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June

Give your graduate cash — a lifetime of it: 

A Roth IRA can be a gift that clients can give their loved ones who will be graduating from college, according to Bloomberg. Unlike a traditional IRA, which is created with pre-tax money, a Roth IRA is funded with after-tax money, allowing the recipient to tap the funds easily. Also, a Roth IRA offers tax-free growth through compounding while withdrawals are nontaxable in retirement. "It will cause [your child] to think fondly of you when they're in their seventies and start to withdraw the 50-year compounded nest egg you created for them," says a financial planner. – Bloomberg

 

 

Reporting a required minimum distribution to charity on your tax return:

Retirees who reach 70-½ can make tax-free donations to charities directly from their IRA and count the gifts as part of their required minimum distribution without including it in their adjusted gross income, according to Kiplinger. While retirees cannot do the same with their 401(k) assets, clients may consider rolling over some funds from the plan to their IRA so they can direct the RMD to a qualified charitable organization. The RMD should be reported as gross distribution on Line 15a of Form 1040 but should be identified as a qualified charitable distribution on Line 15b. – Kiplinger

 

 

IRS Warns of Latest Scam Variation Involving Bogus “Federal Student Tax”

WASHINGTON — The Internal Revenue Service today issued a warning to taxpayers about bogus phone calls from IRS impersonators demanding payment for a non-existent tax, the “Federal Student Tax.”

Even though the tax deadline has come and gone, scammers continue to use varied strategies to trick people, in this case students. In this newest twist, they try to convince people to wire money immediately to the scammer. If the victim does not fall quickly enough for this fake “federal student tax”, the scammer threatens to report the student to the police.

 

“These scams and schemes continue to evolve nationwide, and now they’re trying to trick students,” said IRS Commissioner John Koskinen. “Taxpayers should remain vigilant and not fall prey to these aggressive calls demanding immediate payment of a tax supposedly owed.”

 

Scam artists frequently masquerade as being from the IRS, a tax company and sometimes even a state revenue department. Many scammers use threats to intimidate and bully people into paying a tax bill. They may even threaten to arrest, deport or revoke the driver’s license of their victim if they don’t get the money.

I

Some examples of the varied tactics seen this year are:

·      Demanding immediate tax payment for taxes owed on an iTunes gift card.

·      Soliciting W-2 information from payroll and human resources professionals

·      “Verifying” tax return information over the phone

·      Pretending to be from the tax preparation industry

·       

The IRS urges taxpayers to stay vigilant against these calls and to know the telltale signs of a scam demanding payment.

 

The IRS Will Never:

·      Call to demand immediate payment over the phone, nor will the agency call about taxes owed without first having mailed you a bill.

·      Threaten to immediately bring in local police or other law-enforcement groups to have you arrested for not paying.

·      Demand that you pay taxes without giving you the opportunity to question or appeal the amount they say you owe.

·      Require you to use a specific payment method for your taxes, such as a prepaid debit card.

·      Ask for credit or debit card numbers over the phone.

·       

If you get a phone call from someone claiming to be from the IRS and asking for money and you don’t owe taxes, here’s what you should do:

·      Do not give out any information. Hang up immediately.

·      Contact TIGTA to report the call. Use their “IRS Impersonation Scam Reporting” web page or call 800-366-4484.

·      Report it to the Federal Trade Commission by visiting FTC.gov and clicking on “File a Consumer Complaint.” Please add “IRS Telephone Scam” in the notes.

·      If you think you might owe taxes, call the IRS directly at 1-800-829-1040.

·      Easy to see

More information on how to report phishing or phone scams is available on IRS.gov.

 

 

 

Trump Gets Chance for Tax Cut by Moving Trademarks to Delaware

BY LYNNLEY BROWNING

 

As Donald Trump prepared for the Republican primaries, he transferred dozens of his most prized assets, the “Trump” trademarks that adorn everything from hotels to ties to his U.S. golf courses, into a new Delaware-based company—a move that offers him a chance to cut his income-tax bills.

 

By shifting more than 110 registered or pending trademarks to Delaware, Trump consolidated them in a state that doesn’t tax income from royalties on intellectual property. Among the trademarks he moved are his own name and those of some of his best-known properties, including “Trump National Golf Club,” “Trump Tower” and “Mar-a-Lago,” his private club in Palm Beach, Florida, according to records from the U.S. Patent and Trademark Office.

He also shifted some of his less prominent trademarks, including “Trumptini,” a martini made with pink lemonade, and a design of a Scottish crest that he applied for and received in 2012. The crest shows a lion, a two-headed eagle and the Latin phrase “Nunquam Concedere” which means “Never Give Up.”

 

Moving the trademarks to his new company, DTTM Operations LLC, will enable Trump to avoid other states’ income taxes on royalties paid for their use—an income stream worth perhaps tens of millions of dollars or more, according to a federal financial disclosure form he filed this month.

 

It’s Confidential’

“If he contributes all of that IP to a Delaware entity, that’s a fairly big tax break and a fair amount of change,” said Robert Reilly, a certified public accountant and managing director at Willamette Management Associates, a Chicago firm that specializes in the valuation of businesses and intellectual property.

 

The chief custodian of Trump’s trademarks declined to discuss why his boss, who previously owned the trademarks personally, made the change.

“I can’t get into that; it’s confidential,” said Alan Garten, the executive vice president and general counsel of the Trump Organization. He added later: “It’s sort of too complicated to explain.” After an initial brief telephone interview, in which he said Trump still personally owned some foreign-registered trademarks, Garten didn’t respond to repeated telephone and e-mail requests for comment.

 

No Returns

Much of Trump’s tax planning remains a mystery. After initially saying he’d release his federal income tax returns, he then defied decades of tradition by declining to do so. Trump has said his returns are being audited by the Internal Revenue Service, and that he’ll keep them private until the audit is over. The IRS has said there’s no rule barring people from releasing returns that are under audit.

Trump’s campaign chairman, Paul Manafort, said last week that he’ll be “surprised” if Trump ever releases his tax returns. “I wouldn’t necessarily advise him to,” Manafort told The Huffington Post. “It’s not really an issue for the people we are appealing to. His tax returns are incredibly complicated.”

 

Trump has said repeatedly that he works hard to avoid paying taxes.

 

“I fight very hard to pay as little tax as possible,” Trump told ABC News on May 13. Corey Lewandowski, his campaign manager, told CBS News last week: “Mr. Trump is proud to pay a lower tax rate, the lowest tax rate possible.”

Given that position, some tax lawyers questioned why Trump didn’t move his trademarks to Delaware sooner. In a November deposition, Garten testified that Trump personally owned more than 500 trademarks—theoretically exposing his income from them to the top federal income tax rate for individuals, 39.6 percent.

 

Unusual Approach

“It’s unusual for an individual to hold trademarks,” said Angelo Bufalino, an intellectual property lawyer at Vedder Price in Chicago. Pamela Chestek, an IP lawyer in Raleigh, North Carolina, said she was “surprised that he owned them personally until now—it seems like they are very high-value assets for someone as financially sophisticated as Donald Trump to own personally.”

 

Garten explained in his deposition that Trump’s personal ownership of the trademarks was arranged “for tax-planning purposes.”

 

“I’m not a tax guy, but—yeah,” he said in the deposition, part of a trademark dispute brought by an investment firm that wants to call its online marketing service, “Trump Your Competition.” The case is on hold at the patent office’s Trademark Trial and Appeal Board, pending a motion Trump filed last week to dismiss it. Garten offered no further explanation of Trump’s tax planning in his testimony, or in the brief interview.

 

Irish Control

It’s possible that Trump had previously assigned control of his trademarks to a company or companies he created in a low-tax jurisdiction like Delaware, but the January transfer is the first large-scale assignment he recorded with the patent and trademark office, according to agency records. (Trademark owners who assign their rights to others aren’t required to report the transactions to the agency.)

 

For example, at least three Trump-related trademarks—all for “Doonbeg,” the name of his Irish golf resort—are held by an Irish company, TIGL Ireland Enterprises Limited, according to records from Ireland’s Patent Office. (Trump owns TIGL—like the new Delaware company—through other entities, his disclosure shows.) That means any Doonbeg-related royalties are taxed at Ireland’s 12.5 percent corporate rate, which falls well below the top U.S. corporate tax rate, 35 percent, and even further below the top U.S. personal tax rate.

 

It’s entirely possible for Trump to assign all his trademarks—including the ones he just moved to Delaware—to an Irish company now, said Brian Conroy, an intellectual property lawyer in Dublin, said in an e-mail.

 

‘Biggest Problems’

While that kind of move would almost certainly cut Trump’s federal income taxes in the U.S., it might also subject him to some of the same criticism he has leveled at others. For example, Trump has criticized corporate inversions, in which U.S. companies merge with foreign firms and shift their tax addresses offshore to lower-tax countries, including Ireland. “It’s one of the biggest problems our country has,” he said during a Jan. 14 Republican debate.

 

News reports have questioned the value Trump has assigned to his many trademarks—which he has registered for an array of goods and services that includes lingerie, wines and flush-mount ceiling lights. In February, Trump—who built his initial campaign success on a pledge to build a wall along the Mexican border to control undocumented immigration—registered trademarks in Mexico for bricklaying, air-conditioner repair and street cleaning.

 

Last year, in a one-page, unofficial “financial summary,” Trump valued his trademarks, licensing, branding and “other intellectual property activities” at more than $3.3 billion. In a 104-page federal financial disclosure that his campaign filed this month, he reported income from royalties—excluding book deals—that ranged from just $10.1 million to $56.1 million. Federal rules require filers to report their income in ranges.

 

Golf Revenue

That range is dwarfed by more than $300 million that Trump reported from golf resorts around the world—though his disclosure appears to conflate revenue with income, meaning it doesn’t subtract regular business expenses from his reported amounts.

It’s not known how Trump handles the use of his trademarks by his own companies, including those that own the golf courses. They might pay licensing fees to his new company, creating tax-deductible business expenses for them and moving more income into tax-free Delaware.

 

But it’s more likely that Trump’s businesses use a “relief from royalty” approach, said Joseph Kettell, a managing director at Appraisal Economics in Paramus, New Jersey, an independent valuation firm for intellectual property. Under that strategy, the golf properties wouldn’t make royalty payments, but Trump could ultimately deduct the equivalent of such payments, which are supposed to be estimated at arm’s-length prices, from his own taxable income.

 

Delaware Companies

Trump is no stranger to Delaware, which has an international reputation as a tax haven. Most of the 542 entities listed on his May 16 financial disclosure form are registered there. Companies choose Delaware for various reasons in addition to its tax laws; it has a specialized court system, scant disclosure requirements and strong legal protections against liability.

