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March

House Democrats propose to extend tax-filing deadline 5 weeks

By Michael Cohn

 

A pair of House Democrats has introduced a bill to extend the tax-filing deadline until May 20 to give taxpayers more time to file their taxes after the partial government shutdown, amid lingering uncertainty over the extensive changes in the tax code and tax forms in the wake of the Tax Cuts and Jobs Act.

 

Reps. Sean Casten, D-Ill., and Lauren Underwood, D-Ill., introduced the Taxpayer Extension Act on Wednesday to give taxpayers an extra five weeks to file their individual tax returns for 2018.

 

They noted that during the 35-day shutdown, the IRS sent close to 90 percent of its workforce home without pay. The Taxpayer Extension Act would provide an extension of the tax return due date for five weeks, from April 15, 2019 to May 20, 2019, for individual income tax returns for 2018, to provide additional time equal to the government shutdown.

 

“When President Trump shutdown the government for five weeks, Americans were left high and dry,” Casten said in a statement. “When tax filers — many hit with sticker shock thanks to the Trump tax changes — called the customer assistance line, their questions went unanswered. When they visited the walk-in taxpayer assistance centers, they found locked doors. This is unacceptable. I am proud to introduce a bill that would give individual tax filers more time to prepare their return.”

 

They pointed out that many taxpayers in Illinois are running into unexpectedly high tax bills due to the $10,000 cap on the state and local tax deduction in the Tax Cuts and Jobs Act.

 

“Because of the Republican tax law enacted last year, this tax season is going to be hard for many Illinoisans—particularly those in the 14th district who are carrying a disproportionately high tax burden due to a new limit state and local tax deduction,” Underwood stated. “On top of that, just before many families went to file their taxes, there was a senseless government shutdown that left tax filers’ calls unanswered, doors for assistance centers locked, and 90 percent of the IRS workforce home without pay. This is common sense legislation that will help give taxpayers extra time to ask questions and file their taxes this year.”

 

They contend that the extra five weeks would help ensure taxpayers have the online tools they need to file their returns electronically. The extension would help to avoid computer systems breakdowns like the one the IRS encountered last April. Last year, they noted, the IRS issued an emergency one-day, penalty-free extension for tax filers after suffering an all-day computer breakdown that kept taxpayers from filing their returns electronically on the day 2017 payments were due. They believe the legislation would help alleviate the extra burden on the IRS’s filing systems.

 

The National Taxpayers Union Foundation released an analysis Thursday also calling on Congress to consider extending the tax-filing deadline this year. The NTUF pointed to the shaky start to the tax filing season, which began only a few days after the partial government shutdown ended. The group noted that the timing of the shutdown combined with its historic 35-day length left the IRS scrambling to work through a significant backlog of preparations for a busy filing season. Despite the IRS’s efforts, the shutdown left taxpayers and tax practitioners without adequate support to determine legal obligations, as service centers went unstaffed and many forms were not yet finalized.

 

"The newly-passed TCJA was already poised to shake up tax filing, but the shutdown constituted an earthquake for an agency with an unstable foundation to begin with,” said the study’s authors, Andrew Moylan and Andrew Wilford. “By taking swift and decisive action, Congress and the IRS can help to ease the time crunch that threatens to harm taxpayers and further disrupt IRS operations.”

 

The study draws from data from the IRS’s Taxpayer Advocate Service. National Taxpayer Advocate Nina Olson highlighted the lingering effects of the shutdown on the IRS in her annual report to Congress, noting the extent of service disruptions in the IRS’s taxpayer support operations (see Taxpayer Advocate sees continuing impact on IRS from shutdown). The study also points to lesser-known issues, like interest accruing on certain pending U.S. Tax Court matters, to highlight the need for Congress to work with the IRS to provide for a comprehensive extension of tax filing deadlines.

 

The NTUF recently also studied the ways the shutdown has had an impact on tax refunds and left taxpayers with misinformation regarding how the Tax Cuts and Jobs Act has made a difference in tax refunds and tax liability.

 

 

 

IRS keeps cutting back on audits of millionaires and big businesses

By Michael Cohn

 

The Internal Revenue Service is subjecting a relatively small percentage of wealthy taxpayers to tax audits, and less than half of the biggest corporations in the U.S. are now being audited, according to a new report.

 

The report, from Syracuse University’s Transactional Records Access Records Clearinghouse, or TRAC, found that 97 out of every 100 individual taxpayers who reported over $1 million in income weren’t audited last year, based on IRS statistics. In fiscal year 2010, such audits turned up $5.1 billion in unreported taxes. Now with just half the audits, the government uncovered only $1.9 billion in unreported taxes in fiscal 2018.

 

The Internal Revenue Service has been dealing with a series of budget cuts over the past decade, and it has been forced to reduce the number of audits it conducts as other priorities, such as implementing new tax laws, curbing identity theft and updating aging computer systems have taken a greater priority.

 

 

Millionaires being audited by IRSTRAC’s research also found that more than half of the 633 largest corporations in the country, those with over $20 billion in assets, weren’t audited last year. This is the first year the audit rate has slipped below 50 percent, TRAC noted. As recently as 2010, 96 percent of such returns were being examined by IRS. Audits in 2010 of large corporations (those with greater than $250 million in assets) uncovered $23.7 billion in unreported taxes. That number was halved to only $12.5 billion during fiscal year 2018.

 

At the same time, criminal prosecutions have also plunged dramatically. IRS referrals of taxpayers for criminal prosecution relative to population size plummeted 75 percent in the past 25 years, dropping 63 percent in only the past five years. The number of taxpayers convicted after IRS investigations slid to an all-time low in fiscal 2018. There were only 530 convictions for tax fraud.

 

The report noted that for years, Congress has slashed the budget at the IRS, forcing it to cut back on staff dedicated to audits and criminal investigation. In 2010 IRS had more than 100,000 employees on staff. By June 2018, staffing had dropped 22 percent to just 79,071. Revenue agents and criminal investigators have fallen even more. Despite the additional responsibilities IRS was assigned to implement the Tax Cuts and Jobs Act of 2017, the IRS had 3,000 fewer employees than it had before the tax overhaul was passed.

 

 

 

Buffett’s advice has NFL star OK with higher taxes

By Scott Soshnick and Eben Novy-Williams

 

National Football League veteran Ndamukong Suh has always mixed football with finance, considering things like state taxes when weighing where to play.

 

Florida has no state income tax, which is one reason Suh, a 6-foot-4, 305-pound defensive lineman, said he chose to play for the Miami Dolphins after leaving the Detroit Lions following the 2014 season.

 

Prior to this past season, however, Suh signed with the Los Angeles Rams, and California’s tax rate is among the highest in the nation. The 32-year-old did so on the advice of longtime friend Warren Buffett, who told the former University of Nebraska star that all cities aren’t equal, particularly to an athlete-investor with interests in restaurants, technology and real estate.

 

“As Mr. Warren Buffett has always said: There’s intrinsic value in certain cities,” Suh said on the Bloomberg Business of Sports podcast. “So, even though L.A. and the state of California have very high taxes, there’s a lot of intrinsic value that I’ve been able to lean on.”

 

Suh signed a one-year, $14 million contract with the Rams and said he pocketed about half of that. He said being in L.A. has allowed him to develop relationships with people like Dodgers part-owner Magic Johnson and Mandalay Entertainment Chairman Peter Guber, also an investor in the Dodgers, as well as basketball’s Golden State Warriors and Los Angeles Football Club of Major League Soccer.

 

“I’ll take a hit in taxes to be able to have the opportunity to be close to those people,” said Suh, whose principal residence is in Texas, which also has no state income tax.

 

Suh is a free agent, meaning he can sign with any NFL team. Should he want advice on what to do next, he said the multibillionaire Berkshire Hathaway Inc. chairman, whom he met as a senior in college, is always available.

 

“All you have to do is pick up the phone and he’s always there to answer,” said Suh — who, by the way, said he owns “plenty” of Berkshire Hathaway shares, declining to be specific. “I’ve learned a handful of things from him and continue to do so.”

 

 

 

The IRS is issuing new ACA penalties

By Joanna H. Kim-Brunetti

 

Lost amid the confusion of the federal government shutdown this year was a new set of penalties the IRS began to issue as part of the agency’s ongoing enforcement of the Affordable Care Act.

In the final days of 2018, the agency started issuing notices to assess penalties against employers that failed to file Forms 1094-C and 1095-C with the IRS or to furnish 1095-C forms to employees under IRC Sections 6721 and 6722 for the 2015 or 2016 tax year. These penalties are separate from the IRC Section 4980H penalties for failing to offer the required healthcare coverage.

 

It appears the IRS is calculating these IRC 6721 and 6722 penalty assessments for certain employers based on the number of W-2s the employers filed with the IRS. These IRC 6721/6722 penalty assessments are proposed using Letter 5005-A and Form 886-A.

 

This penalty assessment process is a follow-up to Letter 5699. The IRS sends Letter 5699 to employers that did not file any ACA information returns (i.e., 1094-C/1095-C schedules) for a reporting year. The employer must, in essence, respond to (1) confirm the name the employer used when filing its ACA information returns and identification information for tracking, (2) provide the ACA information returns or indicate when they will be submitted, or (3) explain why the employer is not an Applicable Large Employer, which is an employer with 50 or more full-time employees and full-time equivalent employees. Failure to respond to Letter 5699 or to take action to address any filing issues resulted in the penalty assessment being issued in Letter 5005-A/Form 886-A.

 

The penalties for failing to file and furnish are indexed each tax year. For the 2018 tax year, penalties for failing to file and furnish can be as much as $540 per return. The penalties for the 2016 tax year can be as much as $520 per return.

 

In the meantime, the IRS is continuing to issue penalties for noncompliance under IRC Section 4980H. Under the ACA’s employer mandate, ALEs are required to offer minimum essential coverage to at least 95 percent of their full-time workforce (and their dependents), whereby such coverage meets minimum value and is affordable for the employee or be subject to IRS 4980H penalties.

 

These penalties are included in Letter 226J, which the IRS is currently issuing for the 2016 tax year.

 

Why should accountants care? Employers receiving these penalty notices from the IRS are often shocked to see they are in the millions of dollars. While some of the Letter 226J notices for the 2015 tax year were more easily addressed in view of the significant transition relief accorded to employers for compliance, the new round of penalties, both for IRC 4980H and IRC 6721/6722, is more challenging. In addition, for 2016 and subsequent tax-reporting years, as the IRS staff becomes more experienced handling the ACA information returns (or lack thereof), there is less leniency toward employers who fail to accurately and completely provide their ACA information returns.

 

Employers should consider undergoing an ACA penalty risk assessment to determine if they are at risk of receiving IRS penalties. Some outside experts may offer to undertake this assessment at no cost. Such a review can reap dividends by helping employers avoid significant ACA penalties from the IRS.

 

Accountants also may want to determine if these employers have indeed been filing the required ACA information returns annually with the IRS. If the employers have not, they may need to work with their accountants to ensure these organizations file this information as soon as possible to avoid receiving an IRS penalty notice and to minimize potential penalties.

It’s time for those employers that have buried their heads in the sand about the ACA in hopes the health care law would disappear to take a serious look at that ill-advised strategy. We see every day how serious the IRS is taking the responsibility of enforcing the ACA.

 

 

 

Low-income tax filers targeted with false promise of big refunds

By Joe Light

 

Michael Anderson and his wife, Kathy, spun his tax preparer’s electronic “prize wheel” and won a promise from the company to double their refund.

 

That never happened. Instead, the preparer charged the Andersons more than twice as much as Anderson says he was told, made mistakes on the federal return and, without Anderson’s permission, told the Illinois department of revenue that he wanted to donate his 2017 state refund to charity, according to a complaint filed last week by Illinois Attorney General Kwame Raoul.

The complaint, made against Nu Republic LLC and Refund Republic LLC along with their owners and some employees, reflects a growing problem of companies scamming taxpayers, often of modest means, with wild promises and misleading claims, according to attorneys and consumer advocates.

 

Companies are using gimmicks and fine print to lure low-income taxpayers into hiring them for tax preparation, often charging far greater fees than what other preparers would charge for the same service.

 

In the Illinois complaint, filed in Cook County circuit court, Raoul wrote that as a result of Nu Republic’s and Refund Republic’s practices, “customers, many of whom are low-income, only receive a fraction of their expected tax refunds and risk losing future refunds” while the companies profited.

 

The complaint didn’t list Anderson’s income or occupation.

 

Refund Republic and Nu Republic, which share owners and a telephone number in Georgia, did not respond to a message left at its office on Tuesday morning.

 

“People should be wary of tax preparers who offer ‘free’ incentives and promise big refunds, because these offers can ultimately lead to expensive, and in some cases, prohibited fees,” Raoul said in a statement on Tuesday.

 

The tax-preparing firms in the complaint were founded in 2013 and 2015. According to the complaint, the firms as recently as last year recruited prospective employees on Facebook with promises of potentially earning $50,000 to $100,000 in two to three months with “no experience needed” in preparing taxes.

 

Preparers would earn $90 per return as long as the fees the preparers charged the consumer were more than $300. Less than that, and they’d earn a quarter of the fees they charged.

 

The companies marketed their tax services in neighborhoods where residents rely heavily on the Earned Income Tax Credit, which often ends up accounting for a quarter or more of a family’s income. They offered cash advances on the refund and the chance to win prizes like a cruise to the Bahamas or gift cards.

 

Banks Exit

But the clients were often charged multiples of what the preparer told them they’d receive, the complaint said, and fees that they didn’t realize until the company took it straight out of the refund.

 

For decades before 2009, banks and other lenders offered loans against anticipated tax refunds that often carried double- or even triple-digit interest rates. The loans were meant to bridge the few weeks between filing a return and receiving the refund check. After new laws and regulations capped the interest rates lenders could charge or limited other terms, most banks left the market.

 

Some large tax preparers still allow tax refund “transfers,” which don’t get consumers money more quickly than the Internal Revenue Service, but do allow the taxpayer to pay for the preparation services out of their checks.

 

The banks’ departure from the refund loan business provided an opportunity for tax preparation firms that take advantage of people who need money quickly, according to the National Consumer Law Center. According to the complaint, Nu Republic and Refund Republic offered clients such advances, though in many cases they never materialized.

 

Barbershop Meeting

The companies did allow customers to pay for the services out of the refund checks, but the fees ended up being much higher than the customers were told, according to the complaint.

 

Manuelita Martinez, another consumer in the complaint, met with a Nu Republic tax preparer in a Chicago barbershop in January 2018, according to the attorney general. The preparer estimated his fee would be $350 to prepare her federal and state returns. She also opted to buy “audit protection” for about $60. Another form estimated her tax refund to be $4,688.

 

When she received her federal refund check, Nu Republic had deducted $750 in charges, the attorney general said. The company told the attorney general that Martinez had signed a disclosure listing the $750 in fees, but Martinez said she did not remember the disclosure or know how her signature appeared on it.

 

Dory Rand, president of the Woodstock Institute, said low-income taxpayers can often find free tax preparation help at local nonprofits and, regardless, should ideally wait the less-than-two weeks it typically takes the IRS to deliver a refund instead of getting an advance from a private company.

