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The Estate Tax Dodge That Went Too Far



Wealthy people have lots of ways to avoid the estate tax. But a federal judge says one family got a little too creative in dodging its tax bill.


When Julius Schaller died at the age of 91 in 2003, his executors set up the "Educational Assistance Foundation for the Descendants of Hungarian Immigrants in the Performing Arts, Inc." and sent it $2.6 million of Schaller's money. (Schaller once owned a grocery business in Philadelphia called J. Schaller & Co.)


The foundation's stated goal was clear in its name, and the donation provided enough of a deduction to reduce his estate's tax bill to zero. Despite the awkward, 14-word name and the highly specific purpose, the IRS initially approved the foundation’s application for tax-exempt status.


A year after Schaller's death, the foundation awarded its first two scholarships—to two descendants of Schaller's niece and nephew. They got another set of scholarships the next year, as did another Schaller relative. The IRS cried foul after noticing scholarships “were made only to descendants of the nieces and nephews of Julius Schaller.” A court fight began, and on July 1, U.S. District Judge Reggie B. Walton ruled the foundation wasn’t a legitimate tax break. “The Foundation’s activities contravened the law in such a blatant and egregious manner that the Court could not come to any other conclusion,” Walton wrote.


The foundation’s lawyers argued that the scholarship was technically open to all eligible descendants of Hungarian immigrants. But it didn’t follow through on promises to advertise the scholarship in newspapers, Walton wrote. It did send information to and in 2007, but only on the day after the IRS started an audit. Attorneys for the foundation and Schaller’s executors did not return phone calls seeking comment.


The wealthy have a variety of techniques to avoid the estate tax. When Schaller died, the first $1 million of an estate were exempt from U.S. estate taxes. That’s now up to $5.4 million, and for married couples, it's $10.8 million, because they can effectively share their exemptions. To keep more of their estate away from the IRS, the rich can donate art or classic cars to their own private museums or set up special trusts that send income to relatives tax-free. What they can’t do, according to Walton’s ruling, is give relatives scholarship money and call it charity.





IRS Phone Scam Ringleader Gets 14-Year Sentence



A scammer who organized a scheme in which taxpayers were threatened with calls purporting to come from the Internal Revenue Service and the FBI demanding payment has been sentenced to 14 years in prison.


Sahil Patel was sentenced to 175 months in prison and $1 million in forfeiture for his role in organizing the U.S. side of a massive fraud and extortion ring run through various “call centers” located in India, through which Patel and his co-conspirators impersonated American law enforcement officials and threatened victims with arrest and financial penalties unless those victims made payments to avoid purported charges.


In addition to the prison sentence, Patel, 36, of Tatamy, Pa., was sentenced to three years of supervised release.


Patel pleaded guilty in January 2015 before U.S. District Judge Alvin Hellerstein, who imposed the sentence Wednesday. “The nature of this crime robbed people of their identities and their money in a way that causes people to feel they have been almost destroyed,” said Hellerstein.


According to prosecutors, from Dec. 2011 through the day of his arrest on Dec. 18, 2013, Patel participated as a leader in a sophisticated scheme to intimidate and defraud hundreds of innocent victims of hundreds of dollars apiece. Throughout the course of the fraud, telephone call centers located in India hired English-speaking employees to place telephone calls to individuals living in the U.S.


Armed with long lists of potential victims, referred to by Patel and his co-conspirators as “lead sheets,” those India-based callers systematically placed thousands of calls to individuals in the U.S. in the hopes of intimidating the call recipients into providing a payment to the co-conspirators. To extort these victims, the India-based callers impersonated law enforcement officials of the FBI and IRS and threatened their victims with financial penalties and arrest in connection with fabricated financial crimes.


“Sahil Patel’s elaborate scheme involved impersonating law enforcement officers and using intimidation and fear to bilk over a million dollars from hundreds of unsuspecting victims,” said Manhattan U.S. Attorney Preet Bharara in a statement.


In order to receive funds in a manner that would mask the identity of Patel and his co-conspirators, the ring undertook several measures to anonymize itself, including by using anonymized voice-over-internet technology, which was subscribed under fraudulent names in order to give the appearance of being related to U.S. law enforcement agencies.


Patel and his co-conspirators also used several layers of wire transactions in order to conceal the destination and nature of the extorted payments, which totaled at least $1.2 million.


The scam has been continuing and on the rise this year despite Patel’s arrest. Taxpayers who have been targeted by the scam can report the incident to the Treasury Inspector General for Tax Administration at and clicking on the IRS Impersonation Scam Reporting tab in the upper right corner, or call the TIGTA hotline at 1-800-366-4484.



IRS Fights Hedge-Fund Tax Maneuver Once Used by Renaissance



A tax strategy once used by the hedge fund Renaissance Technologies is attracting a new level of scrutiny from the IRS.


The government Wednesday labeled the “basket options” strategy of converting short-term capital gains and ordinary income into lighter-taxed long-term gains as a “listed transaction.” That requires anyone who uses it to declare the maneuvers on their tax returns and imposes penalties for those who don’t.


“A listed transaction is, in effect, flagged as a tax shelter by the IRS,” said Steve Rosenthal, a senior fellow at the Tax Policy Center in Washington who testified about the transactions at a hearing last year. “They’re really sort of the worst of the worst that the IRS trips across.”


The notice applies to transactions in effect as far back as 2011.


Renaissance’s use of basket options was the subject of a U.S. Senate hearing in 2014. According to the panel’s report, Renaissance probably avoided more than $6 billion in U.S. income taxes over 14 years through transactions with Barclays Plc and Deutsche Bank AG.


The transactions allowed Renaissance to claim that it wasn’t the owner of securities inside the basket options, whose value would fluctuate based on the value of securities chosen by the hedge fund, according to the Senate report.


Medallion Fund

Renaissance, founded by James Simons, is one of the most successful hedge funds. Its flagship Medallion Fund achieved annual returns, before fees, averaging 71.8 percent from 1994 through mid-2014, according to a public filing.


Last year, Renaissance said it was “comfortable” that its tax treatment was correct and that it expected to prevail in a dispute with the Internal Revenue Service. The firm said then that its decision to use basket options wasn’t driven by the tax benefits.


It’s not clear whether the IRS and Renaissance have resolved their dispute.


Ron Wyden of Oregon, the top Democrat on the Senate Finance Committee, praised the IRS decision to “bring the hammer down” on the transactions.


“The law is very clear in this area—basket options are a tax shelter,” Wyden said in a statement. “Today’s guidance from the administration is a win for taxpayers and brings us one step closer to a more fair and equitable tax code.”

Converting short-term gains to long-term gains can yield a major advantage.


Under current law, profits from short-term capital gains are taxed at a top federal rate of 43.4 percent, compared with a 23.8 percent top rate for long-term gains. In some prior years, the top rates were 35 percent and 15 percent.

Jonathan Gasthalter, a spokesman for Renaissance, declined to comment. Spokesmen for Barclays and Deutsche Bank also didn’t comment.


As of last year’s hearing, both banks had ceased offering the basket options.


—With assistance from Zachary R. Mider in New York.




IRS Sees Increase in Whistleblower Tips



The Internal Revenue Service’s Whistleblower Office received more claims last fiscal year than in any prior year as the program has begun paying out larger awards to tipsters with information on tax evaders.


The Tax Relief and Health Care Act of 2006 allows whistleblowers to collect up to 30 percent of the proceeds that the IRS collects from tax evaders. During fiscal year 2014, the Whistleblower Office received more claim submissions than in any other year, the IRS said in a report released Tuesday.


The total claims received in FY 2014 were 14,365, an increase of 3,845 compared to FY 2013. In FY 2014, the IRS reported that it made 101 awards totaling $52,281,628. However, reductions in expenditures required by sequestration reduced the whistleblower award payments in FY 2014 by $3,764,722. The total award amount, before sequestration, represented 16.9 percent of the total amount the IRS collected as a result of whistleblowers’ claims.


Sen. Chuck Grassley, R-Iowa, who authored the Whistleblower Office improvements in the 2006 law, commented on the report. “The point of the whistleblower office changes was to encourage the IRS to work as closely as possible with whistleblowers to rein in tax cheats and return money to the U.S. Treasury,” he said in a statement. “It seems the IRS has made some progress, but there’s always danger of moving backward if the IRS’ focus changes or if whistleblowers stop coming forward out of fear of poor results, such as the seeming lack of urgency in the processing of awards. I’ll continue to look for progress and even more evidence that the IRS is offering a welcome mat to whistleblowers.”




Americans Delaying Life Decisions for Financial Reasons

By Michael Cohn 


More than half of Americans admitted to postponing a major life decision, such as enrolling in higher education, retiring or starting a family, because of financial reasons, according to a new poll from the American Institute of CPAs.


The survey of 1,010 adults, conducted by phone for the AICPA by Harris Poll in March, asked about a number of specific life events. It found the percentage of Americans delaying them for financial reasons have more than doubled since a similar survey in 2007.


Those events include higher education (24 percent delaying in 2015, compared to 11 percent in 2007), buying a home (22 percent delaying in 2015, compared to 14 percent in 2007), medical procedure (19 percent delaying in 2015, compared to 9 percent in 2007), retirement (18 percent delaying in 2015, compared to 9 percent in 2007), having children (13 percent delaying in 2015, compared to 5 percent in 2007), and marriage (12 percent delaying in 2015, compared to 6 percent in 2007).


“When making major life decisions like buying a home or getting married, it’s crucial that you consider both the short and long-term financial implications,” said Ernie Almonte, chairman of the AICPA’s National CPA Financial Literacy Commission, in a statement. “If you don’t have adequate savings in place or you’re having trouble paying your bills, it may make sense to hold off on major life decisions until you’re on more solid financial footing.”


For those delaying these major life decisions, the primary reason given was a lack of savings, cited by 60 percent of those polled. This was followed by concerns about the U.S. economy (50 percent), difficulty paying non-mortgage monthly bills (39 percent) and medical bills (29 percent).


Other reasons people say they are delaying life decisions are a need to take care of elderly parents or other relatives (29 percent), pay down credit card debt (28 percent), as well as concerns about losing their job (27 percent) and difficulty making mortgage payments (25 percent).


On the positive side, the survey found that a vast majority (85 percent) of Americans report having made positive changes to their financial behavior since the recession. That includes following a monthly budget (58 percent), increasing their savings rate (44 percent) or adding to an emergency fund (35 percent)—among other things.


For more information on financial planning, visit the AICPA's 360 Degrees of Financial Literacy site.



Supreme Court Rules in Favor of Same-Sex Marriage



In a 5-4 ruling, the Supreme Court held in Obergefell v. Hodges that the 14th amendment requires all states to license a marriage between two persons of the same sex, and to recognize same-sex marriages validly performed out of state.


Justice Anthony Kennedy wrote the majority opinion, and was joined by Justices Ruth Bader Ginsburg, Stephen Breyer, Sonia Sotomayor, and Elena Kagan. Chief Justice John Roberts filed a dissenting opinion, in which Justices Antonin Scalia and Clarence Thomas joined. Scalia, Thomas and Alito also filed their own dissenting opinions, in which other justices joined.


In reversing the Sixth Circuit Court of Appeals, Justice Kennedy wrote: “No union is more profound than marriage, for it embodies the highest ideals of love, fidelity, devotion, sacrifice, and family. In forming a marital union, two people become something greater than once they were. As some of the petitioners in these cases demonstrate, marriage embodies a love that may endure even past death. It would misunderstand these men and women to say they disrespect the idea of marriage. Their plea is that they do respect it, respect it so deeply that they seek to find its fulfillment for themselves. Their hope is not to be condemned to live in loneliness, excluded from one of civilization’s oldest institutions.  They ask for equal dignity in the eyes of the law. The Constitution grants them that right.”


 “Today’s ruling will provide both same-sex and opposite-sex married couples with the same rights across all 50 states and the District of Columbia,” said Gail Cohen, vice president and general trust counsel for Fiduciary Trust Company International.


“The myriad of state and federal rights and privileges that are afforded to married couples will apply to everyone equally,” she added. “As advisers, we can now provide advice to all of our married clients in a manner that is consistent regardless of where the marriage takes place and regardless of where the married couple lives.”


“The decision affects fewer states than a ruling the other way would have done,” said Mark Luscombe, principal federal tax analyst for Wolters Kluwer. “Only four states were directly before the court, so the ruling technically only directly applies in Michigan, Ohio, Kentucky and Tennessee. Other states may decide to go along with the Supreme Court on this, or drag their heels and wait until a federal court with jurisdiction over them files a decision in line with this case.”


“There are 20 states in which same-sex marriage has been imposed by a court,” Luscombe observed. “Had the ruling gone the other way, it might have caused some of the 20 states to try to reverse.”


Rishi Agrawal, a state tax law editor at Bloomberg BNA, said the U.S. Supreme Court’s decision in Obergefell v. Hodges allows same-sex couples to now marry in all 50 states. “This right confers the same benefits to same-sex married couples that opposite-sex married couples already have in all states, including the ability to file joint tax returns and the right to inherit property from each other,” he said.


“Before the decision, same-sex married couples were already able to file joint tax returns at the federal level as a result of the 2013 U.S. Supreme Court case, U.S. v. Windsor. The 37 states that already recognized same-sex marriage generally require same-sex married couples to use the same filing status on their state returns as on their federal return. However, most states that did not recognize same-sex marriage required couples to file individually or as head of household. Some states even required same-sex married couples that filed jointly at the federal level to prepare pro forma individual returns for their federal taxes, creating an additional burden for those couples.”


“As a result of today's decision, it is likely that states that did not recognize same-sex marriage before will follow the lead of other states and require same-sex married couples to use the same filing status on their state returns as on their federal returns,” he added. “We anticipate that states will soon issue tax guidance as a result of today’s decision on how same-sex couples can file joint returns and whether couples who were already married can file amended returns for 2014.”


“The U.S. v. Windsor decision in 2013 specifically addressed the fact that same-sex spouses may take advantage of the federal estate tax exemption for married couples when inheriting property,” Agrawal noted. “Following today’s decision, same-sex married couples will likely be treated identically to all married couples in all states with regards to estate tax and other inheritance issues.”


“The decision is the culmination of decades of litigation and the fastest shift in public opinion in American history,” said Nicole M. Pearl, a partner in the Los Angeles office of McDermott Will & Emery who has extensive experience in estate and tax planning for gay, lesbian and unmarried couples.


Those couples who live in states that don’t currently allow or recognize same-sex marriages will finally have the opportunity under federal tax regulations to:

•    Make unlimited gifts to one other without having to worry about gift tax implications.
•    Leave property to one another without the survivor needing to pay estate taxes.  
•    Leave an IRA to the surviving spouse as a "rollover" IRA, which is treated much more favorably for tax purposes than an "inherited" IRA.  
•    Qualify as a surviving spouse for purposes of determining Social Security benefits. For instance if a deceased spouse was receiving a higher Social Security benefit than the surviving spouse, the surviving spouse can generally qualify for the higher benefit.


Various state benefits will also accrue to such couples.  Pearl added that those who traveled to another state to marry but reside in a state that does not currently recognize their marriage may be able to take advantage of certain state rights afforded only to married couples, including: 

•    Rights to visit each other in the hospital, or act as guardian or conservator for an incompetent spouse. 
•    Rights to file joint state income tax returns, thus saving money in many cases. 
•    Rights to inherit property under a state’s intestacy statute, or to act as executor or personal representative of a deceased spouse’s estate, and importantly,
•    Enable same-sex couples to end a marriage that did not work out. Most states allow anyone to obtain a marriage license—regardless of where a couple is living. However, a couple generally cannot file for divorce in the court of any state in which they do not live




Lawmakers Introduce Bill to Roll Back Tax Penalties on Health Reimbursement Arrangements



A group of lawmakers has introduced legislation to roll back guidance from the Treasury Department that prohibits employers from using stand-alone health reimbursement arrangements to reimburse employees for health care-related expenses.


