are counted in determining the allowable expense for the items listed in (b), but not (a).



Tax Tips for Newlyweds

Late spring and early summer are popular times for weddings. Whatever the season, a change in your marital status can affect your taxes. Here are several tips from the IRS for newlyweds.

1.      It’s important that the names and Social Security numbers that you put on your tax return match your Social Security Administration records. If you’ve changed your name, report the change to the SSA. To do that, file Form SS-5, Application for a Social Security Card. You can get this form on their website at, by calling 800-772-1213 or by visiting your local SSA office.

2.      If your address has changed, file Form 8822, Change of Address to notify the IRS. You should also notify the U.S. Postal Service if your address has changed. You can ask to have your mail forwarded online at or report the change at your local post office.

3.      If you work, report your name or address change to your employer. This will help to ensure that you receive your Form W-2, Wage and Tax Statement, after the end of the year.

4.      If you and your spouse both work, you should check the amount of federal income tax withheld from your pay. Your combined incomes may move you into a higher tax bracket. Use the IRS Withholding Calculator tool at to help you complete a new Form W-4, Employee's Withholding Allowance Certificate. See Publication 505, Tax Withholding and Estimated Tax, for more information.

5.      If you didn’t qualify to itemize deductions before you were married, that may have changed. You and your spouse may save money by itemizing rather than taking the standard deduction on your tax return. You’ll need to use Form 1040 with Schedule A, Itemized Deductions. You can’t use Form 1040A or 1040EZ when you itemize.

6.      If you are married as of Dec. 31, that’s your marital status for the entire year for tax purposes. You and your spouse usually may choose to file your federal income tax return either jointly or separately in any given year. You may want to figure the tax both ways to determine which filing status results in the lowest tax. In most cases, it’s beneficial to file jointly.



Tax Tips if You’re Starting a Business

If you plan to start a new business, or you’ve just opened your doors, it is important for you to know your federal tax responsibilities. Here are five basic tips from the IRS that can help you get started. 

Type of Business.  Early on, you will need to decide the type of business you are going to establish. The most common types are sole proprietorship, partnership, corporation, S corporation and Limited Liability Company. Each type reports its business activity on a different federal tax form.

Types of Taxes.  The type of business you run usually determines the type of taxes you pay. The four general types of business taxes are income tax, self-employment tax, employment tax and excise tax.

Employer Identification Number.  A business often needs to get a federal EIN for tax purposes. Check to find out whether you need this number. If you do, you can apply for an EIN online.

Recordkeeping.  Keeping good records will help you when it’s time to file your business tax forms at the end of the year. They help track deductible expenses and support all the items you report on your tax return. Good records will also help you monitor your business’ progress and prepare your financial statements. You may choose any recordkeeping system that clearly shows your income and expenses.

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

Professional advice.  Seek out a CPA (Certified Public Accountant) and an Attorney as soon as practical.  Preferably before you begin/form the business.  The choice of a type of entity to operate under is a very important decision and several major IRS elections must be made shortly after starting the business.



Job Search Expenses May Lower Your Taxes

Summer is often a time when people make major life decisions. Common events include buying a home, getting married or changing jobs. If you’re looking for a new job in your same line of work, you may be able to claim a tax deduction for some of your job hunting expenses.

Here are seven things the IRS wants you to know about deducting these costs:

Your expenses must be for a job search in your current occupation. You may not deduct expenses related to a search for a job in a new occupation. If your employer or another party reimburses you for an expense, you may not deduct it.

You can deduct employment and job placement agency fees you pay while looking for a job.

You can deduct the cost of preparing and mailing copies of your résumé to prospective employers. 

If you travel to look for a new job, you may be able to deduct your travel expenses. However, you can only deduct them if the trip is primarily to look for a new job.

You can’t deduct job search expenses if there was a substantial break between the end of your last job and the time you began looking for a new one.

You can’t deduct job search expenses if you’re looking for a job for the first time.

You usually will claim job search expenses as a miscellaneous itemized deduction. You can deduct only the amount of your total miscellaneous deductions that exceed two percent of your adjusted gross income.



Smart Phones

We subscribe to Comsumer Reports and their August issue rates smart phones from the 4 major carriers (Verizon, Sprint, T-Mobile & AT&T). The top rated phone for all carries was the Samsung Galaxy S 4. The Apple iPhone 5 was rated 6th, 6th, 4th and 5th respectively. Other phones rated about the Apple were the Samsung Galaxy S III, Morotola Droid Razr Maxx HD, Motorola Droid Razr ND, HTC One, Motorola Droid Razr M, and the LG Optimus G.