Democrat Hillary Clinton, Trump’s likely opponent in the November presidential election, has also registered a Delaware company, ZFS Holdings LLC. The company is organized as a pass-through; she receives earnings from her speeches and royalties through it. Hillary Clinton’s campaign has said that ZFS hasn’t helped her or her husband, former President Bill Clinton, save anything on their federal, state or local taxes, according to a report published last month in Britain’s The Guardian. The campaign didn’t respond to a request for comment.

 

‘Easier’ Loans

Trump’s new company affords him flexibility in other areas, according to 11 tax and intellectual-property lawyers and specialists contacted for this story: He can leverage the consolidated trademarks’ value as collateral for bank loans, for example—a common financing mechanism for intellectual property.

Pulling the trademarks into one pile makes it “much easier” to get such loans, said Nigel Eastaway, a chartered certified accountant and tax lawyer specializing in intellectual property at MHA MacIntyre Hudson in London.

Shifting the trademarks may also simplify estate planning. Trump, who turns 70 next month, could simply transfer ownership of the new company’s equity to his heirs, said Lynn Fowler, a business-tax lawyer at Kilpatrick, Townsend & Stockton in Atlanta.

“The heirs could then benefit from any appreciation in the trademarks without paying gift or estate taxes,” he said.

 

 

 

How Blockchain Will Change Business Transactions

BY PETER HORADAN

You may have heard people talking about blockchain technology, but how does it work and what does it mean for tax compliance?

 

Today, we are witnessing a potentially profound change in the underlying technology for conducting business transactions. It’s called blockchain, and it could dramatically shift the way we define, track, share, own and manage transactions.

Blockchain technology was developed to implement Bitcoin, but it's entirely separable from Bitcoin. What makes blockchain useful to Bitcoin makes it ideal for all kinds of other business transactions.

 

The Shared Ledger

We're all used to managing private ledgers. For example, if you run the finances of a company, you have a general ledger (usually software) that records your company’s transactions, leading to income statements and a balance sheet giving current totals for each account. Your general ledger is usually managed privately and only by authorized employees or agents.

 

The GL works great for internal transactions. But transactions that represent relationships with outside entities require expensive overhead to manage. Let's say we're Company A, and our books have an accounts receivable total that says Company B owes us $100,000. That's only really valid if Company B has a corresponding balance in their accounts payable owing Company A $100,000. Today, we validate and coordinate by having staff sending and entering invoices with elaborate approval processes (often, with auditors and accountants reviewing things to ensure we get it right). If things really get bad, we kick it up to the attorneys. That's a lot of effort (and cost).

 

In contrast, the blockchain comprises both the transaction itself and a shared ledger for that transaction. Using blockchain, we all share the same data. There is one ledger for this transaction that is shared between the two companies; we can conclusively say B owes A $100,000, because both A and B are looking at exactly the same data.

 

How Blockchain Addresses Ownership Tracking

Tracking ownership of things today is generally an expensive and antiquated process. What blockchain does really well is track ownership, of anything. Since blockchain is a shared public ledger of all transactions in the system, all users can calculate the current state (balance sheet) of the system at any time. It does this by solving all of these problems:

 

• Synchronization: Each party has its own full copy of all of the data (of all the entries in the ledger).

• Indelibility: Once a transaction is recorded, it is effectively impossible to undo or erase that transaction.

• Deterministic: Blockchain can tell absolutely if a transaction happened or if it didn’t.

• Single use: If the system records product as owned by A, and A wants to sell it, it ensures A can only transfer ownership of the product exactly once. Similarly if A owns $10, then A can only transfer out $10.

• Nonrepudiation: All transactions are digitally signed. So if there is a record of A selling the product, we can cryptographically prove that someone with A's credentials approved that sale. There is still vulnerability if electronic credentials are stolen, but it’s a much smaller problem than the paper signature system we use today.

• Speed: Blockchain transactions can be confirmed in about 10 minutes. Compare that to daylong processes today around settling stocks, property or even ACH transfers.

So let’s consider some real-world potential applications of blockchain:

• Real estate: Real estate ownership in the U.S. is tracked publicly by local governments (towns or counties), which use systems that haven't changed in hundreds of years. Say you want to transfer property. You write a paper contract, sign it, notarize it and then file it with the county clerk. If you want to know who owns a piece of property, you ask the clerk for photocopies of everything that has ever been recorded about a parcel and you do a ton of reading. Beating (or cheating) this system is fairly easy: anyone with some gumption and a $15 stamp can file falsified papers to legally transfer any real property to their name. That’s why there is a $20 billion title insurance industry: to prevent fraud and to manage the uncertainty inherent in this ancient process.

Blockchain potentially obviates the need for expensive title insurance, because it is synchronized (each party has copies of the ownership contract); its non-repudiation ensures that the contract has integrity (it’s been digitally signed and authenticated); and it’s both deterministic and indelible (blockchain includes proof that it actually happened).

• Financial securities: Although far more automated, PwC predicts that $2.3 billion will be spent in 2016 on security in financial services, while clearing and settling financial transactions still generally takes a number of days.

Blockchain could greatly reduce the likelihood of fraud through non-repudiation, and speed, since transactions can be cleared in minutes (rather than days)

• Art and collectibles: There is no clear system for proving the provenance of expensive collectibles. In fact, there is an entire industry built around selling fake copies of art, because there are no reliable ways to prove ownership of collectibles.

Blockchain eliminates the murkiness of provenance and authenticity, since the chain of ownership is documented as part of its determinism, indelibility and single-use properties.

• Concert and sports tickets: Is the guy on the street selling half-price tickets giving you real tickets or fakes? Did he sell them just once, or did he make many fraudulent copies? Ticketmaster provides a solution to this problem with their resale market, but they take 10 to 20 percent of the sales price for that service.

Blockchain offers an automated, low cost method of authenticating transactions—again via determinism, indelibility and single use. Using Blockchain, what you got is what you thought you got.

• Funds transfer: The AR and AP examples above, or managing bank balances, are just exercises in proving the ownership and transfer of money. Consider how much time auditors spend sending request letters to verify AR balances with counterparties. Blockchain eliminates this need, since transactions are synchronized and nonrepudiated.

 

Building Consensus

Blockchain accomplishes all of the above with an open, legitimate means for achieving consensus. The shared ledger is entirely open. But if anyone can write on your ledger, how do you know it's any good?

That's where consensus comes in—a means for proving exactly what belongs on that ledger. There are two approaches:

 

Open and decentralized: In this model, no one is in charge. The details are complex, but the fundamental innovation of blockchain is to create a way that uncoordinated parties can agree on what transactions are valid in the shared ledger. Blockchain technology makes it hard computationally to add transactions to the ledger; as long as “good guys” have more resources than “bad guys,” the ledger will reflect what good guys have accepted as valid transactions. Another way to put it: if transactions are invalid (due to “bad guys”), then the shared ledger is no longer legitimate. It may be hard to accept this can work, but this is exactly how $5 trillion in current bitcoin value is managed today, and it does work.

 

Private: In this model, a private entity (such as your bank or broker) is running the blockchain. The private entity decides which transactions are valid.

There's an ongoing argument about whether a "private blockchain" is really a blockchain at all; without the distributed consensus mechanism, Blockchain is really no different than any shared database that’s been available for years. I believe we'll eventually see both models thrive. A decentralized blockchain is revolutionary and unleashes many new applications, but there are also times when people like a throat to choke. If you lose your Bitcoin credentials, there is absolutely no one to turn to, who can help you.

 

Smart Contracts

Once blockchains are used to manage ownership of property, then the Smart Contract becomes an exciting possibility.

 

Let's say A wants to sell 100 acres of waterfront property to B for $100 million. Today, we would negotiate a lengthy contract in words. Part of that contract would include escrow instructions and would require a human being at an escrow firm to implement those instructions.

 

Smart Contracts allow us to include the programming code to implement the deal into the contract itself. In this case, the code would make entries in the blockchain that records ownership of property to transfer the waterfront parcel from A to B, and make entries in the blockchain that records ownership of money to transfer $100 million from B to A. Then once the contract is signed, we just run the program contained in the contract.

 

Reading and writing computer programs as part of a contract may seem difficult for nonprogrammers. But Wall Street whizzes who trade complicated financial instruments (such as credit default swaps) are already working on exactly such systems. And, over time the programs inside contracts could be simplified and made more accessible to the general public.

 

Once property is tracked in open computer-readable systems, why would we describe that transaction in English, instead of in a program that would actually make the changes?

 

The Next Steps

Most blockchain implementations (other than Bitcoin) are just pilots at this stage. But there are a lot of pilots and a trainload full of venture investment money pouring into this space. Google conducted the first Dutch auction IPO. It's not hard to conceive of the next like-minded attractive company telling the financial industry it doesn't need their help in its IPO—it would prefer to track ownership of its shares via a blockchain method instead.

 

Blockchain and the Accounting Profession

Blockchain is a rapidly evolving paradigm shift that has the potential to change the way in which your clients transact and manage their business, and directly impact deficiencies related to security, transparency and business efficiency. In your advisory capacity, clients will soon be looking to you for information and guidance related to the applicability of blockchain to their business.

 

The blockchain is coming. It’s up to each of us to understand and embrace it.

 

Peter Horadan is chief technology officer of the tax technology company Avalara.

 

 

 

Trump Accounting: cooking the books at the expense of the rest of us

Details are slowly emerging about Trump’s methods of accounting that place vastly different values on assets depending on the purpose of the report.  One example cited by the Washington Post is the Trump National Golf Club in In Ossining, New York:

·      The municipal tax assessor values the golf club at roughly $15 million.

·      Trump’s attorneys have filed papers with the state claiming that the full market value of the property is $1.4 million.

·      The financial disclosure released by the Trump campaign office this week values the property at “more than $50 million”.

 

No explanation is provided for the difference of $48.6 million in the property valuation. Fortune Magazinereported on how such screwy accounting methods are hurting local governments in the locations of Trump’s 12 luxury golf courses that unabashedly cater to the very rich. The town supervisor in Ossining is quoted explaining how this accounting hurts the finances and upsets municipal budgets for the rest of us: “Everyone else has to pick up the difference … In this case, we are not the powerful. This is local government, vs. a real estate tycoon … So how do we get ahead?”. Meanwhile, Trump critics are quick to point out that Trump is either lying on his personal financial statement or lying to local tax officials.

 

Fortune Magazine writes: “How Trump handles the valuations on his golf properties—inflating their theoretical value to boost the perception of his wealth while simultaneously claiming local tax assessors are overvaluing the same courses—is just another window into how he’s run his campaign, as well as his casinos and other business over the years, as Fortune detailed here: Business the Trump Way.”

 

Working class Americans already have a term for this type of accounting; it is called “cooking the books”; a term commonly associated with white collar criminals.