Senators Chuck Grassley, R-Iowa, and Heidi Heitkamp, D-N.D., and Congressmen Charles W. Boustany, Jr., MD, R-La., and Mike Thompson, D-Calif., recently introduced bipartisan companion language in the House (H.R. 2911) and Senate (S. 1697) known as the Small Business Healthcare Relief Act to roll back existing Treasury Department guidance issued under the authority of the Affordable Care Act prohibiting the use of health reimbursement arrangements. Boustany and Thompson originally introduced the legislation in the last Congress.


The Treasury issued guidance in September 2013 disallowing employers from using stand-alone HRAs to reimburse employees for healthcare-related expenses, stating these arrangements did not satisfy the Affordable Care Act’s minimum benefit and annual dollar cap requirements for health insurance plans offered by employers. As a result, employers that continue to offer HRAs would be subject to a $100 per day per employee penalty, totaling up to $36,500 over the course of the year. After Boustany questioned Secretary Jack Lew on this issue in a House Ways and Means Committee hearing on Feb. 3, 2015, the Treasury announced on February 18 that it would delay enforcement of this guidance and resulting penalties until July 1, 2015


However, the penalties took effect last week, prompting concerns among small business groups (see New Tax Penalty Starts Today on Small Business Health Insurance).


Grassley, Heitkamp, Boustany, and Thompson’s legislation aims to restore flexibility and choice into the marketplace by ensuring that small businesses and local municipalities with fewer than 50 employees are allowed to continue using pre-tax dollars to give employees a defined contribution for health care expenses. The bill would also allow employees to use HRA funds to purchase health coverage on the individual market, as well as for qualified out-of-pocket medical expenses if the employee has qualified health coverage. In addition, the bill would protect employers from being financially penalized for providing this cost-sharing option to employees


“I’ve heard from farmers, small business owners and accountants who are worried about getting hit with a penalty for something they’ve done for a long time without any controversy,” Grassley said in a statement. “It doesn’t make sense to tell small employers they can’t help their employees get health insurance. Why disrupt something that worked? Our bill puts this provision back to what it was so farmers and small businesses can use this option as they see fit.”

Supporters of the legislation include the U.S. Chamber of Commerce, the National Association for Towns and Townships, the American Farm Bureau Federation, the National Association of Manufacturers, the National Association of Home Builders, the National Federation of Business, the Small Business Majority, the National Association for the Self Employed, the Coalition for Affordable Health Coverage, the Retail Industry Leaders Association, and the National Retail Federation.




Lawmakers Introduce Bill to Roll Back Tax Penalties on Health Reimbursement Arrangements



A group of lawmakers has introduced legislation to roll back guidance from the Treasury Department that prohibits employers from using stand-alone health reimbursement arrangements to reimburse employees for health care-related expenses.


Senators Chuck Grassley, R-Iowa, and Heidi Heitkamp, D-N.D., and Congressmen Charles W. Boustany, Jr., MD, R-La., and Mike Thompson, D-Calif., recently introduced bipartisan companion language in the House (H.R. 2911) and Senate (S. 1697) known as the Small Business Healthcare Relief Act to roll back existing Treasury Department guidance issued under the authority of the Affordable Care Act prohibiting the use of health reimbursement arrangements. Boustany and Thompson originally introduced the legislation in the last Congress.


The Treasury issued guidance in September 2013 disallowing employers from using stand-alone HRAs to reimburse employees for healthcare-related expenses, stating these arrangements did not satisfy the Affordable Care Act’s minimum benefit and annual dollar cap requirements for health insurance plans offered by employers. As a result, employers that continue to offer HRAs would be subject to a $100 per day per employee penalty, totaling up to $36,500 over the course of the year. After Boustany questioned Secretary Jack Lew on this issue in a House Ways and Means Committee hearing on Feb. 3, 2015, the Treasury announced on February 18 that it would delay enforcement of this guidance and resulting penalties until July 1, 2015 (see Treasury Delays Enforcement of Standalone Health Reimbursement Arrangement Ban).


However, the penalties took effect last week, prompting concerns among small business groups (see New Tax Penalty Starts Today on Small Business Health Insurance).


Grassley, Heitkamp, Boustany, and Thompson’s legislation aims to restore flexibility and choice into the marketplace by ensuring that small businesses and local municipalities with fewer than 50 employees are allowed to continue using pre-tax dollars to give employees a defined contribution for health care expenses. The bill would also allow employees to use HRA funds to purchase health coverage on the individual market, as well as for qualified out-of-pocket medical expenses if the employee has qualified health coverage. In addition, the bill would protect employers from being financially penalized for providing this cost-sharing option to employees


“I’ve heard from farmers, small business owners and accountants who are worried about getting hit with a penalty for something they’ve done for a long time without any controversy,” Grassley said in a statement. “It doesn’t make sense to tell small employers they can’t help their employees get health insurance. Why disrupt something that worked? Our bill puts this provision back to what it was so farmers and small businesses can use this option as they see fit.”


Supporters of the legislation include the U.S. Chamber of Commerce, the National Association for Towns and Townships, the American Farm Bureau Federation, the National Association of Manufacturers, the National Association of Home Builders, the National Federation of Business, the Small Business Majority, the National Association for the Self Employed, the Coalition for Affordable Health Coverage, the Retail Industry Leaders Association, and the National Retail Federation.



IRS Tips about Vacation Home Rentals


If you rent a home to others, you usually must report the rental income on your tax return. However, you may not have to report the rent you get if the rental period is short and you also use the property as your home. In most cases, you can deduct your rental expenses. When you also use the rental as your home, your deduction may be limited. Here are some basic tax tips that you should know if you rent out a vacation home:

  • Vacation Home.  A vacation home can be a house, apartment, condominium, mobile home, boat or similar property.
  • Schedule E.  You usually report rental income and rental expenses on Schedule E, Supplemental Income and Loss. Your rental income may also be subject to Net Investment Income Tax.
  • Used as a Home.  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 these rules, see Publication 527, Residential Rental Property (Including Rental of Vacation Homes).
  • Divide Expenses.  If you personally use your property and also rent it to others, special rules apply. You must divide your expenses between the rental use and the personal use. To figure how to divide your costs, you must compare the number of days for each type of use with the total days of use.
  • Personal Use.  Personal use may include use by your family. It may also include use by any other property owners or their family. Use by anyone who pays less than a fair rental price is also personal use.
  • Schedule A.  Report deductible expenses for personal use on Schedule A, Itemized Deductions. These may include costs such as mortgage interest, property taxes and casualty losses.
  • Rented Less than 15 Days.  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. In this case you deduct your qualified expenses on schedule A.
  • Use IRS Free File.  If you still need to file your 2014 tax return, you can use IRS Free File to make filing easier. Free File is available until Oct. 15. If you make $60,000 or less, you can use brand-name tax software. If you earn more, you can use Free File Fillable Forms, an electronic version of IRS paper forms. Free File is available only through the website.


You can get forms and publications on at any time.



Scam Targets Corporations; LARA alerts Michigan businesses of scheme collecting $150 fee to prepare annual minutes


Beware of a scam hitting the mailboxes of Michigan corporations and limited liability companies from a non-governmental entity called “Division of Corporate Services” trying to collect a $150 fee to prepare corporate meeting minutes. The misleading compliance solicitation implies that Michigan requires corporations and limited liability companies to complete a 2015 Annual Minutes Form and is designed to look like an official document, but it is not. 


“Beware of mailings that may appear to come from the State of Michigan offering assistance in performing non-existent or non-required services,” said Department of Licensing and Regulatory Affairs (LARA) Chief Deputy Director Shelly Edgerton. “Our corporation customers should only respond to correspondence from LARA. No such letters are being sent from the LARA Corporations Division, no matter how official they may look.”


Michigan businesses are receiving an official-looking form called the “2015 Annual Minutes Form.” The form implies that the recipient is obligated to complete and return it with a fee payment for the preparation of corporate meeting minutes. The accompanying instructions for completing the form list a return address at 3105 S. Martin Luther King Blvd, Suite 317, Lansing, MI 48910. In 2012, 2013, and 2014, LARA warned of similar scams requesting $125 that involved a company with a similar name and an address located in Lansing.


“Annual meeting minutes for Michigan corporations are best prepared either by corporate officers, directors, or by a business attorney, but are not required to be filed with our Corporation Division,” Edgerton emphasized. “This is not to be confused with the legally required annual report or annual statement which can be filed online along with the applicable fee to the State of Michigan.”


Michigan appears to be the latest state where corporations are being targeted to file annual minutes for a fee. Similar solicitation mailings have occurred in several other states including California, Colorado, Florida, Georgia, Indiana, Illinois, Massachusetts, and Texas where corporations have been victimized by such scams. These entities operate under identical or similar names and request payment fees ranging from $125, $150, $175 to $239 for the completion and submittal of an annual minutes statement.


The phony letters can look authentic. They may be addressed to the corporation, the resident agent, director or officers; cite a Michigan statute or a federal statute; and may appear to be issued by the Michigan Department of Licensing and Regulatory Affairs, Corporations, Securities, and Commercial Licensing Bureau, Corporations Division. If such notices are received, they can be disregarded because they are neither issued by LARA nor any governmental agency


Any Michigan corporation that receives a notice to have annual meeting minutes prepared and pay a fee to avoid dissolution of their corporation are advised to do the following:

  2. Keep the notice, mailing envelope, and return envelope.
  4. Contact the United States Postal Inspections Service to report mail fraud at: 1-877-876-2455 or
  6. Or contact the Michigan Office of the Attorney General at P.O. Box 30212, Lansing, MI 48909.


Legitimate notices and mailings to Michigan corporations are issued from LARA’s Corporations Division and are mailed to the resident agent at the registered office address on record. When receiving any official-looking document, please review carefully and read the small print. If you are not sure, please contact the LARA Corporations Division at 517-241-6470.


Customers with questions about their corporation, limited liability company or limited partnership are encouraged to use the Business Entity Search to check their status. If an annual report or statement needs to be filed, customers may file online using  Additional information is available on the Corporations Division website at or by calling the Corporations Division at 517-241-6470.




New Tax Penalty Starts Today on Small Business Health Insurance



Small business groups are sounding a warning about an obscure Internal Revenue Service rule that takes effect Wednesday imposing heavy fines on small businesses for helping defray the cost of their workers’ insurance or medical expenses.


The National Federation of Independent Business said small businesses that get caught helping their workers buy insurance or pay medical bills can be fined 18 times more than larger employers that don’t provide coverage at all.

“It’s the biggest penalty that no one is talking about,” said NFIB policy director Kevin Kuhlman in a statement. “The penalty for compensating employees for healthcare-related expenses is enough to destroy most small businesses.”


Under the rule, which the NFIB noted appears nowhere in the Affordable Care Act, employers who do not offer a group health plan, but give their workers additional pay to compensate for the purchase of health insurance or direct medical expenses, can be fined $100 per day, per employee. Over the course of a year that can add up to $36,500 per employee, up to $500,000 in total. In contrast, the penalty on businesses for failing to comply with the employer mandate is only $2,000 per year.


The National Association for the Self-Employed,  an advocacy group for the self-employed and micro-business community, is calling on the Treasury Department to immediately delay the policy until the end of the year in order for bipartisan legislation to be passed by Congress to remedy the situation.


“Currently in Congress bipartisan legislation has been introduced that would fix this unintended consequence of the Affordable Care Act,” said NASE vice president for government relations and public affairs Katie Vlietstra. “The Treasury Department should immediately announce a delay in this rule until the end of the year in order for the legislative process to work and for small businesses to be spared the devastating effects this IRS rule could have across America’s Main Street.”


In February, the U.S. Department of the Treasury’s announced a delay in the enforcement of the technical guidance issued in September 2013 for health reimbursement arrangements. The February delay expires July 1 and fines could begin to be imposed on businesses not meeting the requirement for group coverage plans that provide health care assistance for their employees through the use of traditional HRA accounts.


“It’s hard to believe Congress or the President intended to punish employers much more severely for actually helping their workers,” said Kuhlman. “Nevertheless, that’s the consequence and most small businesses don’t know it.”


According to the NFIB’s research, 14 percent of small businesses that do not offer group insurance reimburse their workers instead, unaware of the potential pitfalls of the regulation.


“Reimbursing employees for the cost of insurance or medical services is a way for small businesses to help their workers without the administrative headache of setting up a costly group plan,” said Kuhlman. “Most small employers don’t have HR departments or benefits specialists, so this is a simpler, easier way to help their employees.”


The NFIB noted that Congress would be able to remedy the situation by repealing the IRS rule, and there is legislation in both houses awaiting action. 


The bipartisan Small Business Healthcare Relief Act, introduced last week in Congress by Rep. Charles Boustany, R-La., and Mike Thompson, D-Calif., in the House and Sen. Charles Grassley, R-Iowa, and Heidi Heitkamp, D-N.D., in the Senate, would provide a remedy to this situation by enabling small businesses to continue to use health reimbursement arrangements, which allow employers to provide pre-tax dollars to employees to pay for medical care and services.


“Health reimbursement accounts have historically been a very powerful and effective tool for the small business community,” said Vliestra. “HRAs allow small business owners to do the right thing by helping provide financial assistance to their employees for qualified health care expenses.  Which should be applauding them for wanting to help their employees access affordable health care coverage, not punish them with arbitrary IRS policies that could cripple their business.”


When the technical guidance was originally issued back in 2014, the NASE provided comment on the guidancestating that, “the technical guidance misinterprets the intent of the ACA as it relates to these types of tools (HRAs) used to provide financial support to employers with less than 50 employees.”


“If there’s an opportunity for a bipartisan improvement toward affordable health care, this has to be it,” said Kuhlman. “There’s no real justification for penalizing small businesses that do what the law’s strongest supporters claim to want, which is to help employees obtain coverage or pay medical bills. This is a rigid and thoughtless bureaucratic rule that undermines the purpose of the law, and it ought to be repealed immediately.”




Tax-Related ID Theft a Huge and Growing Problem



The Federal Trade Commission says that 2014 marked the fifth consecutive year that tax-related identity theft was the most common form of reported identity theft.


According to the IRS National Taxpayer Advocate, the reason is simple: “We have heard of organized criminals who have given up drug trafficking to engage in the much easier, safer, and just-as-lucrative endeavor of tax refund fraud.”


Personal information can be stolen in many ways, from bogus IRS emails and unscrupulous return preparers to large-scale thefts of information from banks, schools and even correctional facilities. In the recent hacking of the IRS’s Get Transcript online application, the thieves apparently trolled social media to obtain answers to various “out of wallet” questions that (in theory) only the taxpayers would know.


The IRS has issued approximately 1.5 million Identity Protection (IP) PINs, a unique number assigned to victims to use when filing their federal tax return. In addition, when the IRS stops processing a suspicious return with a real name and/or Social Security Number, it may send a letter to the taxpayer requesting verification of identification by accessing the Identity Verification (Idverify) website or calling a toll-free IRS number.


Those affected by the Get Transcript hack will receive one of two letters. Letter 4281-A will go to the 100,000 taxpayers whose information was successfully obtained. It will explain how to obtain an IP PIN and offer one year of free credit monitoring. Letter 4281-B will be sent to the 100,000 taxpayers where an attempt was made but was unsuccessful. It will provide general information but no credit monitoring.


Identity theft victims should take the following steps:

1. Contact local law enforcement.
2. File an FTC complaint. 
3. Ask one of the three major credit bureaus to place a fraud alert on their account.
4. Close any financial accounts that were opened or accessed without permission.
5. Respond immediately to any IRS notices.
6. Submit IRS Form 14039 (Identity Theft Affidavit).


Bear in mind the IRS does not contact taxpayers by email, telephone, or a knock on the front door to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels. The first contact will be through official correspondence sent via U.S. mail.