I found this interesting based on the general preception of the iPhones.  Food for thought.

      Another point – most smart phones now have hard disks inside the phone.  When you dispose of your phone or trade it in are you giving away your contact information, calendar, etc?  Are you “wipping” the hard disk of all personal information?  Passwords?  Bank Accounts – remember mobile banking? Etc?


How Entrepreneurs Should Use Their Accountants

By Brian Hamilton

Being entrepreneurial doesn’t end at starting a business; it means constantly striving to perfect your business model and quickly and continually adapting to change.

While “big data” has become a buzz word and the ability to readily capture data to inform business decisions has significantly increased in recent years, overlooked in this data grab is the importance of financial data and accountants, specifically.

You may just think of your accountant when it’s time to file your taxes, but he or she actually holds the secret to how healthy your company is and what to do about it.

What the accountant has is a mass of financial data, and with the right amount of financial data, a good accountant can almost instantly identify a business’s strengths and weaknesses.

Are your costs of goods sold too high? Are your prices too low? Do you have a manager whose team is particularly productive?

Your accountant likely has the answers to all of these questions and the data to back them up.

Entrepreneurs tend to make decisions using their instincts. This is not necessarily a bad thing as being an entrepreneur requires a healthy amount of decisiveness and self-confidence. The problem with this mindset, however, is that we as business owners end up making decisions to serve our immediate needs, when we should be looking at the financial data first and making decisions based on that information.

The role of your CPA or accountant should not just be to prepare your taxes but to help you gather accurate data and make more informed decisions. Here are some practical ways to make sure this happens:

1. Never receive financial data without a written explanation of the contents. Never just take data from your accountant and assume you will understand what it means. The best way to achieve this is to ask your accountant to include one-page executive summaries with all financial data you are presented. Nothing in finance is so complicated that it cannot be presented well in summary form, so one page should be more than enough.

2. When talking to your accountant, always focus your conversation on how the numbers affect the bottom line (profit) and/or cash flow. Avoid what we used to call at the bank “elevator analysis”— incessantly talking about how this or that number moved up or down since last period. Relate everything to two of the only things that really count in a business- increasing profit and cash in the company.

3. Know your company’s strategic objectives. Know its mission. Know its value statement. This sounds so obvious, but it often surprises me how many people think strategic objectives are divorced from financial objectives. Management of a company is a circle, where all functional points touch each other in some way. When discussing the company’s financial condition with your accountant, relate your conversation to these objectives. Numbers are not just numbers—they tell a story of how the company is moving towards or away from its strategic objectives. If we change from a major supplier to cut cost of goods sold and increase gross margins, talk about how this may affect the quality of delivery to clients. Your accountant can even help develop the objectives of the company, but he or she can only do this if you see his or her role and function as intertwined with overall objectives.

A smart entrepreneur doesn’t just consult his accountant at tax time. He or she knows the underlying reasons why your business is succeeding or failing and should be consulted a minimum of two times per year for non-tax-related consulting and advice.

That is, until your company gets big enough to warrant hiring a CFO, at which point, financial data should be at the root of every decision.

Brian Hamilton is the chairman of Sageworks, a financial information company that collects and analyzes data on the performance of privately held companies.


IRS Admits Interest Calculation Error on CP2000 Notices

Washington, D.C. (July 12, 2013)

By Michael Cohn

The Internal Revenue Service alerted taxpayers and tax professionals in an email Friday about an interest calculation error on certain notices mailed the weeks of July 1 and July 8.

Later this month, the IRS said it will be sending a special mailing to the recipients of the notices.

The IRS admitted it discovered errors in the CP2000 notices during a two-week period this July. The notices contained an incorrect calculation on the interest owed on proposed taxes from under-reported income. The interest figures were lower than they should be. The IRS said it has corrected the issue for future mailings.

It advised taxpayers to follow the directions on the letter it will be sending taxpayers this month about the error. They will be encouraged to either call a special toll-free number or write to the IRS to receive the corrected interest amount.

A CP2000 notice shows proposed changes to income tax returns based on a comparison of the income, payments, credits and deductions reported on a tax return with information reported by employers, banks, businesses and other payers, the IRS noted. The CP2000 also reflects any corrections made to an original tax return during processing.