 

“As often happens in the high-cost lending space, people keep coming up with ingenious ways to rip people off,” said Rand, whose nonprofit advocates on behalf of low-income and minority consumers.

 

 

 

Section 199A: Nothing is ever simple

By Roger Russell

 

Practitioners have been waiting for filing season guidance on Section 199A, which provides a 20 percent deduction for qualified business income of pass-through entities. Although proposed regulations were issued on Aug. 8, 2018, a number of issues awaited clarification. On Jan. 18, 2019, the Treasury and Internal Revenue Service issued final regulations, additional proposed regulations, and a notice containing a revenue procedure, designed to clarify additional issues.

 

“An important part of the final regs was the aggregation rules,” said Howard Wagner, a partner at the national tax office of Top 10 Firm Crowe. “If a partnership or S corporation has multiple trades or businesses, they can now be aggregated if certain tests are met. Allowing aggregation at the entity level is huge. It will greatly simplify compliance.”

 

“Every industry went to the service wanting them to add examples to the regs to show that their industry was qualified. Not everyone got what they wanted,” he continued. “A lot of industry groups put out press releases or newsletters saying they were good, but you need to dig a little deeper and examine what they are actually doing in light of the regulations.”

 

Triple net leases are generally not eligible for the deduction, but this is more a product of how the statute was written, rather than a decision on the part of the IRS, according to Wagner. “It works off the IRS definition of a trade or business,” he said.


Always more questions ...

“The regs that came out last August answered many questions, but they created some new issues,” said David Mellem, a Green Bay, Wisconsin-based practitioner and educator. “The final regs answered some of the new questions, and created additional issues.”

 

When the proposed regulations came out last August, one of the questions was whether a rental was a business, Mellem indicated.

 

“Instructors were doing the best they could to answer this,” he said. “Initially it appeared they were leaving rentals out, then it used wording on ‘rentals rising to the level of a business.’ But it didn’t define ‘rising to the level of a business’ — the preamble said to look at case law, which is contradictory. The only clarity was a self-rental to a commonly controlled business, which is eligible for the [qualified business income] deduction. The final regs said, ‘Look at our notice and revenue procedure.’ The notice basically said that a rental may rise to the level of a business — look at case law, but it also gave a safe harbor provision. If you meet the safe harbor test your rentals will be considered a business.”

 

The safe harbor rule states that it doesn’t apply to triple net leases or vacation home rentals, Mellem indicated. “That doesn’t mean that a triple net lease does not rise to the level of a business, but it does mean that they don’t qualify for safe harbor treatment. But in my experience it would be difficult for a triple net lease to rise to the level of a business because the landlord collects rent and does nothing else. It would be hard to show that the landlord is working enough for his activities to rise to the level of a business.”

 

“Remember that a taxpayer who meets the safe harbor rules can treat income from the rental property as QBI,” he said. “If the taxpayer doesn’t meet the safe harbor rules, the rental property may still qualify for QBI if it meets the definition of a trade or business — in other words, you can still argue about the issue.”

 

The safe harbor test includes aggregation rules, minimum hours of service rules, a definition of rental services, and contemporaneous records rules. To use the safe harbor, the taxpayer must attach a statement to the tax return that the requirements of Section 3.03 of Revenue Procedure 2019-7 have been met. The statement must be signed by the taxpayer or the pass-through entity’s authorized representative, under “penalties of perjury.”

 

Roger Harris, president of Padgett Business Services, has “one minor concern” with the safe harbor provision. In a Feb. 11, 2019, letter to the IRS, he suggested that the safe harbor election be made without requiring a taxpayer signature.

 

“Given the taxpayer is consenting to everything contained in the electronic return by signing Form 8879, the need for a signature on the safe harbor election seems redundant and poses a burden on the tax preparer and the taxpayer,” he said. “Many other elections that are required to be filed with the return do not require a signature.”

 

Harris observed that many tax software programs allow the election to be electronically filed without the signature, and predicted that this may cause returns to be filed without the required signature.

 

If the service believes a signature is necessary, Harris suggests reducing the burden by treating the election similarly to that of the signature requirement on Form 8879: “Perhaps the election statement could be attached to the return without a signature, but the signed copy received prior to filing and held at the preparer’s office along with the signed Form 8879.”

 

Aggregation of properties is permitted, so long as commercial and residential properties are grouped separately, according to Mellem. “Under the safe harbor rules, the taxpayer must either treat each rental as a separate activity, or treat all similar rentals as a single activity. Commercial and residential are not similar.”

 

“Once this treatment is made, it must continue unless there has been a significant change in facts and circumstances,” he said. “For example, a taxpayer with three residential rentals can’t choose to combine two out of the three. They have to keep each one separate or combine all three.”


Hatred, and confusion

“The IRS hated giving the 199A pass-through deduction to rental property,” said Beanna Whitlock, a Canyon Lake, Texas-based practitioner and educator, and former IRS director of National Public Liaison. “They have traditionally denied rental property activity as being a trade or business. Even with the safe harbor provision, they had to admonish taxpayers to file 1099s if this was a trade or business.”

 

“The history of filing 1099s for rental property goes back to 2010,” she said. “Later, under President Obama, Congress repealed the requirement for rental property owners to file 1099s. The IRS is quick to say in Rev. Proc. 2019-7 that the trade or business definition is only for Code Section 199A — well, guess what, taxpayers can say the same thing.”

 

“One of the most confusing parts of the deduction is the definition of a specialized service trade or business,” said Tom Wheelwright, chief executive of WealthAbility, a CPA network.

 

Income from specified service trades or businesses is qualified for the deduction only if the taxpayer is below an applicable income threshold. A specified service business is a business that involves the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, investing, and investment management or trading, dealing in securities, partnership interests or commodities, or any business whose principal asset is the reputation or skill of one or more of the owners or employees.

 

“In the recently released regulations, the IRS provides a bright-line test that says that if a business has less than $25 million of gross receipts and less than 10 percent of its gross receipts are from SSTB services, then the business is not an SSTB,” he explained. “This would apply, for example, where a pharmacist — an SSTB service provider — owned their own pharmacy that sells retail goods, including pharmaceuticals, and also provides health care services, such as flu shots. The regulations suggest that so long as the gross receipts from the flu shots and other related health services (not the drug costs, just the services of providing the inoculations) are less than 10 percent, the entire pharmacy business is exempt from the SSTB limitations.”

 

Many “simple” 199A filing situations turn out to be not so simple, Mellem cautioned. “My client, a partner, had what I thought was a simple deduction. But we ended up reducing his QBI by the 179 deduction we took on his 1040, then reduced it by [unreimbursed partnership expenses], and reduce it further by a pro rata share of his guaranteed payments. The guaranteed payments are not QBI but they are subject to the self-employment tax.”

 

 

 

Supreme Court rules injured railroad worker’s damages are taxable compensation

By Roger Russell

 

 

The U.S. Supreme Court, in a 7-2 decision, held that a railroad’s payment to an employee for working time lost due to an on-the-job injury is taxable compensation under the Railroad Retirement Tax Act.

 

The court reversed a decision by the Eighth Circuit in the case, BNSF Railway Co. v. Loos, in a majority opinion Monday written by Justice Ruth Bader Ginsburg, who returned to the court after undergoing lung cancer surgery. Justices Neil Gorsuch and Clarence Thomas dissented in the case.

 

In the case, railroad worker Michael Loos injured his knee while on the job, and after a jury trial was awarded more than $126,000 in damages, ascribing $30,000 of the amount to wages lost during the time he was unable to work. His employer, BNSF Railway Company, asserted that the lost wages constituted compensation taxable under the RRTA and asked to withhold $3,765 to cover Loos’ share of the taxes owed. Both the district court and the Eighth Circuit denied the requested offset, holding that an award of damages that compensate an injured railroad worker for lost wages is not taxable under the RRTA. The question has been decided differently by different state courts, prompting the U.S,. Supreme Court to hear the case.

 

“It’s curious as to why the railroad appealed the case all the way to the Supreme Court,” said Arvin J. Pearlman, of counsel at Sommers Schwartz, PC. “It now has a bargaining tool in regard to future settlements. If we go to trial and get a verdict, and a portion of the verdict is for past present and future wages lose, the railroad will be able to deduct from the award the taxes due under the RRTA standard.”

 

 

 

Tales of SALT woe from the rich who try to flee high-tax states

By Ben Steverman

 

This tax season, many wealthy Americans are getting an expensive jolt.

 

The Republican tax overhaul signed by President Donald Trump more than a year ago provides plenty of perks for the rich. But not all well-off folks are treated alike under the new law. A controversial provision that helps pay for huge corporate tax cuts punishes residents of states with higher income taxes—most of which, but not all, lean Democratic.

 

By setting a $10,000 cap on how much Americans can deduct in state and local taxes, or SALT for short, Washington created a pricey problem for the privileged in some parts of the country. Now that the first tax season under the overhaul is here, that reality is hitting home—and the thought of moving to a low-tax state may suddenly look more attractive.

 

But even before the law, there were rich people in blue states trying this strategy. Some actually moved, while some just pretended to—and that’s where state tax auditors come in. Officials in places such as California and New York don’t make it easy for the rich to say goodbye, with investigators who dig deep, forcing residents to prove they really have cut ties in favor of cheaper pastures.

 

“You have to abandon the old and establish the new,” said Karen Tenenbaum, a New York lawyer who specializes in residency disputes. “The more ties you cut, the better—auditors like to see a moving van and an itemized list of what was moved.”

 

James Gazzale, a spokesman for New York’s Department of Taxation and Finance, echoed her sentiment, albeit more formally. “Ensuring taxpayers pay their fair share is a top priority; therefore, our nonresident audit program continues to be very active,” he said.

 

Here are a few of the more colorful examples of litigation between wealthy residents who claimed to have moved and jilted states that didn’t quite believe them.

 

The Teddy Bear Test

Gregory Blatt was a rising star at InterActiveCorp (IAC) when in 2009 billionaire Chairman Barry Diller asked him to take over as chief executive of Dallas-based subsidiary Match.com.

 

At first, Blatt was reluctant to move. Just 40 years old, he was single, loved to spend summers in the Hamptons and had just remodeled his $2.4-million West Village apartment, according to the New York Division of Tax Appeals’ ruling on his case. At first, he negotiated to work out of IAC’s New York headquarters most of the time, traveling back and forth to Dallas when necessary. After a few months as Match’s CEO, however, Blatt testified that he had actually fallen in love with Dallas.

 

He joined a gym there, rented an apartment in one of the city’s nicest buildings, made friends and dated. When he filed taxes as a Texas resident in 2009 and 2010, however, New York started asking questions. Tax authorities could point to the fact that, just two years after moving to Dallas, Blatt had actually moved back to New York to take over as CEO of IAC itself when Diller stepped down.

 

Texas, unlike New York, does not levy an income tax. Based on an audit, New York notified Blatt in 2013 that he owed the state $430,065, plus interest and penalties.

 

The judge noted an important point in Blatt’s favor. There’s a curious gauge of New York residency tied to the location of items “near and dear” to the taxpayer—often called the “Teddy Bear Test.” Where you leave your teddy bear is home, basically.

 

In this case, the bear was a dog.

 

Blatt’s decision to move his large, elderly dog to Dallas was a critical factor, the judge said. In an email submitted to the court, Blatt wrote a friend at the time: “Dog is the final step that I haven’t been able to come to grips with until now. So Big D is my new home.”

 

The judge ruled that Blatt’s move officially took effect in November 2009, when his dog arrived. She canceled his tax bill.

 

The Case of the Kansas Pizza Empire

Gene Bicknell spent decades building a sprawling business from his headquarters in tiny Pittsburg, Kansas, a town of 20,000 people about 120 miles south of Kansas City. He served as mayor and even ran unsuccessfully for governor as a Republican—twice. Though he owned a T-shirt maker, a marketing firm and a plastics company, the crown jewel of Bicknell’s enterprises was National Pizza Co., the largest chain of Pizza Hut franchises in America.

 

In 2006, when he sold the group of 790 locations for an undisclosed sum to Merrill Lynch & Co., the Kansas Department of Revenue wanted its cut. At the time, Bicknell said he’d already moved to Florida—which is famously free of state income tax. Kansas wasn’t buying it, however, and in 2010 sent him a bill for $42.5 million. Over the course of a six-day trial in March 2013, Bicknell sought to prove he had every intention of moving to Florida. He said he obtained a driver’s license, voted there and even joined a country club. His family spent winter holidays at his 5,870-square-foot home in Englewood, Florida, which he bought back in 1990. He said he intended to retire there.

 

The problem, the Kansas Court of Tax Appeals found, was that Bicknell couldn’t prove that he’d actually cut ties with Kansas, or when his move to Florida actually occurred.

 

Around the time of the sale, the court said Bicknell was spending less time in Kansas, having co-written, produced and starred in a patriotic musical called “Celebrate America,” inspired by the Sept. 11 attacks. In 2005 and 2006, the show had a run in Branson, Missouri—two hours from Pittsburg. But more time in Missouri didn’t bolster Bicknell’s argument that he really lived in Florida. Meanwhile, his businesses, staff, doctors, children, church and much of his philanthropy—including the Gene Bicknell Celebrity Charity Golf Tournament—were all back in Kansas, according to the court. His wife also remained a Kansas resident, working as an attorney there.

 

The court noted that the Bicknells even kept a cat, Checkers, at their 5,200-square-foot Pittsburg home.

 

“On balance, we find little change in Mr. Bicknell’s manifest attitude toward his long-established domicile,” the court held in its 2013 ruling—seven years after the sale. The court awarded Kansas $42.5 million.

 

But it didn’t end there. Bicknell, now 86, has spent the past five years unsuccessfully fighting to overturn the ruling. In 2016, the Kansas legislature changed some procedural rules for tax appeals, breathing new life into his case. A new court decision may come as soon as this week. A spokesman for the Kansas Department of Revenue declined to comment. Bicknell’s spokeswoman declined to immediately comment.

 

California Tries to Force a Turnover

It wasn’t looking good for National Football League star Keyshawn Johnson.

 

In 2017, California was demanding $2.2 million in taxes for the six years the former wide receiver said he was living out of state. His 11-year career included stints with the New York Jets, Tampa Bay Buccaneers, Dallas Cowboys and Carolina Panthers. Tax authorities cited Johnson’s real estate holdings in California as evidence of his residency when he was playing for teams elsewhere, according to a California Department of Tax and Fee Administration summary of the case. He built two homes of more than 11,000 square feet and added a 2,000-square-foot gym to a third, the state said. Most of his medical, financial and legal advisers lived in California, and the Los Angeles native even opened a restaurant there, according to the state.

 

California also argued that an NFL player works only part of the year anyway, so Johnson could consider California his true home while playing somewhere else. They even cited his 1997 autobiography, Just Give Me the Damn Ball!: The Fast Times and Hard Knocks of an NFL Rookie (co-written with Shelley Smith), where he mused about how he always liked to return to California to rest.

 

“Everybody needs a break,” Johnson wrote, “To me, that meant getting my butt to Los Angeles.”