Jim Keller is executive editor of tax and financial planning with the Tax & Accounting business of Thomson Reuters.




Jeb Bush Made $29 Million after Leaving Office, Tax Returns Show


Jeb Bush made $29 million in the first seven years after he left public office, dramatically increasing his wealth during a recession, a financial crisis and the Obama presidency he has criticized.


Bush’s tax returns, released Tuesday, show how the former Florida governor set up a successful consulting and speaking business and plowed the profits into an array of investments including offshore holdings and business ventures in the shipping and oil industries.


Bush now has a net worth of $19 million to $22 million, his presidential campaign said, which means his wealth is more than 14 times larger than when he left office in early 2007. While he was governor, his net worth declined.


 “Thank God for term limits,” Bush quipped on Tuesday as he briefed a small group of reporters in a law office a block from the White House.

“I’ve been truly blessed to be able to be more successful than I imagined,” he added.


Bush, 62, released 33 years of tax returns Tuesday in a show of transparency that topped the Republican Party’s previous two nominees and presented a challenge to other candidates for president. Romney and John McCain, the two most recent past presidential nominees, each released two years of returns.


Bush, the son and brother of former presidents, says he is running to close what he calls the opportunity gap between high-income Americans and everyone else. As other candidates emphasize their modest upbringings, Bush is trying to make his business experience an asset and prevent his wealth from becoming a political liability.


Among the biggest sources of Bush’s expanding wealth after leaving the governor’s office in 2007 were a contract with Lehman Brothers in 2007 and 2008 before the firm went bankrupt and a similar arrangement with Barclays Plc. Lehman paid Bush about $1.3 million a year and Barclays paid him about $2 million a year through 2014, according to the campaign.


Bush also made $8.1 million giving speeches from 2007 to 2013 to groups including the National Potato Council, the Minnesota Bankers Association and Pfizer Inc. Since the beginning of 2014, he has earned another $1.8 million from speeches, according to a list released by the campaign.


Another source of Bush’s income was his work on corporate boards of companies including Tenet Healthcare Corp., Rayonier Inc., Cormatrix, Swisher Hygiene, Empower Software Holdings and Geo Fossil Fuels LLC.  Bush had other consulting clients through Jeb Bush & Associates, a firm he has since sold to his son, Jeb Bush Jr.


Bush and his campaign wouldn’t release a complete list of consulting clients, citing confidentiality agreements. The campaign did release the names of some consulting clients: Academic Partnerships, Clinical Medical Services, Planetary Resources and All-Med. None of the undisclosed clients are foreign, and Bush never lobbied, his campaign said.


40.1 Percent Rate

Bush and his wife, Columba, paid a 40.1 percent effective federal income tax rate in 2013 on more than $7 million in earnings. They paid slightly lower rates in the other years. "It's a little daunting to be paying 40 percent of your income in taxes," Bush said. "It's not something I'm bragging about."


The 40.1 percent rate is more than double what President Barack Obama paid in 2014 and nearly triple the rate that Mitt Romney, the 2012 Republican presidential nominee, paid in 2011.


Bush’s campaign drew attention to the disparity between the candidate’s tax returns and the president’s. There are a few reasons for Bush’s relatively high rate.


Compared with other high-income families, the Bushes earned relatively little income from lightly taxed capital gains and dividends. They faced increased marginal tax rates—up to 43.4 percent in 2013—as a result of Obama’s policies.


They live in Florida, a state without an income tax they can deduct from their federal taxes. Bush’s self-employment taxes—the equivalent of a wage-earner’s payroll taxes—show up on his income tax return. And the Bushes donated a much smaller share of their income to charity than the Obamas have.


Charitable Giving

From 2007 to 2013, the Bushes gave a total of $431,056 to charity, or about 1.5 percent of their adjusted gross income. In 2011, Romney, who is much wealthier than Bush, donated more than 29 percent of his income to charity. The Obamas donated 14.8 percent last year.


Bush said his total charitable giving from 2007 to 2014 is $739,000; he hasn’t filed a tax return for that final year. The campaign released the names of some, but not all, charities that got donations from the family. They include: the Urban League of Miami, Knights of Columbus, Ave Maria University and the Green Beret Foundation.  The campaign noted that Bush has helped raise more than $70 million for various causes.


The returns don’t give a comprehensive picture of Bush’s wealth as of today.


That will come later. Bush is seeking an extension for the personal financial disclosure that’s required of presidential candidates, and he’ll file that this year. He will also release his 2014 tax return after he files it near the extended October 15 deadline.


‘The Jeb View’

When he left office, Bush said, he wanted to make his family financially secure. As a senior adviser at Barclays, he traveled the world. He said he deepened his knowledge about foreign markets while advising bank clients from Europe to Asia.


“My experience in government allowed me to provide some insights,” Bush said. “It wasn’t the Barclays view. It was the Jeb view about how the world works. And it seemed to have been quite effective. I mean, the amount of time I spent traveling the world talking to their top clients was an indication that I did add value for the enterprise.”


Bush said his speaking fees rose over time and that he was typically paid $40,000 to $50,000 per event, and as much as $75,000 outside the U.S.


“Not many people can sustain it over the length that I did,” he said.


‘Less Than Chelsea Clinton’

Asked whether the speaking fees and seven-figure payments disconnected him from most Americans, Bush said the appearances put him in front of people from “every sector of life.”


“I talked to a lot of people that have added a lot of value in my life,” Bush said, adding that he was mostly talking to community and business leaders.


“I made less than Chelsea Clinton,” Bush joked, referring to a Washington Post report Tuesday that the daughter of Bill and Hillary Clinton, the Democratic presidential candidate, earned $65,000 for an appearance this year at the University of Missouri at Kansas City.


“I’m not even on the third team of the Clintons,” Bush said. The former president and his wife made at least $30 million from speeches in 2014 and 2015 alone, the couple disclosed earlier this year. 
Bush’s tax returns show a mix of successful and failed investments.

In October 2013, he sold $903,216 worth of Tenet stock and claimed $462,013 in profit, more than doubling his money since he purchased it in May 2011. He made another $94,270 in profit on another batch of Tenet shares that he sold in September 2013.


Lehman Stock

Other investments didn’t fare so well. Bush bought $77,000 in Lehman Brothers stock in July 2008. The firm filed for bankruptcy in September 2008 and Bush sold the shares for $54 on Dec. 26, 2008.


Bush bought an exchange-traded fund that invested in gold in August 2011, right after the showdown in Washington over the federal debt ceiling and Standard & Poor’s downgraded the U.S. government. He sold the investment at a $65,037 loss in December 2013.


He made $351 buying shares of Facebook Inc. and then selling them on May 18, 2012, the date of the company’s initial public offering.


Bush also owned funds run by Abbey Capital LP that resulted in him filing tax forms that include addresses in Malta, the Cayman Islands and Bermuda. Investment funds often set up addresses outside the U.S. to help foreign investors limit their U.S. tax liabilities.


Bush said he paid U.S. taxes on those investments as required, and the campaign said those investments lost about $20,000.


Gambling Winnings

Bush also said he didn’t choose the offshore investments, but that they were picked by SunTrust Banks Inc., which manages much of Bush’s money. Bush said the bank chose the investments based on a questionnaire he filled out about his risk tolerance and preferences. His campaign said the Abbey Capital investment amounted to less than two percent of his investments at SunTrust.


The tax returns and other documents released on Tuesday reveal a few other details about Bush’s finances:


• In 2013, he reported $6,575 in gambling winnings. That was actually a table prize at a dinner and should have been reported as regular income, not proceedings from gambling, according to the campaign.

• Columba Bush, his wife, has received a salary from Jeb Bush & Associates. In 2013, for example, she was paid $27,000.

• Jeb Bush made money from Old Rhodes Holdings LLC, which made at least part of its income from investing in disaster response services. In that business and in Bush’s Britton Hill Partners investment firm, he worked with Amar Bajpai, a former Lehman banker.

• Bush said Britton Hill Partners, which he has since left, has been wrongly described as a private equity firm. It provides capital to companies without taking them over or running them.

• Bush set up a revocable trust as part of an estate-planning strategy. He is the trustee, and Columba Bush is the beneficiary.




Reporting Gambling Income and Losses on Your Tax Return


If you play the ponies, play cards or pull the slots, your gambling winnings are taxable. You must report them on your tax return. If you gamble, these IRS tax tips can help you at tax time next year:


1. Gambling income.  Income from gambling includes winnings from the lottery, horse racing and casinos. It also includes cash and non-cash prizes. You must report the fair market value of non-cash prizes like cars and trips.


2. Payer tax form.  If you win, the payer may give you a Form W-2G, Certain Gambling Winnings. The payer also sends a copy of the W-2G to the IRS. The payer must issue the form based on the type of gambling, the amount you win and other factors. You’ll also get a form W-2G if the payer must withhold income tax from what you win.


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


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.

See Publications 525, Taxable and Nontaxable Income for rules on this topic. Refer to Publication 529, Miscellaneous Deductions for more on losses. It also lists some of the types of records you should keep. You can download and view both on at any time.




Ten Things to Know about Identity Theft and Your Taxes


Learning you are a victim of identity theft can be a stressful event. Identity theft is also a challenge to businesses, organizations and government agencies, including the IRS. Tax-related identity theft occurs when someone uses your stolen Social Security number to file a tax return claiming a fraudulent refund.


Many times, you may not be aware that someone has stolen your identity. The IRS may be the first to let you know you’re a victim of ID theft after you try to file your taxes.

The IRS combats tax-related identity theft with a strategy of prevention, detection and victim assistance. The IRS is making progress against this crime and it remains one of the agency’s highest priorities.


Here are ten things to know about ID Theft:


1. Protect your Records.  Do not carry your Social Security card or other documents with your SSN on them. Only provide your SSN if it’s necessary and you know the person requesting it. Protect your personal information at home and protect your computers with anti-spam and anti-virus software. Routinely change passwords for Internet accounts.


2. Don’t Fall for Scams.  The IRS will not call you to demand immediate payment, nor will it call about taxes owed without first mailing you a bill. Beware of threatening phone calls from someone claiming to be from the IRS. If you have no reason to believe you owe taxes, report the incident to the Treasury Inspector General for Tax Administration (TIGTA) at 1-800-366-4484.


3. Report ID Theft to Law Enforcement.  If your SSN was compromised and you think you may be the victim of tax-related ID theft, file a police report. You can also file a report with the Federal Trade Commission using the FTC Complaint Assistant. It’s also important to contact one of the three credit bureaus so they can place a freeze on your account.


4. Complete an IRS Form 14039 Identity Theft Affidavit.  Once you’ve filed a police report, file an IRS Form 14039 Identity Theft Affidavit.  Print the form and mail or fax it according to the instructions. Continue to pay your taxes and file your tax return, even if you must do so by paper.


5. Understand IRS Notices.  Once the IRS verifies a taxpayer’s identity, the agency will mail a particular letter to the taxpayer. The notice says that the IRS is monitoring the taxpayer’s account. Some notices may contain a unique Identity Protection Personal Identification Number (IP PIN) for tax filing purposes.


6. IP PINs.  If a taxpayer reports that they are a victim of ID theft or the IRS identifies a taxpayer as being a victim, they will be issued an IP PIN. The IP PIN is a unique six-digit number that a victim of ID theft uses to file a tax return. In 2014, the IRS launched an IP PIN Pilot program. The program offers residents of Florida, Georgia and Washington, D.C., the opportunity to apply for an IP PIN, due to high levels of tax-related identity theft there.


7. Data Breaches.  If you learn about a data breach that may have compromised your personal information, keep in mind not every data breach results in identity theft.  Further, not every identity theft case involves taxes. Make sure you know what kind of information has been stolen so you can take the appropriate steps before contacting the IRS.


8. Report Suspicious Activity.  If you suspect or know of an individual or business that is committing tax fraud, you can visit and follow the chart on How to Report Suspected Tax Fraud Activity.


9. Combating ID Theft.  Over the past few years, nearly 2,000 people were convicted in connection with refund fraud related to identity theft. The average prison sentence for identity theft-related tax refund fraud grew to 43 months in 2014 from 38 months in 2013, with the longest sentence being 27 years.   During 2014, the IRS stopped more than $15 billion of fraudulent refunds, including those related to identity theft.  Additionally, as the IRS improves its processing filters, the agency has also been able to halt more suspicious returns before they are processed. So far this year, new fraud filters stopped about 3 million suspicious returns for review, an increase of more than 700,000 from the year before. 


10. Service Options. Information about tax-related identity theft is available online. We have a special section on devoted to identity theft and a phone number available for victims to obtain assistance.

For more on this Topic, see the Taxpayer Guide to Identity Theft.



Three Sure-Tell Signs Your Hard Drive Is Failing


Under ideal conditions, the average stationary hard drive lasts five to ten years. With the growing use of external drives and laptops that are toted around frequently and exposed to damaging elements, that life span shrinks to between three and five years.

Consequently, it is important to watch for indications that your hard drive is failing, so you can back up all of your valued files and data. Here are three signs that it's time to act:


Slowed Operation and Freezes

You should immediately back up the contents of your hard drive when you notice that freezes and display of the blue screen become the norm.


It is even more imperative to do so, if these problems continue in Safe Mode or after a fresh installation of your operating system because that's an indication that hard drive failure is imminent.


Corrupted Data

When it becomes problematic to save or open your computer's files and you start getting error messages about corrupted data, you should know that your hard drive is failing.


As a hard drive's functionality gradually wanes, this is a common problem, so act fast to ensure your business and personal data stays intact and safe.


Presence of Bad Sectors

If your hard drive has bad sectors, or areas incapable of maintaining data integrity, you may not immediately notice the problem.


The presence of such sectors is a grave problem and tells that your hard drive is in its final strides.


To check your hard drive for bad sectors, run a disk check with the options to automatically fix the problem and attempt recovery of files.


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




Include a Few Tax Items in Your Summer Wedding Checklist


If you’re preparing for summer nuptials, make sure you do some tax planning as well. A few steps taken now can make tax time easier next year. Here are some tips from the IRS to help keep tax issues that may arise from your marriage to a minimum:


  • Change of name. All the names and Social Security numbers on your tax return must match your Social Security Administration records. If you change your name, report it to the SSA. To do that, file Form SS-5, Application for a Social Security Card. The easiest way for you to get the form is to download and print it on You can also call SSA at 800-772-1213 to order the form, or get it from your local SSA office.
  • Change tax withholding. When you get married, you should consider a change of income tax withholding. To do that, give your employer a new Form W-4, Employee's Withholding Allowance Certificate. The withholding rate for married people is lower than for those who are single. Some married people find that they do not have enough tax withheld at the married rate. For example, this can happen if you and your spouse both work. Use the IRS Withholding Calculator tool at to help you complete a new Form W-4. See Publication 505, Tax Withholding and Estimated Tax, for more information. You can get IRS forms and publications on at any time.
  • Changes in circumstances. If you receive advance payments of the premium tax credit you should report changes in circumstances, such as your marriage, to your Health Insurance Marketplace. Other changes that you should report include a change in your income or family size. Advance payments of the premium tax credit provide financial assistance to help you pay for the insurance you buy through the Health Insurance Marketplace. Reporting changes in circumstances will allow the Marketplace to adjust your advance credit payments. This adjustment will help you avoid getting a smaller refund or owing money that you did not expect to owe on your federal tax return.
  • Change of address. Let the IRS know if you move. To do that, file Form 8822, Change of Address, with the IRS. You should also notify the U.S. Postal Service. You can change your address online at, or report the change at your local post office.
  • Change in filing status. If you are married as of Dec. 31, that is your marital status for the entire year for tax purposes. You and your spouse can choose to file your federal tax return jointly or separately each year. It is a good idea to figure the tax both ways so you can choose the status that results in the least tax.