Former H&R Block Manager Pleads Guilty to Stealing Clients’ Identities

Los Angeles (March 11, 2013)

By Michael Cohn

The former manager of an H&R Block outlet pleaded guilty Monday to charges that he used the identities of his former tax prep clients to file false tax returns seeking fraudulent tax refunds.

Damon Charles Dubose, 39, of North Hills, Calif., pleaded guilty to one count of wire fraud and one count of filing false claims with the Internal Revenue Service.

While working as a manager for an H&R Block Preparation store in Van Nuys, Dubose used his access to H&R Block records to obtain the personal identifying information of H&R Block clients.  He admitted to creating false and unauthorized tax returns for at least 12 individuals using their personal identifying information and submitted the returns to the IRS in order to generate fraudulent tax refunds of at least $48,593. Dubose filed the returns so that the refunds would be accessible by the H&R Block Emerald Card.  Dubose then used the H&R Block Emerald Cards at ATMs to withdraw as cash the fraudulent tax refunds.

Dubose was charged in the case last April (see H&R Block Manager Charged in Identity Theft Scheme). Shortly before midnight on Feb. 12, Dubose was seen by a patrolman in La Canada, Calif., loitering near the ATMs of three banks. Dubose was wearing pantyhose over his face along with beanies and a scarf.  Inside his vehicle, the officer found six envelopes with a name and partial Social Security number handwritten on the outside, and an H&R Block Emerald Card on the inside.

The Emerald Cards allow H&R Block customers to access their tax refunds electronically like a debit card. Dubose’s vehicle also contained approximately $2,960 in cash and a printout of dates of birth and Social Security numbers that matched the handwritten information on the envelopes. Dubose claimed that the information was for his tax clients and he was authorized to make withdrawals on their behalf.

The Los Angeles County Sheriff’s Department obtained a search warrant for the home of Dubose’s girlfriend and found $6,900 in cash, six H&R block Emerald Cards, and the personal identifying information of more individuals.

H&R Block did not immediately respond to a request for comment.

Three taxpayers whose identifying information Dubose possessed were contacted by law enforcement. All of them said Dubose was not authorized to make withdrawals on their behalf or possess their personal identifying information.

According to his plea agreement, the wire fraud count stems from Dubose electronically transferring an unauthorized tax return from Van Nuys, Calif., to Tennessee or West Virginia.  The false claim count stems from an unauthorized tax return filed by Dubose on February 6, 2012 for an individual using fabricated information to falsely claim a refund in the amount of $4,353.

As a result of his guilty plea, Dubose faces up to 25 years in federal prison and a fine of $500,000 when he is sentenced on July 8 by U.S. District Judge Dale S. Fischer.

The investigation of Dubose was conducted by IRS Criminal Investigation’s Los Angeles Field Office, with assistance from the Los Angeles County Sheriff’s Department.


Singer Lauryn Hill Begins Prison Sentence for Tax Evasion

Danbury, Conn. (July 10, 2013)

By Michael Cohn

Singer and songwriter Lauryn Hill began serving her three-month sentence for tax evasion at a minimum-security federal correctional institution in Danbury, Conn.

The former lead singer of the Fugees who won a Grammy for her album “The Miseducation of Lauryn Hill” was sentenced in May to three months in prison and three months of home confinement for failing to file tax returns for five years and not reporting more than $2.3 million in income (see Fugees Singer Lauryn Hill Sentenced to Prison for Tax Evasion). In addition to the prison term and home confinement, the judge sentenced Hill to serve a year of supervised release and ordered her to pay a $60,000 fine in addition to her restitution to the IRS. Judge Arleo also ordered Hill to fully cooperate with the IRS, including payment of outstanding interest and penalties on her tax obligations. According to the Associated Press, she will be confined in an open dormitory type of facility with the general prison population. She reported to prison Monday.

In addition to being a singer and actress, Hill owned and operated four S corporations, and her primary source of income was royalties from the recording and film industries. She won Grammy Awards for her 1998 solo album “The Miseducation of Lauryn Hill” and had recorded several successful albums with her previous group, The Fugees.

During 2005, 2006 and 2007, Hill received more than $1.8 million in income from those sources, according to prosecutors, but didn’t file her tax returns for those years. While Hill pleaded guilty to charges specifically related to those tax years, her sentence also takes into account additional income and tax losses for 2008 and 2009— when she also failed to file federal returns—along with her outstanding tax liability to the state of New Jersey, for a total income of approximately $2.3 million and total tax loss of approximately $1,006,517.