In a 2017 hearing in Sacramento, Johnson and his lawyers argued that his California real estate holdings were either investment properties or purchases for family members, including for his ex-wife and children.

 

When Johnson was traded to Tampa Bay in 2000, he ended up opening a restaurant there, too, while building himself a lavish home nearby. In a transcript of the hearing, Johnson’s lawyers argued that California was underestimating the time commitment of a football player. No matter what a contract states, they said, coaches can and do demand more than just the regular season.

“Because you know what they do to you? They look at you and they frown,” Johnson told the State Board of Equalization at the hearing. “It means you better be at [training] camp or we got somebody else to replace you.”

 

In the end, Johnson won. The board voted that the player, now 46, wasn’t a California resident for five of the six years in question and owed just $218,857 in taxes. This month, California’s Office of Tax Appeals rejected the state’s request to rehear the case. Johnson’s attorney and state authorities declined to comment.

 

Home Isn’t Where the Ferrari Is

When New York challenged Thomas Campaniello’s residency, he responded by saying not only did he live in Florida, but he loved the Sunshine State. The proof? He kept his “teddy bears” there, including two classic guitars, a professional espresso machine, his doctoral degree certificate, a 1988 Ferrari and a catamaran that he sailed on Sundays.

 

When Campaniello, 88, earned more than $5 million in profits on the sale of a Florida office building in 2007, New York said he owed taxes up north of $488,781. Tax auditors pointed out that, while Campaniello might enjoy Florida, the rest of his life seemed to be in the Big Apple, according to the ruling of the New York Division of Tax Appeals. He sold high-end furniture in showrooms located in Florida, but his company’s headquarters were in Manhattan and his warehouse was in Queens.

 

He’d typically fly into New York on Tuesday, work during the week, and then fly back to Florida on Friday, according to the ruling. His wife of 51 years, meanwhile, ran Campaniello’s 57th Street showroom. Their apartment was in Riverdale, a wealthy enclave in the Bronx, where he still kept clothes and received mail. His only daughter and grandchild also lived in New York, and he saw doctors and dentists there, the court said.

 

Campaniello’s business and family ties outweighed his obvious affinity for Florida’s warm weather, an administrative law judge ruled in 2015.

 

“I do not find that petitioner has shown a change in his lifestyle that would support his claimed change of domicile,” she wrote in her opinion. As a result, Campaniello owed the full amount that New York claimed. His lawyers didn’t return a call seeking comment.

 

New York Really Does Have a Heart

New York was suspicious when Stephen Patrick, the former chief financial officer of Colgate Palmolive, declared that he’d moved to Paris—leaving behind, the state calculated, a tax bill of $2.2 million.

 

Then New York’s Division of Tax Appeals got to hear the whole story. It stretched back to a 1965 high school dance in Mamaroneck, a northern suburb of New York City, where Patrick met Clara, who was originally from Italy. According to the division’s ruling on his case, they dated for two years, but then Patrick went to West Point and Clara returned home.

 

They tried to keep in touch, but she eventually sent word that she was to be married. According to the ruling, Patrick destroyed all her letters and mementos and, several years later, married someone else. He went on to raise four children in Connecticut while rising through the ranks at Colgate. But in 2007, the year he turned 58, Patrick had emergency surgery for a serious heart condition and, according to the court’s opinion, sought to reevaluate his life. (Patrick declined to comment on the case.)

 

He told his wife he wanted a divorce, moved closer to work in New York, and started searching for Clara, his long-lost love. Through her 85-year-old uncle, Patrick found her living in Paris—and married.

 

“We met, and we opened the door, we looked at each other, we just knew it was us again,” she testified. She divorced her husband. Patrick turned his life upside down, too. Previously a workaholic who rarely vacationed, he took long trips with Clara, learned scuba diving and climbed Mount Kilimanjaro, according to the ruling. By 2009, they were married. Patrick retired early from Colgate, missing out on a large pay package, and moved in with Clara and her teenage son in a $3.2-million Paris apartment with a view of the Eiffel Tower.

 

He returned to New York frequently for medical treatments, but the Division of Tax Appeals didn’t harp on that. It was clear, the administrative law judge held, that Patrick, now 69, had sufficiently changed his lifestyle to prove he had left for good.

 

So New York let him go.

 

 

 

The most flabbergasting questions from clients for tax season

By Michael Cohn

 

The Minnesota Society of CPAs has a list of real questions clients have asked MNCPA members. These will not only educate, but also show there’s truly no such thing as a silly tax question.

 

1. Do I really need to file?

It’s highly advisable to submit timely returns to avoid problems in the future. The IRS has specific guidelines about who must file a tax return. A common misunderstanding some people have is that they don’t need to file a return when they reach a certain age. There is no such rule. Everyone needs to file if they meet the income filing requirements. Keep in mind you may even need someone else to file your final tax return after you pass away.

 

2. Is the new tax code so simple now that CPAs aren’t needed?

The new tax law removed some deductions, created new deductions and changed the format of the tax forms. For some individuals, the increased standard deduction for federal returns does make filing taxes simpler. That being said, there are still thousands of pages of tax law. For those who have a complicated tax situation, such as small-business owners, retirees, executives and investors, a CPA is a great resource to interpret those laws and help take advantage of the tax benefits that are available.

 

3. I did volunteer work for a charitable organization. Can I deduct my time?

Bless you for committing your time to making the world a better place. You get a hearty pat on the back and a great feeling inside for donating your time. Sadly, that is all a CPA can provide you. Time spent doing volunteer work is not a valid deduction.

 

4. I took photos of my dogs for a calendar. Can I deduct the dogs on my return?

Generally no, but, interestingly enough, if you are selling the calendars, you may get some tax benefits from the maintenance of the dogs. That’s why it’s important to ask these types of questions of your CPA and determine what’s allowable in the eyes of the IRS. But, generally speaking, “man's best friend” is not deductible.

 

5. How much can I deduct without any proof?

Documentation (or lack thereof) has become the easiest way for the IRS and state taxing authorities to disallow deductions. You need to have substantiating records to support the deductions if you’re going to claim them on your return. Remember what your English teacher taught you in Beginning Composition: Who, what, when, why and where are all necessary to support a deduction. So, keep your receipts and log your expenses in a timely manner.

 

6. What are my chances of being audited?

It’s hard to say exactly what the odds are of being audited, but there are certain red flags that can trigger an audit. Failure to report income will easily generate a notice from the government. Large deductions and losses, as well as high-income taxpayers, are going to garner an extra look by the government, too.

 

7. Can a CPA fix what I’ve done wrong on my tax return?

If it’s found that you’ve filed incorrect returns, a CPA can work with you on your options. In most cases, it may be necessary to file an amended return.

 

8. Why do I owe taxes on gambling winnings?

Gambling winnings are technically income. You can offset your gambling winnings with gambling losses, but only to the extent of your winnings.

 

9. Can a CPA get my taxes done by April 15 if I drop everything off April 14?

The complexity of the new tax laws will increase the time it takes to complete 2018 tax returns. CPAs are geared up to meet this challenge but need your help. Send your records as soon as available to avoid the last-minute crunch. If you show up on April 14 with a shoebox of receipts, you’ll likely be greeted with a smile and an extension form.

 

 

 

Is your association term insurance really a good deal?

By Henry Montag & Bill Boersma

 

As a young accountant or professional who is a member of an association, you may well have been offered the opportunity to purchase inexpensive term insurance through that association. You get all the benefits of easy enrollment, with no lengthy forms or medical questions to complete, nor do you even have to pay a bill, as everything is done electronically through your payroll department. Then, to top it all off, you receive a dividend or refund check, making the price even lower. You’re convinced association term life insurance is the best and only way you should ever buy term insurance for your family. The only problem is those automatic five-year increases become very expensive once you hit age 40.

 

Let’s take a closer look and see what actually happened. In the early years, you didn’t feel each of the five-year incremental increases because they were very small. The dividend refunds during the first 20 years (ages 25 to 45) are in the 40 to 45 percent range, and the member is made to feel association term life insurance is inexpensive and the best deal possible because, for the first 20 years, several life insurance agents had unsuccessfully tried to compete for your business with a lower price, but couldn’t because the association rates were extremely inexpensive.

 

However, once you hit age 45, your cost for the same $1 million of coverage over the last five years triples. Once that same individual hits age 50, the cost almost doubles, and increases 90 percent at age 55. The costs then continue to increase by approximately 90 percent every five years up until age 75, at which point the coverage gets cut by 50 percent.

 

Those dividends that reduced the premium by 46 percent at ages 20 to 40, and were thought to continue throughout the life of the policy, have now been reduced to 36 percent from ages 40 to 50, 20 percent from ages 50 to 60, and down to 10 percent from ages 60 to 80.

 

A significantly better strategy, if you intend to keep the coverage beyond a 10-year period, would be to lock in the premium for a 20-, 25- or 30-year period, which would result in a significantly less expensive cumulative premium. Not only would the cost be less, but the death benefit would not be cut in half at age 75.

 

Another significant drawback with association insurance is that, if the member needs to convert to a permanent policy due to ill health, there is often only one single option that can be extremely overpriced, because they know you’re trapped. In contrast, a private term product would provide an array of more competitive products to choose from. For example, let’s say a 64-year-old policyholder became ill and couldn’t get coverage elsewhere, and would like to continue their coverage beyond age 75. The cost to convert their $1 million policy to the association’s conversion product is $44,000. Had they initially purchased a non–association private term product, the cost to convert $1 million of coverage would have been $16,000.

 

Keep in mind that although the association makes it easy, with convenient automatic payroll deductions and no medical exams, it is simply not worth the additional cost if you plan to keep your coverage beyond age 50. If you are relatively healthy and choose an association term product, you are unintentionally subsidizing those individuals who have a health issue and are unable to qualify for a standard rating on their own.

 

Association term insurance is a wonderful product if you’re under age 40 and especially if you’re unable to qualify for life insurance coverage on your own. However, if you’re over age 40, in good health and would like to continue your life insurance coverage into your 60s, 70s and beyond, then it would be less expensive to lock in a non-association 20- or 30-year premium, as it will have a cumulative lower net cost and, if desired, better conversion options . Every type of life insurance policy, even term insurance, should be periodically re-evaluated to determine if what you have can be improved upon with whatever else may be available in the marketplace today. Sometimes the answer to requiring additional coverage may simply be to rearrange what you already have.

 

 

 

Trump tax law created breaks for Wall Street to buy private jets

By Lynnley Browning

 

Wall Street money managers love to purchase fancy airplanes.

 

Thrive Capital Management, the venture capital firm run by Jared Kushner’s brother Joshua, bought a used Bombardier Challenger 300 earlier this year. Hedge fund manager Harsh Padia bought a used Bombardier Global Express last spring. Matthew Bronfman of Lincoln Avenue Capital, a real estate fund founded as an affiliate of his family office, bought and registered a used Bombardier 600 just days before Christmas.

 

While wealthy people buying airplanes is nothing new, the Republican-led tax overhaul provided a new incentive.

 

It’s not clear whether any of these money managers had this in mind when they bought their jets, but a provision in the new tax law caps deductions of so-called “excess business losses,” meaning that some investors can face sizable tax bills on personal income that they previously would have offset.

 

So some tax experts have found a way around the excess business loss cap, which was projected to raise $150 billion over 10 years — by advising their clients to buy private planes. It’s an expensive purchase that can cost as much a $67 million but can arguably be used principally for work — unlike, say, a yacht or a mansion in the Hamptons.

 

The prospect of using this workaround to buy private planes risks undermining Republican efforts to use the tax overhaul as a selling point in the 2020 elections, when the White House and both chambers of Congress will be in play. Polling shows Americans are about evenly split on whether they believe the Democrats — who say the new tax law chiefly benefits the wealthy — or the GOP, which argues that it’s a boon to the middle class.

 

The recent airplane buyers won’t say why they decided to make such a big purchase this year. Still, “it’s logical not to waste a loss,” said Michael Kosnitzky, a tax lawyer.

 

Jesse Derris, a spokesman for Thrive Capital, and Padia declined to comment. Zachary Ulman, chief operating officer for Lincoln Avenue Capital, said Bronfman acquired the plane through a limited liability company registered at Lincoln Avenue Capital’s address.

 

The biggest tax-code rewrite in a generation slashed rates for businesses and individuals, and sought to fulfill a campaign promise from President Donald Trump to get “the hedge fund guys to pay more taxes.”

 

The new law made it harder for managers at hedge, private equity and venture capital funds to get the preferential rate of 20 percent (plus 3.8 percent for the Affordable Care Act levy), rather than the top rate of 37 percent, on a key source of compensation, known as carried interest -- typically 20 percent of a fund’s profits. The law triples the time to three years that investors must hold their underlying investments.

 

With the new loss cap, Kosnitzky said, “You should expect highly sophisticated investment fund and family office managers to also find strategies that arbitrage the tax code to benefit themselves.”

 

Kosnitzky, who chairs the private client group at Pillsbury Winthrop Shaw Pittman, said he has clients, whom he won’t name, who have bought planes to take advantage of the tax maneuver.

At first glance, buying a multi million-dollar private jet would seem only to compound the potential problem of the business-loss restriction. That’s because “bonus depreciation” creates sizable business losses that are now capped — potentially making it harder for managers to offset their profits from carried interest.

 

Yet when they buy a jet, investment-fund and family-office managers are recasting on paper the way they get paid, according to three investment fund professionals. By morphing their carried-interest payouts into management fees that are business income to the fund, managers can soak up the sizable business loss that buying an airplane usually creates.

 

Managers can thus avoid both what originally would have been a capital gains tax bill on their carried interest, and what would have been ordinary taxes on their management fees.

 

Jason Traue, a tax partner at Morgan Lewis & Bockius, said funds “are exploring restructuring or structuring new funds to take into account the effect of these rules.”

 

He added that “increasing business income allows you to have fewer business expenses disallowed.”

 

Business income to a fund, deductible by managers and most outside investors, consists largely of management fees paid by investors, historically 2 percent of assets under management but now 1.45 percent, according to Credit Suisse Group AG.

 

While the workaround doesn’t affect investors like pension funds or foreign individuals and businesses, it can hurt U.S. individual investors. That’s because the new law ended their ability to deduct their share of the fees — now increased as a result of the airplane buys.

 

Before the Republican tax overhaul, businesses of all stripes could generally deduct all of their business expenses. The old rule was meant to encourage companies, especially startups that run losses in early years, to grow over the long term.

 

Owners of pass-throughs, like hedge fund and other money managers, can now deduct only a small chunk of business losses that exceed their business income — $250,000 for a single filer, or $500,000 if married filing jointly. Any leftover, or “excess,” losses have to be carried forward to future years and can reduce only 80 percent of taxable income.

 

A business loss at a publicly traded company used to flow to the company itself. For non-corporate pass-throughs, which pass on their deductions and income to their owners, the deduction flowed through to the entity owner’s personal tax return. That usually allowed the owner to offset, or reduce taxes upon, all of his or her non-business income from salaries, dividends and capital gains. Business losses that exceeded that other income could be carried back two years or forward 20 years.