Rollovers from qualified plans to IRAs


Employees who quit or retire will often have to decide whether to leave their qualified retirement plan account (e.g., 401(k) account) alone or to roll it over to an IRA. The answer, of course, depends on the individual's specific circumstances. However, there are some general pros and cons to consider.


Postmortem tax-deferral opportunities. Beneficiary designations as of the date of the owner's death control the availability of various postmortem tax-deferral opportunities. Therefore, it is important to set up these designations to maximize those opportunities. Greater flexibility generally is afforded in beneficiary designations for IRAs and in stretching out the tax-deferral period.


Investment choices. Although some qualified plans offer self-directed accounts, many restrict the available investment choices. However, most IRA providers offer their entire investment portfolio for the participant to choose from. On the other hand, the qualified plan may provide access to better investment opportunities (such as a chance to buy a more favorable class of mutual fund shares) than would be available to the IRA.


Availability of taking withdrawals. While most qualified plans restrict the availability of withdrawals, IRA withdrawals are available at any time and in any amount. However, an employee who separates from service at age 55 or older can take distributions from the qualified plan without being subjected to the 10% early withdrawal penalty. With an IRA, the employee may have to wait until age 59½ to take penalty-free distributions.


Applicable fees. IRAs may be subject to fees not charged to the qualified plan account.


Creditor protection. Qualified retirement plans have federal creditor protection in the case of malpractice, bankruptcy, divorce, business problems, or creditor problems. IRAs are not protected in all states.


Please contact us if you have questions about qualified plan rollovers or the tax aspects of retirement saving.




Avoiding an inadvertent termination of S corporation status


An inadvertent termination of a company’s S corporation status can mess up even the best tax planning intentions. Here are some important considerations and suggestions to help avoid an inadvertent loss of the company’s qualification to be treated as an S corporation.


100-shareholder limitation. The S election will terminate if the number of S corporation shareholders is more than 100 at any time during any year. Therefore, it is important to monitor future stock issues so that the 100-shareholder limitation will not be exceeded. A shareholder agreement can help avoid termination of the S election by prohibiting the transfer of shares that would result in more than 100 shareholders.


Ineligible shareholdersAn S corporation can generally have only shareholders that are (1) individuals who are U.S. citizens or residents, (2) estates, and (3) certain types of trusts. Ineligible shareholders include nonresident aliens, partnerships, corporations, and nonqualified trusts. Therefore, it is important to continually ensure that all the shareholders are eligible to hold S corporation stock.


A shareholder agreement is one of the most important tools available to protect the corporation’s S election from termination because shares have been transferred to an ineligible shareholder. Such an agreement should prohibit the transfer of any shares to a person other than a permitted S corporation shareholder.


One class of stock. An S corporation can have only one class of stock. This means that all outstanding shares must confer identical rights to distribution and liquidation proceeds. The rules do provide, however, that an S corporation can issue both voting and nonvoting stock without violating the one-class-of-stock rule. This rule is complicated, so be sure to contact us when considering future changes to the capital structure of the corporation or when drafting agreements that may affect distribution and liquidation rights.


Excess passive investment incomeIf a corporation has more than 25% of its gross receipts from passive investment sources in three consecutive years and has C corporation Accumulated Earnings and Profits (AE&P) at the end of each year, then S status is terminated as of the beginning of the fourth consecutive year. An S corporation will generally have AE&P only if it previously operated as a C corporation or acquires a C corporation in a tax-free reorganization.


Corporate records tracking the corporation’s passive investment income should be maintained to determine whether the 25% limitation will be exceeded. If a corporation is in danger of going over the 25% passive income limitation for three consecutive years, termination of the corporation’s S status can be avoided by distributing the AE&P to shareholders. Furthermore, if the corporation lacks the cash or liquid assets to make the distributions, the corporation can elect to make a “deemed” dividend. If such an election is made, the corporation acts as though a distribution has been (1) paid to the shareholders and (2) contributed back to the corporation. Any distribution of AE&P, however, whether actual or deemed, is taxable to shareholders as a dividend.


If distributing the AE&P is not feasible, it may be possible to avoid termination under the passive income rules by arranging the corporation’s operations so that the 25% passive income limit is not exceeded for three consecutive years. To accomplish this, the corporation could (1) reduce the amount of passive investment income, (2) increase the amount of other income, or (3) do a combination of both.


Let us help. These rules are complex, and some of the procedures apply only if special tax elections are properly filed with the IRS. If you have any questions or if you are considering implementing any of these procedures, please do not hesitate to contact us.




Combined business and vacation travel


If you go on a business trip within the U.S. and add on some vacation days, you know you can deduct some of your expenses. The question is how much.


First, let’s cover just the pure transportation expenses. Transportation costs to and from the scene of your business activity are 100% deductible as long as the primary reason for the trip is business rather than pleasure. On the other hand, if vacation is the primary reason for your travel, then generally none of your transportation expenses are deductible. Transportation costs include travel to and from your departure airport, the airfare itself, baggage fees and tips, cabs, and so forth. Costs for rail travel or driving your personal car also fit into this category.


The number of days spent on business vs. pleasure is the key factor in determining if the primary reason for domestic travel is business. Your travel days count as business days, as do weekends and holidays if they fall between days devoted to business, and it would be impractical to return home. Standby days (days when your physical presence is required) also count as business days, even if you are not called upon to work on those days. Any other day principally devoted to business activities during normal business hours is also counted as a business day, and so are days when you intended to work, but could not due to reasons beyond your control (local transportation difficulties, power failure, etc.).


You should be able to claim business was the primary reason for a domestic trip whenever the business days exceed the personal days. Be sure to accumulate proof and keep it with your tax records. For example, if your trip is made to attend client meetings, log everything on your daily planner and copy the pages for your tax file. If you attend a convention or training seminar, keep the program and take some notes to show you attended the sessions.

Once at the destination, your out-of-pocket expenses for business days are fully deductible. Out-of-pocket expenses include lodging, hotel tips, meals (subject to the 50% disallowance rule), seminar and convention fees, and cab fare. Expenses for personal days are nondeductible.




Summer time is a good time to start planning and organizing your taxes


You may be tempted to forget all about your taxes once you've filed your tax return, but that's not a good idea. If you start your tax planning now, you may avoid a tax surprise when you file next year. Also, now is a good time to set up a system so you can keep your tax records safe and easy to find. Here are some tips to give you a leg up on next year's taxes:


Take action when life changes occur. Some life events (such as marriage, divorce, or the birth of a child) can change the amount of tax you pay. When they happen, you may need to change the amount of tax withheld from your pay. To do that, file a new Form W-4 (“Employee's Withholding Allowance Certificate”) with your employer. If you make estimated payments, those may need to be changed as well.


Keep records safe. Put your 2014 tax return and supporting records in a safe place. If you ever need your tax return or records, it will be easy for you to get them. You'll need your supporting documents if you are ever audited by the IRS. You may need a copy of your tax return if you apply for a home loan or financial aid.


Stay organized. Make tax time easier. Have your family put tax records in the same place during the year. That way you won't have to search for misplaced records when you file next year.

If you are self-employed, here are a couple of additional tax tips to consider:


Employ your child. Doing so shifts income (which is not subject to the “kiddie tax”) from you to your child, who normally is in a lower tax bracket or may avoid tax entirely due to the standard deduction. There can also be payroll tax savings; plus, the earnings can enable the child to contribute to an IRA. However, the wages paid must be reasonable given the child's age and work skills. Also, if the child is in college, or is entering soon, having too much earned income can have a detrimental impact on the student's need-based financial aid eligibility.


Avoid the hobby loss rules. A lot of businesses that are just starting out or have hit a bump in the road may wind up showing a loss for the year. The last thing the business owner wants in this situation is for the IRS to come knocking on the door arguing the business's losses aren't deductible because the activity is just a hobby for the owner. If your business is expecting a loss this year, we should talk as soon as possible to make sure you do everything possible to maximize the tax benefit of the loss and minimize its economic impact.




IRS Proceeds with Caution on Expanding Online Access



In the wake of high-profile data breaches at the Internal Revenue Service and other federal agencies, a new government report warns the IRS against expanding its online customer service options before completing key technology upgrades.


The report, from the Treasury Inspector General for Tax Administration, pointed out that the IRS has made progress in providing taxpayers with online customer service options. However, the report cautions that the IRS needs to prioritize the completion of key information technology projects needed to develop future projects that will provide taxpayers with dynamic online access capabilities.


In May, the IRS revealed that organized criminals had used its online Get Transcript application to access the tax returns of approximately 104,000 taxpayers (see IRS Detects Massive Data Breach in ‘Get Transcript’ Application).


 “As taxpayers continue to be provided with the electronic products and services they desire to interact and communicate with the IRS, the risk associated with unauthorized access to tax accounts will continue to grow,” said TIGTA Inspector General J. Russell George in a statement. “As such, completion of those technology projects that improve online service while mitigating the risks must be a priority.”


In its most recent Strategic Plan, the IRS acknowledged that the current technology environment has raised taxpayers’ expectations for online customer service, and it needs to meet these expectations. The IRS’s goal is to provide taxpayers with dynamic online account access that includes viewing their recent payments, making minor changes and adjustments to their accounts in real-time, and corresponding digitally with the IRS to respond to notices or complete forms. 


TIGTA performed an audit to assess IRS efforts to identify taxpayers’ needs and preferences for online services and the actions planned or taken to deliver these online capabilities. In the report, TIGTA found that the IRS has made progress in providing taxpayers with online customer service options. However, the report pointed out that the IRS must complete three main information technology projects to establish the electronic platform for developing future projects that will provide taxpayers with dynamic online access capabilities. These three projects are Online Account Activity, Taxpayer eAuthentication, and Taxpayer Digital Communications.


The completion of these projects is needed to provide the account features to enable taxpayers to view their accounts online, to accurately authenticate their identities online, and to enable the IRS and taxpayers to communicate with secure electronic messages, TIGTA noted.


TIGTA recommended that the IRS’s deputy commissioner for services and enforcement reprioritize the 71 Service on Demand projects to align with the IRS Commissioner’s long-term vision for modernizing taxpayer service. The IRS agreed with the recommendation. The IRS plans to use its annual Services Approach reflection and refresh process to ensure that the projects proposed for implementation, including the Service on Demand projects, align with the IRS commissioner’s long-term vision for modernizing taxpayer service.


“The IRS’ long-term vision for tax administration is to modernize taxpayer service by providing taxpayers with more robust online services and providing more efficient service options,” wrote Rajive Mathur, director of the IRS’ Office of Online Service, in response to the report. “To that end, the IRS has focused on delivering a number of self-service online interactive tools to increase service to taxpayers while achieving cost savings by reducing traffic on traditional, more expensive channels.”


An IRS spokesperson emailed a further response to the report. “The IRS’s long-term vision is to modernize its customer service by providing taxpayers with additional robust online accounts and applications in a safe and secure environment,” said the statement. “At the same time, we continue to focus on increasing the security of our online services. As TIGTA notes, the IRS has made considerable progress in providing taxpayers with more digital self-service options, including modernizing the IRS public website, updating the technical infrastructure that supports it, improving website content and design, and optimizing search capabilities. This also includes delivering a number of self-service online interactive tools, such as Where’s My Refund and Online Payment Agreements, to increase service efficiency for both taxpayers and IRS, while achieving cost savings and reducing traffic on traditional more expensive channels.


"The IRS will continue to look for ways to improve the taxpayer experience to provide more efficient options, particularly through the Service on Demand initiatives," the IRS statement continued. "Since 2010, the IRS has seen a budget decline of $1.2 billion and lost 16,000 employees across the IRS. Any proposed strategy must consider our limited funding and finite resources for high-priority information technology projects and other investments across the agency. We agree with TIGTA that we should continually revisit our strategic priorities to advance our digital offerings to taxpayers as far and fast as our resources allow to efficiently satisfy taxpayer service expectations.”




Supreme Court Upholds ACA Subsidies



The Supreme Court, in a 6-3 decision, has upheld the tax subsidies under the Patient Protection and Affordable Care Act.


The challenge by opponents of Obamacare grew out of the phrase “established by the state,” which referred to the exchanges, or marketplaces, where people could compare and purchase insurance plans. Each state can establish its own Exchange, but the ACA also provides that the federal government will establish an exchange if the state does not.


Under the ACA, tax credits “shall be allowed” for any applicable taxpayer, but only if the taxpayer has enrolled in an insurance plan through “an Exchange established by the State.” An IRS regulation interprets this as making the credits available on an exchange “regardless of whether the Exchange is established and operated by a State…or by [Health and Human Services].”


According to the petitioners in the case, known as King v. Burwell, Virginia’s federal exchange does not qualify as an exchange “established by the State” so they should not receive any tax credits. That would make the cost of buying insurance more than eight percent of their income, exempting them from the act’s coverage requirement. As a result of the IRS regulation, however, they would receive tax credits, making the cost of buying insurance less than 8 percent of their income, rendering them subject to the coverage requirement.


The specific holding of the court is that Section 36B’s tax credits are available to individuals in states that have a federal exchange.


Chief Justice John Roberts delivered the majority opinion, and was joined by Justices Anthony Kennedy, Ruth Bader Ginsburg, Stephen Breyer, Sonia Sotomayor and Elena Kagan. Justice Antonin Scalia filed a dissenting opinion, in which Justices Clarence Thomas and Samuel Alito joined.


The phrase “an Exchange established by the State under [42 U.S.C. section 18031]” is properly viewed as ambiguous, according to Roberts.


The phrase may be limited in its reach to state exchanges, Roberts noted. “But it is also possible that the Act refers to all Exchanges—both State and Federal – for purposes of the tax credits. If a State chooses not to follow the directive in Section 18031 to establish an Exchange, the Act tells the Secretary of Health and Human Services to establish ‘such Exchange.’ And by using the words ‘such Exchange,’ the Act indicates that State and Federal Exchanges should be the same,” he stated.


“But State and Federal Exchanges would differ in a fundamental way if tax credits were available only on State Exchanges—one type of Exchange would help make insurance more affordable by providing billions of dollars to the States’ citizens, the other type of Exchange would not.”


Roberts pointed out provisions in the ACA that would not make sense unless tax credits were available on both the state and federal exchanges. Looking to the broader structure of the Act, he concluded that “the statutory scheme compels the Court to reject petitioners’ interpretation because it would destabilize the individual insurance market in any State with a Federal Exchange, and likely create the very ‘death spirals’ that Congress designed the Act to avoid.”


Reactions from Tax Experts

Tax experts weighed in on the Supreme Court’s ruling. “The status quo has been preserved.” said Mark Luscombe, principal federal tax analyst at Wolters Kluwer Tax & Accounting US. “The stock market seems to be rewarding the health insurance companies that might have lost out on subsidies. By and large, people can keep doing what they were doing—this is the way the IRS has been interpreting the law, so in that sense, nothing will change.”


Republicans are saying they will continue their attempts to repeal or further curtail Obamacare, Luscombe noted.  “One of the techniques being looked at will be to tie it in to reconciliation, which only needs a majority vote in the Senate,” he said. “This would avoid the necessity of finding 60 votes in the Senate, and it’s how Obamacare got passed in the first place. It was included as part of a reconciliation measure in 2010 and so avoided that issue. Of course, if they tried to overcome a veto then they would need some Democratic support.”


“King V. Burwell upholds the validity of tax credits for individuals living in states that use the federal exchange,,” said Bloomberg BNA state tax law editor Annabelle Gibson. “That means individuals who purchase insurance through that are eligible for credits will continue to receive them to help pay for their health insurance.” 


“The court focused on determining Congress’ intent when enacting the ACA when determining whether the words ‘Exchange established by the State’ include federal and state run exchanges,” she said.


“The court wrote that allowing credits for insurance purchased on any exchange will avoid the ‘calamitous result that Congress plainly meant to avoid’ when enacting the ACA, as the ACA was meant to increase access to health care throughout the United States,” Gibson remarked.