 

Tony Novak Certified Public Accountant

 

 

Matching for-profit Sec. 183 rules with re-energized Boomers

BY GEORGE G. JONES AND MARK A. LUSCOMBE

 

A recent taxpayer win in the Seventh Circuit Court of Appeals may be read to signal some subtle changes in the application of the hobby-loss rules under Code Sec. 183. In reversing the Tax Court, however, the appellate court nevertheless excused the Tax Court’s own application of these rules, reasoning that the Tax Court “felt itself imprisoned by a goofy regulation (Treas. Reg. Section 1.183-2: Activity Not Engaged in for Profit Defined).” Both courts tried to make sense out of the same regulation that looks to “facts and circumstances” under a nine-factor test — each arrived at a different result based upon the same facts.

 

The hobby-loss rules themselves may be getting a higher profile as interest in entrepreneurship takes hold within the growing ranks of the newly retired. Advertisements focus on Baby Boomers who are “not done yet,” with starting a new business cited in particular as enjoyable and fulfilling. The extent to which these Boomers will be entitled to net losses should their new “businesses” turn south may depend now, more than ever, on heeding the factors noted in the Section 183 regulations. A for-profit business can deduct expenses that exceed gross income. If the for-profit business is conducted in noncorporate form (as a sole proprietorship, limited liability company, or partnership, for example), the owner(s) of the business can use the losses to offset other income.

 

FACTORS UNDER THE REGS

The regulations under Code Sec. 183 describe nine non-exclusive factors to be used in evaluating whether an activity is a business. The regs advise that no one factor is decisive, that other factors should also be used … and that the factor-approach is not purely an objective test. For example, although a reasonable expectation of profit is not always required, the circumstances should indicate that the taxpayer entered into, or continued, the activity with the objective of making a profit. And in another situation that also may seem paradoxical, it may be sufficient that there is a small chance of making a large profit.

Reg. 1.183-2(b) lists, among the relevant factors to be considered, the following:

·      The manner in which the taxpayer carries on the activity (businesslike or not);

·      The expertise of the taxpayer or their advisors;

·      The time and effort expended by the taxpayer in carrying on the activity;

·      The expectation that assets used in the activity may appreciate in value;

·      The success of the taxpayer in carrying on other similar or dissimilar activities;

·      The taxpayer’s history of income or losses with respect to the activity;

·      The amount of occasional profits;

·      The financial status of the taxpayer; and,

·      Elements of personal pleasure or recreation.

 

COURT DECISIONS

The courts recently issued three separate decisions that determined whether an activity was a for-profit business under Code Sec. 183. The scorecard there was two taxpayer wins and one loss. The decisions illustrate the importance of the facts and circumstances and demonstrate how the courts apply the factors in the regulations.

 

Horses. In Roberts, CA-7, 2016-1 USTC ¶50,260, the Seventh Circuit reversed the Tax Court’s conclusion that an individual’s racehorse activities started as a hobby and only later became a business. The taxpayer in this case was in his mid-60s and retired from a successful career in the restaurant industry. Although he incurred losses every year for the four years at issue, the appeals court found that the taxpayer conducted his activities in a business-like manner — purchasing horses, becoming a licensed trainer, building training facilities, acquiring land for larger facilities, and serving on the boards of two professional associations. The taxpayer boarded, bred, trained, cared for and raced the horses throughout the period at issue and was entitled to deduct all expenses incurred.

Although the Tax Court viewed the taxpayer’s land acquisitions in the early years as not purchased “to have a place to enjoy the golden years of his retirement,” neither did it consider the undertaking as a going business of raising horses at the time. The appeals court, on the other hand, rejected the view that the business started as a hobby. It found that the business evolved from the taxpayer’s start-up activities (his decisions to expand training facilities and to purchase land for facilities) and did not suddenly “flip” from a hobby to a business. The Tax Court’s dismissal of these earlier actions as irrelevant to the profit-making issue was clearly wrong, the appeals court concluded.

 

Hair salon. In Delia, TC Memo. 2016-71, Dec. 60,582(M), the Tax Court took a more lenient approach. The court concluded that the taxpayer’s hair-braiding activity qualified as a business, because the taxpayer had a genuine, if optimistic, intent to earn a profit. The taxpayer had limited resources, but leased facilities for a shop and engaged in continuous marketing efforts. The court indicated that a reasonable expectation of profit was not required, as long as the taxpayer had an actual and honest objective to make a profit. Although the taxpayer had persistent losses from the activity, she opened her salon with a genuine profit motive. While the court did allow expenses in excess of income, the court denied some expenses that the taxpayer failed to substantiate, and even imposed a negligence penalty for failure to document the expenses. In some ways, this taxpayer was lucky in not having the court view the lack of records sufficient to support certain business deductions as indicative of an un-business-like approach that lacked an underlying profit motive.

 

One factor in this taxpayer’s favor — a factor that is not always stated outright by case opinions — was that she did not have the deep pockets to afford losses for a period of time without some personal discomfort. For those Boomers recently retired and with an adequate nest egg to fund what might be considered more an “adventure” than a business, however, proving a profit motive may become more of a challenge.

 

Aircraft leasing. The taxpayer in Hoffman, TC Memo. 2016-69, Dec. 60,580(M), did not fare as well as the others. The Tax Court concluded that a taxpayer who acquired aircraft and leased them to another company he owned did not engage in the aircraft activity for profit. The taxpayer never made a profit and continued to operate the aircraft at a loss even after he could have returned the aircraft to its owner and avoided further losses by not doubling down. The court found that the taxpayer’s continued operation of the aircraft indicated a strong element of personal convenience in their continued use.

 

CONCLUSIONS

So, where does that leave the current retiree who wants to start their “dream” business that combines business with personal enjoyment — and wants to be able to offset other income if the business doesn’t show a profit?

·      Assuming the retiree has a nest egg sufficient to support a start-up business that isn’t showing a profit for a while, they should also know when to “fold ‘em” — and do so, if red ink persists.

·      Having an accountant or other professional advisor provide a “reality check” in evaluating whether to start a venture, and then whether to continue one, is good advice, whether or not it is aimed at being Section 183-compliant.

·      Keeping good records to indicate tight business practices. Even though a retiree’s business is typically a smaller-scale operation, at least to begin with, the taxpayer should avoid the tendency to keep incomplete or confusing books and records. Good documentation is critical.

 

Finally, as the taxpayer in Delia learned, substantiation of a deduction must be sufficient to support a deduction under other code sections as well as Section 183. The taxpayer there lacked substantiation for some of her expenses: supplies (which were for meals), hair products, and cell phone expenses (which may have been personal in any case). These were non-deductible not because of the hobby-loss rules but because of additional substantiation rules that also were not met.

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

 

 

 

Higher Taxes Don't Scare Millionaires into Fleeing Their Homes After All

BY BEN STEVERMAN

 

When it comes to taxes, millionaires have short fuses. Ratchet up their rates and they'll blow you off and move to a low-tax, or no-tax, state.

Or so goes one argument against taxing the rich: States that levy a “millionaires tax” risk chasing those millionaires away to Florida, Texas and other places with no income tax. Hedge fund manager David Tepper's recent decision to move from New Jersey to

 

Florida, possibly creating a billionaire-size hole in Jersey’s budget, raised alarms. Golf great Phil Mickelson, shortly after his infamous Dean Foods stock trade, complained about his high tax rate in California and threatened to move to Florida.

Now, a study based on 13 years of tax data finds that most millionaires don’t move cross-country just to avoid a tax bill. It turns out that the rich, while perhaps different from us, aren’t all that mobile. When they do move, it’s often for reasons that have nothing to do with taxes. For one thing, they appear to like the beach.

 

The study, published in the June issue of the American Sociological Review, suggests that states—and countries—may have some leeway to raise taxes on the wealthy without scaring away their tax base. It has obvious political implications, possibly serving as ammunition for those who favor taxing the rich. It could help advance the arguments of presidential candidates Hillary Clinton and Bernie Sanders, for example, who have both proposed higher taxes on upper-income Americans.

 

It could also influence voters who, in as many as four states—California, Colorado, Maine and Minnesota—will decide in November whether to raise taxes on residents in the top brackets. 

 

Rich people do move for tax reasons, but only about 2.2 percent of the time, the study estimates, with little impact on revenues in the states they leave behind. If states increase their top tax rate by 10 percent, they risk losing just 1 percent of their population of millionaires, the researchers found, using a statistical model based on millionaires' past movements from state to state.

 

“Millionaire tax flight is occurring, but only at the margins of significance,” write the authors, Stanford University sociology professor Cristobal Young, his Stanford colleague Charles Varner, and two U.S. Treasury Department economists, Ithai Lurie and Richard Prisinzano.

 

The researchers analyzed 45 million tax records, covering every filer who reported income of at least $1 million in any year from 1999 to 2011, and found that the rich are in fact less likely to move around than the poor. Typically, about half a million households report such an income and only 2.4 percent of these taxpayers move from state to state in any given year. That compares with 2.9 percent of the general population and 4.5 percent of those earning about $10,000 a year.

 

Why are the wealthy, with all their resources, more likely to stay in one spot? The study notes that millionaires are likelier to be married, have kids, and own businesses, all conditions that tend to make moving more difficult. Wealthy people often form deep roots in their communities, ties that helped them succeed in the first place.

 

“Most millionaires are the ‘working rich,’ ” the study notes, with wealth that flows from the particular places where they’ve built business relationships. For a certain kind of tech entrepreneur, low-tax New Hampshire and Tennessee are no substitute for Silicon Valley. Wall Street lawyers need to stay near Wall Street. For a famous actor or director, Hollywood, Fla., is nothing like Hollywood, Calif.

 

The study also looked at regions of the country where it is easy for taxpayers to commute daily across state lines from low-tax states to high-tax states. Residents of Portland, Ore., for example, must pay a top state tax rate of 9.9 percent, while across the river in Vancouver, Wash., there’s no income tax at all. You would expect people of means to live on the low-tax side. Yet in these easily commutable border areas, “the difference in millionaire population at the state border is not significant,” the study concludes.

 

As for the jet-setting millionaire who has breakfast in Miami, spends the day in Manhattan, and wakes the next morning in his Idaho compound, changing where you’re taxed isn’t as simple as putting a different address on your 1040 form. States such as New York often demand proof from wealthy residents that they really have uprooted their lives and are spending more than half the year out of state.

 

One curious finding was how much the wealthy seem to like Florida. The Sunshine State is one of seven with no income tax, yet it accounts for almost all the tax-influenced migration the authors detected. Meanwhile, Texas, Tennessee and New Hampshire didn’t appear to be drawing millionaires away from higher-tax states. In fact, when Florida is excluded from the analysis, there is “virtually no tax migration” by millionaires.