 

But the new excess business loss cap “will come as a surprise to a lot of people that have not been really doing hard numbers throughout the year,” said David Kirk, a partner in private client services at Ernst & Young’s National Tax Department and a former IRS lawyer.

 

The cap, in force until 2026, is supposed to raise nearly $150 billion over a decade, according to Congress’s Joint Committee on Taxation.

 

“This is an industry that likes private planes, gets paid a lot of money and wants to minimize taxes,” Kosnitzky said. So with the workaround to the GOP tax law, “no one should be surprised.”

— With assistance from Alan Levin

 

 

 

Prevent ID theft: Avoid financial scams

Follow best practices for safeguarding information to avoid scams.

FIDELITY VIEWPOINTS

 

Key takeaways

  • Protect your personal information everywhere online and secure your mobile phone accounts with your phone provider.
  • Learn to recognize phishing emails and calls. Don't trust calls from individuals claiming to represent technical support, the IRS, or your financial institutions.
  • File your tax return as early as possible.

 

Being contacted by the Internal Revenue Service can cause concern for any taxpayer, but imagine receiving a telephone call and hearing this:

 

"This prerecorded message is to notify you that the IRS has found fraud and misconduct on your tax return. This needs to be resolved immediately, and it's very important that I hear from you as soon as possible or a legal action will be taken against you."

 

That's an actual message received by a real taxpayer, and reported to the IRS—but everything about the call is fake. It's a criminal scam, aimed at scaring victims into placing a call to the scammer who might demand an immediate cash payment, or attempt to obtain personal information that could be used for identity theft.

 

With tax-filing season in full swing, intimidating calls of this type try to take advantage of taxpayers' IRS anxiety. Most people are quick to spot the call as a fake since the IRS doesn't threaten taxpayers by telephone, emails, or text messages, or issue arrest warrants.

 

But the IRS ploy isn't the only scheme in the scam artists' bag of tricks, nor do they occur only at tax time. Other approaches may be more subtle, appearing to come from a company you trust and asking you to verify account information. Or the criminals may operate almost entirely behind the scenes, quietly gathering information about you that can be used for a wide range of identity fraud. The common thread in almost all of the schemes is that they rely on the victim to provide sensitive information or, at the very least, to be inattentive to the security of their personal information.

 

5 common scams

Tax refund fraud

A criminal, having illegally obtained your Social Security number, files a fraudulent tax return in your name and collects a refund. When you submit your legitimate tax return, it is rejected because the IRS has already processed a return with your Social Security number. In some cases, you may receive a notice prior to filing your return that the IRS has received a suspicious return using your identity.

 

What to do:

  • File your return early, reducing the likelihood that a criminal would have previously filed a fraudulent return.
  • If your return is rejected because of a duplicate filing under your Social Security number, submit Form 14039, Identity Theft AffidavitOpens in a new window, to the IRS.
  • Remember, the IRS will contact you through the US Postal Service, not a phone call. If you receive a letter from the IRS that it has received a suspicious return using your identity, contact the IRS. Visit IRS.govOpens in a new window for contact information.
  • Do not return a call from someone claiming to be with the IRS.

 

Continue to pay your taxes and file your legitimate tax return, although you may have to submit a paper return rather than an electronic one. Attach Form 14039, Identity Theft Affidavit, when filing your return.

 

Employment or health care fraud

A person uses your identity to obtain a job or receive health care services. You may become aware of the scheme after you file your tax return, and are notified by the IRS that you appear to have underreported your income and owe additional tax. Or, in the health care version of the scheme, you receive notification that you are required to pay for medical exams, procedures, and prescription drugs that you never received.

 

What to do:

  • If you suspect you are a victim of taxpayer identity theft, immediately contact the IRS and file Form 14039, Identity Theft AffidavitOpens in a new window.
  • Never surrender Social Security, Medicare or health insurance numbers to anyone you don't know and trust.
  • If you believe someone has signed up for health insurance in your name, call the Health Insurance Marketplace call center at 800-318-2596, and explain the situation.

 

Tech support scam

You receive a phone call from someone claiming to be a technical support person, informing you that there is something wrong with your computer and the caller can help you fix the problem. Alternately, a message appears on your computer screen informing you that your computer is infected with viruses, or that you are locked out of your computer and your files have been encrypted, denying you access. If you follow the instructions of the caller or the screen message, your computer may be taken hostage and your personal information stolen. You are then asked to pay a fee to restore access to your computer or data.

 

What to do:

  • Prevention is the best medicine. Don't click pop-up ads or attachments from unknown senders. Avoid clicking links in emails. Visit known websites by manually typing the URLs in a browser.
  • Do not allow anyone to control your computer remotely and don’t give passwords and security codes to anyone on the phone.
  • Hang up if you receive tech support call, and don't respond to scare messages about your computer being infected. If you need help with your computer, go to your local computer or electronics store.
  • Back up your data regularly. That way, you can reboot and regain control of your computer by cleaning your hard drive and reinstalling your operating system.

 

Credit card fraud

Someone using your identity signs up for a credit card and racks up large charges. A crook who obtains a new card could use it extensively before being discovered. Sometimes, a stolen identity is used to obtain personal loans or open unauthorized financial accounts. You will likely learn about this when bills are not paid and collection agencies start calling for payments.

You may notice either you are not getting any postal mail or you start receiving confirmation or decline letters for credit cards or loans that you did not initiate.

 

What to do:

  • Report the crime and start a recovery plan on IdentityTheft.govOpens in a new window.
  • Notify law enforcement officials.
  • Consider freezing your credit files if you do not have any plans to take new credit cards or loans. Beginning September 21, 2018, you can freeze and unfreeze your credit file for free. Read more about it on the Federal Trade Commission websiteOpens in a new window.
  • Put a fraud alertOpens in a new window on your credit reports, which notifies lenders and creditors that they should take extra steps to verify your identity before extending credit. Contact one of the 3 credit bureaus to report the crime (Equifax at 800-525-6285, Experian at 888-397-3742 or TransUnion at 800-680-7289). For a fee, these credit bureaus can also help with freezing your credit files, to prevent unauthorized activity.

 

Fake charities

You are solicited by email, phone, or in person to contribute to an organization that sounds like a good cause but is actually a scam. Such schemes may be general in nature, often using a name very similar to a well-known charity, or they may be more targeted, attempting to prey on people who are victims of a natural disaster or known to have a personal interest in a particular disease or social cause. These days, charity scams are also being circulated through social media posts such as Facebook, Twitter, WhatsApp and LinkedIn.

 

What to do:

 

 

How to protect yourself

The good news is that you can protect yourself in most cases, by being aware of the threat and following certain practices for safeguarding your information.

 

1. Don't take the phishing bait

Phishing is a technique used by criminals to trick victims into providing personal information that can be used for identity theft. Most phishing attempts are carried out by email, text messages, or phone.

  • Ignore deals, freebies, and awards that sound too good to be true. Disregard offers that appear to come from unusual foreign contacts, as well as requests from strangers for help.
  • Ignore phone calls, emails, or texts that appear to be from the IRS. The agency will not contact you by phone, email, text message, or social media to request personal or financial information.
  • Be suspicious of anyone requesting your Social Security number, date of birth, financial account number, PIN, email, or passwords—especially if there is a request to verify your information when you were not expecting it.
  • Never click a link or download an attachment inside an unexpected email. If the email claims to be from a company you do business with, don't log in from a link in the email message—go to the company's website and log in to your account from there.
  • Never provide personal information over the phone to an unsolicited caller. If you think the call might be a legitimate request from a company you do business with, hang up, and call the company directly.

 

 

2. Protect your phone service

Your phone has become an important part of security protocol and is the "master key" to accessing online accounts and information.

 

Criminals and scam artists are actively using stolen identity information to port your mobile phone number, or forward your phone calls and text messages. They do this by calling phone service providers such as AT&T, Verizon, Sprint, T-Mobile, Xfinity, etc. If you use Voice over IP (VoIP) phones such as from Xfinity, Verizon FIOS, Google Voice, etc., then your voice phone portal accounts are also at risk.

 

Cyber criminals do this to steal your 2-factor authentication codes and text messages to get into your financial institution accounts.

  • Learn signs that your phone may be hacked. If you notice your mobile phone showing "no service" or "emergency calls only," or you stop receiving phone calls and text messages even after you restart your phone, contact your mobile company to see if your account has been compromised.
  • Ask your telecom provider about ways to better secure your account, especially verifying your identity with a PIN or 2-factor authentication to make changes, route phone calls, forward phone messages, or port your phone number.
  • Secure your online phone and internet service provider account where you pay bills and manage settings. Use a separate and strong password for such accounts and enable 2-factor authentication on these accounts.

 

 

3. Monitor and secure your accounts

Many companies, including Fidelity, go to great lengths to safeguard customers' information and provide security tools. For instance, Fidelity offers 2-factor authentication, designed to prevent someone from accessing your account, even if they have your password.

 

Here are a few actions you can take to reinforce those safeguards.

  • Choose passwords that can't be guessed easily. Use different passwords for different websites, and change them regularly.
  • Sign up for 2-factor authentication at your financial institutions and email service providers to protect all your online accounts.
  • Make sure your financial institutions have up-to-date contact information for you, especially your mobile number. Your financial institutions use this information to protect your accounts and to contact you when suspicious activity is detected.
  • Sign up for automated alerts of suspicious account activity wherever offered. Fidelity automatically alerts you by email and text messages of certain suspicious activity. Do not ignore these text alerts whenever received.
  • Check your credit report regularly. The 3 major agencies—Equifax, Experian, and TransUnion—are required by law to provide you with a free copy of your credit report once every 12 months, which means you can check your report for free 3 times throughout the year.

 

 

4. Secure your mobile devices and personal computers

Any device you use that is connected to the internet can become a mechanism of attack by cyber-criminals. Hackers can get in through newly discovered security holes in these devices and systems.

  • Apply updates and patches as soon as the system maker releases them.
  • Don’t download mobile apps and games that you do not trust. Some mobile apps have been found to contain hidden malicious software. Use your best judgment before using a brand new app from an unknown company and read reviews before downloading.
  • Run antivirus software on your computers, and ensure that your mobile devices have the most recent security updates and patches.

 

 

Keep good habits

Security measures aren't foolproof, and anybody can suffer a moment of inattention or lapse in judgment. Nevertheless, awareness and basic prevention practices can protect you from the vast majority of attempts to steal your identity or money through fraudulent schemes.

 

 

 

Worker classification challenges in the age of the independent contractor

By Frank Fiorille

 

Gone are the days of the traditional 9 to 5, Monday through Friday workday. Of course, some employees still maintain the traditional schedule, but small business owners are increasingly relying on the services of independent contractors with more flexible schedules as an integral part of their business model.

 

New research by Paychex shows that independent contractor growth outpaces employee hiring among small businesses that already rely on the services of at least one independent contractor. The growth rate of independent contractors peaked in August 2017 at 11 percent year-over-year among the businesses surveyed. While the growth has slowed since then (5 percent in August 2018), it far outpaces the growth rate for employee hiring among the small businesses analyzed, which has been at less than one percent since 2013. The data shows that the rate of growth for the use of independent contractors has been faster than employee hiring for the past five years.

Broken down further, the data reveals that:

  • Businesses with one to four employees utilize the most independent contractors (6.7 per employer).
  • There is a slightly higher percentage of male independent contractors (51 percent nationally), but the percentage of female independent contractors is on the rise, increasing 1.5 percent during the past five years.
  • The trade, transportation and utilities sector uses the most independent contractors among industries, while the manufacturing sector uses the fewest.

 

While many businesses may benefit from the use of independent contractors, utilizing different types of workers can bring different types of regulatory and tax challenges depending on where the business operates. As the use of independent contractors increases across the U.S., states — including California, Illinois and New Jersey — and courts are actively examining worker classification definitions, with the aim of potentially advancing greater worker protections. But another Paychex survey revealed that 37 percent of business owners are not complying with or aware of applicable worker classification requirements.

 

Some of the questions your small business clients may have on the work they do with independent contractors may be around classification and payroll requirements. According to the IRS, a worker is generally classified as an independent contractor for tax purposes if the payer (or business) has the right to control or direct only the result of the work and not what will be done and how it will be done. As such, the earnings of a person who is working as an independent contractor are subject to self-employment tax, but businesses should be aware that if a worker is intentionally misclassified, the IRS can mandate the business to pay all withholding taxes, plus interest.

 

There are several forms required when handling taxes for businesses that utilize independent contractors. Upon determining a worker’s status as an independent contractor, business owners should request the contractor to complete a Form W-9. This form is used to request the contractor’s taxpayer identification number; the TIN can be the contractor’s social security number or an employer identification number. This form should be kept on file for four years in case questions arise from either the contractor or the IRS.

 

With regard to payroll, companies aren’t generally required to withhold taxes from correctly classified independent contractors’ pay or pay the employer portion of social security, Medicare and state unemployment taxes, as they do with employees. However, companies are required to keep track of contractors’ earnings and report to the IRS those earnings on a 1099-MISC tax form for all contractors who earned more than $600 in a calendar year. Businesses must file Form 1099-MISC with the IRS by Jan. 31 if reporting Non-Employee Compensation in Box 7. All other 1099-MISC forms need to be filed with IRS by Feb. 28 (March 31, if filed electronically). Businesses are also responsible for providing independent contractors with a copy of the form by Jan. 31 of the year following payment. When filing Forms 1099-MISC with the IRS, businesses should also file Form 1096, which is used as an annual summary. This form should include the combined totals for all independent contractors paid $600 or more during the previous tax year.

 

As your clients, and maybe even your own firm, embrace the use of independent contractors for projects, it’s important to understand how an independent contractor differs from an employee and what that means for the business under federal and state law. Knowing your clients as well as you do, you can help them better ensure they’re aware of the applicable classification standards, so they can make the best staffing decisions for their business.

 

 

 

Now, More Than Ever, You Need Your Tax Professional

By Spencer Wilson, EA

 

Think about everything that you could accomplish with a spare 17 hours of time each week.

You could get more work done at your job. Catch up on all that sleep you’ve been missing. Watch the extended versions of Peter Jackson’s “Lord of the Rings” trilogy in one sitting – and then move right onto the equally mammoth “Hobbit” series of films, too.

 

Seventeen hours, by the way, is the average amount of time that most people spend in trying to figure out their personal tax paperwork – according to a study recently released by the American Action Forum. To put that into perspective, roughly 150 million people spend a combined 2.6 billion hours every year wading through paperwork and filling out forms, to a total amount of hours that breaks down to about two full workdays per person. If you’re talking about business taxes, that number balloons exponentially, as the same study revealed that the average organization spends about 275 hours every year preparing taxes.

 

Taxes are as complicated as they are irritating – you’d be hard-pressed to find someone on the other side of this issue. But it’s also important to note that these numbers are from prior to the passage of the Tax Cuts and Jobs Act. These days, even seasoned tax professionals who have been in the industry for decades are having a hard time figuring out what changed and what they need to do for their clients.