Applicable large employers who are subject to the employer mandate will continue to be liable for penalties for failing to offer minimum essential insurance coverage to their employees and their dependents, if employees purchase health insurance through any exchange and receive a tax credit, according to Gibson.


“If the tax credits had been struck down, employers in states using the federal exchange would not have been liable for a penalty even if an employee had purchased insurance through a federal exchange, because under the strict wording of the ACA, the penalty only applies if an employee received a tax credit to pay for their insurance,” she said. “Because the subsidies have been upheld, the employer mandate remains in place for all applicable large employers.”


Individuals in all states remain subject the individual mandate under the ACA, she indicated.


“If subsidies had been struck down, then the cost of health care would have gone up for many people and it was possible that the cost of purchasing health care could have been greater than eight percent of those individual’s income, exempting them from the ACA’s coverage requirement,” she said. “That type of situation could have pushed insurance marketplaces into a ‘death spiral.’”


“However, because the subsidies remain intact, people can continue to use them to help pay for their health insurance, likely bringing the cost of their insurance under the 8 percent level,” said Gibson. “That means that the individual mandate would still apply if someone didn’t purchase health insurance.”



Internal Revenue, Hold the Service

How the agency’s woes will change your relationship



Taxpayer service has been a big part of what enabled the IRS to address its mission: to provide taxpayers with top-quality service by helping them understand and meet their tax responsibilities and by applying tax law with integrity and fairness. But that playing field has changed.


The traditional notion of dealing with the IRS — such as when handling an audit or collection case — is no longer true. Does that mean that routine face to-face office audits, field audits, and negotiating an installment agreement with a revenue officer are a thing of the past? Yes, it does.


You will notice that the word “service” is prominent in the description provided above of what the IRS is all about. That service aspect — at least what we’ve been accustomed to — is likely gone.


Here’s a quick recap of the difficulties engulfing the IRS: National Taxpayer Advocate Nina Olson released her 2014 annual report to Congress on Jan. 15, 2015. The report describes the decline in taxpayer service in detail, and attributes it to a combination of more work and reduced resources. She reported that the diminished service expectations for fiscal 2015 were as follows:

  • The IRS would be unlikely to answer half the telephone calls it receives, and levels of service would average as low as 43 percent.
  • Taxpayers who manage to get through should expected to wait on hold for 30 minutes on average, with considerably longer waits at peak times.
  • The IRS would answer far fewer tax-law questions than in past years. During filing season, it would only answer “basic” tax-law questions; after filing season, it will not answer any tax-law questions. This means roughly 15 million taxpayers who file later in the year will be unable to get answers to their questions by calling or visiting IRS offices.
  • Tax return preparation assistance has been eliminated.


Over the years, efforts have been made to maintain some level of service with fewer resources. Computer-generated collection notices and referrals to the IRS Web site to seek solutions to problems, for example, enable the IRS to reach more taxpayers at a lower cost. The IRS is responding to an environment of budget cuts, a shrinking workforce, travel restrictions, limited training budgets, and frustrated workers who are asked to do more with less. Based on this outlook, nobody could blame the IRS if it considered a name change to Internal Revenue instead of Internal Revenue Service, but I doubt its reduced budget would allow for new signage and letterhead.


With all that being said, CPAs and other tax professionals have a close relationship with the IRS, so we have to play the cards we are dealt.




The audits of individual returns are rarely conducted in a face-to-face setting. They have evolved into correspondence examinations. These correspondence examinations allow the IRS to reach more taxpayers at a lower cost. These examinations are generally conducted at one of the IRS campus offices (Service Centers), but the actual site assigned to work the examination is dependent on workload and worker availability. The Internal Revenue Manual provides a list of issues that are conducive to correspondence examinations. Examples include dependency exemptions and related credits (Earned Income Tax, Child Care, Adoption, etc.), Hope and Lifetime Learning Credits, Schedule C or F income and expenses, employee business expenses, home-office deduction (if a tour is not required), and some itemized deductions.


The problem, from what I have noticed, is that most items subject to correspondence examinations are not items in the IRS guideline. I have found that the No. 1 issue raised in correspondence examinations is employee business expenses. This is not easy to address through correspondence. Information for a salesman who drives 20,000 to 30,000 business miles a year just isn’t easy to submit. Forget about any other expense that may be claimed; think about the automobile expenses.


Depending on whom you are dealing with, the submission of the requested diary or calendar can be an adventure. First, mailing information into an abyss and not knowing how long you will wait for a response to the information submitted is nerve-wracking. Then, if the answer is an adjustment due to lack of proper substantiation, you do not have an opportunity to explain. I am of the opinion that certain types of expenses are easier to verify and explain if you can present them in person. So, the next step is to file an appeal.


An appeal, however, can end up in any of the appeals offices, and a “face-to-face” meeting could be via a telephone conference. Telephone conferences are not my idea of an appeals conference. You could request that it be transferred to your local office, but again we are dealing with an agency that is trying to do more with less. I have always tried to deal within the system, and have had successes. But I have also had my share of miserable failures.


One lesson that I learned is to never accept an appeal conference where the only option is to work through the matter with phone conferences. I think that requesting a transfer to your local office gives you the option to meet with the appeals officer if required, and I like to keep all options open.


In addition to the geographic and logistic pitfalls of the correspondence examination, the length of time it takes to review and respond to taxpayers’ responses can be very frustrating. Surely you’ve encountered situations when you respond to a notice, and then 45 days later you get a “Thank you for your correspondence letter. We have been unable to address this matter, but we will get back to you in the next 30 to 60 days.”


Staffing shortages and excessive workloads are now chronic and to be expected with the IRS. The shift to more correspondence examinations does not appear to have alleviated the situation. The truth of the matter is that unless you have a slam-dunk type of a case where your client maintains immaculate records, correspondence examinations will be less than ideal.




Say you encounter a situation where one of your clients is contacted to resolve a discrepancy between information reported on the return and third-party information available to the IRS. Your first reaction would probably be to call the Practitioner Priority Service telephone line.


How many times have you picked up the phone thinking the matter can be easily resolved if you can only get to a person who will listen and understand? Most of the time, the listening and understanding once you got through had rarely been a problem. Access to the Practitioner Priority Service has been an exclusive resource for tax professionals and requests related to resolving client-related issues. But now, before you dial, know that reduced training budgets at the IRS may mean the person you initially reach may not have the depth of knowledge or experience that you need.


With one recent inquiry, a 60-plus minute wait revealed that, although the power of attorney was signed properly, the client entered his title as managing partner. The entity I was inquiring about was an S corporation, so that title was not acceptable. Back to square one.


Another request to have an account transcript faxed (the issue involved a payroll tax issue, and these transcripts are not available through e-Services) was met with a question about a secure fax. I answered saying that the fax will come in as an e-fax and that I would have access to it through my computer, only to be told that that was not a secure delivery method. I gave a different number, one that prints out paper faxes, and was asked if the machine was in a room that was secured, and if only I would have access to it for the next 48 hours. That conversation, too, ended without getting the needed information, requiring another call and speaking with another representative to get the requested information. You might call this shopping for the answer. Yes, it is, and sometimes it will be required.


Not all phone contact will be as troubling. I find that certain penalty issues can be easily resolved with a phone call — at least when compared to sending a letter, waiting six months for a reply, and having the reply be a denial of your abatement request that sends you back to the start. For situations that qualify for reasonable cause penalty relief available under Revenue Procedure 84-35 to small partnerships or the first-time penalty abatement waiver, phone calls may be the way to go. I have been successful many times on the phone getting penalty relief by citing the revenue procedure or requesting the administrative relief provided for by the first-time penalty abatement waiver.


The criteria set forth in Revenue Procedure 84-35 can lead to reasonable cause basis penalty abatement for late-filed partnership returns. If the answers to all of the following questions are “Yes,” the IRS will abate this penalty:

  • Is the partnership a domestic partnership?
  • Does the partnership have 10 or fewer partners? (Husband and wife and their estate are treated as one partner.)
  • Are all partners natural persons (other than a nonresident alien) or an estate of a deceased partner?
  • Is each partner’s share of each partnership item the same as his or her share of every other item?
  • Have all the partners timely filed their income tax returns?
  • Have all the partners fully reported their share of the income, deductions and credits of the partnership of their timely filed income tax returns?


The first-time penalty abatement waiver, on the other hand, is an administrative penalty waiver that allows a first-time noncompliant taxpayer to request abatement of certain penalties, including failure-to-file, failure-to-pay, and failure-to-deposit. This is one of the easier requests to make by phone. The service person evaluates the request using decision-support software designed to help IRS employees make penalty relief determinations. It has been reported that this system can be flawed, but if it works and the penalty relief is granted, your mission is accomplished.




The current IRS collection process involves three possible phases:

  • A series of computer-generated notices sent by IRS campuses;
  • An automated collections system; and,
  • Assignment to a revenue officer — if one is available — or placement in a queue awaiting assignment


The third item listed can be very frustrating. Like the rest of the IRS, the collection division has to do more with less. In recent years, the number of revenue officers has declined to such an extent that any assignment to an officer could take quite a while.

In one case, a nonprofit client ran into some administrative problems, which led to payroll returns being late and payroll deposits not being timely. The situation was short-lived and the matter was quickly corrected, but the tax, interest, and penalties associated were substantial. Initially the liability was addressed through setting up an installment agreement, and the amount negotiated was paid monthly. These payments were beginning to impact the organization’s ability to survive. The IRS was contacted, and a request was made to abate certain penalties. This could not be done.


Next was a request to have the case assigned to a revenue officer so all factors could be examined and something could be worked out. I was told by the telephone contact that this could only be done if we defaulted on the installment agreement. We did not want to default on the agreement, but I was told that since the entity had an existing installment agreement, this case had a low priority for assignment. Needless to say, we recommended defaulting on the installment agreement, and began the wait to be assigned.




The IRS Web site provides a lot of information on numerous topics. It is an effort to resolve some of the information-sharing shortcomings due to the decline in taxpayer services and the reduction of manpower.


The IRS e-Services Web site provides information on subjects such as payments and refunds, credits and deductions, forms and publications, help and resources, identity protection, filing, how to contact the IRS, getting a transcript, and numerous other topics. As with any online search, though, you have to be able to identify what you need, how to organize your search, and then understand what the provided text is talking about.


Remember, we are talking about Internal Revenue laws and regulations. I was told by someone once that the words in the Internal Revenue Code make sense ... until you put them in a sentence.


The relationship between CPAs and the IRS has changed, and not for the better. Just remember that you have to play the cards you are dealt, control your frustrations, and learn to like the soothing music while on hold waiting your turn.


If you can learn to live with the new normal, that’s terrific. If you want the “service” back in Internal Revenue, make sure your voice is heard.


James D. Mahoney, CPA, is a tax manager with CBIZ MHM LLC in Plymouth Meeting. Reach him at Reprinted with permission from The Pennsylvania CPA Journal, a publication of the Pennsylvania Institute of CPA.




Latest U.S. Tax Break Fad Means Today’s Winners Would Score Anew



U.S. lawmakers are exploring a new corporate tax break that would benefit companies already adept at avoiding taxes.


The idea—known as a patent box or innovation box—would impose a lower tax rate on income generated from patents and other intellectual property housed in the U.S. This would aid technology and pharmaceutical companies trying to maintain low tax rates that they’ve achieved by booking income in overseas tax havens.


The so-called innovation box also is attractive to lawmakers in both parties worried that companies can easily move income outside the U.S. and chase low tax rates around the world. The break could help preserve the domestic tax base threatened by tax inversions and takeovers by foreign companies, said Representative Charles Boustany, a Louisiana Republican who is working on innovation box legislation.


 “Using the patent box approach with international tax reform might be a slim window through which we can actually start phase one of full tax reform,” he said. “We need to do something on international tax reform to put us on a competitive basis.”


Still, the appeal to technology companies looking abroad for lower taxes also is what makes the benefit problematic. Any break designed to attract income that’s mobile to the U.S. will soak up revenue that could be used to lower tax rates on income that can’t be moved.


‘Go Ballistic’

Retailers and electric utilities would have trouble getting their income inside the innovation box so it could qualify for lower rates, and they would have little if any guarantee that Congress would come back and cut their tax rates.


“If you’re a retailer or some other firm that’s not benefiting from this, you’re going to go ballistic,” said Marty Sullivan, chief economist at Tax Analysts, a nonprofit publisher. “Once the revenue estimate comes in, that’s going to be a cold slap in the face of reality and the patent box won’t be as attractive any more.”


Talks still are in the early stage, and the idea hasn’t been fully endorsed by any of the key players—Senate Finance Chairman Orrin Hatch, Ways and Means Chairman Paul Ryan and Treasury Secretary Jacob J. Lew. Even if they reach an agreement, they won’t have much time to act before election politics distract lawmakers.


Senator Ron Wyden of Oregon, the top Democrat on the Finance Committee, hadn’t included an innovation box in his previous tax plans. He said Tuesday that he is open to the idea, though he has technical concerns about how the rules would be written.


Portman and Schumer

Boustany is trying to revive and revamp a proposal he wrote with former Democratic Representative Allyson Schwartz. And two senators—Republican Rob Portman of Ohio and Democrat Charles Schumer of New York—are working on their own idea.


“Democrats, I think, are a little more open to it because it’s tied to innovation; it’s not just a corporate tax cut across the board,” said Robert Atkinson, president of the Information Technology and Innovation Foundation, a Washington group whose board of directors includes technology company executives. “Republicans like it because it’s a tax cut.”


The details aren’t settled yet, and they’re important. A box that offers lower rates for trademarks, copyrights and other intangible property would generate broader political support than one focused only on high-tech patents. It would also deprive the government of much more revenue.


Silicon Valley Executives

A group of Silicon Valley tax directors suggested a rate of 10 percent to 15 percent in an April letter to lawmakers, compared with today’s 35 percent top corporate rate and the 25 percent rate that Republicans are seeking.


The executives, led by Jeff Bergmann of NetApp Inc., said the U.S. should act quickly to develop a box with a broad definition of qualifying income so it can be “first in line” to tax its companies’ income from intellectual property.


An innovation box could become part of a larger international tax deal that has eluded Congress. Many Republicans and President Barack Obama agree broadly on a plan that would impose a mandatory one-time tax on about $2 trillion in U.S. corporate profits overseas, use that money for highways and make structural changes to the international tax system. The U.S. House is holding a hearing Wednesday on the idea.


U.S. lawmakers are examining the innovation box—which could mimic one in the U.K.—as industrialized countries develop rules to crack down on corporations’ use of cross-border structures. Companies including Starbucks Corp., Google Inc. and Apple Inc. are facing scrutiny in Europe.


Tax Rates

The U.S. can’t compete with the single-digit tax rates some companies can now achieve abroad. But if those rates rise above 10 percent or 15 percent in Europe, a U.S. innovation box could provide a reason for companies to locate intellectual property—and potentially more research jobs—at home.


“What the advocates for a patent box want is something that will substitute for their current tax planning,” Sullivan said.


Critics say innovation boxes don’t necessarily create incentives for new investment. And companies relying on older intellectual property—cartoon characters, for example—could gain windfall benefits.
Also, the rules could be tricky for the Internal Revenue Service to administer.


“You get people jumping through all kinds of hoops and playing all kinds of games to get their income into that box,” said Rebecca Wilkins, executive director of the Financial Accountability and Corporate Transparency Coalition. “You can bet the tax attorneys are figuring out how they can play the patent box rules, even though they haven’t been drafted yet.”




IRS Proposes Regulations for ABLE Accounts



The Internal Revenue Service has issued proposed regulations to implement a recent federal law authorizing states to offer specially designed tax-favored ABLE accounts to people with disabilities who became disabled before age 26.