 

The authors can only guess why the rich prefer Florida. “It is the only state with coastal access to the Caribbean Sea,” they note, but “it is difficult to know whether the Florida effect is driven by tax avoidance, unique geography, or some especially appealing combination of the two.”

 

Look, lounging under a palm tree can be even more relaxing when it comes with a tax break. You don't have to be a sociologist to know that.

 

 

 

French Tax Investigators Swoop on Google's Paris Offices

BY GASPARD SEBAG AND STEPHANIE BODONI

 

French police and prosecutors swooped on Google’s Paris offices on Tuesday, intensifying a tax-fraud probe amid accusations across Europe that the Internet giant fails to pay its fair share.

 

The raids are part of a preliminary criminal investigation opened in June 2015 after French tax authorities lodged a complaint, according to a statement from the nation’s financial prosecutor. The probe is seeking to verify whether Google’s Irish unit has permanent establishment in France and whether the firm failed to declare part of its revenues in France.

 

Prosecutors will probably go after Google’s management in Ireland, according to Alain Frenkel, a tax lawyer in Paris. “That doesn’t mean Google won’t also face a recovery order from France’s tax authorities,” he said in a phone interview.

 

The raids come as Google, which is part of parent company Alphabet Inc., faces outrage in Europe over the small amount of tax it pays in the region. France has called on the company to pay back taxes of about 1.6 billion euros ($1.8 billion).

While no one has been charged of any wrongdoing, French penalties for aggravated tax fraud have recently been ramped up. Convicted managers can potentially face as long as 7 years in jail and a 2 million-euro fine.

 

Google said in a statement that it complies with French law and is “cooperating fully with the authorities to answer their questions.” While French investigators delved into Google’s tax affairs, Alphabet Chairman Eric Schmidt was speaking a just a few hundred miles up the road at a conference in Amsterdam.

 

Unmarked Cars

Two unmarked cars with police signs on the windshield were still parked outside Google’s Paris office at 8 rue de Londres on Tuesday afternoon. The raids started at about 5 a.m. local time, Le Parisien newspaper reported earlier, citing an unidentified source.

French tax officials first raided Google’s Paris offices in 2011. The country’s government has criticized Google for booking most of its sales to French customers through its Irish subsidiary. Irish corporation tax is just 12.5 percent compared to France’s 33.3 percent rate. Last year, Google’s French subsidiary reportedly paid just 5 million euros in French tax, despite sales to French customers that analysts have estimated were greater than 1 billion euros.

 

Google’s European subsidiaries also pay hefty royalty payments to another Irish subsidiary that is physically located in Bermuda and which holds Google’s international intellectual property licensing rights. This reduces the profitability of Google’s European subsidiaries, which means they pay less tax.

 

U.K. Deal

Earlier this year Google reached a controversial 130 million pound ($190 million) settlement with the U.K. government over an audit covering 10 years of accounts. Critics called the amount "derisory" and urged the European Union to examine the agreement.

The scrutiny of Google’s tax affairs coincides with a separate EU clampdown into how some nations may be offering special deals to lure big companies.

 

EU regulators showed their resolve last year, ordering Belgium in January to recover about 700 million euros in illegal tax breaks to companies, including Anheuser-Busch InBev NV and BP Plc. Tech giants Apple Inc. and Amazon.com Inc. are still under investigation after the EU criticized their tax arrangements in Ireland and Luxembourg.

 

—With assistance from Jeremy Kahn and Gregory Viscusi.

 

 

 

Summer Camp Expenses May Be Deductible

By Michael Cohn 

 

Summer isn’t too far away, and many parents are wondering if they can afford to send their kids away to summer camp this year. The ability to take a tax deduction for such expenses could make all the difference.

 

Some of the expenses for summer camp, like medical expenses, are tax deductible, according to Ellen Minkow, CPA, of MS 1040 LLC in New York City.

 

That includes the cost of shots, physical exams and fees for doctors. “These are deductible if you itemize on Schedule A and only to the extent that the total medical expenses paid during the year exceeds 10 percent of adjusted gross income (AGI), and 7.5 percent if you or your spouse is over 65,” she pointed out. “Not deductible are sports equipment, clothing, fans or furniture. If there are transportation costs associated with summer camp—whether by bus, subway, taxi or car—the costs may qualify as an expense for purposes of the credit if the camp takes the child to or from the place where the child care is provided. However, the costs that you spend on your own transportation to get your child to summer camp will not qualify as an expense for purposes of the credit.”

 

While sleepaway camp does not count for the child care credit, day camp could, according to Minkow. For a camp or daycare facility to qualify, parents must add the camp’s federal ID number and address to the Form 2441 or the camp will not qualify for the credit, she noted.

 

“In addition, to qualify for the credit, you must pay child and dependent care expenses so that you and your spouse, if married, can work or look for work,” Minkow added. “However, if you don’t find a job or if you don’t have any earned income from wages, salaries, tips, other taxable employee compensation or net earnings from self-employment for the year, you may not claim the credit. On the actual credit, there is an exception to earned income for taking the credit. The exception is for a student or disabled spouse. If one spouse is a full-time student or disabled, earned income is deemed to be at $250 per month with one qualifying child to $500 for two or more. Other exceptions do apply.”

 

 

 

Senate Bill Would Require Presidential Nominees to Release Tax Returns

BY MICHAEL COHN

 

Sen. Ron Wyden, D-Ore., the ranking Democrat on the Senate Finance Committee, has introduced legislation that would require presidential nominees such as Donald Trump, the presumptive Republican nominee, to release their tax returns.

 

Wyden’s bill, the Presidential Tax Transparency Act, would require candidates to release their most recent three years of tax returns to the Federal Election Commission within 15 days of becoming the nominee at the party convention. Should the candidate refuse to comply, the Treasury Secretary would provide the tax returns directly to the FEC for public release. The bill also provides for redaction of certain information, as the FEC deems appropriate.

 

"Since the days of Watergate, the American people have had an expectation that nominees to be the leader of the free world not hide their finances and personal tax returns,” Wyden said in a statement Wednesday.

 

Trump has so far refused to release his tax returns until the Internal Revenue Service finishes auditing them. He has claimed that the IRS has been auditing his tax returns every year since 2002, but has declined to release even the tax returns that the IRS has finished auditing, claiming they are “linked.”

 

“In interview I told @AP that my taxes are under routine audit and I would release my tax returns when audit is complete, not after election!” he tweeted earlier this month after reports emerged that he might not release his tax returns before the election (see Trump Doesn’t Expect to Release Tax Returns by November).

 

The IRS has said that he is not prohibited from releasing any tax returns that are being audited, and President Richard Nixon released tax returns that were under audit in 1973.

 

Hillary Clinton, the likely Democratic nominee, has been pressing Trump to release his tax returns, pointing out that she and her husband Bill Clinton have released their tax returns ever since 1977. She noted that the last time Trump was required to disclose his tax returns to New Jersey gambling regulators in 1981, they revealed that for two years in the 1970s he paid no federal income taxes because of real estate deductions.

 

“Not a penny,” she said, according to The Wall Street Journal. “It may be that he hasn’t ever paid federal income tax. That’s why we want to see his tax returns.”

 

Trump has said that he fights to pay the lowest tax rate possible, and his campaign manager, Corey Lewandowski, reiterated that point to CBS News, saying, “He is going to pay the smallest amount of taxes possible, which I think the American people also understand. Every deduction possible. He fights for every single dollar. That’s the mindset you want to bring to the government.”

 

Wyden pointed out that for nearly 40 years presidential candidates from major political parties have voluntarily released their tax returns during the campaign. “Tax returns deliver honest answers to key questions from the American public,” he said. “Do you even pay taxes? Do you give to charity? Are you abusing tax loopholes at the expense of middle class families? Are you keeping your money offshore? People have a right to know.”

 

 

 

Lionel Messi Goes to Court to Avoid Tax Conviction

BY RODRIGO ORIHUELA AND MARIA TADEO

 

Lionel Messi, the record five-time world soccer player of the year, appeared in a court in Barcelona Thursday as he seeks to defend himself in a tax evasion case that has cast a spotlight on the financial dealings of elite sport stars.

 

The star of Spanish champion Barcelona and his father Jorge are accused of failing to pay taxes on image rights, and state attorneys are demanding sentences of about 22 months for each as well as the payment of the taxes and costs. The Messis arrived at court shortly after 10 a.m. local time in a black SUV accompanied by a security team.

 

Messi avoided the media gathering outside Barcelona’s Justice Palace, rushing through the entrance’s steps with his father behind him. The two sat in court side by side in silence as a team of four tax inspectors laid out their case for more than two hours.

 

The trial comes as global scrutiny mounts into how the rich manage their income, with governments looking at information released in leaked legal documents dubbed the “Panama Papers.” Messi, who was part of the Argentina team that finished runners-up in the 2014 World Cup, looked to be in the clear two years ago when a Spanish prosecutor recommended that charges be dismissed because the player didn’t make decisions on his own financial arrangements. The request to clear Messi was thrown out by a judge in Barcelona, who sent the case to court. An appeal by Messi was also rejected.

 

Prosecutors filed a complaint in 2013 that the 28-year-old player and his father evaded 4.2 million euros ($4.7 million) in taxes over three years on endorsement payments from Adidas AG, PepsiCo Inc., Procter & Gamble Co. and other companies.

 

The government is pursuing the case after the Messis paid 5 million euros, the amount prosecutors say they evaded, plus interest. According to prosecutors, Jorge Messi oversaw the use of companies in Belize, the U.K., Switzerland and Uruguay to divert money away from the Spanish tax authorities.

 

The judge who sent the case to trial said in his ruling that the fact that the Messis agreed to pay back taxes doesn’t affect the potential existence of crimes. He also dismissed Messi’s argument that he wasn’t involved in money management decisions.

 

Whether he serves the prison sentence state lawyers are demanding will be up to the judge. Under Spanish law, individuals can avoid serving jail time for prison sentence under two years if they have no criminal record and have sought to make amends for their offense.

 

 

 

6 Quick Tax Tips for Students Starting a Summer Job

BY ABIGAIL SCHAFFER

 

Summer jobs are an excellent opportunity to learn responsibility in the areas of work ethic, time management, and financial responsibility.

 

According to the Bureau of Labor Statistics, 20.3 million youth were employed in the summer of 2015. This is a significant increase from only 2.1 million employed during the school year. If your child—or the child of one of your tax clients—is a student and one of the millions joining the work force this summer, kudos to them! Along with establishing a good work ethic and building time and financial management skills, a summer job also means learning about the obligatory duty of paying taxes.

 

To help navigate the tax process, we have put together a list of six tax tips to be aware of when a child prepares for a summer job. We hope these tips will help you and your child plan ahead and know what to expect as they begin their summer job.