 

All of this is to say that taxes are clearly a situation that is only going to get worse before it gets better, which is why if you don’t already have a tax professional lined up to help you get ready for April, now would be an excellent time to find one.

 

“The Only Two Certainties in Life Are Death and Taxes”

To put how complicated things are getting into a little bit of perspective, consider the fact that the United States tax code was made up of only 409,000 words in 1955. Flash forward to today, and it’s now about 2.4 million words long – about six times larger than it was originally, and about twice as long as it was in 1985.

 

All of this was supposed to change with the passage of the Tax Cuts and Jobs Act – something that was billed as the single biggest positive adjustment to taxes in decades. If you turned on cable news in the days leading up to the December 2017 passing of the bill, you would have seen commentators talk on and on about how “tax preparation was about to get simple.”

 

By all accounts, that probably isn’t as true as we’d like it to be.

 

Experts agree that a lot of the new laws are not just very complex – they’re also often vaguely written. This means that people trying to do their own taxes are going to require even more time to research implications and figure out how to best prepare their returns for an ideal outcome. Up to six new schedules may be required for some people, and business owners will also face increased challenges.

 

Adding to this anxiety is the fact that the April filing deadline isn’t even here yet – meaning that people are only just now starting to get a real idea of how things have changed, the scope of those changes, and what this means for businesses and personal tax filers alike moving forward.

In the end, the most important thing to understand is that it’s always been a good idea to enlist the help of a trained tax professional to make sure that you satisfy Uncle Sam in a way that creates a mutually beneficial situation for everyone involved. But in an era where taxes aren’t just getting more complicated but also more uncertain, it’s overwhelmingly clear that anyone with even a modestly complex situation would be better served by working with a fire-star pro this year. At a certain point, having someone do your taxes for you is no longer a recommendation – it’s largely a requirement.

 

 

Online Gambling and Offshore Cryptocurrency Exchange Mailing Addresses for 2019

By Russ Fox EA

 

With the United States v. Hom decision, we must again file an FBAR for foreign online gambling sites. An FBAR (Form 114) is required if your aggregate balance exceeds $10,000 at any time during the year. (The IRS and FINCEN now allege that foreign online poker accounts are “casino” accounts that must be reported as foreign financial accounts. The rule of thumb, when in doubt report, applies—especially given the extreme penalties.) You also should consider filing an FBAR if you have $10,000 or more in a non-US Cryptocurrency Exchange.

 

There’s a problem, though. Most of these entities don’t broadcast their addresses. Some individuals sent email inquiries to one of these gambling sites and received politely worded responses (or not so politely worded) that said that it’s none of your business.

 

Well, not fully completing the Form 114 can subject you to a substantial penalty. I’ve been compiling a list of the addresses of the online gambling sites. It’s presented below.

 

I have made major updates on this list for 2019. Many, many addresses have changed. We went through the complete database and attempted to find new addresses for each entry.

 

FINCEN does not want dba’s; however, they’re required for Form 8938. One would think that two different agencies of the Department of the Treasury would speak the same language…but one would be wrong.

 

You will see the entries do include the dba’s. Let’s say you’re reporting an account on PokerStars. On the FBAR, you would enter the address as follows:

Rational Entertainment Enterprises Limited

Douglas Bay Complex, King Edward Rd

Onchan, IM31DZ Isle of Man

 

Here’s how you would enter it for Form 8938:

Rational Entertainment Enterprises Limited dba PokerStars

Douglas Bay Complex, King Edward Rd

Onchan, IM3 1DZ Isle of Man

 

You will also see that on the FBAR spaces in a postal code are removed; they’re entered on Form 8938. You can’t make this stuff up….

 

Finally, I no longer have an address for Bodog. If anyone has a current mailing address, please leave it in the comments or email me with it.

 

Note: This list is presented for informational purposes only. It is believed accurate as of February 5, 2019. However, I do not take responsibility for your use of this list or for the accuracy of any of the addresses presented on the list.

 

 

 

Steinhoff deals come back to haunt retailer in PwC investigation

By Renee Bonorchis

 

For 20 years, global retailer Steinhoff International Holdings NV thrived off deal-making — from the U.S. and the U.K. to South Africa and Europe. Now, some of those transactions are back in the spotlight, and not in a good way.

 

The long-awaited summary of PwC’s more than 3,000-page forensic investigation into Steinhoff’s activities has identified what it described as fictitious and irregular transactions with parties that appeared to be closely related to the same small group of people. Irregular transactions with eight firms not tied to the Steinhoff group from 2009 and 2017 amounted to 6.5 billion euros ($7.36 billion), the 10-page PwC summary released on Friday showed.

 

The summary did not name the deals the auditing firm had found to be questionable, but said they fell into four categories, including profit and asset creation, asset overstatement and reclassification, asset and entity support, and contributions.

 

“In general terms, the PwC report finds that the fictitious and, or irregular transactions had the effect of inflating the profits and, or asset values of the Steinhoff group,” according to the summarized report. “The PwC report identifies three principal groups of corporate entities that were counter-parties to the Steinhoff group in respect of the transactions that have been investigated.”

 

‘Legal Privilege’

PwC was mandated by Steinhoff to study the retailer’s accounts when it disclosed irregularities at the end of 2017. Swamped with work, the auditing firm was limited to investigating transactions dating back to 2009, the summary of the report shows. The full report will not be made public because it is “confidential and subject to legal privilege and other restrictions,” the accounting firm said.

 

Documents seen by Bloomberg show that companies linked to Steinhoff’s former Chief Executive Officer Markus Jooste sold car-dealership properties and forestry plantations to Steinhoff for far more than market prices in transactions that began as early as 2001. Jooste couldn’t be reached for comment as his phones didn’t ring when called by Bloomberg on Friday. His lawyer didn’t immediately respond to an emailed request for comment.

 

An example of the over-valuation of properties sold to Steinhoff can be shown in the transactions linked to one plot, 28 Lake Avenue in Benoni, east of Johannesburg. The land, a little bigger than two tennis courts, is on a street lined by dilapidated buildings in an industrial area. Three nearby stands on that road sold for an average of 670,000 rand ($46,600) in 2007, online records at Property24 show. A company linked to Jooste bought it in 2002 for 4.79 million rand and then sold the plot to Steinhoff’s property unit in 2007 for 33.7 million rand, records show.

 

Over and above the three groups identified as counter parties in various transactions “other corporate entities have also been identified together with a finding that there was a practice of using similar entity names and changing company names resulting in confusion between entities,” PwC said in the report. “Various transactions were entered into to obscure the extent of the overstatement of the assets.”

 

Jooste in September told South African lawmakers that the origin of the company’s woes related to protracted dispute with a former partner. He also said he wasn’t aware of the financial irregularities reported by the company the day he quit. Instead, he blamed Deloitte LLP for wanting an additional probe into allegations of financial mismanagement in Europe just days before the retailer was due to report 2017 financials.

 

 

 

Trump tax reform hits home in wealthy New York suburbs

By Patrick Clark

 

Nick Boniakowski’s clients bought a home in Northern New Jersey in 2016. Now they want to move again.

 

They found a house they liked. It wasn’t the charm of new construction, an upgrade in location, better schools or a swimming pool that attracted them.

It was the lower property taxes.

 

Like many of Boniakowski’s clients at Redfin Corp.’s Hoboken office, these two are looking at their returns for the first time since President Donald Trump’s tax changes took effect and, despite more than a year of lead time, experienced a mild freakout. Maybe buying a new house — the rare financial ordeal that’s more maddening than the annual April 15 ritual — could be the solution.

 

Alas, taxes on the house they wanted to buy turned out to be higher than they thought, so they went back to scouring listings.

 

“It’s a confusing process,’’ Boniakowski said.

 

The Tax Cut and Jobs Act promised to, well, cut taxes. For many, it does. But a new limit on the amount of state and local levies that can be deducted has costly and confounding implications for some, especially in high-income-tax, high-property-tax places like the New York City area.

 

Deadline Dread

Nearly 11 million taxpayers will be affected by the new cap on so-called SALT deductions on the taxes they file this year, and could lose out on a cumulative $323 billion, according to a February estimate from the U.S. Treasury Inspector General for Tax Administration.

 

For those people, the April 15 deadline carries a greater sense of dread than usual. New rules include a higher standard deduction and changes to the Alternate Minimum Tax, and it can be hard to say, even for experts, how they’ll affect individuals until they file.

 

The situation wasn’t made any simpler by state lawmakers, who argued that the cap on the SALT deduction was intended to hurt states that tend to elect Democrats, and concocted a series of elaborate workarounds that were shot down by the Internal Revenue Service.

 

People with more money and thus more complicated tax returns tend to file later in the season, meaning that the triggering has just begun.

 

Tax Strategy

“A lot of my clients are very surprised by what’s happening,” said Ann Callari, tax partner at RotenbergMeril, an accounting firm in Saddle Brook, New Jersey. “That’s the nature of taxes. People hope for the best and don’t pay attention. They don’t notice until it affects them.”

In the meantime, plenty of taxpayers are expecting the worst.

 

Gail Rosen, a certified public accountant, said one client didn’t submit his charitable donations because he assumed that he would take the standard deduction. (He didn’t.) Others have been under-withholding, meaning they could get tax cuts but see lower-than-expected numbers on their refund checks. One client who benefited from a new deduction for business owners found her unexpected refund disorienting.

 

“She looks at me and says, ‘Oh my god, this is wonderful, who can I thank?’” Rosen said. “I said, ‘Trump.’ It was like she saw a ghost. She didn’t want to hear it.”

 

The Void

Real estate pros, nobody’s first call for tax planning, are stepping into the void. South Florida developers have set up sales offices in Manhattan, angling to lure tax-weary finance workers with the promise of sunshine and no state income tax. Local realtors are highlighting small changes in tax rates that can benefit home buyers who cross town lines.

 

As Chad Curry, an agent at the Michelle Pais Group at Signature Realty NJ, put it in a recent listing, “Close to Westfield but taking advantage of Mountainside’s low taxes.”

 

Saddle River, a New Jersey Republican stronghold where Richard Nixon once owned a home, went so far as to hire a public relations firm to pitch the town as the Palm Beach of Route 17 — a local tax haven that keeps levies lower than neighboring municipalities because of a lack of sidewalks, professional firefighters and a public high school.

 

“You don’t need all of that stuff,” said Mayor Al Kurpis, whose day job is dentist.

 

For those who don’t want to move, the obvious solution is to complain — ideally to a tax court. Michael Schneck, the managing member of a Livingston, New Jersey-based firm that bears his name, has been fielding calls from homeowners who want to appeal their property taxes. Some of them may even have a case.

 

“Homes over $3 million are seeing a significant slowing of sales and reduction of offering prices,” Schneck said.

 

That may be because savvy shoppers are factoring in the new limit on the SALT deduction, or simply that the market for luxury homes is cooling after a period of rapid appreciation. In either case, a slowing market gives affluent homeowners an avenue to lowering their levies — eventually.

 

“What is the impact of the loss of the deduction on market values?” Schneck asked.

It was a rhetorical question. For many, it’s still too early to say.

 

 

 

Forensic accounting helped uncover college admissions scheme

By Michael Cohn

 

In a case that has all the hallmarks of a forensic accounting investigation, federal authorities announced charges last week against dozens of prominent people, including CEOs, Hollywood actresses, athletic coaches and college exam administrators, in a nationwide conspiracy to cheat on college entrance exams to help admit students to elite universities as purported athletic recruits.

 

“I definitely think it played a huge role in the indictments because, in order to indict all of these people for mail fraud and basically sending illicit payments, what the investigators would have done is trace the funds from the illegal entities to the people and vice versa, for the bribes and payments,” said Dr. Jennifer Stevens, assistant professor of accountancy in the Ohio University School of Accountancy. “It played a huge role in the indictment, and the FBI has an entire forensic accounting team that does this. They’re not actually special agents. They work alongside special agents, but they have a division of forensic accountants that would have been working on a case like this.”

 

For instance, one of the main complainants cited in the Justice Department's criminal complaint is Laura Smith, an FBI special agent who got her start at the FBI in 2010 working as a forensic accountant conducting complex financial investigations.

 

Athletic coaches from Yale, Stanford, USC, Wake Forest and Georgetown, among others, were implicated in the college admissions case, along with parents and exam administrators. The ringleader was William “Rick” Singer, 58, who owned a college counseling and preparation business in Newport Beach, California, called the Edge College & Career Network LLC. He was also CEO of the Key Worldwide Foundation, a nonprofit he established as a purported charity that his clients used to send their payments, claiming the money as charitable donations.

“The people supposedly donating to charitable entities were probably deducting that from their taxes,” said Stevens. “The IRS will get involved, because you do have to pay tax, even if it is ill-gotten gains. Fraudsters usually don’t report that on their taxes because they’re stealing it. There’s usually a tax aspect to any type of fraud.”

 

Singer allegedly conspired with his clients to use bribery and other types of fraud to secure admission of students to colleges and universities. Authorities also charged 33 parents, including actresses Felicity Huffman and Lori Loughlin, as well as 13 coaches and associates of Singer’s businesses, including two SAT and ACT test administrators. Singer ultimately agreed to help the authorities with the investigation and gave them information on his clients.

 

“I don’t know who the original whistleblower would have been, but normally the greatest source of uncovering frauds is a whistleblower or tips, not always anonymous,” said Stevens. “Then the government would get people to collaborate with them, offering them deals so they end up getting a lesser penalty, and give information on other people.”

 

Stevens doesn’t think the investigators needed to trace the payments to the universities to uncover the fraud. “I think they would have gotten payments from the fake charitable entity, and Singer’s books, but I don’t think they would have gotten into the books and records of the universities,” she said. “But they would have been able to see payments going to people’s bank accounts, and that’s how they would have been able to start to trace them.”

 

 

 

IRS overlooks $74M in bogus claims for Social Security tax credit

By Michael Cohn

 

The Internal Revenue Service isn’t doing enough to flag over $74 million in potentially erroneous claims for the Excess Social Security Tax Credit, according to a new report.

 

The report, from the Treasury Inspector General for Tax Administration, found the IRS paid more than $74 million in potentially erroneous Excess Social Security Tax Credits as a result of incomplete Social Security tax credit selection criteria, insufficient procedures and tax examiner processing errors.

 

Taxpayers who have more than one employer and whose combined Social Security tax withholding from all their employers is bigger than the maximum annual withholding amount for FICA taxes are able to claim the excess amount of Social Security tax that’s been withheld as a refundable tax credit. As of Dec. 28, 2017, the IRS received more than 1.5 million tax returns for 2016 claiming the Excess Social Security Tax Credit and gave out tax credits totaling more than $3.1 billion.

 

TIGTA saw some improvement in how the IRS is handling claims for the tax credit since the last time it did an audit. It analyzed more than 2.5 million tax returns that were electronically filed in 2017 and 2018 with an Excess Social Security Tax Credit claim and found that the processes implemented in response to its previous audit have improved the IRS’s identification of questionable claims for excess FICA taxes.