During the hearing, Hill compared her tax predicament to slavery. “I was put into a system I didn’t know the nature of,” she said, according to the Los Angeles Times. “I’m a child of former slaves. I got into an economic paradigm and had that imposed on me,” she said. “I sold 50 million units ... now I’m up here paying a tax debt. If that’s not likened to slavery, I don’t know what is.”

When Hill was originally charged by federal authorities, she wrote a lengthy explanation on her Tumblr blog of her rationale for not paying taxes, saying she had gone “underground … in order to build a community of people, like-minded in their desire for freedom and the right to pursue their goals and lives without being manipulated and controlled by a media protected military industrial complex with a completely different agenda.” However, she added that she eventually hoped to straighten out her tax problems (see Lauryn Hill Explains Failure to Pay Taxes).



Tips for Taxpayers Who Travel for Charity Work

Do you plan to travel while doing charity work this summer? Some travel expenses may help lower your taxes if you itemize deductions when you file next year. Here are five tax tips the IRS wants you to know about travel while serving a charity.

1. You must volunteer to work for a qualified organization. Ask the charity about its tax-exempt status. You can also visit and use the Select Check tool to see if the group is qualified.

2. You may be able to deduct unreimbursed travel expenses you pay while serving as a volunteer. You can’t deduct the value of your time or services.

3. The deduction qualifies only if there is no significant element of personal pleasure, recreation or vacation in the travel. However, the deduction will qualify even if you enjoy the trip.

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

Taxi fares or other transportation costs between the airport or station and your hotel.



Tips for Employers Who Outsource Payroll Duties

Many employers outsource their payroll and related tax duties to third-party payers such as payroll service providers and reporting agents. Reputable third-party payers can help employers streamline their business operations by collecting and timely depositing payroll taxes on the employer’s behalf and filing required payroll tax returns with state and federal authorities.

Though most of these businesses provide very good service, there are, unfortunately, some who do not have their clients’ best interests at heart. Over the past few months, a number of these individuals and companies around the country have been prosecuted for stealing funds intended for the payment of payroll taxes. Examples of these successful prosecutions can be found on

Like employers who handle their own payroll duties, employers who outsource this function are still legally responsible for any and all payroll taxes due. This includes any federal income taxes withheld as well as both the employer and employee’s share of social security and Medicare taxes. This is true even if the employer forwards tax amounts to a PSP or RA to make the required deposits or payments. For an overview of how the duties and obligations of agents, reporting agents and payroll service providers differ from one another, see the Third Party Arrangement Chart on

Here are some steps employers can take to protect themselves from unscrupulous third-party payers.

1.      Enroll in the Electronic Federal Tax Payment System  and make sure the PSP or RA uses EFTPS to make tax deposits. Available free from the Treasury Department, EFTPS gives employers safe and easy online access to their payment history when deposits are made under their Employer Identification Number, enabling them to monitor whether their third-party payer is properly carrying out their tax deposit responsibilities. It also gives them the option of making any missed deposits themselves, as well as paying other individual and business taxes electronically, either online or by phone. To enroll or for more information, call toll-free 800-555-4477or visit

2.      Refrain from substituting the third-party’s address for the employer’s address. Though employers are allowed to and have the option of making or agreeing to such a change, the IRS recommends that employer’s continue to use their own address as the address on record with the tax agency. Doing so ensures that the employer will continue to receive bills, notices and other account-related correspondence from the IRS. It also gives employers a way to monitor the third-party payer and easily spot any improper diversion of funds.

3.      Contact the IRS about any bills or notices and do so as soon as possible. This is especially important if it involves a payment that the employer believes was made or should have been made by a third-party payer. Call the number on the bill, write to the IRS office that sent the bill, contact the IRS business tax hotline at 800-829-4933 or visit a local IRS office. See Receiving a Bill from the IRS on for more information.

4.      For employers who choose to use a reporting agent, be aware of the special rules that apply to RAs. Among other things, reporting agents are generally required to use EFTPS and file payroll tax returns electronically. They are also required to provide employers with a written statement detailing the employer’s responsibilities including a reminder that the employer, not the reporting agent, is still legally required to timely file returns and pay any tax due. This statement must be provided upon entering into a contract with the employer and at least quarterly after that. See Reporting Agents File on for more information.

5.      Become familiar with the tax due dates that apply to employers, and use the Small Business Tax Calendar to keep track of these key dates.