 

1.Understand the Rules for Claiming Dependents

You may be wondering, since your child has a summer job, if you will still be able to claim him or her as a dependent on your own return. The answer is, "Yes." A child under the age of 19 (or under the age of 24 and a full-time student) can make any amount of income and still be claimed as a dependent as long as you are still providing more than half their support. This includes food, shelter, clothing, entertainment, school expenses, vehicle expenses, etc. As “independent” as your child may feel now that they are taking on some responsibilities of their own, when you add up all of the expenses, it may be surprising to see how “dependent” working children still are on the support of their wonderful parents!

 

2.Filling Out Form W-4: Determine How Much To Withhold 

Before your child begins a summer job, he or she will be required to fill out a federal and state Form W-4 to instruct the employer how much to withhold for federal and state income taxes. To determine how much, if any, should be withheld, it is important to note the thresholds of when your child will need to file an income tax return. Estimate how much they will earn this summer based on their wages and expected hours to be worked.  Regardless of amounts withheld for income taxes, Social Security and Medicare tax will be withheld at the regular 6.2 and 1.45 percent rate and is never available for refund.

 

3.If No Taxes are Withheld, Set Money Aside to Be Prepared for Tax Time
Your child may have a summer job when the employer does not take your child on as an official employee, but, rather, as an independent contractor for their temporary summer work. In this instance, your child's paycheck will not include any deductions for Social Security and Medicare tax, nor will there be any withholdings for federal or state income tax. If $600 or more is earned from this employer, your child should receive a 1099-MISC at the end of the year. Most likely the income will be shown as "Non-employee Compensation" in box 7 of the 1099-MISC. This is treated as self-employment income and is subject to self-employment taxes. In this case, your child must file a return if earnings were at least $400. Be aware that because the employer did not withhold and pay any taxes on behalf of your child, taxes may be owed when tax returns are filed the following spring. It will be a good idea for your child to set aside money from each pay check so that he or she can pay the tax when the returns are filed.

 

4. Know the Tax Implications of Employing your Child
Many of you may be exploring the idea of hiring your child for the summer. Giving your child a summer job may provide an opportunity for tax savings for you as the employer as well as for your child. There are tax benefits of having your child as an employee if your trade or business is a sole proprietorship or partnership in which you and/or your spouse are the sole owners or partners. 

 

Wages paid to your child who is under the age of 18 are not subject to Social Security and Medicare taxes, or Federal Unemployment Tax (FUTA). Wages paid to your child who is 18 years or older, but under 21, are not subject to FUTA. Your child's wages are a deductible business expense to your company, as long as your child is treated as a regular employee, wages are paid in dollars, and a W-2 is filed.

 

According to "Tax Dos and Don'ts for Hiring Your Child", on wsj.com, Laura Saunders reports that a Tax Court judge in Washington disallowed a business owner from deducting $15,000 in wages to her three children ages 15, 11, and 8 who helped their mom with tasks such as stuffing envelopes. 

 

The business owner's method of payment was regularly expected parenting expenses such as food, lodging and tutoring services. In other words, you cannot use pizza as a form of payment to your employee-child and use the value as a business deduction for wages. The IRS recommends you pay your employee-child via paycheck and have him or her deposit it into his or her own bank account. This will verify that your child received the funds.

 

5. Understand How Taxes Work with an Out-Of-State Summer Job
If you reside in Illinois and your dependent child gets a summer job out-of-state, your child is considered an Illinois resident and will need to file an Illinois return based on Tip #2 above. If the job is in Iowa, Kentucky, Michigan, or Wisconsin, a reciprocity agreement exists with Illinois. This means the out-of-state employer will withhold and pay Illinois taxes and no taxes should be paid to that employer’s state. In most other states, taxes will be withheld and paid to the state of employment. In those cases, an Illinois return and a non-resident return for the state of employment will need to be filed. The good news is, any taxes paid in the other state will be a credit on the Illinois return. Tax rules differ from state to state so it is a good idea to do your homework and understand the income tax filing requirements for the employer's state.

 

6. Understand Roth IRA Eligibility and Benefits

Something else to think about if your child gets a summer job is that he or she will be eligible to start making Roth IRA contributions. While retirement may seem like eons away for your newly working teen, the power of compounding is amazing. In addition, the contributions can be withdrawn tax-free and penalty-free at any age and the earlier they begin contributing, the greater the earnings potential. 

 

As you can see, there is a lot to keep-in-mind as your child—or the child of one of your clients—begins exploring summer job opportunities since the tax implications can be complex.

For more information, visit http://www.irs.gov/pub/irs-pdf/p17.pdf.

 

Abigail Schaffer, is a staff accountant at Kessler Orlean Silver & Co., a CPA firm in Deerfield, Ill. She can be reached at aschaffer@koscpa.com.

 

 

 

Political Tax Avoidance Chokes Off Infrastructure Investment

BY AMANDA ALBRIGHT

 

Every state or municipal government will eventually face the question of whether to raise taxes. Since the era of George H.W. Bush, officials answer increasingly "No."

 

"It’s politically hard to make a case for tax increases, and particularly at a time when people have less money in their pockets," said Lucy Dadayan, a senior policy analyst with the Nelson A. Rockefeller Institute of Government.

 

The nation’s reluctance to talk taxes has resulted in a drop in borrowing for needed infrastructure as well as missed opportunities to take advantage of historically low interest rates to finance long-term projects. The political response to rebuilding the Washington D.C. Metro, the nation’s second-largest subway system, has been, don’t expect a bailout.

 

States increased taxes by $33 billion in response to the Great Recession, 38 percent less than the $54 billion raised after the 1990 recession, according to a 2015 study by the Rockefeller institute.

Meanwhile, some states still haven’t recovered completely from the 2008-2009 financial crisis. At some point, something will have to give. Sooner or later they’ll have to raise taxes.

 

"It’s inevitable," Dadayan said. "Otherwise, the fiscal systems are not going to be sustainable over a long period of time."

 

George H.W. Bush’s famous 1988 mantra, "Read my lips: No new taxes," has stuck with state and local government officials to this day, said Emily Evans, a former Nashville councilwoman who is now a managing director at investment research firm Hedgeye Risk Management.

 

"We are not past that point at all," said Evans. It varies, "depending where you are. If you’re in a really deep red state like Tennessee, we’re really not past it. If you’re in the purple and blue states, there’s a whole lot more open mindedness about it."

 

While Bush’s promise had an impact, so did what happened afterwards, she said. The president eventually raised taxes and didn’t win a second term. "That stands in the minds of most elected officials as a serious problem," Evans said. "If I raise taxes, I won’t get reelected. That’s the equation. That still is a big part of the thinking that goes into those decisions to vote ’yes’ or ’no’ on new tax projects."

 

One example of a changing approach to tax increases can be seen in the state sales tax, said William Fox, a business professor at the University of Tennessee at Knoxville, who studies the subject.

 

During the 1980s recession, about 30 states raised their rates, he said. The number of states that enacted increases fell to about 20 during the 1990s and continued to decline during the 2000s to the mid-teens, Fox said.

 

"The pressure is ever-stronger on keeping taxes low," he said. "If you went back into the 1980s, when money got tight in state governments, particularly during recessions, what you would get is a wave of tax-rate increases," he said. "While that is true today, the propensity for that to take place has fallen over time."

 

The impact of politicians’ reluctance to raise taxes has been felt in the municipal market. New-money municipal issuance has averaged $150 billion annually from 2011 to 2015, which is a marked decline from the previous 10 years, according to an April report by Citigroup Inc.

 

New-money issuance averaged $242 billion annually during 2001 to 2010, Citigroup found. "In other words, state and local debt as a source of funding for needed projects has been running, on an inflation-adjusted basis, at least 45 percent lower over the past five years than it was over the prior 10," Citigroup said in the report.

 

"State and local governments aren’t able to keep up with new project funding needs and urgently needed major maintenance and replacements, and the extent to which they are falling behind continues to grow," Citigroup said.

 

This reduced level of borrowing is "astonishing" given the state of the country’s infrastructure, said Citigroup strategist George Friedlander. "The Republican tax pledge still exists—‘we will not raise taxes in any way that is not offset by reductions in spending somewhere else,”’ he said. "That’s a big issue. The whole concept of cost-benefit when it comes to infrastructure has vanished. It is not part of the discussion right now.

 

"Is there a benefit in raising spending on infrastructure which, in terms of keeping us competitive with the rest of the world, will pay an economic benefit down the road? Well, probably, yeah, but nobody cares."

 

Additionally, politicians’ concerns about raising taxes are preventing them from taking advantage of historic low interest rates, said Michael Mazerov, a senior fellow with the Center on Budget and Policy Priorities. "In most cases, those services and the infrastructure is going to be paid through bonding," he said. "Interest rates are so low now that this is a time when states should be investing in infrastructure."

 

Governments only have a few choices when budgets get tight—taxes are one of the only ways they can generate revenue. Another option is to refinance debt to delay final repayment. This can be a "trick" that state and local governments resort to instead of raising taxes, Evans said.

 

Evans saw this happen first hand during her time on the Metropolitan Council of the Metropolitan Government of Nashville and Davidson County in 2010. The council approved the issuance of $600.2 million in general obligation bonds, which included retiring commercial paper and refinancing debt. Evans said the refinancing resulted in about $48 million in additional debt service payments because it extended the life of the debt. The council did so after the mayor at the time promised residents he would not raise property taxes, she said.

 

"Instead of doing one, cutting expenses, or two, raising revenue, [the mayor] opts for a refinancing of outstanding debt, which cost the taxpayers," she said. "There wasn’t any other compelling reason to refinance that debt."

 

The Two Choices
 

Richard Riebeling, the chief operating officer for Nashville’s mayor’s office, disputes the $48 million figure, and says the refinancing was one of the smartest things the city did from a financial standpoint during that time.

 

"It was real simple," he said. "We were in the middle of a recession. The city had two choices that were very poor. One was raise taxes on people during the middle of a recession, which was not a very good idea. Or second, you significantly reduce services. And so neither of those were strong options, so the third was a slight restructuring of our debt to move back some principal a few years."

 

Nashville and Davidson County enacted a 53-cent property tax increase per $100 of assessed value for fiscal 2012-13. Riebeling said economic conditions supported a property tax increase.

"There was a need to continue to fund schools and the other needs of the city," he said. "We did a small property tax [increase] that year because we thought it was the right thing to do. Could we have re-done the debt again? Probably. Would it have been the right thing to do? No, it would have been the wrong thing to do. This restructuring of the debt is not something that you do very often at all."

 

One of the first major modern instances of voters voicing their displeasure with tax policies was in 1978, when California voters enacted Proposition 13. The referendum enacted a limit on property tax rates. It was one of the first laws that put a hard limit on municipalities’ ability to raise revenue, Fox said.

 

To be sure, voters can also approve tax increases, like Californians did in 2012 with Proposition 30, which temporarily increased sales and income taxes.