 

Nevertheless, the IRS paid more than $74 million in potentially erroneous tax credits on the claims. In addition, incorrect return selection criteria led to the IRS unnecessarily spending around $1.1 million to manually review 737,735 valid Social Security Tax Credit claims filed in 2017 and 2018. The majority of potentially erroneous claims for the tax credit identified by the IRS’s post-processing income matching program are still not being addressed.

 

TIGTA made eight recommendations in the report to improve the IRS’s efforts to detect and prevent erroneous Excess Social Security Tax Credit claims. It suggested the IRS update its internal procedures to make sure IRS employees follow the right procedures to accurately determine the correct amount of Excess Social Security Tax Credit. On top of that, TIGTA recommended the IRS develop processes to make sure the Social Security tax maximum withholding amounts are updated annually in its programs that select claims for review. The IRS should also set up a process to send and measure the success associated with soft notices that let individuals know about potential errors related to Excess Social Security Tax Credit claims, TIGTA suggested.

 

The IRS agreed with all eight of the report’s recommendations and plans to take action to correct the problems. That includes implementing a review process for the 2019 filing season to make sure IRS tax examiners correctly address the potential errors. The review results will then be evaluated to see what’s causing the problems. The IRS will also make sure the maximum withholding amounts are updated annually. The agency has also agreed to determine the feasibility of sending and measuring the success of sending “soft notices” to taxpayers related to the Excess Social Security Tax Credit.

 

However, an IRS official disagreed with some of the findings related to the soft notices. “We disagree that sending soft notices to taxpayers with excess social security tax discrepancies could generate a potential revenue of $28,327,843,” wrote Kenneth C. Corbin, commissioner of the IRS’s Wage and Investment Division, in response to the report. “We do not agree with the methodology used to project this potential revenue. Our resources would not afford us the ability to send notices to all the taxpayers you identified with excess social security tax credit claimed. Additionally if this work is pursued versus another type of work there will be an opportunity cost for that business decision.”

 

 

 

New scam uses Taxpayer Advocate Service numbers

By Jeff Stimpson

 

A fresh twist on the well-known IRS-impersonation phone scam now finds criminals faking calls from the Taxpayer Advocate Service, an independent organization within the IRS.

 

As with other IRS-impersonation scams, thieves make unsolicited calls to intended victims fraudulently claiming to be from the tax service, according to a warning issued by the agency. Callers spoof the number of the IRS Taxpayer Advocate Service office in Houston or Brooklyn, New York. The communications may be robo-calls that request a call back.

 

Once the taxpayer returns the call, the con artist requests personal information, including the Social Security number or ITIN.

 

The TAS does not initiate calls to taxpayers “out of the blue,” the IRS reiterated.

 

Oversight Subcommittee

In other variations of the scam, fraudsters, often hostile and abusive, demand immediate payment of taxes by a prepaid debit card or wire transfer. Scammers may also tell would-be victims that they’re due a large refund but must first provide personal information. Other characteristics of these scams include fake names and IRS badge numbers, knowledge of the last four digits of the taxpayer’s Social Security number, in addition to the spoofed caller ID. Victims may hear background noise of other calls during the conversation like a telemarketing center. Scammers may also send bogus IRS emails to their victims.

 

The government is asking taxpayers and tax professionals to report IRS- or Treasury-related fraudulent calls to phishing@irs.gov using the subject line “IRS Phone Scam."

 

 

 

IRS steps up arrests of identity thieves and tax fraudsters

By Michael Cohn

 

The Internal Revenue Service has been increasing its efforts to crack down in recent weeks on tax-related identity theft, working with the Justice Department and federal prosecutors around the country to make 11 arrests and indict 15 individuals, as well as see five other individuals or businesses sentenced for participating in refund fraud or identity theft schemes.

 

The IRS revealed the results Wednesday of a national two-week enforcement and education campaign to combat tax refund crimes and identity theft that led to legal actions against suspected criminals and businesses committing tax crimes. Through its Security Summit initiative, the IRS has teamed up with state tax agencies, the software industry, the tax industry, tax preparation firms, payroll and tax financial product processors since 2015 to fight identity theft refund fraud to safeguard taxpayers.

 

"Identity theft is a pervasive crime and stopping it remains a top priority of the IRS," said IRS commissioner Chuck Rettig in a statement. "The IRS, with the help of our Security Summit partners, continues to make progress in this area, but we need to continue our significant efforts to protect taxpayers and assist those who have been a victim of identity theft. We are fighting this problem with enhanced systems, smarter technology and the efforts of our dedicated workforce, including Criminal Investigation. We will retain our relentless, vigorous pursuit of those who prey upon others in this arena."

 

The IRS’s Criminal Investigation unit is also working to investigate and prosecute unscrupulous tax preparers this tax season.

 

“Millions of taxpayers put their trust in tax professionals to prepare accurate and lawful returns,” said IRS criminal investigation chief Don Fort in a statement. “Unfortunately, a few bad apples take advantage of that trust for their own greed and profit. CI's special agents are highly skilled at unraveling fraudulent schemes. With our partners in other agencies and the private sector, we are dismantling these crooked enterprises and enforcing our tax laws.”

 

Meadows, Collier, Reed, Cousins, Crouch & Ungerman, at the NYU Tax Controversy Forum

Earlier this month, a group of Senate Democrats wrote a letter to Rettig complaining about the IRS's enforcement priorities, in light of a recent series of articles by ProPublica on how low-income taxpayers claiming the Earned Income Tax Credit are increasingly more likely to be audited by the IRS than wealthier taxpayers and large corporations. The lawmakers, including Senators Dick Durbin, D-Ill., Sheldon Whitehouse, D-R.I., Elizabeth Warren, D-Mass., Richard Blumenthal, D-Conn., and Bernie Sanders, I-Vt., urged the IRS to focus more on financial crimes such as money laundering. "A failure to fully commit to investigate and prosecute tax fraud can have serious implications in the investigation and prosecution of more serious financial crimes, such as terrorist financing or money laundering," they wrote.

 

They pointed to a report last November by the IRS Criminal Investigation unit showing that the number of special agents responsible for investigating money laundering, violations of the Bank Secrecy Act, and criminal violations of the tax code is at its lowest level in 50 years, thanks to budget cuts. According to a 2017 Treasury Inspector General for Tax Administration report, reductions in staffing and funding for criminal investigation activities at the IRS have contributed to a significant decline in the number of criminal cases initiated and completed by the IRS.

 

 

 

Treasury repeals hundreds of outdated tax rules

By Michael Cohn

 

The Treasury Department finalized the repeal Thursday of 296 obsolete or duplicative tax regulations in response to President Trump’s executive orders early in his administration calling on the Treasury and other departments to get rid of unnecessary regulations.

 

The proposed list last year included regulations governing a wide variety of areas, including the alternative minimum tax, when property is placed in service, the exemption for dividends from shares and stock of federal agencies, the tax exemption for interest on federal obligations, and technical matters related to old tax laws that have been rendered obsolete by the Tax Cuts and Jobs Act of 2017 and earlier legislation going back to 1942. After receiving only five comments on the proposed regulations, the Treasury has now issued final regulations.

 

“Balanced regulation is important for a healthy economy. Unnecessary regulation creates compliance costs and confusion that make it difficult for American businesses, families, and workers to get ahead,” said Treasury Secretary Steven T. Mnuchin in a statement. “By eliminating nearly 300 regulations that serve no useful purpose to taxpayers, we are building a more efficient tax regulatory system that promotes economic growth.”

 

 

 

IRS estimates 23.7M taxpayers may claim QBI deduction

By Michael Cohn

 

The Internal Revenue Service is estimating that nearly 23.7 million taxpayers may be eligible to claim a new 20 percent tax deduction for qualified business income provided by the Tax Cuts and Jobs Act, according to a new report, but the service needed to scramble to provide guidance and forms for taxpayers in time for this tax season.

 

The report, from the Treasury Inspector General for Tax Administration, examined the IRS’s implementation of the provision, Section 199A, which was added to the Tax Code by the Tax Cuts and Jobs Act. It provides a deduction of up to 20 percent for an individual’s domestic qualified business income from their taxable income. Lawmakers included the provision as a way to provide pass-through businesses with a tax deduction, and not just corporations.

 

However, the law excludes certain types of businesses, including accounting and law firms, from claiming the full deduction on all their income. Nevertheless, the IRS estimates that almost 23.7 million taxpayers may be eligible to claim the deduction. In addition, the Joint Committee on Taxation estimates a reduction in tax from this provision of $27.7 billion in fiscal year 2018 and $47.1 billion in fiscal year 2019, totaling $414.5 billion over fiscal years 2018 through 2027.

 

The TIGTA report found that the IRS took a number of steps to implement the QBI deduction, including setting up an implementation team, creating an action plan, and developing a communication strategy. However, because of the late timing of the release of guidance in late January just before tax season began, in the midst of the partial government shutdown, the IRS wasn’t able to develop a tax form for the deduction (see The 199A final regulations: A little more light shining in the darkness).

 

However, IRS officials told TIGTA that delaying the development of a tax form until tax year 2019 gave the IRS more time to receive comments on the guidance, consider the comments before finalizing the guidance, and get some experience with the first filing season. As an alternative, the IRS has developed a worksheet to help taxpayers calculate the deduction. IRS officials also expect to develop a post-processing compliance plan. Near the conclusion of TIGTA’s fieldwork on the report, the IRS prepared a computer programming request to identify and/or reject tax returns when the QBI deduction exceeds the 20 percent taxable income limitation.

 

“The QBID is quite complex and subject to various limitations and thresholds,” wrote Lisa Beard-Niemann, acting deputy commissioner of the IRS’s Small Business/Self-Employed Division, in response to the report. “It is expected to impact millions of taxpayers, which will result in billions of dollars in tax deductions.”

 

 

 

College scandal involved shadowy tax-exempt charity with ‘yellow flags’

By Lynnley Browning, Simone Foxman and Suzanne Woolley

 

The California charity at the center of the college-admissions scandal listed no employees, had questionable documentation, and didn’t live up to its promises for years before it was exposed as a conduit for bribes to officials at elite universities.

 

And it apparently never attracted attention from the IRS.

 

Key Worldwide Foundation told potential donors that its aim was to provide educational opportunities to underprivileged kids. But the foundation, headed by William Singer, also helped celebrities, executives and other wealthy people bribe test monitors, school officials and coaches so their kids would be admitted to top universities, according to the FBI.

 

“Many things were off, odd,” said Lloyd Mayer, a professor at Notre Dame Law School who focuses on nonprofits and charities and who has read the filings. “These are all yellow flags.”

The foundation was spotlighted as the FBI conducted what it dubbed "Operation Varsity Blues," ensnaring key players from Hollywood, Wall Street and the sports world in a scandal that has laid bare the class distinctions in the college admissions process. The parents and coaches involved face criminal charges and some have lost their jobs.

 

Despite taking in more than $7 million in funds over four years and claiming to run an intern development program, Key Worldwide didn’t list any employees, according to four years of disclosures filed with the IRS. It had just three officers, low for a charity of its assets, and reported that two of them worked zero hours. Singer worked eight hours a week for the non-profit, the filings say, and didn’t report any compensation.

 

“You’d think they were at least paying somebody to keep track of the funds and pick recipients,” Mayer said.

 

The foundation had no independent directors, meaning that its own officers filled that role, led by Singer. The IRS considers non-independent directors to potentially have conflicts of interest through personal or financial ties to the entity.

 

At least one recipient of the foundation’s grants had the same residential address as the charity itself. Other grant recipients say they never received any money.

 

Despite these questionable practices, experts say the IRS just doesn’t go after foundations like Key Worldwide unless someone alerts it to possible wrongdoing.

 

Marcus Owens, a former IRS official in charge of the agency’s tax-exempt division, said that the filings didn’t contain details that "would automatically trigger an audit.” But that’s because "they avoided describing what they really do and they lied about certain grants they made."

 

Publicly, Key Worldwide highlighted its work with underprivileged kids. It “has touched the lives of hundreds of students that would never have been exposed to what higher education could do for them,” its website says. “Many of these students have only known life on the streets, surrounded by the gang violence of the inner-city.”

 

Its IRS filings say that its mission is “to provide education that would normally be unattainable to underprivileged students, not only attainable but realistic.”

 

Central Figure

Key Worldwide was founded about seven years ago by Singer, the central figure in the college bribery operation. He pleaded guilty Tuesday to racketeering, money laundering, fraud and obstruction of justice.

 

He is cooperating with investigators who have charged some 50 people, including actors Lori Loughlin and Felicity Huffman; William McGlashan Jr., a former partner at the private equity firm TPG, who was fired; and Gordon Caplan, the co-chairman of global law firm Willkie Farr & Gallagher, who has since been put on leave.

 

Singer bribed college coaches and officials at top universities including Yale, the University of Southern California and Georgetown University. Prosecutors allege that well-heeled parents paid Singer around $25 million from 2011 until last month.

 

Court papers allege that Singer conducted the scheme through his firm, Sacramento, California-based Edge College & Career Network LLC, and funneled the bribes through his Key Worldwide Foundation, an affiliated nonprofit.

 

Earlier this week, the California Attorney General’s office ordered Key Worldwide to cease and desist operations in the state; the charity’s website no longer has any content.

 

In most years since its inception, the foundation filed annual required financial statements with the IRS that are public record. The filings were signed by accountant James Williams, in Sacramento, who didn’t respond to repeated requests for comment.

 

In 2016, the last year records were available, the nonprofit reported $2,024,828 in “total functional expenses,” of which only $908 was for “management and general expenses,” leaving a clear question mark over how it was using its money.

 

IRS spokesman Eric Smith declined to comment, citing agency rules on taxpayer confidentiality.

In its first year at least, Key appears to have taken part in some genuine charitable activities. Tobi Quintiliani, a senior director with the 1736 Family Crisis Center, said that Singer set up a 5-day summer camp on entrepreneurship for about 80 students in July at UCLA.

 

Summer Program

But in federal tax filings, Key said it created a residential summer program for 100 kids with the center, and claimed they had placed students identified by the center in programs for the next two years, an assertion Quintiliani disputes.

 

Between 2014 and 2016, Key sent $33,329 to “Community Donations," an entity located at the same Sacramento residential address as the charity itself. While charities like hospitals occasionally raise money through affiliated organizations that share their own address, experts encourage them to keep particularly careful records as such coincidences draw scrutiny. Records for a business entity of the same name couldn’t be located.

 

In 2016, Key reported a $100,000 “donation” to Princeville Enterprises, a suspended corporation that shows no record of having been a formal charity. A public filing indicates its chief executive was Jorge Salcedo, the head men’s soccer coach at UCLA who has been charged with conspiracy to commit racketeering in the college admissions case. Attempts to reach Salcedo were unsuccessful.

 

Warning Signs

Robert Seltzer, the accountant who set up the entity for Salcedo in 2004, said Wednesday that Princeville Enterprises was set up to hold money that Salcedo made from summer soccer camps.

Paul Streckfus, editor of EO Tax Journal, said one obvious area where investigators can see warning signs is a foundation’s compensation. And Key Worldwide was reporting curious numbers.

 

Gordon Ernst, a former head tennis coach at Georgetown University, received almost $1.5 million from the foundation as a consultant from 2013 through 2016, according to its IRS filings. Ernst has been charged with conspiracy to commit racketeering. Ernst’s lawyer didn’t immediately return a message seeking comment.