Renting Your Vacation Home

A vacation home can be a house, apartment, condominium, mobile home or boat. If you own a vacation home that you rent to others, you generally must report the rental income on your federal income tax return. But you may not have to report that income if the rental period is short.

In most cases, you can deduct expenses of renting your property. Your deduction may be limited if you also use the home as a residence.

Here are some tips from the IRS about this type of rental property.

You usually report rental income and deductible rental expenses on Schedule E, Supplemental Income and Loss.

You may also be subject to paying Net Investment Income Tax on your rental income.

If you personally use your property and sometimes rent it to others, special rules apply. You must divide your expenses between the rental use and the personal use. The number of days used for each purpose determines how to divide your costs.

Report deductible expenses for personal use on Schedule A, Itemized Deductions. These may include costs such as mortgage interest, property taxes and casualty losses.

If the property is “used as a home,” your rental expense deduction is limited. This means your deduction for rental expenses can’t be more than the rent you received. For more about this rule, see Publication 527, Residential Rental Property (Including Rental of Vacation Homes).

If the property is “used as a home” and you rent it out fewer than 15 days per year, you do not have to report the rental income.



Six Tips on Gambling Income and Losses

Whether you roll the dice, play cards or bet on the ponies, all your winnings are taxable. The IRS offers these six tax tips for the casual gambler.

1. Gambling income includes winnings from lotteries, raffles, horse races and casinos. It also includes cash and the fair market value of prizes you receive, such as cars and trips.

2. If you win, you may receive a Form W-2G, Certain Gambling Winnings, from the payer. The form reports the amount of your winnings to you and the IRS. The payer issues the form depending on the type of gambling, the amount of winnings, and other factors. You’ll also receive a Form W-2G if the payer withholds federal income tax from your winnings.

3. You must report all your gambling winnings as income on your federal income tax return. This is true even if you do not receive a Form W-2G.

4. If you’re a casual gambler, report your winnings on the “Other Income” line of your Form 1040, U. S. Individual Income Tax Return.

5. You may deduct your gambling losses on Schedule A, Itemized Deductions. The deduction is limited to the amount of your winnings. You must report your winnings as income and claim your allowable losses separately. You cannot reduce your winnings by your losses and report the difference.

6. You must keep accurate records of your gambling activity. This includes items such as receipts, tickets or other documentation. You should also keep a diary or similar record of your activity. Your records should show your winnings separately from your losses.


Businessman Pleads Guilty to Not Declaring Israeli Bank Account on Tax Return

Washington, D.C. (July 18, 2013)

By Michael Cohn

A California businessman has pleaded guilty to concealing a foreign bank account at an Israeli bank on his 2007 tax return.

Moshe Handelsman of Saratoga, Calif., pleaded guilty Wednesday to filing a false tax return for tax year 2007. According to the plea agreement, between approximately 1993 and 2000,

Handelsman, a U.S. citizen, used three bank accounts held in the names of two different foreign corporations at foreign banks to falsely reduce his taxes. The last of those accounts was held at an unidentified Israeli bank located in Tel-Aviv, Israel.  The foreign bank accounts and foreign corporations were set up with the assistance of his tax return preparers.

According to court documents, in approximately 2000, Handelsman traveled to Israel and met with a banker at the Israeli bank who referred him to an Israeli attorney to set up a foreign corporation. The foreign corporation was called Exportus Ltd. and was the named account holder of the account at the Israeli bank. 

From 2003 through 2008, Handelsman sent $1,808,075 from a domestic corporation he controlled called Advanced Forecasting Corp. to the Exportus Ltd. bank account, according to prosecutors. With the assistance of his tax return preparers, the funds transferred offshore were then deducted as false “Information Acquisition” expenses on the Advanced Forecasting Corp.’s tax returns.  The false business expenses on the corporate tax returns resulted in an under-reporting of Handelsman’s income on his individual income tax returns for 2003 through 2008.

Handelsman also failed to disclose the existence of his foreign bank account on his individual income tax returns. According to the plea agreement, in 2009, Handelsman closed his account at the Israeli bank and repatriated the money by transferring the funds into a second Israeli bank account and then to a U.S.-based Charles Schwab account in the name of a relative. The funds were then transferred from the Charles Schwab account to Handelsman to make it appear that the funds were a non-taxable gift from the relative.