 

Voters may be willing to raise taxes for specific issues such as education, said Vladimir Kogan, a political science professor at Ohio State University. "It’s not like voters are clamoring for this," he said. "It’s a matter of selling it."

 

 

 

Tax Audits: Once Bitten, Twice Shy

BY ROGER RUSSELL

 

It’s no surprise that the experience of going through a random IRS audit affects future behavior. What is surprising is how the expected change in behavior—increased reporting of taxable income, and presumably, increased compliance—differs from corporations to individuals, and from individuals subject to third-party information to those who are not.

 

ATO great reward them of mileage and get a lot of mileage and Valeant at my helpers: July July and cut of all it but the estrogen college and now of it by a line of cover of the hall and every member of the Bradley Heim, a professor at Indiana University School of Public and Environmental Affairs and a former economist at the U.S. Treasury Office of Tax Analysis, specializes in the behavioral impacts of tax policy. His research into how tax audits change behavior showed contradictory results for individuals and corporations.

 

“Audits were extremely effective in reducing individuals’ subsequent tax evasion, but corporations gradually increase tax aggressiveness for a few years following an audit, and then reduce it sharply,” said Heim. “This calls for a reexamination of the theory and policy of legal enforcement.”

 

 “We looked at the behavior of taxpayers after a random National Research Program [formerly TCMP, the Taxpayer Compliance Measurement Program] audit for the period 2006 to 2009 to determine both the short- and long-run effects of audits on taxpaying behavior,” he said.

 

“We found that corporations were more aggressive after the audit. The thinking was that companies learn something during the audit and get a sense of how quickly they’re going to be audited again, so there’s a window for them to be more aggressive in terms of taxes. These are medium- and smaller-size businesses, not large enough to be audited every year,” he explained.

 

“With individuals it’s the opposite,” Heim said. “There’s a bump up in the taxable income they report. It fades away, but the speed with which it fades away depends on the kind of income we’re talking about. If it’s wage and salary income, there’s a small bump up in taxable income and it persists for quite a while.”
 

Self-employment returns are notorious for noncompliance, he noted. “The impact with these is stronger but more quickly diminishes for income not subject to third-party information.”

 

The IRS budget is often viewed through the lens of the amount of revenue collected from an audit, Heim indicated. But his research found there is a secondary yield from an audit in the aftereffect of reporting more taxable income in the years following an audit. “The amount of revenue that is collected after an audit is about equal to the amount that was received directly from the audit itself,” he said.

 

Heim’s research also found that individuals with higher income volatility revert to their pre-audit behavior more quickly, “conceivably because of a larger degree of asymmetric information between the filer and IRS.”

 

Larger and more persistent responses to audits were found among those who are less tax literate, Heim observed.

 

“Companies’ perception as to how long it will take before they are audited again, based on the experience of themselves and their peers, seems to be accurate,” he said. “The window for noncompliance that this creates closes gradually over the ensuing years. As the window closes they become more careful.”

 

 

 

 

IRS to Delay Tax Refunds Involving EITC and ACTC Next Year

BY MICHAEL COHN

 

The Internal Revenue Service is warning tax professionals that next year, a new law will require the IRS to hold all Earned Income Tax Credit and Additional Child Tax Credit refunds until Feb. 15 as a safeguard against identity theft and tax fraud.

 

The IRS pointed out the new law is likely to affect some returns submitted early in the tax filing season. The IRS is encouraging tax professionals to begin preparing for the change now. Planning is also underway for a wider communication effort this summer and fall to alert taxpayers.

 

The action is driven by the Protecting Americans from Tax Hikes Act of 2015, or PATH Act, which was enacted Dec. 18, 2015. Section 201 of the new law mandates that no credit or refund for an overpayment for a taxable year shall be made to a taxpayer before Feb. 15 if the taxpayer claimed the Earned Income Tax Credit or Additional Child Tax Credit on the return.

 

The change begins Jan. 1, 2017 and may affect some returns filed early in 2017. To comply with the law, the IRS said it will hold the refunds on EITC and ACTC-related returns until Feb. 15. This allows additional time to help prevent revenue lost due to identity theft and refund fraud related to fabricated wages and withholdings.

 

The IRS plans to hold the entire refund until that time. Under the new law, the IRS cannot release the part of the refund that is not associated with the EITC and ACTC.

 

The IRS advised taxpayers to file as they normally do, and tax return preparers should also submit returns as they normally do. The IRS will begin accepting and processing tax returns once the filing season begins, as we do every year. That will not change.

 

The IRS still expects to issue most refunds in less than 21 days, though IRS will hold refunds for EITC and ACTC-related tax returns filed early in 2017 until Feb. 15 and then begin issuing them.

 

The IRS plans to work closely with stakeholders and IRS partners to help the public understand this process before they file their tax returns and ensure a smooth transition for this important law change. More information about this law will be posted to IRS.gov and shared with partners and taxpayers throughout the second half of 2016.

 

 

 

Don’t Forget to Report Certain Foreign Accounts to Treasury by the June 30 Deadline

 

WASHINGTON—The Internal Revenue Service today reminded taxpayers who have one or more bank or financial accounts located outside the United States, or signature authority over such accounts that they may need to file an FBAR by Thursday, June 30.

 

By law, many U.S. taxpayers with foreign accounts exceeding certain thresholds must file Form 114, Report of Foreign Bank and Financial Accounts, known as the "FBAR." It is filed electronically with the Treasury Department's Financial Crimes Enforcement Network (FinCen).

"Robust growth in FBAR filings in recent years shows we are getting the word out regarding the importance of offshore tax compliance," said IRS Commissioner John Koskinen. "Taxpayers here and abroad should take their foreign account reporting obligations very seriously.”

 

In general, the filing requirement applies to anyone who had an interest in, or signature or other authority over foreign financial accounts whose aggregate value exceeded $10,000 at any time during 2015. Because of this threshold, the IRS encourages taxpayers with foreign assets, even relatively small ones, to check if this filing requirement applies to them. The form is only available through the BSA E-Filing System website.

 

In 2015, FinCen received a record high 1,163,229 FBARs, up more than 8 percent from the prior year. FBAR filings have grown on average by 17 percent per year during the last five years, according to FinCen data.

 

The IRS is implementing the Foreign Account Tax Compliance Act (FATCA), which mandates third-party reporting of foreign accounts to foster offshore tax compliance. FATCA created a new filing requirement: IRS Form 8938, Statement of Specified Foreign Financial Assets, which is filed with individual tax returns. The filing thresholds are much higher for this form than for the FBAR.

 

The International Taxpayers page on IRS.gov provides the best starting place to get answers to important questions. The website has a directory that includes overseas tax preparers. International taxpayers will find the online IRS Tax Map and the International Tax Topic Index to be valuable resources.

 

 

 

Higher Taxes Don’t Scare Away Millionaires After All

BY BEN STEVERMAN

When it comes to taxes, millionaires have short fuses. Ratchet up their rates and they'll blow you off and move to a low-tax, or no-tax, state – or so goes one argument against taxing the rich.

 

The conventional wisdom holds that states that levy a “millionaires tax” risk chasing those millionaires away to Florida, Texas, and other places with no income tax. Hedge fund manager David Tepper's recent decision to move from New Jersey to Florida, possibly creating a billionaire-size hole in Jersey’s budget, raised alarms. Golf great Phil Mickelson, shortly after his infamous Dean Foods stock trade, complained about his high tax rate in California and threatened to move to Florida. 

 

Now, a study based on 13 years of tax data finds that most millionaires don’t move cross-country just to avoid a tax bill. It turns out that the rich, while perhaps different from us, aren’t all that mobile. When they do move, it’s often for reasons that have nothing to do with taxes. For one thing, they appear to like the beach.

 

The study, published in the June issue of the American Sociological Review, suggests that states — and countries — may have some leeway to raise taxes on the wealthy without scaring away their tax base. It has obvious political implications, possibly serving as ammunition for those who favor taxing the rich. It could help advance the arguments of presidential candidates Hillary Clinton and Bernie Sanders, for example, who have both proposed higher taxes on upper-income Americans. 

 

It could also influence voters who, in as many as four states — California, Colorado, Maine, and Minnesota — will decide in November whether to raise taxes on residents in the top brackets.

Rich people do move for tax reasons, but only about 2.2 percent of the time, the study estimates, with little impact on revenues in the states they leave behind. If states increase their top tax rate by 10 percent, they risk losing just 1 percent of their population of millionaires, the researchers found, using a statistical model based on millionaires' past movements from state to state.

 

“Millionaire tax flight is occurring, but only at the margins of significance,” wrote the authors, Stanford University sociology professor Cristobal Young, his Stanford colleague Charles Varner, and two U.S. Treasury Department economists, Ithai Lurie and Richard Prisinzano.


THE STUDY

The researchers analyzed 45 million tax records, covering every filer who reported income of at least $1 million in any year from 1999 to 2011, and found that the rich are in fact less likely to move around than the poor. Typically, about half a million households report such an income, and only 2.4 percent of these taxpayers move from state to state in any given year. That compares with 2.9 percent of the general population and 4.5 percent of those earning about $10,000 a year. 

 

Why are the wealthy, with all their resources, more likely to stay in one spot? The study notes that millionaires are likelier to be married, have kids, and own businesses, all conditions that tend to make moving more difficult. Wealthy people often form deep roots in their communities, ties that helped them succeed in the first place.

 

“Most millionaires are the ‘working rich,’” the study notes, with wealth that flows from the particular places where they’ve built business relationships. For a certain kind of tech entrepreneur, low-tax New Hampshire and Tennessee are no substitute for Silicon Valley. Wall Street lawyers need to stay near Wall Street. For a famous actor or director, Hollywood, Fla., is nothing like Hollywood, Calif.

 

The study also looked at regions of the country where it is easy for taxpayers to commute daily across state lines from low-tax states to high-tax states. Residents of Portland, Ore., for example, must pay a top state tax rate of 9.9 percent, while across the river in Vancouver, Wash., there’s no income tax at all. You would expect people of means to live on the low-tax side. Yet in these easily commutable border areas, “the difference in millionaire population at the state border is not significant,” the study concludes.

 

As for the jet-setting millionaire who has breakfast in Miami, spends the day in Manhattan, and wakes the next morning in his Idaho compound, changing where you’re taxed isn’t as simple as putting a different address on your 1040 form. States such as New York often demand proof from wealthy residents that they really have uprooted their lives and are spending more than half the year out of state.

 

One curious finding was how much the wealthy seem to like Florida. The Sunshine State is one of seven with no income tax, yet it accounts for almost all the tax-influenced migration the authors detected. Meanwhile, Texas, Tennessee and New Hampshire didn’t appear to be drawing millionaires away from higher-tax states. In fact, when Florida is excluded from the analysis, there is “virtually no tax migration” by millionaires.