Key Worldwide also appears to have listed numerous questionable partnerships on its website. Representatives for three of the six organizations it lists as partners on the site — Houston Hoops, Atlanta Xpress and Bizworld.org — said they had never heard of the foundation or had a partnership with it.

 

IRS Efforts

Bizworld.org has demanded that Key Worldwide immediately remove all references to it from the website, Bizworld.org chief executive officer Thais Rezende said in an email.

 

Efforts by the IRS to root out and prosecute tax fraud have declined in recent years amid steep cuts in staffing and budgets. In 2017, a tax-exempt organization stood a less than 1 percent chance of being selected for an audit, according to IRS data. The agency had about 840 fewer tax examiners in 2017 than it did four years ago.

 

"No one at the IRS probably even looked at the returns until the FBI called," Mayer said.

The IRS tends to focus more on individual taxpayers claiming deductions than on how charities are spending the money they’ve raised, said Suzanne Friday, vice president for legal affairs at Council on Foundations.

 

Still, Key Worldwide was relatively straightforward in one part of its mission statement. On its most recent IRS filing, it says, “Our contributions to major athletic university programs, may help to provide placement to students that may not have access under normal channels.”

— With assistance from Laura Davison, Robert Lee and Tom Maloney

 

 

 

Shrinking tax refunds cast a shadow on Trump’s signature law

By Laura Davison

 

Getting a tax refund is a springtime tradition that Americans love as much as Easter candy.

But fewer people are getting refunds this year and that’s causing angst for Republicans who want to convince voters that the 2017 tax overhaul really did give them a tax cut. If middle America can’t be persuaded, it could have big implications for the long-term viability of the overhaul, and how consumers spend their extra income.

 

Republicans are on the defensive. The once little-noticed ritual of releasing weekly refund data during the tax filing season has become politically fraught, with unfavorable data being released late on a Friday night, and better figures a week later causing Treasury Secretary Steven Mnuchin to take to cable news to tout success.

 

“Taxes are down so refunds should be down,” Mnuchin told the House Ways and Means Committee on Thursday. Mnuchin added that many people did not change their withholding and so refunds are consistent with last year.

 

Democrats see an opportunity to use the drop in refunds to hammer Republicans in the 2020 campaign for seeming to favor the wealthy and denying middle- and lower-income people the refunds they count on.

 

Polling shows the GOP has work to do. The tax law is the Republican Party’s signature legislative achievement, but still only about 39 percent of people approve of it, according to a series of polls conducted this year.

 

Representative Judy Chu, a California Democrat, said her office has received many calls from taxpayers complaining they didn’t get as big a refund as expected. Chu has introduced legislation that would lower penalties for people who didn’t withhold enough during 2018 as a result of the updated withholding tables. The Internal Revenue Service has eliminated some penalties for taxpayers who, in the first year of the new law, didn’t withhold enough.

 

“They depend on their refunds to pay bills, so they are quite upset,” Chu said. Senator Bob Casey, a Pennsylvania Democrat, predicts voters will remember their small refunds come 2020.

Early in the filing season, Mnuchin argued that smaller refunds meant people had more money in their pockets throughout the year. More recently, he’s pointed out that the refund numbers are coming into line with last year, a sign that he’s given up trying to convince the public that large refunds are less desirable.

 

Representative Dave Schweikert, an Arizona Republican on the House Ways and Means Committee, pointed to IRS data that shows the average refund is up compared to last year, a point that he said hadn’t been noticed.

 

“Even on the issue of tax refunds, it’s become politicized,” he said.

 

The GOP has some facts on its side. The number of refunds issued is down only 3.3 percent. And about 80 percent of filers received a tax cut under the new law, which lowered income tax rates and about doubled the standard deduction to $24,000 for a couple, according to estimates from the Urban-Brookings Tax Policy Center.

 

Yet the changes in withholding, which resulted in slightly higher paychecks, and the minimizing of popular write-offs, such as capping the deduction for state and local taxes at $10,000, made the changes more subtle than the arrival of a refund check.

 

Extra money may not seem like that much if it’s doled out in small amounts.

“It’s hard to diet if there is candy on the counter every Friday,” said Richard LeVine, a tax lawyer at Withers Bergman.

 

Americans seem to like to keep the candy out of sight until the spring refund season. The argument that the refund cycle means people are giving an interest-free loan to the government falls on deaf ears when the refund allows people to make a significant payment on a debt or pay for a vacation.

 

A poll done by Bankrate in 2015 shows that most Americans want a refund, ranging from 57 percent for those earning less than $30,000 to 63 percent for those earning between $50,000 and $74,999. And 53 percent of those who earn more than $75,000 prefer those springtime windfalls.

“Irrational as it might be, big refunds seem to be something that many households are comfortable with,” Nancy Van Houten, an economist at Oxford Economics, said. “People view it as savings that they wouldn’t save otherwise.”

 

Ultimately, it’s not yet known exactly how refunds will compare to last year. The IRS has issued about 53.5 million refunds, approximately 40 percent of the total anticipated for the year, as of March 8. National Taxpayer Advocate Nina Olson has said people who have a liability tend to file later, so the refund data could become bleaker as the filing season wears on.

 

Republicans have consistently lost the messaging battle on the tax overhaul. An internal Republican National Committee poll from before the 2018 midterm elections concluded that by a 2-to-1 margin, voters believe the changes helped the wealthy more than the average American.

Conservatives complain the the confusion about refunds has overshadowed the argument that the tax law has helped keep unemployment low and sustained the economic expansion.

 

“It’s unfortunate that the economic growth message lost out to discussion about how many dollars are in my paycheck,” said Adam Michel, a senior policy analyst at the Heritage Foundation.

 

Tax refunds also have economic sway, according to research from the JPMorgan Chase Institute. Those checks are often the biggest windfall of the year for many Americans, and those who receive refunds have higher bank-account balances for six months after the check arrives. Smaller-than-anticipated refunds could cut into some of the economic security that some taxpayers expect.

 

“The tax cut was never quite as popular as Republicans hoped and I don’t think the refund numbers help,” Van Houten said. “This will stick with people for a bit.”

 

 

 

The 5 new tax provisions keeping accountants up at night

By Michael A. Sonnenblick

 

There has been no shortage of confusion as American taxpayers have started filing their returns for the first time under the 2017 tax overhaul.

 

Though it was pitched initially as a simplification, the Tax Cut and Jobs Act ultimately ushered in approximately 500 changes to the Internal Revenue Code, including many brand new and highly complex provisions.

 

While some of these changes were small, others have caught taxpayers off guard. Accordingly, the headlines have been littered with examples of families that neglected to change their paycheck withholdings during the year, only to be surprised when their tax return disappeared, and homeowners lamenting lost tax deductions.

 

While those anecdotal, individual tax dramas are unfolding on an hourly basis these days, there is a list of even bigger issues that are keeping even trained tax professionals and accountants up at night. To find out which provisions of the TCJA are sparking the most uncertainty and confusion among the experts, we queried our Thomson Reuters Checkpoint database to find out where the greatest number of searches and information requests were concentrated.

 

Here are some of the TCJA-related areas that have generated the highest level of concern:

 

  1. The IRC § 199A qualified business income deduction: This is a brand-new deduction that many, if not all, pass-through entities are looking at. The provision allows eligible taxpayers to deduct up to 20 percent of their qualified business income (QBI), plus 20 percent of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income. Income earned through a C corporation or by providing services as an employee is not eligible for the deduction. Like Qualified Opportunity Funds (discussed below), the Treasury regulations accompanying this provision are complex and confusing. Tax planners see the regulations as both positive tax planning opportunities but also potential traps for the unwary.

 

  1. 100 percent depreciation of qualified property under IRC § 168(k): Many taxpayers are familiar with 50 percent bonus depreciation — an immediate deduction of 50 percent of the cost of eligible business or other income producing property, followed by depreciation deductions for the remaining 50 percent of the cost over the regular depreciation period. By accelerating the tax savings from depreciation deductions for machinery, equipment, most software and certain real property, 50 percent bonus depreciation deduction was available to lower the true economic cost of these assets. But the TCJA replaced the 50 percent bonus depreciation with 100 percent bonus depreciation, an even more powerful cost cutting tool.

 

  1. Qualified Opportunity Funds under IRC § 1400Z-2: This is the triple play of tax benefits. Investors can defer recognizing capital gains if they rollover the capital gain to a qualified opportunity fund (QOF). Then, if they keep the QOF investment for a period of time, a portion of the capital gain is reduced. And if they keep the QOF investment for a longer period of time, there is no tax on the appreciation within the QOF itself.

 

  1. The new like-kind exchange rules under IRC § 1031: Like-kind exchanges, which previously afforded favorable tax treatment to a broader range of property types, are now limited to real property.

 

  1. Nondeductibility of entertainment expenses under IRC § 274: This one is simple — no deduction is allowed for any item with respect to an activity of a type that is generally considered to be entertainment, amusement, or recreation (but there is still allowed a 50 percent deduction allowed for meals, including food and beverage).

 

The interest in these topics is high. And for new concepts such as the qualified business income deduction and Qualified Opportunity Funds, the IRS has issued hundreds of pages of regulations to help explain what can and cannot be done.

 

For many tax pros, though, that’s still not enough. They not only need the original source material, but also the analysis and interpretation around each provision, which helps to organize the information and provide insight into what’s really going on with the new laws. Based on the volume of inquiries into these five provisions, expect to see these areas crop up on the IRS’s radar for closer review. 

 

 

 

Taxpayers unaware of filing deadline, withholding and tax law changes

By Michael Cohn

 

Many taxpayers are unaware of the tax-filing deadline this year, as well as of the amount of taxes being withheld from their paychecks and some of the key provisions of the recent tax law, according to a new survey. Other surveys released this week revealed uncertainty about the new tax law.

 

One survey released Thursday by Betterment, an online financial advisor, polled a sampling of 1,000 people online and found that 85 percent of respondents reported feeling somewhat confident in their knowledge of taxes. However, when asked about specific tax matters, 23 percent of the respondents didn’t know the correct tax filing deadline for this year was April 15, 48 percent didn’t know tax rates for tax brackets decreased from last year, and 50 percent didn’t know how much was withheld from their paycheck for taxes

 

The survey also asked about consumers’ plans for this tax season, and found that 41 percent of the respondents plan to use tax refunds to pay off debt, but only 6 percent of them said they would use it to save for retirement. As a result of the Tax Cut and Jobs Act of 2017, 18 percent of respondents said they have increased their 401(k) contributions, while 10 percent have increased their IRA contributions. In the aftermath of the government shutdown, one-third of the taxpayers polled said they plan to file earlier than usual because of concerns about delays on their tax refunds. The survey found that 41 percent of the respondents plan to use at least some of their tax refunds to pay off debts, such as medical bills, car payments and credit card balances.

Tax filing deadline

More Republicans than Democrats indicated they believe the majority of tax dollars aren’t spent wisely. When asked where they think the bulk of federal tax dollars go, the top response across all political affiliations was “bureaucracy and waste,” but Republicans were more likely to cite that response than Democrats.

 

“Taxes seem to be an almost universal source of dread and it’s clear that the news cycle this past year has brought additional stress and confusion to the equation,” said Eric Bronnenkant, head of tax at Betterment, in a statement.

 

Enrolled Agents

A separate survey of tax professionals bears this out. The National Association of Enrolled Agents released a report Tuesday on the results of an online survey of 924 of its members. The enrolled agents polled mostly think taxpayers are unprepared for the current filing season. They believe more consumers will find tax preparation more challenging this year due to the Tax Cuts and Jobs Act and will seek the services of tax professionals.

 

The poll found 91 percent of the enrolled agents surveyed strongly agree that taxpayers are baffled by the TCJA and are unprepared to file. It’s not just the new tax law confusing taxpayers. Many businesses are also unprepared to deal with the Supreme Court’s Wayfair decision on online sales taxes. An overwhelming 86 percent of the NAEA membership believe that small businesses are unprepared to deal with the Supreme Court’s decision in South Dakota vs. Wayfair Inc. et al. When combined with tax reform uncertainty, 59 percent of the survey respondents believe there’s a perfect storm of doubt that will drive more taxpayers to their firms.

Despite the importance of paying attention to tax withholding in the wake of the new tax law, the survey found 90 percent of enrolled agents strongly agreed that taxpayers pay little or no attention to planning their annual withholding amounts. Many taxpayers found this tax season they unexpectedly owed money to the IRS, or they received a much lower tax refund than expected, because of the changes in the new tax law and the withholding tables.

 

“Refunds are top of mind when people think of tax season, but we should caution clients that the better metric by which to judge a tax return is total tax—and whether the return is accurate and defensible if IRS comes knocking,” said NAEA Executive Vice President Robert Kerr in the report.

 

When asked which documents taxpayers were least likely to remember to provide to a tax professional, the enrolled agents surveyed identified the Schedule K-1, Form 1095-A, Form 1099, Form 1099-S, 1099-R, and proof of health insurance as the most probable.

 

Swim with Sharks or File Taxes?

Another survey shows a combination of optimism and pessimism about the new tax law and taxes in general. The consumer finance site Wallethub released a taxpayer survey Tuesday. It found that fewer than four out of 10 people are happy with the tax changes from the Tax Cuts and Jobs Act, with 70 percent indicating they think the reforms benefit the rich more than the middle class. Similar to the Betterment survey, 89 percent of the respondents said the government currently does not spend their tax dollars wisely.

 

WalletHub also asked about Tax Day fears, and 31 percent of the respondents said making a math mistake was their biggest Tax Day fear, edging out not having enough money (28 percent) at the top of the list. When asked what they would do to have a “tax-free future,” 36 percent of the respondents said they would move to a different country, 24 percent would get an “IRS” tattoo, 15 percent would take a vow of celibacy, 11 percent would name their child “Taxes,” and 2 percent would clean prison toilets for three years.

 

According to WalletHub’s survey, nearly 50 percent of people would rather serve jury duty than file their taxes, 25 percent would miss a connecting flight, 21 percent would rather talk to their kids about sex, 13 percent would prefer to swim with sharks, 11 percent would spend the night in jail, and 11 percent would drink expired milk.

 

“Being on jury duty can be interesting and get you a few days off work,” said Michael Ettlinger, director of the Carsey School of Public Policy at the University of New Hampshire, in a statement. “You feel you are performing a useful service to your community. Dealing with tax filing is complicated and the consequences of doing it wrong can be substantial — which makes it stressful.”

 

When asked what they like more than the IRS, 42 percent said inlaws, 21 percent said snakes and spiders, 20 percent said cold showers, and 17 percent said traffic jams.

 

WalletHub also asked about attitudes toward accountants. While 56 percent of the respondents found accountants to be sometimes helpful, and 20 percent said accountants are a good deal, 20 percent said they’re overpriced and 4 percent said they’re a scam.