The Achieving a Better Life Experience, or ABLE, account provision was signed into law in December 2014 as part of the tax extenders legislation. In recognition of the special financial burdens faced by families raising children with disabilities, ABLE accounts are designed to enable people with disabilities and their families to save for and pay for disability-related expenses.


The new law authorizes any state to offer its residents the option of setting up an ABLE account. Alternatively, a state can contract with another state that offers such accounts. The account owner and designated beneficiary of the account is the disabled individual. In general, a designated beneficiary can have only one ABLE account at a time, and must have been disabled before his or her 26th birthday. The law provides what it means to be disabled for this purpose.


Contributions in a total amount up to the annual gift tax exclusion amount, currently set at $14,000, can be made to an ABLE account on an annual basis, and distributions are tax-free if used to pay qualified disability expenses.


These are expenses that relate to the designated beneficiary’s blindness or disability and help that person maintain or improve health, independence and quality of life. For example, they can include housing, education, transportation, health, prevention and wellness, employment training and support, assistive technology and personal support services and other expenses.


In general, an ABLE account is not to be counted in determining the designated beneficiary’s eligibility for many federal means-tested programs, or in determining the amount of any benefit or assistance provided under those programs, although special rules and limits apply for Supplemental Security Income (SSI) purposes.


The proposed regulations, available Friday for public inspection at, provide guidance to state programs, designated beneficiaries and other interested parties on a number of issues. For example, the proposed regulations explain the flexibility the programs have in ensuring an individual’s eligibility for an ABLE account. They also indicate that the IRS will develop two new forms that ABLE account programs will use to report relevant account information annually to designated beneficiaries and the IRS — Form 1099-QA for distributions and Form 5498-QA for contributions.


Until the issuance of final regulations, taxpayers and qualified ABLE programs can rely on the proposed regulations.


The IRS is asking for comments on the proposed regulations by Sept. 21, 2015. They can be submitted electronically, by mail, or hand delivered to the IRS. A public hearing is scheduled for Oct. 14, 2015, at the IRS Auditorium, 1111 Constitution Ave. NW, in Washington, D.C. See the proposed regulations for details on submitting comments or participating in the public hearing. More information can be found at Tax Benefit for Disability: IRC Section 529A.



Uber Overtakes Taxis on Expense Reports

By Michael Cohn 


The ride-sharing app Uber is showing up more than taxis on employee expense reports, according to a new analysis.


The travel and expense management technology provider Certify analyzed business spending in the second quarter of the year for its quarterly Certify SpendSmart Report and found that Uber continues to grow in popularity with business travelers, accounting for 55 percent of ground transportation receipts compared with taxi services at 43 percent.


In the previous quarter, Q1, Uber had 46 percent of receipts compared with taxis at 53 percent. When including rental car data, Uber grew from 8 percent in Q2 of 2014 to 31 percent in Q2 of 2015. During that same 12-month period, taxi usage declined from 37 percent to 24 percent, while rental cars dropped from 55 percent to 45 percent.


The top cities for Uber customers, based on the percentage of receipts, are San Francisco (79 percent), followed by Dallas (60 percent) and Los Angeles (54 percent). Lyft, although comprising only 1 percent of ground transportation receipts, showed growth of 153 percent in ridership over Q1.


Certify also measured business adoption of Airbnb, the fifth most popular online travel-booking site, specializing in online room rentals While receipts from Airbnb are small, Certify’s data shows growth of 143 percent over Q1. Business travelers stay longer in Airbnb accommodations—3.8 nights compared with 2.1 in a hotel—and gave Airbnb a satisfaction rating of 4.72 stars, compared with 4.04 stars for hotels. The cities with the highest percentage of Airbnb bookings by business travelers are, in order, San Francisco, with customers spending an average of $558 per stay, followed by Chicago ($248), Seattle ($221), Miami ($139) and Tampa ($103).


In other categories, the top travel vendors based on percentage of receipts include Starbucks, McDonald’s, Subway, Delta, United, Marriott, Hampton Inn, National and Enterprise.




The Marriage Checklist


When clients are about to get married, thinking about the financial implications might not be at the top of their priority list—or even on it at all. But they will benefit from, and ultimately appreciate, an effort on your part to walk them through the basic decisions they should address.


Here’s a list of eight topics to consider from the professionals at HD Vest Financial Services:


1. Account titling and beneficiary designations. Review all financial accounts for proper titling, and decide whether accounts should be jointly registered.


2. Full disclosure. Clients may need a reminder that their future spouse will need to know where all the investment accounts are, and how to access them, particularly if they are paperless which makes them less visible.


3. Estate plans and documents. Clients should establish or update the beneficiary on their last will and testament, durable power of attorney, medical power of attorney, living will, and revocable living trust. Another thing to consider: whether to establish a prenuptial agreement or a trust to hold assets intended to go to any children from a prior relationship.


4. Insurance coverage. Clients should assess whether current life insurance protection is adequate, and that beneficiary designations are appropriate. Also up for review: health benefits, disability coverage and the full suite of property casualty policies.


5. Balance sheet review. It’s tempting for clients to “spare no expense” on weddings and honeymoons. But there is no time like the beginning of a marriage to take stock of current debt burdens and make tough decisions about what “affordable” means.


6. Creating a budget. After the balance sheet review comes the prospective combined income statement and the dreaded “B” word: budget. Starting out on the right foot with spending, saving, and investing goals (with a mutually agreeable exposure to investment volatility) can establish a pattern that will lead to achieving financial goals throughout the marriage.


7. Tax withholding. Making any needed adjustments ensures that the new couple doesn’t wind up with a huge bill on April 15 or having made a large interest-free loan to Uncle Sam.


8. Retirement savings. If one spouse makes more than the phase-out limits for IRA contributions, it may affect both spouses’ ability to make IRA contributions. More broadly, are they taking full advantage of 401(k) matching contributions?




5 Things You Should Know (And Probably Don’t) About Windows 10



Small-business owners like myself (and most of my clients) hate it when Microsoft releases a new version of their Windows operating system. Of course, new versions of Windows mean new features and capabilities that will hopefully help us run our businesses better. And developers and other geeks look forward to it because there are always new tools available to help them build better applications (which helps us in the end).


But we don’t necessarily want new things – we just want to work with existing things that get better and better each time. And no one knows for sure if Windows 10, which was slated for release on July 29, will be better for us until it’s been out there for a while.


But here’s one thing we do know: Like it or not, it will be part of our lives and companies. And smart business owners who are thinking ahead are starting to consider the effects that Windows 10 will have on their companies. So here’s what you should know right now.


1. Windows 7 and Windows 8 support will end sooner than you think. Windows 7 support already ended in January 2015. Microsoft has extended support for Windows 8.1 to 2023 and its policy is to support products for up to two years after the release of its successor. Although nothing has been publicly announced, I would expect that Microsoft will stick to that policy and end general support for Windows 8.1 by July 2017. The company wants its customer base to move forward into the future and Windows 8.1 is not the future.


2. There is no Windows 9. No, you’re not losing your mind. Microsoft skipped a version. With all the things going on in your business, do you really care why? Thought not. Move on.


3. You have just one year to upgrade for free. If your company is littered with Windows 7 and Windows 8 machines and devices then you want to have a plan for upgrading to Windows 10 sometime in the next 12 months. Otherwise, you’re going to have to pay. Once upgraded, you’ll get all updates for free. Of course, being a business owner you know that nothing in your life is free. You will have to pay your internal or external IT people to perform these upgrades. And, of course, being a business owner you know that nothing in your life goes smoothly. So to avoid surprises and absorb the inevitable pain you’ll experience, you’ll want to plan out your upgrades in advance, have them done during your company’s least active times, and upgrade in phases, starting with your least critical devices. My recommendation is to also wait as long as possible for your upgrades – hopefully after the first bug-fixing build of Windows 10 is released. Let some other guy deal with the headaches before you.


4. “Most” of your hardware is “probably” fine. I know – that sounds like a typical IT guy talking. And it is. That’s because we just never really know. Sure, Microsoft’s specifications for Windows 10 are pretty reasonable (1 gigahertz or faster processor, 1-2 gigabytes of RAM, 16-20 gigabytes of hard disk space) and well within the capabilities of most PC’s and laptops. But read deeper and you’ll see some “important notes” and “feature depreciation” (which definitely doesn’t sound good) and “additional requirements to use certain features.” So, like all software made by every software company in the world, things should work fine about 90 percent of the time. Be proactive. With your IT person, make a list of your users and flag those who may be trouble because of the applications they use. Budget to replace 10-20 percent of your machines. And rather than complain, just be grateful that software companies don’t build airplanes.


5. The more you invest in Windows 10 the more you will benefit. Like most of my clients, you’re probably using just 20 or 30 percent of the capabilities of your business applications. Which means you’re likely ignoring many features that could increase productivity and improve your profits. Windows 10 is no different. Standardizing this platform across all your company’s devices (which is what Windows 10 does because it’s now all just one code base) means that your employees will have a unified, simplified and synchronized experience for managing their data, communicating and collaborating with others. Learning how to use the enhanced, voice-driven Cortana tool will help you get things done faster. Diving into the new Edge browser will make your business more secure. Coughing up a few bucks for some basic training on all the new user features, time-saving tricks and tools contained in the operating system for your employees will pay itself back in happier, more productive people. Like life, the more you put into it the more you’ll get out of it.


So is it worth it?


I’m going to bet yes. Windows 10 is Microsoft’s first big release of its flagship operating system under its new chief executive, Satya Nadella. If you read anything I’ve written before you’ll agree that even though my firm is a Microsoft Partner (and no, I have not been compensated to write this) I do not often drink the Microsoft Kool Aid. But Nadella is making enormous changes to Microsoft’s culture. He’s turning the company back into a cool and innovative maker of software applications that help their customers do things quicker, better and wiser. If Windows 10 works reliably and quickly (and given my two decades of experience selling Microsoft products that’s always a big “if”) then I’m expecting it to be a good investment for my client base. And for you too. 


Besides Accounting Today, Gene Marks writes for The New York Times, Forbes and A version of this column previously appeared on





You Gotta Eat: IRS Expects Real Businesses To Make Money

Kelly Phillips Erb Contributor Forbes


You may love what you do but at some point, you gotta eat.


That’s more or less the word from Internal Revenue Service (IRS) when it comes to being an independent contractor.


When you work for someone else – and you get a form W-2 – reporting your income is easy. You enter the information from theboxes on your form W-2 on your tax return. It’s pretty straightforward and there’s little in the way of elections or choices.


When you work for yourself as an independent contractor, reporting can be more difficult. You may get a form 1099-MISC – but not necessarily. You may get a form 1099-K – but not necessarily. You have to report your income even if you don’t receive a form. You also have to make some important choices.


One of the choices that you have to make is how to classify what it is that you do. Specifically: is what you do a hobby or a business? That’s an important question for tax purposes because the two are treated very differently. They are reported on different spots on your federal income tax return (line 21 for hobby income versus Schedule C for business income). They are treated differently for purposes of self-employment tax (business income is generally subject to self-employment tax while hobby income is generally not). Perhaps most important, if you earn income in the pursuit of a hobby, you can offset the income with deductions but you cannot claim deductions that exceed your income – there’s no loss for a hobby. If, however, you earn income in the pursuit of a business, you can not only offset the income with deductions, you can carry any losses forward. These rules are sometimes referred to as the “hobby loss rules.”


Claiming those losses, as you can imagine, is huge for new businesses. Statistically, not everybody makes money out of the gate – many businesses spend more than they make when they’re just getting started. To the extent that you lose money, as a taxpayer, you want to be able to offset any losses when you make money in the future. That’s where being classified as a business can be an advantage.


You can’t just call yourself a business, however. You have to show that you’re operating as a legitimate business. To do that, for the most part, you occasionally you have to make some money.


Howard Berger found this out the hard way. For years, Berger had reported on the Toronto Maple Leafs as a radio announcer. When he was let go from his position, he decided to continue reporting on the Maple Leafs but as an independent blogger. When he started out, Berger claimed pretty considerable expenses and little in the way of income: the result were significant losses. Those losses were largely attributable to travel expenses for road games: Bereger spent nearly $60,000 on hotel and transportation costs. Add in the costs of building a web site, hosting and the like and his expenses dwarfed his advertising and sponsorship income. His balance sheet was grim and taxing authorities didn’t buy the idea that he was running a bona fide business.


His story isn’t all that novel with one exception: Berger appealed the decision and won in court. Berger had to prove that he was operating a legitimate business, just not at a profit. Since that time, Berger has kept at it, but he’s made some changes to his business model. He doesn’t travel to nearly as many away games now which keeps expenses low. At the same time, page views for his site, Berger Bytes, are up – and so are revenues.

It’s worth noting that Berger is Canadian and this was a Canadian tax matter – not a US tax matter. While the two systems often have considerable differences, this is one area where they are remarkable similar. In fact, the same set of facts would likely also have attracted the attention of the IRS with a similar result (denial of losses).


In the US, the IRS has made it clear that it considers profit motive a primary consideration when determining whether you’re engaged in a hobby or a business. While start up costs can be high – just ask Berger – the IRS expects you to be make some money eventually. As a rule of thumb, you should be able to demonstrate that you have made a profit for at least three of the last five tax years.


Of course, all businesses can falter – especially in the beginning – so the IRS looks at a number of other factors, too. Those, as outlined in the Regs at Section 1.183-2(b), include:

  • Your business manner. Do you keep good records? Do you work at promoting your business? A real business runs like a business.
  • How much time and effort you spend. It should go without saying that only spending minimal time and effort on your business sends a message that you’re not so serious about it.
  • Your expertise. How much do you know about your business? Trying your hand at something new isn’t a deal breaker but the more experience and education in the business you have, the more likely you are to be successful.
  • Your track record. What kind of success or failure have you had in other similar endeavors?
  • Your financial picture. Remember, you gotta eat. The IRS expects that you’re going to make money eventually. If you’re not – and you’re relying on other money to pay the bills long term – the IRS may think you’re not very serious about your business.
  • Whether you continue to change your business practices in order to make money. When things aren’t going so well in business, business owners switch gears (remember, that’s what Berger did). Repeatedly doing the same thing while you’re losing money doesn’t send a signal to the IRS that you’re taking your finances seriously.
  • The nature of your losses. All start ups expect a few bumps at the beginning. And sometimes, there’s just bad luck and bad timing (think housing bubble). However, losses that appear to be within your control – and you don’t change - may be suspect.
  • Whether you expect the value of your business to grow. In some industries, even when you’re not turning a profit, you have the potential to accumulate appreciating assets (real estate, for example). If you’re losing money and not banking assets, the future of your business won’t look encouraging.
  • How much fun you’re having. Yes. The IRS looks at whether you enjoy yourself. There’s nothing wrong with liking what you do – but if you like it so much that it’s not really work – especially if you’re not making money – that’s going to raise some eyebrows.


The Tax Court has consistently upheld these factors. One of the more famous cases on the matter, Konchar v. Commissioner, (opinion downloads as a pdf) though not controlling is worth a read. In Konchar, the Court specifically noted that “[n]o single factor is controlling, and we do not reach our decision by merely counting the factors that support each party’s position.” In fact, the Court stated that the outcome of each case will turn on the “relevant facts and circumstances.”


Even though the Konchar case isn’t supposed to be cited as authority, it, like the Berger matter, offers some universal truths – the most important being: If you’re going to operate a business, treat it like a business.


That said, remember that there’s nothing wrong with simply making money from a hobby. Remember that so long as you make money, the tax consequences are pretty much the same for a business as for a hobby (self-employment income notwithstanding). If you like what you’re doing and it only rises to the level of a hobby and you don’t want to make it a business, then don’t.




Lawmakers Introduce Bill to Roll Back Tax Penalties on Health Reimbursement Arrangements



A group of lawmakers has introduced legislation to roll back guidance from the Treasury Department that prohibits employers from using stand-alone health reimbursement arrangements to reimburse employees for health care-related expenses.