 

The authors can only guess why the rich prefer Florida. “It is the only state with coastal access to the Caribbean Sea,” they note, but “it is difficult to know whether the Florida effect is driven by tax avoidance, unique geography, or some especially appealing combination of the two.”

Look, lounging under a palm tree can be even more relaxing when it comes with a tax break. You don't have to be a sociologist to know that.

 

 

 

IRS to Change How It Reviews Amended Tax Returns and Refund Claims

BY MICHAEL COHN

The Internal Revenue Service plans to change some of its procedures for reviewing amended tax returns after a government report estimated it may have inappropriately allowed approximately $34.4 million in tax refunds and abatements.

 

The report, from the Treasury Inspector General for Tax Administration, examined whether the IRS’s controls over auditing amended individual tax returns ensure the claims are properly evaluated and processed to prevent inappropriate tax refunds and tax abatements.

 

For the report, TIGTA reviewed a statistical sample of 84 closed surveys and audits of amended individual returns with claims for tax refunds or abatements for fiscal year 2013 and found that 31 claims were not appropriately substantiated or had large, unusual or questionable items that were not adequately considered and investigated. A combination of factors apparently caused these problems. The report identified several actions the IRS can take to better ensure claims are substantiated with the appropriate supporting documentation and that issues on the amended returns are recognized, considered and investigated.

 

When the sample results are projected to a larger population of tax returns, TIGTA estimates a total of approximately $34.4 million in tax refunds and abatements may have been inappropriately allowed.

 

TIGTA recommended the IRS change specific controls, tools and procedures in its Examination function to improve surveying, auditing and documenting reviews of claims for refunds and abatements of taxes.

 

IRS management agreed with five of the report’s six recommendations and plans to take corrective actions.  However, the IRS disagreed with one of the recommendations to require that claims coordinators document the justification for surveying a claim and to evaluate the benefits of requiring claims coordinators to identify and document whether any large, unusual or questionable items existed on the return.

 

TIGTA, for its part, said it believes that it would be beneficial for claims coordinators to use their expertise and research any such items for all returns since they are more knowledgeable about audit issues and perhaps are more equipped to identify issues.

 

Karen Schiller, commissioner of the IRS’s Small Business/Self-Employed Division, pointed out that managers already have the ability to evaluate a claims coordinator’s decision to survey a claim at the time of closure and discuss any concerns that they may have.

 

“We fail to see sufficient potential benefits to warrant expanding our limited resources on creating documentation to support the reason for surveys in PSP,” she wrote, referring to the IRS’s Planning and Special Programs unit.

 

Schiller also disagreed with TIGTA’s outcome measure, the $34.4 million in potentially inappropriate tax refunds and abatements estimated in the report. “While there were unusual fact patterns in a number of TIGTA’s exception cases, we believe the employees, using all available information, reached the appropriate conclusion in most instances,” she wrote. “Thus, we believe the ‘exception rates’ throughout the body of the report and the outcome measures are overstated.”

 

 

12 Questions You Should Ask Your Cloud Provider

BY DANIEL HOOD

When it comes to picking a cloud provider, you should ask some tough questions, an industry expert suggests.

 

Speaking in a session at the American Institute of CPAs’ Practitioners’ Symposium and Tech+ conference, held here this week, Clay Hart, the CEO of private cloud hosting provider Diverse Technology Solutions laid out a dozen questions you should bring to any cloud provider you might be working with:

 

1. Where will my data be located? “Everyone’s a cloud provider these days, and you don’t want your data in someone’s garage,” Hart said. Ideally, your information will be stored in a safe part of the country that’s remote from your own location, so it’s not subject to the same regional risks.

 

2. What can go wrong during installation or migration?This could range from problems with Internet connection on up to data loss or incompatibility, so you want to discover the problems that previous users have faced.

 

3. Are you a reseller of cloud services, or do you own the equipment you provide the cloud services on?“This is one of the most important questions,” Hart said. “Are they hosting on their own equipment, or on Amazon?” If it’s someone else’s infrastructure, you may not have clarity on who is responsible for service and support.

 

4. Are you sharing hardware resources between clients? You want to know whether your processing is being dedicated just to you, or if it’s being shared out among all the provider’s customers.

 

5. What are the specs of the data center you operate out of? This would include physical and electronic security measures, redundancies, and so on. “It might even be worth visiting,” Hart said -- just to make sure it’s not someone’s garage.

 

6. Do you have insurance in the case of an outage or data loss? Hart estimated that 95 percent of cloud providers do not have insurance against your data being destroyed or unavailable. “The reality is that a very good cloud provider will have insurance,” he said.

 

7. How much Internet bandwidth is needed for the solution to perform correctly? This is one of the most crucial questions to ask -- and you want to make sure that you know the figure per user. You’ll also want to check with your Internet service provider to know what both you upload speed and your download speed are.

 

8. Is my data automatically redundant across multiple data centers? This will give you a strong idea of their backup and security procedures.

 

9. What is the recovery time if the systems hosting my data are completely destroyed? And don’t forget to ask what kind of secondary backups they have, how often they’re made, and how often they’re tested.

 

10. Do you have documented data security policies? “Every cloud provider has employees,” Hart said. “One of the fears is, ‘Doesn’t someone else have access to my data?’ Knowing that what kind of formal security policies they have in place will give you an idea of how secure your data is from the provider’s own staff.

 

11. What is the average total downtime for the services I’m subscribing to? They should be able to tell you have often during a particular period of time -- annually, over three years, over five years, etc. -- their services are unavailable. It should be be a relatively low percentage.

 

12. Do you outsource your helpdesk? “Is it offshore? Outsourced?” Hart asked. “Will it give you the support you need on the schedule you need?”

 

Hart also noted a number of items you want to make sure are included in the provider’s service level agreement, including a clause clearly stating who owns the data (you), a confidentiality clause, clear identification of where primary and back up data will be located; an insurance clause; guarantees of uptime; and a “change of business” clause covering what happens if the provider is acquired by another company.

 

 

 

10 Tips for Fighting Tax-Related ID Theft

Tax-related identity theft is shaping up to be the No. 1 concern this tax season – the Internal Revenue Service even had to temporarily shut down a tool it offers victims of ID theft, because apparently ID thieves had wormed their way into it.

With that in mind, VPN service provider NordVPN offered these timely tips on staying safe during tax time. (A slideshow version of this story is available here.)

1. When is a Web site not a Web site? When it’s a “spoofed” site – one that’s designed to mimic an official site, so that victims can be lured into divulging private information through it. Often scammers send an e-mail asking users to verify personal information, with a convenient link to the spoofed site. 

These sites can often be spotted through their URLs, which may bear no resemblance to that of the organization they purport to come from. For instance, the IRS Web site is www.irs.gov, not www.irsgov275.hu.

2. If it sounds too good to be true … it is. Ignore Web sites, e-mails and tax preparers who promote inflated tax refunds. Refunds should be based on the taxpayer’s tax situation, not the marketing claims of the tax preparer, and many of those offering inflated returns are actually fronts for ID theft operations, or unscrupulous preparers who inflate client refunds through illegal deductions (and often skim most of the inflated refund off themselves).

 

3. Hang up! The IRS never initiates contact with taxpayers over the phone. The original scam here was to call taxpayers and threaten them with prison time if they didn’t immediately pay a (non-existent) tax debt; this year it has been refined to ID thieves claiming to be IRS agents who only need to verify a few pieces of data to process the taxpayer’s return … .

 

4. Information is precious. Sensitive personal information needs to be protected, particularly when being transmitted. Take the necessary precautions when giving info out online – check the security levels of the sites you’re visiting, and use technology like private client portals, e-mail encryption, and virtual private networks where appropriate.

 

5. The password is … . A weak password on even the least-important-seeming account can lead fraudsters to the sort of information that allows them to unlock other accounts or steal an identity outright. Taxpayers should regularly change their passwords, and use strong passwords that aren’t easy to guess.

 

6. Perils in public. Public Wi-Fi is great -- but not for any kind of sensitive personal information, and definitely not for filing taxes.

 

7. Social criminals. It’s remarkable how much information ID thieves can gather from social media to populate a bogus return. Change social media settings to “Private” or otherwise make them inaccessible to strangers.

 

8. Keep it secret; keep it safe. Don’t leave old tax return information and other sensitive data lying around on a hard drive; encrypt it and store it somewhere secure.

 

9. Alert the team. The biggest security bug in any system is people, whether at a business or in a family. Educating everyone who has access to a system that includes private information -- from children and spouses to employees and partners – is critical.

 

10. Don’t let your guard down. The end of tax season doesn’t mean the end of the threat. Taxpayers need to remain vigilant about securely sharing information, storing it safely, not giving it away in social media or other public fora, and otherwise staying on top of their identity -– to make sure someone else doesn’t borrow it.

 

 

 

What to Do if Your Client is a Victim of Tax-Related Identity Theft

BY TRENDA B. HACKETT

 

If you’re in the tax preparation business, chances are you’ve had a client experience tax-related identity theft.

 

With the 2015 tax season in full swing, there is no doubt this trend is continuing. Most states have slowed the state refund process as they work to combat identity theft, and the IRS has issued numerous alerts on tax scams that have taxpayers wary. The most recent alert by the IRS indicates a 400 percent increase in email tax scams this filing season over the last filing season.

With so many issues to tackle, the process of assisting victims is a slow one. As of May 2015, the IRS had 671,773 open identity theft cases, with just over 3,000 trained employees dedicated to working directly on these type cases while in the process of training 35,000 employees to be on the front-line to troubleshoot and direct victims in recognizing and reporting identity theft. Further, according to a Treasury Inspector General for Tax Administration audit, the IRS is taking an average of 278 days to resolve identity theft cases rather than the 180 days they have publicized.

From understanding how tax-related identity theft is identified to the ways it can be reported, it’s important that tax practitioners know how to effectively and efficiently guide clients through the process to best support them in their time of need.

Identifying Tax-Related Identity Theft

First, let’s start with the basics. Tax-related identity theft occurs when someone files a fraudulent tax return using another person’s tax identification number to obtain refund. The IRS has two ways to detect identity theft on filed tax returns:

 

1. Identity Theft Filters – At Filing

Identity theft filters are applied to all tax returns at processing. If a return gets stopped by one of the filters, a letter is generated and mailed to the taxpayer requesting identity verification or additional information to process the return. The problem with this approach is that of the 3.8 million returns that were suspended by identity theft filters last year, 34 percent were false positives, according to the National Taxpayer Advocate report to Congress on the 2015 filing season. This indicates that at least one out of three returns were falsely suspended, causing not only a delay in issuing the taxpayer their refund, but understandably, frustration.