U.S. citizens and residents who have an interest in, or signature or other authority over, a financial account in a foreign country with assets in excess of $10,000 are required to disclose the existence of such account on Schedule B, Part III, of their individual income tax returns, the Justice Department noted. In addition, U.S. citizens and residents must file a Report of Foreign Bank and Financial Reports, or FBAR, with the U.S. Treasury disclosing any financial account in a foreign country with assets in excess of $10,000 in which they have a financial interest, or over which they have signature or other authority.

Handelsman faces up to three years in prison and a maximum fine of $250,000. In addition, Handelsman has agreed to pay a civil penalty to the Internal Revenue Service in the amount of 50 percent of the high balance of his undeclared accounts for failing to file FBARs.  Sentencing is scheduled for Nov. 6, 2013.

Assistant Attorney General Kathryn Keneally and U.S. Attorney Melinda Haag thanked special agents of IRS-Criminal Investigation, who investigated the case, and Tax Division trial attorneys Ellen M. Quattrucci and Christopher S. Strauss, who prosecuted the case, and Assistant U.S. Attorneys Thomas Moore and Thomas Newman of the U.S. Attorney’s Office for the Northern District of California, who assisted with the prosecution.




Health Care Act

The IRS has a good website with a lot of information on the new health care act that begins to take effect on 1/1/14.  Everyone in the US will be effected somehow.  Check it out at:



Another Lesson on Unreasonably Low Compensation

Payroll tax collection continues to vex the Internal Revenue Service despite several court cases that have resulted in rulings favorable for the IRS regarding unreasonably low compensation. A recent high profile case was David E. Watson, P.C. v. United States on which the Eighth Circuit ruled in 2012. Watson was an indirect partner in a CPA firm, practicing through an S corporation that paid him $24,000 of salary per year and between $175,000 and $203,000 in profit distributions. The court adjusted his compensation to $93,000.

It isn’t hard to see why shareholders of S corporations attempt to justify wage levels below what the IRS considers “reasonable compensation” (assuming the understated compensation is below the FICA wage base). Both the S corporation and employee save the 7.65% FICA and Medicare taxes on the wages not reported.

Another recent case is Herbert v. Commissioner. Herbert received between $24,000 and $29,000 of wages for the years 2004 through 2006. In 2007, he received $2,400 of wages. Although the Tax Court noted that the corporation lost money or earned very little income in each of the years, and the corporation closed down in 2009, the Court increased the taxable compensation for 2007. The IRS wanted to reclassify all of the draws from the S corporation for 2007 as additional wages (i.e., an additional $52,600). Ultimately, the judge averaged the petitioner’s wages for 2002 through 2006 to arrive at $30,445 as a reasonable wage. (The business was owned by someone else in 2002 and 2003.)

It didn’t help matters that Mr. Herbert used the draws to pay corporate expenses personally. He lost, misplaced or never kept receipts for many corporate expenses he paid with cash. The Court accepted Herbert’s testimony that he in fact paid significant corporate expenses with cash using funds received from the corporation. Nonetheless, the judge also believed that the wages of $2,400 were too low.

The result? Herbert was found to have under-reported his wages, even though the amount of cash drawn out of the corporation covered corporate expenses. If he had maintained a better set of books, paid all of the corporate expenses with corporate (rather than what became to be personal) funds, he wouldn’t have had distributions from the corporation to himself.

Although the wages were quite low, the fact of the matter is the business was failing. There wasn’t an adequate cash flow to pay wages and expenses. By shuffling funds and taking money personally, Mr. Herbert created a payroll tax liability where such liability shouldn’t have existed.

Payroll tax reduction or avoidance is, perhaps, a major reason for the popularity of S corporation status for an operating entity, even though the formation of an LLC under state law provides similar liability protection for the sole proprietor. The IRS projects that 4.6 million Forms 1120-S will be filed for 2012, compared to 3.6 million Forms 1065 (partnership).  

As part of its tax reform efforts, Congress is evaluating the continuing treatment of the bottom-line S corporation as not subject to payroll taxes or self-employment tax. The AICPA will be closely monitoring any developments and keeping you up to date through its tax reform page and other communications.

Chris Hesse, CPA, Partner, CliftonLarsonAllen. Chris is with CliftonLarsonAllen’s Federal Tax Resource Group serving all offices of the firm. FTRG is a firm wide group that assists all offices of the firm on federal income tax matters, in addition to drafting CPE material for in-house presentation.  Chris is also chairman of the S Corporation Technical Resource Panel for the AICPA.


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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