Senators Chuck Grassley, R-Iowa, and Heidi Heitkamp, D-N.D., and Congressmen Charles W. Boustany, Jr., MD, R-La., and Mike Thompson, D-Calif., recently introduced bipartisan companion language in the House (H.R. 2911) and Senate (S. 1697) known as the Small Business Healthcare Relief Act to roll back existing Treasury Department guidance issued under the authority of the Affordable Care Act prohibiting the use of health reimbursement arrangements. Boustany and Thompson originally introduced the legislation in the last Congress.


The Treasury issued guidance in September 2013 disallowing employers from using stand-alone HRAs to reimburse employees for healthcare-related expenses, stating these arrangements did not satisfy the Affordable Care Act’s minimum benefit and annual dollar cap requirements for health insurance plans offered by employers. As a result, employers that continue to offer HRAs would be subject to a $100 per day per employee penalty, totaling up to $36,500 over the course of the year. After Boustanyquestioned Secretary Jack Lew on this issue in a House Ways and Means Committee hearing on Feb. 3, 2015, the Treasury announced on February 18 that it would delay enforcement of this guidance and resulting penalties until July 1, 2015 (see Treasury Delays Enforcement of Standalone Health Reimbursement Arrangement Ban).


However, the penalties took effect last week, prompting concerns among small business groups (see New Tax Penalty Starts Today on Small Business Health Insurance).

Grassley, Heitkamp, Boustany, and Thompson’s legislation aims to restore flexibility and choice into the marketplace by ensuring that small businesses and local municipalities with fewer than 50 employees are allowed to continue using pre-tax dollars to give employees a defined contribution for health care expenses. The bill would also allow employees to use HRA funds to purchase health coverage on the individual market, as well as for qualified out-of-pocket medical expenses if the employee has qualified health coverage. In addition, the bill would protect employers from being financially penalized for providing this cost-sharing option to employees


“I’ve heard from farmers, small business owners and accountants who are worried about getting hit with a penalty for something they’ve done for a long time without any controversy,” Grassley said in a statement. “It doesn’t make sense to tell small employers they can’t help their employees get health insurance. Why disrupt something that worked? Our bill puts this provision back to what it was so farmers and small businesses can use this option as they see fit.”


Supporters of the legislation include the U.S. Chamber of Commerce, the National Association for Towns and Townships, the American Farm Bureau Federation, the National Association of Manufacturers, the National Association of Home Builders, the National Federation of Business, the Small Business Majority, the National Association for the Self Employed, the Coalition for Affordable Health Coverage, the Retail Industry Leaders Association, and the National Retail Federation.




IRS Missing Key Data to Oversee Obamacare Tax Credits



The Internal Revenue Service is hampered by incomplete information from health insurance marketplaces in its efforts to oversee tax breaks for individuals in the Affordable Care Act, according to a new government report.


The report, from the Government Accountability Office, found the IRS needs to strengthen its oversight of those tax provisions.


Incomplete and delayed marketplace data limited the IRS’s ability to match taxpayers’ claims for the premium tax credit with marketplace data at the time that tax returns were filed. Complete marketplace data for the 2014 coverage year was due to the IRS in January, but thanks to marketplace delays in transmitting the data and technical difficulties at the IRS with processing the data for matching, as of March 21, 2015, the IRS had complete data available for verification of taxpayer PTC claims for only four of the 51 marketplace states (that is, the 50 states and the District of Columbia).


The IRS does not know whether these challenges are going to be for a single year or an ongoing problem, the GAO noted. According to IRS officials, the IRS checks the formatting, but not the accuracy, of the data. Although the IRS implemented contingency plans to compensate for any missing and inaccurate data, those processes were more burdensome for taxpayers, according to the GAO.


Assessing whether the problems with the timeliness and reliability of the marketplace data are expected to be an ongoing challenge, rather than just a first-year problem, would help the IRS understand how it can use the data effectively and better target contingency plans, the GAO pointed out.


Tax year 2014 marked the first time individual taxpayers were required by the Patient Protection and Affordable Care Act to report health care coverage information on their tax returns. Taxpayers reported on whether they had health care coverage, had an exemption from the coverage requirement, or owed a tax penalty (known as the shared responsibility payment, or SRP).


Most taxpayers who received coverage through a health insurance marketplace were also eligible for an advance premium tax credit, or PTC, to make their coverage more affordable. Marketplace customers can choose to have the PTC paid in advance to their insurance company or they can claim all of the credit when they file their tax returns.


In January 2015, the IRS began verifying taxpayers' premium tax credit claims using marketplace data on enrollments and advance payments of the PTC. The IRS is using its standard examination processes to check the coverage, exemption or shared responsibility payment information that taxpayers report.


The IRS's overall goals are to efficiently and effectively enforce compliance with tax laws, reduce taxpayer burden, and encourage voluntary compliance.


The GAO noted that successful implementation of the premium tax credit and individual shared responsibility tax provisions requires the IRS to collaborate with the Centers for Medicare & Medicaid Services, also known as CMS—which is responsible for overseeing the marketplaces—and the marketplaces. The IRS also has to communicate with other stakeholders, such as tax software companies, employers and health insurers.


The IRS has worked to collaborate and communicate with external stakeholders to implement the requirements of the health care law for tax year 2014, the GAO acknowledged. However, several external stakeholders that the GAO spoke with reported challenges with the IRS collaboration efforts, such as not receiving certain IRS guidance in time for the stakeholders to have complete information at the beginning of the filing season.


The IRS is evaluating opportunities for improving return processing and the taxpayer experience, but is not evaluating its collaboration efforts, the GAO noted. Without an assessment of its efforts to collaborate and communicate with its key external stakeholders, challenges in implementing the 2014 PPACA requirements that relied on these groups could also affect new requirements taking effect in 2015, including new information reporting requirements for the state-based marketplaces, issuers of coverage, and applicable large employers.


The GAO recommended the IRS assess whether marketplace data delays are an ongoing problem, assess the reliability of the data for IRS matching, work with CMS to get complete data and track the aggregate gap between advance PTC paid and reported, and evaluate its collaboration efforts. The IRS generally agreed with the GAO’s recommendations.


“As you noted in your report, the implementation of these ACA provisions was a broad, complex and significant undertaking for IRS,” wrote IRS deputy commissioner for services and enforcement John M. Dalrymple in response to the report. “The IRS developed new systems, processes, tax forms, instructions and educational materials; and we worked closely and had ongoing collaborations with government and private sector stakeholders to facilitate implementation of these provisions.”

Dalrymple pointed out the IRS also had extensive outreach and coordination with the health insurance marketplaces, and it developed a strategic roadmap for implementing the ACA. However, he agreed with the GAO that it did not get all the needed information from the marketplaces.


“As you noted, the IRS did not receive all necessary data submissions from the Marketplaces prior to January 20, 2015, which was the start of the 2015 tax-filing season,” he wrote. “As a result, the IRS employed certain contingency plans it had developed in the event that partial data was received. These contingency plans included using Form 1095-A data as a secondary source of verification, corresponding with taxpayers when appropriate and using other available data to preform verification checks.”


Dalrymple said the IRS plans to analyze and evaluate filing behavior from the 2015 filing season to identify trends, patterns and taxpayer behavior associated with the new ACA provisions. “The results of our analysis and evaluations will be used to inform IRS compliance initiatives and taxpayer education efforts for the 2016 filing season and beyond.”




IRS Uncollected Tax Debts Rise to $380 Billion as Collection Staff Declines



The Internal Revenue Service’s total tax debt inventory has increased 23 percent since 2009 to $380 billion, according to a new government report, while the agency’s collection staff has declined 23 percent after years of budget cuts.


The report, from the Government Accountability Office, found the IRS lacks adequate internal controls over its largely automated tax collection processes. The processes automatically categorize and route unpaid tax or unfiled tax return cases for potential selection. The automated Inventory Delivery System, or IDS, categorizes and routes cases based on many factors, such as type of tax and amount owed.


Outside of IDS, collection managers set goals for closing cases in priority areas, such as delinquent employer payroll taxes and cases involving certain high-wealth taxpayers. If the goals are at risk of not being met, officials are able to take action to select additional priority cases.


In recent fiscal years, the collection program has exceeded nearly all case closure goals for priority cases. However, because the IRS has not identified objectives for the collection program, such as fairness, the GAO said it is difficult to assess the program's overall effectiveness.


The GAO identified several areas where the lack of documented objectives and internal control deficiencies for categorizing and routing cases increase the risk that the collection program's mission, including fair case selection, will not be achieved.


For example, the IRS collection program's objectives and key terms are not clearly defined, according to the report. Although fairness is specified in the collection mission statement and IDS processes can affect how collection cases are selected, IRS management has not defined fairness or any other program or case selection objectives. IRS collection's management referred to various documents as examples of program objectives. However, the GAO found the documents were not specific enough nor codified in official IRS guidance to ensure proper control over the program. Without clearly defined objectives that can enhance program effectiveness, the GAO said it is difficult for the IRS to ensure it selected collection cases in a fair and unbiased manner.


In addition, case categorization and routing procedures for collection cases are not documented. According to IRS management, case categorization and routing procedures were developed over several years as the result of incremental decisions and system changes. However, the GAO found the system and decisions were not documented, such as the selection of priority areas. Without documentation, the GAO pointed out that it is difficult to determine whether processes are effective or consistently applied.


Nor is the effectiveness of the collection processes routinely monitored, the GAO found. Despite some ad-hoc studies, IRS does not have procedures to periodically monitor IDS, including the dollar thresholds used to identify some cases for collection. IRS management could not provide the GAO with justification for the thresholds because, according to IRS officials, they were set so long ago. Without periodic evaluations, out-of-date collection procedures could result in unnecessary costs or missed collections, the GAO report noted. Unadjusted dollar amounts could also lead to inconsistent treatment of taxpayers over time as the real value of dollar thresholds decline over time due to inflation.


The GAO recommended the IRS take five actions to improve collection controls, such as clearly defining and documenting program objectives and control procedures, and periodically evaluating the effectiveness of controls. In commenting on a draft of the report, the IRS said it generally agreed with all of GAO's recommendations.


“In the Collection sphere, the concept of fairness has both a collective and individual component,” wrote IRS deputy commissioner for services and enforcement John M. Dalrymple in response to the report. “We take into account the responsibilities and obligations that all taxpayers share, and we pursue those individuals and businesses who fail to fully pay or file their taxes to ensure fairness to those who do; and we do so while taking into account the individual ability of each taxpayer to meet his or her responsibilities.”




5 Financial Tips for Newly-Employed Young People

by Lauren J. Sternberg


Summer. A time for barbeques, trips to the beach, ice cream and, for many teenagers and young adults, their first jobs. What better time, then, to educate the newly employed about sound financial practices, before they’re tempted to spend all of their hard earned income having a good time?


For many Americans, the pursuit of fun is more of a priority than saving money. Just turn on the radio and you’ll hear any number of songs about frivolous consumerism. In the case of one of this summer’s ubiquitous songs, Time of My Life, the rapper Pitbull (né Armando Christian Pérez) celebrates the disastrous practice of spending money he doesn’t have:

“I knew my rent was gon' be late about a week ago

I worked my [butt] off, but I still can't pay it though

But I just got just enough

To get up in this club

Have me a good time, before my time is up

Hey, let's get it now”


Instant gratification is tempting, but making efforts to teach young adults how to adopt sound fiscal practices will set them up for a lifetime of financial solvency and independence. And, with the right financial savvy, young consumers could presumably afford to spend a little extra when it’s time to “have a good time.”


Here are five tips to share with the newly employed people in your life:


Save, Save, Save!

Saving can be as simple as setting aside a certain portion of your paycheck to go directly into a savings account each pay period, rather than in a checking account. If your employer offers direct deposit, select a specific amount or percentage of each paycheck to go directly into a savings account. If you don’t have direct deposit, you can commit to put 10 percent of each paycheck into a savings account. You can’t miss what you never saw in the first place.


Learn to Budget


If you don’t know how much money you have coming in and how much you have going out every month, it is difficult to plan. Assess how much you make each month. Then, figure out what fixed costs you have—rent, utilities, commuting expenses, gas, discretionary spending, and other one-time expenses like holidays, gifts and vacations.  That will give you a better sense of what you can and can’t afford.


Get Creative


For teenagers:


When I was a teenager, my friends and I started Baby-sitters Incorporated, a babysitting service. (Think the 1980’s book series The Baby-sitters Club.) Babysitters Incorporated’s (self-created) rules required us to put a certain percentage of each babysitting job into our organization’s savings account at a local bank. We also had a fleet of “associates” who we called on when we couldn’t work. They were required to pay us 10 percent of what they earned. By the time we decided we were too old to babysit, we had more than $1,200 in the bank (in 1995 money!). 


For young adults:


While large purchases and expenses—a home or a car, or starting a family—may seem a long way off, preparing for the future now, financially speaking, can put you in a better position to make those large financial decisions. So what can you do? Forego cable television for a Netflix subscription, bring your lunch to work most days, skip Starbucks and drink the coffee offered at work or make it at home, buy a few quality items of clothing and avoid cheap, ill-made pieces. Also consider taking a second job, such as house or pet sitting. Got a hobby that you love? See if you can find a way to make money from it.


Avoid Debt


It’s simple--if you can’t afford something, don’t buy it. Instead, devise a plan to save up until you can afford to purchase the item without debt. Sometimes waiting can make you realize the item isn’t that important, or you might find a way to make this purchase fit into your budget. Another way to avoid debt is to learn the difference between your wants and needs.  


Also, be mindful when signing up for a credit card that it should be used responsibly. While convenient, and at times, necessary, credit cards make it easy to overspend.


Ask for Help


Becoming fiscally responsible takes time and guidance. Don’t be afraid to ask for help! Friends and family may have different suggestions for how to save or invest your money, or handle college loans. Sometimes those that know you best can offer solutions that will best suit your needs.


If you provide young people with sound guidance on fiscal responsibility early in life, you are setting them up for a lifetime of financial stability and good decision making. And, hopefully, now and again they will be able to afford to have, as Pitbull says, the time of their lives.


 Lauren J. Sternberg, Communications Manager, American Institute of CPAs.


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Japan Has an Enron Moment after Accounting Scandals



More than a dozen years ago, the U.S. experienced a rash of high-profile accounting scandals. Now it’s Japan’s turn.


Toshiba, one of the country’s largest technology firms and an internationally respected brand, revealed that it had systematically overstated its operating profits to the tune of about $1.2 billion during a seven-year stretch. The company’s chief executive officer, a number of other high-ranking executives and half of the company’s board have resigned.


The Toshiba scandal isn't the first big case of Japanese corporate fraud to come to light in recent years. In October 2011, CEO Michael Woodford (no relation to the economist of the same name) blew the whistle on accounting fraud at his own company, optical equipment manufacturer Olympus. The fallout from that debacle is still unfolding.


The first takeaway from these scandals is that there will probably be more of them. The consensus is that they happened because of problems with Japanese corporate culture. In both cases, observers have blamed secretive and autocratic management styles by top executives, as well as the generally hierarchical, closed nature of Japanese business. But the real problem is corporate governance itself.


In Japanese companies, boards are almost always made up of people who work for the company. This provides a strong incentive for empire building in which managers try to expand market share—and their own perks and privileges—instead of profitability or shareholder value. Basically, Japanese managers can run companies like their own private fiefdoms, splurging on trips, bar girls and other entertainment expenses. More ominously, they tend to let their companies stagnate, since stagnation is cozy and comfortable. Since they are their own boards, there is no one to stop them.


That style of management looked OK when market share was rocketing upward in the 1970s and 1980s. But since the Japanese economy slowed and international competition intensified, its flaws have taken a heavier toll. Japanese white-collar productivity is horribly low relative to other advanced nations, and companies have traditionally been far less profitable than those in the West.