 

2. Suspicious EIN listings – Post Filing

When IRS examiners screen filed tax returns for fraud potential and identify a particular EIN that has been used to report false income and withholding, the examiner performs extensive research to locate the employer. If the employer is determined to be a fictitious business, the EIN is designated as suspicious. To detect identity theft; this suspicious EIN listing is used by the IRS to identify tax returns that have income reported using those EINs. If a return is identified as using a suspicious EIN to report income, the IRS sends a letter to the real taxpayer informing them of such. To date, there have been over 6,000 EINs confirmed suspicious.

The other way potential tax-related identity theft is uncovered is if a taxpayer suspects it. Suspicious scenarios include:

• Questionable items on a client’s tax account transcript
• Receipt of an IRS notice for underreported income or fictitious employees
• Experiencing an unusual delay in receiving a refund
• E-file rejection indicating a duplicate return filing
• IRS acceptance of original paper filed return as amended
• Receipt of a letter from the IRS indicating balance due, refund offset, or collection actions taken against the client, and no return was filed or refund was received
• Personal information compromised in a data breach, wallet or purse stolen, or client believes they are a victim

 

It’s also important to note that most victims of tax-related identity theft are children, the elderly, deceased individuals and people who are in prison. Why? Because these individuals may not have a filing obligation or file a tax return, so the thief’s tax return is the first one filed with the IRS—and there is no duplicate return or Social Security number to kick out the fraudulent return.

Reporting Tax-Related Identity Theft

In general, all individuals or businesses should take immediate steps to report identity theft as soon as they become aware they are a victim. If they received an IRS notice that identity theft is suspected, instruct them to immediately contact the phone number listed on the notice and follow the instructions to verify their identity.

If you or your client suspects they are a victim of tax-related identity theft, they should contact the Identity Protection Specialized Unit (IPSU) at (800) 908-4490. If they are unable to reach the IRS by phone due to disconnects or long hold times, instruct them to prepare and submit Form 14039 with supporting documentation and mail or fax it accordingly.

If all else fails, direct them to contact the Taxpayer Advocate Service (TAS) by visiting their local office or calling National TAS at (877) 777-4778.

Combating Tax-Related Identity Theft

One of the ways the IRS is combating identity theft is by placing identity theft markers on taxpayers’ accounts. This program began in 2009, and to date, the IRS has placed theft markers on millions of accounts.

Practitioners can determine if one of these markers is on a client’s account via tax account transcripts requested through TDS or directly from the IRS through the PPS line. On the transcript, the identity theft indicator is marked by Transaction Code (TC) 971 Action Code 522 and various tax administration codes that describe where the IRS is in the resolution process.

Additionally, starting this year, the IRS is requiring the use of Identity Protection PINs for all Social Security numbers with an IP PIN requirement, regardless of whether the Social Security number is entered for a primary, spouse, or dependent/qualifying individual. IP PIN entry is required on Form 1040, Form 2441 and Schedule EIC. An IP PIN for a dependent will only be issued if the dependent’s social security number has been used as a primary or secondary on another tax return. Otherwise, the IRS will not issue IP PINs to dependents.

Additionally, numerous data elements from tax return submissions will be shared with the IRS and states by tax software companies. Tax software companies are also enhancing the identity requirements and validation procedures incorporated into their software in an effort to further combat tax-related identity theft.

Requesting a Copy of the Fraudulent Return

New this year is the ability of a victim of identity theft (or a person authorized to obtain the identity theft victim’s tax information) to request a redacted copy of the fraudulent return that was filed. With this information, victims can determine the tax impact of the information reported by the thief on the bad return.

Due to federal privacy laws, the victim’s name and Social Security number must be listed as either the primary or secondary taxpayer on the fraudulent return; otherwise the IRS cannot disclose the return information. For this same reason, the IRS cannot disclose return information to any person listed only as a dependent.

Representing a Victim of Tax-Related Identity Theft

In summary, follow these basic steps when representing a client who has been a victim of tax-related identity theft:

1. Confirm the identity theft incident with your client.
2. Consider obtaining a written engagement agreement.
3. Secure Form 2848, Power of Attorney.
4. File identity theft complaints with FTC, local law enforcement and major credit bureaus.
5. Report the identity theft to the IRS.
6. Address related IRS compliance issues.
7. Monitor the situation by checking transcripts and credit reports and bank and credit card accounts frequently.
8. Review these IRS Publications for Safeguarding Taxpayer Information and Data:
  a. Publication 4600 – General information about requirement and what to do in the case of a data breach
  b. Publication 4557 – Checklists and example security plan

 

Because there is no doubt that these types of crimes will continue for the foreseeable future, it is important for practitioners to understand how best to serve these clients in their time of need. To help prevent and detect identity theft early on in all its forms, assist your client in adhering to these guidelines:

1. Review and read statements carefully noting any suspicious items.
2. Know payment due dates.
3. Read health insurance plan statements—and make sure care received matches the statement.
4. Shred personal documents.
5. Review your credit report once a year.
6. Monitor tax accounts transcripts on a regular basis and review before filing the tax return.
7. Watch out for tax scams that appear to be real.

 

Trenda B. Hackett, CPA, currently serves as a technical editor/author of PPC products for Thomson ReutersCheckpoint within the Tax & Accounting business of Thomson Reuters. A member of the AICPA and TSCPA Relations with IRS Committee, she has over 25 years of experience in tax and accounting.  Prior to joining Thomson Reuters, she spent over 15 years with the IRS as a Revenue Agent. She has significant experience in tax preparation and representing clients before the IRS as well as product development for the GoSystem Tax partnership product. She is a contributing editor to Checkpoint IRS Response Library and coauthor of PPC Guide to Tax-Related Identity Theft.

 

 

 

Boomers, It's Time to Spend - and Pay Taxes on - Your 401(k)

BY SUZANNE WOOLLEY

 

What the IRS giveth, the IRS taketh away. At age 70½, the bill comes due on all those tax-deferred savings accounts we’ve been building, and this week the oldest baby boomers will begin to reach that finish line—with many millions more to follow.

Those waves of retirees will be required to start pulling money from their IRAs and 401(k)s. Following an Internal Revenue Service formula, these annual withdrawals can push you into a higher tax bracket, so financial planners put a lot of energy into building strategies to minimize the tax bite. To be most effective, you need to plan far in advance of the magic age. So anyone with sizable savings may want to get familiar with how these required minimum distributions (RMD) work—and the options for handling them—well before they have to crack open the nest egg. To get a jump-start on what's involved, here are some quick rules of the road:

·      While you have the option of tapping tax-deferred retirement savings accounts without penalty starting at age 59½, you are required by law to start taking distributions from your IRA, 401(k) and other kinds of tax-deferred accounts by April 1 of the year after you turn 70½. From then on, you have to take money out before Dec. 31 every year. If you are still working at that age and participating in your employer's 401(k) plan, you may be able to defer RMDs from that account.

·      The amount you must withdraw is tied to an IRS formula based on life expectancy. Say you just turned 70½ and have one $600,000 IRA. An IRS table sets your distribution period at 27.4 years. Your $600,000 divided by 27.4 equals about $22,000. Whether you want it now or not, that's what you have to take out.

·      The penalties for noncompliance are steep. If you forget to take an RMD, or don't withdraw the full amount, the IRS wants 50 percent of the amount you didn't withdraw. You can avoid this by having your IRA custodian calculate your RMD for you and automatically transfer the money to an account with them or your bank, a service many offer.

 

As you'd imagine, things become trickier once you get into tax strategies. For those to work, you must have sizable amounts saved in both tax-deferred and taxable accounts. If you already have a Roth IRA in place, all the better. By shifting money between these accounts, and paying tax on some at opportune times, you can lessen the ultimate tax damage and add years of retirement income. A few caveats: Everyone's situation is different, and no one can predict future tax policy. One bit of advice that applies to all: Any financial adviser you use should be a fiduciary, required to act in your best interests.

One of the main ways planners help clients facing big RMDs is strategically converting money from a traditional IRA into a Roth IRA, which is funded with after-tax money. That's because those required distributions can push you into a higher tax bracket, said Kevin Reardon of Shakespeare Wealth Management in Pewaukee, Wis.

 

At some point after 59½, when a client can tap tax-deferred accounts without penalty, but before 70½, when they must, Reardon has them convert chunks of a regular IRA into a Roth before they retire. The point is to take advantage of a period when they're in a low tax bracket. Without income yet from RMDs, a pension, or Social Security, there may be a gap between current income and the limit for remaining in the 15 percent tax bracket, for example. The point is to fill that gap with money withdrawn from your traditional IRA, pay tax on it, and put it in a Roth.

How much you convert depends on a lot of things, including how much you have in taxable accounts both to live on and to cover the tax, and how close your income is to the next tax bracket. And of course, there are big benefits to having money compound tax-free in an IRA. Planners have to weigh these considerations against the chance of a higher tax bracket when you start taking distributions and other income streams kick in. Reardon's clients typically delay taking Social Security until age 70. That gets them a much higher monthly benefit than if they'd taken it earlier. It also means Social Security benefits—which are taxed to a degree—don't add to income while clients are trying to fill their 15 percent “tax bucket.”

You Must Convert!

Here's an example of how the strategy could work, courtesy of certified financial planner John Shanley of Pinnacle Investment Management in Simsbury, Conn. His firm worked with a married couple, 67 and 59 years old, who are retiring later this year. The older client is deferring Social Security until 70, and the couple will have $17,000 in income coming from a pension starting in 2017. The couple's spending needs in 2017 and 2018 will come from taxable accounts. Since they have low income for two years, they'll convert $75,000 of a traditional IRA to a Roth in both years. A small part of that conversion falls in the 10 percent bracket and the rest in the 15 percent bracket. By lessening future RMDs, the client won't be bumped into the 25 percent tax bracket in 2019 or the 28 percent bracket they might have hit in later years, said Shanley.

A helpful way to look at the savings is to compare the tax bill generated by a conversion today with what it would likely cost down the line, he said. For instance, a $75,000 move from an IRA to a Roth now at a 15 percent rate costs $11,250 in tax. The same transfer later, while in a 25 percent tax bracket, would cost $18,750.

The conversion’s tax benefit in later years may be diminished if new income streams start, say from another pension or more RMD income, but it’s still a way to take advantage of a few years at a lower rate, Shanley said.

And finally, if you’ve done so well that the RMDs aren’t needed, you can make "qualified charitable distributions" of up to $100,000 a year. That way, RMDs won't be included in gross income. You have to be careful, though—the company holding your tax-deferred account must send the money directly to a qualified charity.

 

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.

15427 Vivian - Taylor, Michigan 48180 – voice (734) 946-7576  fax (734) 946-8166website: www.rigotticpa.com    email: rigotticpa@gmail.com  Tax ID # 38-3083077