If your profitability goes south for long enough, eventually there will be consequences. Bank loans may dry up. Workers may be afraid to work for you, knowing that you might not be around in a decade. Eventually, even a company that is governed by its own management will be forced to take action to preserve some remnant of its coddled, hidebound lifestyle. That action could be to raise profitability, but maximum coziness might be achieved by simple fraud. If you fake profits, you can keep bank loans rolling and live as a zombie company without actually having to restructure and make sacrifices.


That’s why it’s so worrying to see accounting fraud at a company such as Toshiba. Toshiba is one of Japan’s star performers, an internationalized company that has been disciplined by global competition.


Many of Japan’s companies—traditionally the number is quoted as 80 percent—focus on the domestic market, where they  face much less competition, and are usually less productive. If a flagship company like Toshiba was moved to engage in fraud, the impact of Japan’s long economic struggles on the laggards must be even more severe.


But in crisis there is opportunity. In the U.S., the accounting scandals of the early 2000s in companies such as Enron and WorldCom resulted in the Sarbanes-Oxley Act, a harsh crackdown that many cite as a reason for the reluctance of companies to list themselves on public exchanges. But in Japan, there is the hope that the response will be a different kind of reform—improvement of corporate governance in general.


The administration of Prime Minister Shinzo Abe recently introduced a new corporate governance code that requires outside directors on boards and encourages a focus on shareholder value. That is an important step, and its full ramifications have yet to be felt. But the Toshiba scandal—almost surely not the last of its kind—should be an impetus to do even more. “More” would mean stronger enforcement of the governance code, which as things now stand is voluntary. It might also mean increasing the number of outside directors—the current required number is only two—and more disclosure in general.


In parallel to this effort, the government should continue trying to cut ties between Japanese companies and the Japanese mafia. Another thing it should do—which hasn't, to my knowledge, been proposed—is to stop making entertainment expenses tax-deductible. Encouraging companies to splurge on perks is bad for profitability, and creates a long-term incentive for managers to fight tooth and nail to maintain control of their companies.


Unfortunately, the Abe administration has gone in exactly the wrong direction on this issue, increasing the amount that companies can deduct from their taxes for nights of drunken carousing. An about-face on this issue would be welcome.

In general, though, there is the hope that the accounting scandals are a bad sign for the short term but a good sign for the long term. If all goes right, problems that are exposed today will be rooted out tomorrow.


Noah Smith is an assistant professor of finance at Stony Brook University and a freelance writer for a number of finance and business publications. He maintains a personal blog, called Noahpinion. This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners (or Accounting Today)




What's the Matter with Kids Today?

Why so many young professionals lack the basics, and what to do about it



Here’s a story that’s being repeated, with varying details, across the accounting profession:


This first-year associate in a midsized accounting firm, a recent top graduate of a top school, was cutting-edge in his knowledge of a new set of tools and techniques for mining and analyzing data buried within evidentiary documents obtained during pre-litigation discovery. One of the partners said, “This kid had done some projects in school using this new approach and his technical knowledge in this area far surpassed anyone else in the firm. But he kept running into roadblocks because his communication made him seem so immature. At first, he couldn’t get anybody to listen to him. Once we got him going on introducing the new process, I know it sounds petty, but he could barely look people in the eye or string three words together without saying ‘like.’” In short, “His inability to speak in a way that seemed even remotely professional was just rubbing people the wrong way, especially in meetings, though it wasn’t very much better when he was working with people individually.” One of the other partners explained, “We had to send him to a class.” One of the other partners added, “It took a lot more than one class.”


Based on two decades of research, I can report that today’s newest new young workers are increasingly likely to have significant notable weaknesses in one or several key soft skills — such as professionalism and interpersonal communication.




As they step into the adult world with youthful energy and enthusiasm, young workers often clash with their older colleagues.


That’s always part of the story. But there is something much bigger going on here.


Generation Z (born 1990-1999) is the second wave of the great Millennial cohort. They represent a tipping point in the post-Baby Boomer generational shift transforming the workforce. With older Boomers now retiring in droves, they are taking with them the last vestiges of the old-fashioned work ethic. By 2020, more than 80 percent of the workforce will be post-Boomer — dominated in numbers, norms and values by Generation X (born 1965-78), Gen Y (the first wave of the Millennials, born 1978-89), and now Gen Z. In 2020, Generation Z will be greater than 20 percent of the North American and European workforces.


Generation Z is shaped by a confluence of epic historical forces:


·         Technology. The pace of technological advance today is unprecedented. Information. Computing. Communication. Transportation. Commerce. Entertainment. Food. Medicine. War. In every aspect of life, anything can become obsolete any time — possibilities appear and disappear swiftly, radically and often without warning.


·         The information environment. Gen Zers are the first true “digital natives.” They learned how to think, learn and communicate in a never-ending ocean of information. Theirs is an information environment defined by wireless Internet ubiquity, wholesale technology integration, infinite content, and immediacy. From a dangerously young age, their infinite access to information and ideas and perspectives — unlimited words, images and sounds — is completely without precedent.


·         Human diversity. Generation Z will be the most diverse workforce in history in terms of geographical point of origin, ethnic heritage, ability/disability, age, language, lifestyle preference, sexual orientation, color, size, and every other way of categorizing people.  


·         Helicopter-parenting on steroids. Gen Zers have been insulated and scheduled and supervised and supported to a degree that no children or young adults have ever been before. Gen Zers have grown accustomed to being treated almost as customers/users of services and products provided by authority figures in institutions — both in schools and in extracurricular activities, not to mention in their not-infrequent experiences as actual customers. As a result, they expect authority figures to be always in their corner, to set them up for success, and to be of service.


·         Virtual reality. Gen Zers are always totally plugged in to an endless stream of content and in continuous dialogue — through social media-based chatting and sharing and gaming — with peers (and practical strangers), however far away (or near) they might be. They are forever mixing and matching and manipulating from an infinite array of sources to create and then project back out into the world their own ever-changing personal montage of information, knowledge, meaning, and self-hood. Gen Zers are perfectly accustomed to feeling worldly and ambitious and successful by engaging virtually in an incredibly malleable reality.


In a nutshell, Generation Zers are the ultimate non-conformists in an era of non-conformism. Trying to make the adjustment to “fitting in” in the very real, truly high stakes, mostly adult world of the workplace is a whole new game for them. And it’s not really their kind of game. They are less inclined to try to “fit in” at work, and more inclined to try to make this “whole work thing” fit in with them.


Is there anything we can do to help them? And us?


Yes. It’s simple, but not easy. Become a true champion of old-fashioned soft skills in your firm.  




Recognize the incredible power of soft skills. Shine a bright light on soft skills in every aspect of your human capital management practices. But the real action is in your day-to-day working relationships with the new young talent in your firm. Make teaching/learning the soft-skills basics an explicit part of your mission and goals for your team going forward.


Just imagine the impact you could have if you were to spend time every week systematically building up the soft skills of your team: 

You will send a powerful message, week by week. You will make them aware. You will make them care. You will help them learn the missing basics one by one. You will build them up and make them so much better.


Bruce Tulgan is the founder of Rainmaker Thinking. This article is adapted from his latest book, Bridging the Soft Skills Gap: How to Teach the Missing Basics to Today’s Young Talent, which is due out in September 2015.




Senate committee votes to open banking for cannabis businesses



A U.S. Senate committee voted on Thursday in support of opening up banking services to state-legal marijuana businesses, according to a release by the National Cannabis Industry Association.


By a vote of 16-14, the Senate Appropriations Committee passed an amendment to the Financial Services and General Government Appropriations bill, forbidding the use of federal funds to penalize financial institutions that serve marijuana businesses operating legally under state law. The amendment was offered by Sen. Jeff Merkley (D-OR).


“It’s encouraging to see members of the Senate stepping up and joining the House to address the banking crisis facing our industry,” said National Cannabis Industry Association executive director Aaron Smith, in a statement. “Access to basic banking services is one of the most critical challenges facing legal cannabis businesses and the state agencies tasked with regulating them.”


A similar amendment was passed by the full House of Representatives in 2014, but was ultimately stripped out during the final omnibus budget negotiations conducted by the Senate. The House has not yet debated the Financial Services Appropriations bill in 2015, but a repeat of the cannabis banking amendment is anticipated if and when that debate takes place.


The National Cannabis Industry Association is the largest cannabis trade association in the U.S. and the only organization representing cannabis-related businesses at the national level. For more information, head to their site here.




710,000 ACA Tax Credit Recipients Didn’t File Tax Returns



Approximately 710,000 taxpayers who received the Advanced Premium Tax Credit for buying health insurance last year have not filed their tax returns or filed for an extension.


In a letter to Senate Finance Committee chairman Orrin Hatch, R-Utah, IRS commissioner John Koskinen said the IRS is contacting the taxpayers to remind them of their obligation.


“Approximately 710,000 of the taxpayers with APTC have not yet filed a tax return and have not filed an extension, as required,” he wrote last Friday. “As one part of our post-compliance strategy, we are sending letters to taxpayers who had APTC paid on their behalf who have not yet reconciled and who did not file an extension to remind them of their obligation to file a tax return. Under regulations issued by the Department of Health and Human Services, taxpayers must meet this obligation in order to maintain their eligibility for APTC to help pay for Marketplace coverage in 2016. We are urging these taxpayers to file an electronic tax return to reconcile their APTC within 30 days. We will follow up with these taxpayers as appropriate.”


In response to the letter, Hatch called on the Treasury Inspector General for Tax Administration, J. Russell George, to examine the use of the tax credits, noting that the 710,000 people had probably received more than $2.4 billion in Advanced Premium Tax Credit payments.


In a letter to Inspector General George, Hatch reiterated his ongoing concern regarding the integrity of APTC payments and outlined his request for an examination of a large sample of individuals who received a government subsidy and failed to submit a tax return.


“A critical element in safeguarding the integrity of insurance subsidies is the reconciliation process that occurs when taxpayers file their tax returns and reconcile subsidies received versus the amount they were in fact due,” Hatch wrote Monday in a letter to George. “While it is likely that not all of these are fraudulent, because of the Marketplace’s lax integrity controls there is reason to believe that a significant portion could be.”


Hatch’s letter comes on the heels of a Senate Finance Committee hearing that included testimony from an official with the Government Accountability Office who found as part of an undercover investigation that the federal exchange approved 11 out of 12 telephone and online applications for fictitious applicants (see Fake Applicants Received Tax Credits for Health Insurance). As a result, the federal government paid $2,500 per month, or $30,000 per year, in credits for insurance policies for these fictitious individuals.




Ex-Congressman Grimm Gets Eight Months over False Tax Return



Former New York congressman and FBI agent Michael Grimm is heading to prison for scamming the government out of taxes in his operation of a Manhattan health food restaurant.


Grimm, a Republican, was sentenced to eight months after having pleaded guilty to one count of helping prepare a false tax return. He had agreed not to appeal if he were sentenced to a term of two years and nine months or less.

The punishment marks the downfall of a politician who gained national notoriety after threatening to throw a reporter off a balcony and telling him: “I’ll break you in half, like a boy.”


The former U.S. Marine, who represented Staten Island and parts of Brooklyn, was re-elected last year to serve a third two-year term despite facing a 20-count indictment filed against him in what he called a “political witch hunt.” He quit his seat in December after pleading guilty.


“Everyone falls from grace when they get caught committing crimes. Some fall farther than others,” U.S. District Judge Pamela Chen in Brooklyn told Grimm as she sentenced him Friday. “Your moral compass, Mr. Grimm, needs some reorientation.”

She ordered Grimm, 45, to surrender to authorities by Sept. 10.


Grimm was accused of hiding as much as $1 million in revenue from the Manhattan restaurant he previously co-owned called Healthalicious, a seller of salads and wraps.


Impassioned Plea

In an impassioned plea to the judge, Grimm asked for leniency, citing his military service including tours of duty in the Gulf War, where he survived an explosion of a Humvee while traveling through enemy minefields.

“I would give this country my blood, and I have,” he told Chen.


As a restaurant owner, he under-reported income and paid workers under the table in cash because “I didn’t want to fail,” he said. “It was unacceptable.” He also said he wasn’t as involved in the operations as he should have been because his father was dying of cancer.


Arguing that that those practices are prevalent throughout the restaurant industry in New York, and that most violators are not punished with jail time, Grimm told the judge: “Just treat me today like any other restaurant owner.”

“The harsh reality is if you open a restaurant in Manhattan and you have delivery boys, you’re going to have people working off the books,” he said.


Prosecutors argued that Grimm, despite having pleaded guilty, was still trying to “shift the blame” for his conduct. “It wasn’t anyone else’s fault,” Assistant U.S. Attorney James Gatta said. “It was Michael Grimm.”
Grimm, a former federal investigator of white-collar crimes who has a law degree, should’ve known better, Chen said.


“All of these things were wrong and Mr. Grimm knew that at the time,” she said.


The case is U.S. v. Grimm, 1:14-cr-00248, U.S. District Court, Eastern District of New York. (Brooklyn).




IRS Gets Happy (Pizza)



Happy Asker, the founder of a pizza chain based in Farmington Hills, Mich., that operated restaurants throughout Michigan, Ohio and Illinois, was sentenced last week to 50 months in prison for income and employment tax fraud.

He was also ordered to pay $2.5 million to the Internal Revenue Service as restitution.


Asker was convicted of three counts of filing false income tax returns for the years 2006 through 2008, 28 counts of aiding and assisting in the filing of false income and payroll tax returns for several of Happy’s Pizza franchise restaurants for the years 2006 through 2009, and corruptly endeavoring to obstruct and impede the administration of the Internal Revenue Code.


Asker’s co-conspirators and other individuals involved in the tax scheme—Maher Bashi, 47, Tom Yaldo, 42, and Tagrid Bashi, 47, all of West Bloomfield; and Arkan Summa, 42, of Walled Lake, Mich.—all pleaded guilty for their roles prior to Asker’s trial. 


The evidence at trial established that from 2004 through 2011, Asker, along with certain franchise owners and employees, executed a systematic and pervasive tax fraud scheme to defraud the IRS. Gross sales and payroll amounts were substantially underreported on numerous corporate income tax returns and payroll tax returns filed for nearly all 60 Happy’s Pizza franchise locations. 


From 2008 to 2010, Asker and his co-conspirators diverted for personal use more than $6.1 million in cash gross receipts from approximately 35 different Happy’s Pizza stores in the Detroit area, Illinois and Ohio. In total, Asker and certain employees and franchise owners failed to report approximately $3.84 million of gross income and approximately $2.39 million in payroll taxes from the various Happy’s Pizza franchises to the IRS.


A portion of the unreported income was shared among most of the franchise owners, including Asker, in a weekly cash “profit split.” As a result of the scheme, the IRS is owed more than $6.2 million in income and employment taxes. The evidence also established that Asker intentionally misled IRS-Criminal Investigation special agents during voluntary interviews conducted with him in 2010.


“Fraudulent business owners who underreport their income and employment taxes cheat not only the IRS and U.S. taxpayers, but also other businesses that comply with their tax obligations and seek to compete on a level playing field,” said Acting Assistant Attorney General Caroline Ciraolo. “Today’s sentencing of Happy Asker and the sentences imposed on his co-conspirators demonstrate that there is a heavy price for this conduct, and for obstructing and misleading IRS agents in the course of their investigation.”

“The license to run a business is not a license to avoid paying taxes,” said Chief Richard Weber of IRS-Criminal Investigation. “Mr. Asker and his co-defendants chose greed over legal business practices.  As business owners, they had a responsibility to withhold income taxes for their employees and then remit those taxes to the Internal Revenue Service, as well as file timely individual and corporate tax returns. Time and again, our special agents untangle the web of financial transactions to bring to justice those that would try to cheat the government and the American taxpayer.”



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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