 

 

 

 

$1.4 billion in refunds waiting for non-filers

By Jeff Stimpson

 

In a tax season when many have complained about diminished or disappearing refunds, the Internal Revenue Season announced Wednesday that unclaimed income tax refunds totaling almost $1.4 billion may be waiting for an estimated 1.2 million taxpayers who did not file a 1040 for 2015.

 

The IRS estimates the midpoint for the potential refunds for 2015 is $879.

 

To collect, these taxpayers must file their 2015 federal returns no later than this year's tax deadline, April 15. Taxpayers in Maine and Massachusetts have until April 17.

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“Students, part-time workers and many others may have overlooked filing for 2015,” said IRS Commissioner Charles Rettig in a statement.

 

Taxpayers seeking a 2015 tax refund may have their checks held if they have not filed tax returns for 2016 and 2017. In addition, the refund will be applied to any amounts still owed to the IRS or a state tax agency, and may be used to offset unpaid child support or past due federal debts, such as student loans.

State-by-state estimates of individuals who may be due 2015 income tax refunds

State or district

Estimated no. of individuals

Median potential refund

Total potential refunds*

       
       

Arizona

27,300

$780

$29,486,000

Arkansas

11,200

$824

$12,000,000

California

111,200

$832

$124,397,000

Colorado

23,500

$824

$26,173,000

Connecticut

12,700

$952

$15,981,000

Delaware

4,800

$886

$5,570,000

District of Columbia

3,400

$918

$4,219,000

Florida

84,000

$887

$95,697,000

Georgia

41,100

$799

$44,754,000

Hawaii

7,000

$935

$8,523,000

Idaho

5,200

$712

$5,209,000

Illinois

45,800

$924

$54,804,000

Indiana

26,900

$895

$30,670,000

Iowa

12,300

$913

$13,737,000

Kansas

12,700

$874

$14,283,000

Kentucky

15,700

$874

$17,246,000

Louisiana

22,600

$884

$26,759,000

Maine

4,700

$806

$4,820,000

Maryland

25,700

$897

$31,274,000

Massachusetts

26,100

$973

$32,579,000

Michigan

39,700

$873

$45,535,000

Minnesota

18,000

$813

$19,222,000

Mississippi

11,200

$814

$12,032,000

Missouri

27,000

$825

$29,008,000

Montana

4,100

$831

$4,521,000

Nebraska

6,300

$870

$6,923,000

Nevada

13,700

$867

$15,728,000

New Hampshire

5,500

$976

$6,859,000

New Jersey

33,100

$960

$41,353,000

New Mexico

8,600

$860

$9,950,000

New York

62,500

$964

$77,662,000

North Carolina

37,100

$831

$39,955,000

North Dakota

3,700

$980

$4,493,000

Ohio

43,600

$852

$47,428,000

Oklahoma

19,100

$886

$22,006,000

Oregon

17,900

$779

$19,118,000

Pennsylvania

46,000

$934

$53,541,000

Rhode Island

3,300

$949

$4,025,000

South Carolina

14,600

$777

$15,701,000

South Dakota

3,300

$928

$3,646,000

Tennessee

24,000

$853

$25,976,000

Texas

129,300

$929

$158,244,000

Utah

9,300

$791

$9,859,000

Vermont

2,200

$876

$2,388,000

Virginia

32,900

$867

$38,441,000

Washington

32,400

$939

$40,142,000

West Virginia

5,900

$948

$6,979,000

Wisconsin

16,100

$787

$16,532,000

Wyoming

3,300

$958

$3,964,000

Totals

1,197,600

$879

$1,379,412,000

 

 

 

 

Hearing leaves tax extenders still in limbo

By Heidi Henderson

 

The House Ways and Means Committee in Congress held a hearing on Tuesday to discuss temporary tax provisions and the urgency of both currently expired provisions and those set to expire. According to the Joint Committee, there are 80 provisions set to expire between now and 2027, and around 29 provisions which have expired in 2017 or 2018.

 

Many of these provisions have been routinely extended and are often expected to be extended, including clean energy and energy efficiency incentives that have left taxpayers in limbo.

 

Although the hearing was set to discuss these temporary policies in the Internal Revenue Code, the discussion quickly turned political, with arguments from both sides about the value and impact of the Tax Cuts and Jobs Act and how it was enacted. The limited discussion about actual tax extenders led to a suggested outside third-party review to determine which provisions should be extended and which should end. However, it is unclear where this will go.

 

Provisions under consideration

The committee issued document JCX-8-19 outlining the provisions that have expired in 2017 and 2018, and those expiring in 2019. A brief list of these provisions include: 

 

·      45L (a $2,000 credit for the construction of new energy efficient homes);

·      179D ($1.80 per square foot for energy-efficient commercial buildings);

·      6426/6427 (incentives for alternative fuels);

·      Cost recovery provisions for horses, motorsports, Indian reservations property, and film production;

·      Excise taxes on beer, wine and distilled spirits;

·      Credit for health insurance costs;

·      New Market tax credit;

·      Work opportunity tax credit; and,

·      Qualified tuition deduction.

 

Witness statements

There was agreement from both Republicans and Democrats that the temporary and often retroactive nature of extenders is unhealthy and stunts the effectiveness of the provisions due to unpredictability.

 

Congressional members also agreed that tax extenders are positive when they promote good behavior in energy conservation, efficiency and investment in new technologies and job creation.

Witness testimonies included opinions from Chye-Ching Huang, director of federal fiscal policy at the Center on Budget and Policy Priorities, who believes the focus should be on restructuring the TCJA to prioritize low-income families, including a heightened focus on the Earned Income Tax Credit and the Child Tax Credit.

 

Kyle Pomerleau, chief economist and vice president of economic analysis at the Tax Foundation, highlighted the importance of stability, meaning temporary and retroactive tax laws should be avoided. And he pointed out the opportunity to evaluate different aspects of the law to make those that are worthy permanent.

 

Pam Olsen, U.S. deputy tax leader at Big Four firm PricewaterhouseCoopers, encouraged the committee to end the uncertainty that temporary tax provisions breed: Temporary tax provisions are supposed to be an effective tool to test the efficacy of a provision before making it permanent or to encourage or change a behavior, and should remain in effect for a sufficient period to demonstrate their effectiveness.”

 

The takeaway

With the 2018 tax filing season underway, many taxpayers and tax preparers are searching for updates on the status of these expired provisions, which have offered tax relief over the past decade to hundreds of thousands of individuals and businesses — many of whom are waiting for these extensions.

 

The Energy Policy Act of 2005 enacted provisions such as the 45L credit and 179D deduction, which have been extended five to seven times in the past 10 years. Unfortunately, the enactment of another extender bill in the new future is unclear, and the status of these expired provisions will keep taxpayers in limbo for the unforeseen future.

 

 

 

 

Democrats introduce bill to curb tax havens

By Michael Cohn

 

Rep. Lloyd Doggett, D-Texas, a member of the House Ways and Means Committee, and Senator Sheldon Whitehouse, D-R.I., a member of the Senate Finance Committee, introduced a pair of bills aimed at stopping corporations from using offshore tax havens and outsourcing jobs to other countries.

 

The first bill, the No Tax Breaks for Outsourcing Act, aims to level the playing field for domestic companies by ensuring multinational corporations pay the same tax rate on profits earned abroad as they do in the U.S. The bill would end some tax breaks for the oil and gas industry. It would also treating “foreign” corporations that are managed and controlled in the U.S. as domestic companies. It would also prevent multinationals from disproportionately loading up their U.S. subsidiaries with debt to shrink their tax bill.

 

The Stop Tax Haven Abuse Act would prohibit U.S. companies from electing to be treated as “foreign” for tax purposes and deeming corporations that are managed and controlled in the U.S. as domestic companies. The bill would give investors information about risky tax avoidance strategies by requiring corporations to disclose their country-by-country revenue, profits and employee count to the Securities and Exchange Commission. It would require repatriation of oversees money under the Tax Cuts and Jobs Act to be done immediately. The legislation would also limit “inversions” by maintaining the U.S. tax treatment of merged companies that retain a majority of U.S. ownership. It would also prevent investors from avoiding taxes through “swap” payments.

 

“By encouraging multinationals to invest abroad instead of here at home, it puts America last,” said Doggett in a statement. “It is flat wrong that the corner pharmacy should have to pay a tax rate that is substantially higher on its operations here than Pfizer does offshore. The No Tax Breaks for Outsourcing Act would treat both the same, leveling the playing field for small and domestic-oriented businesses. The Stop Tax Haven Abuse Act would shut down the complex shell games that allow corporations and the superrich to hide their profits in island tax havens, forcing working families to make up the difference.”

 

The Stop Tax Haven Abuse Act would also offer enforcement tools to the Treasury Department to compel foreign banks to follow existing law that requires disclosure of new bank accounts. It would provide rebuttable presumption in civil judicial, administrative tax, and SEC proceedings that U.S. taxpayers control the offshore entities they create. The bill would also require banks and brokers to disclose to the IRS beneficial ownership information they find while complying with existing anti-money laundering laws. The legislation includes anti-money laundering requirements for agents that form shell companies, along with streamlined processes for the IRS to investigate Swiss bank accounts and to enforce requirements that taxpayers disclose them.

“We need to end these costly and harmful giveaways and level the playing field for businesses that grow jobs and raise wages here at home,” said Whitehouse.

 

 

 

 

 

Trouble with tax withholding? Taxpayer Advocate had same problem

By Laura Davison and Kaustuv Basu

 

People discovering that they had too little tax taken out of their paychecks last year are in good company. It took National Taxpayer Advocate Nina Olson three attempts to figure out her own withholding.

 

Olson — who runs an independent office in the IRS to help taxpayers with significant problems — said after last year’s tax law changes she consulted the IRS’s online withholding calculator as well as the withholding tables themselves, and came up with what she believed needed to be withheld from each paycheck.

 

But “when the paycheck came out, I thought that’s not the right dollar amount," Olson told reporters Thursday after testifying to a House Ways and Means subcommittee. “So, then I went back and I added some more money.”

 

She said it took her two more tries to get it right.

 

“How is this filing season going to work” for the “regular old taxpayer?” Olson said.

Because many people don’t have Olson’s expertise or the tenacity to continue fine-tuning the amount of tax they have withheld from their paychecks, they could end up with a surprise this tax season. Some, particularly those who benefit from an expanded $2,000 child tax credit, will end up with a bigger refund.

 

But others are finding out that the tax law changes and updated tables that tell employers how much to take out of worker’s paychecks are resulting in lower or no refunds at all.

 

About 21 percent of taxpayers — roughly 30 million people — will end up owing the IRS this tax season, according to the Government Accountability Office. That’s up from 18 percent last year, before the changes from President Donald Trump’s tax overhaul took effect.

 

So far, the total number of refund dollars sent out this year is down about 3.6 percent, compared to 2018, according to IRS data that goes through Feb. 22. Several bank analysts expect the total value of refunds issued this filing season will ultimately be about $20 billion more than last year.

Stories of lower refunds have put Republicans on defense as they try to convince voters that their tax law was good for the average person’s bottom line. About four in five taxpayers got a tax cut as a result of the law, according to the Urban-Brookings Tax Policy Center. But the law has persistently been unpopular, recent polls have found.

 

Olson said she “can’t predict” how refund totals will look at the end of the tax season, but said that taxpayers who have a balance due tend to file close to the April 15 deadline to prolong having to pay the IRS for as long as possible.

 

However, Olson said the number of people who are receiving a lower-than-expected refund or finding out they owe is concerning because “they have allocated that refund for something,” she said.

 

The trouble is compounded when people find out that they owe the IRS, Olson told the House Ways and Means Subcommittee on Thursday. Those who have a balance due and try to call the IRS for help wait on average 60 minutes. And only about 15 percent of calls get answered at all, she said.

 

“I am very concerned about this,” Olson said. “It creates more work for the IRS and more burden for the taxpayer.”

 

 

 

 

 

Capital gains increase at heart of Democrats’ tax-the-rich plans

By Lynnley Browning

 

Bill Gates, Elizabeth Warren and Bernie Sanders all want the rich to pay more taxes, but Gates is saying what the Democratic candidates appear to be thinking: Go for the capital gains rate.

Gates, the billionaire co-founder of Microsoft Corp. and the world’s second-richest man, has suggested that an increase in the capital gains tax rate is the simplest and most direct way to target America’s wealth.

 

And tax experts say that’s essentially what Senators Warren and Sanders, both seeking the 2020 Democratic presidential nomination, are doing with her wealth tax and his expansion of the estate tax. They’re just packaging it in a way that’s easier to sell on the campaign trail.

 

Democratic tax proposals are simply a “stealth attack” on the preferential rate for capital gains, said Christopher Faricy, a political science professor focused on tax and inequality at Syracuse University.

 

Source of Riches

The very wealthiest of taxpayers derive the bulk of their riches not from wages or salaries but from capital gains profits on investments in stocks, property or other assets. Unlike labor income, which is taxed at a top rate of 37 percent, profits on assets held for at least a year before being sold bear a top rate of 20 percent.

 

In 2018, nearly 69 percent, or more than $584 billion, of all long-term capital gains went to the top 1 percent of of the 1.1 million wealthiest U.S. filers, according to the Urban-Brookings Tax Policy Center. The richest Americans got the lion’s share, with the top 0.1 percent of the 110,000 wealthiest filers scoring more than three quarters of that total.

 

“Most of the wealth gap is due to capital gains,” said Mark Spiegel, who runs a small hedge fund at Stanphyl Capital Management. “Nobody’s earning $50 million in labor income.”

 

Warren’s “Ultra-Millionaire Tax” plan targets capital gains without saying so and taxes them differently. She would require the top 75,000 wealthiest U.S. households to pay an annual 2 percent levy on each dollar of net worth over $50 million. Billionaires would pay an additional 1 percent tax over that.

 

By going after accumulated wealth at death, Sanders also targets the fruits of capital gains with his proposal to dramatically expand the estate tax, including imposing a new 77 percent rate on the portion of estates worth more than $1 billion. His plan would also lower the threshold at which the estate tax kicks in, to more than $3.5 million from the current $11 million, a level doubled in the GOP 2017 tax overhaul, and impose a 45 percent rate on estates worth as much as $10 million.

 

But going after capital gains has always been politically tricky and hard to sell to the public.

“Republicans treat” the capital gains tax benefit “like it’s a tablet from Moses,” said Mark Mazur, director of the tax policy center and a senior Treasury official during the Obama administration. “But there’s nothing sacred about it.”

 

Democratic plans that target wealth that largely comes from capital gains functionally serve as the equivalent of a higher rate on those profits, according to Mark Bloomfield, president and chief executive officer of the American Council for Capital Formation, a lobby and research group.

 

Said Andrew Hayashi, a tax law expert at the University of Virginia School of Law: “The spirit of the moment is that people feel like capital income is under-taxed.”

 

The Democrats’ proposals, derided as “socialism” by President Donald Trump, are most likely to remain just campaign rallying cries unless a Democrat wins the White House in 2020 and the party gains control of both houses of Congress.

 

But calls to seize the wealth of the top 1 percent or fewer make for better campaign rallies than calls to raise the rate on capital gains, Mazur said.

 

‘Big Fortunes’

Gates, for what is believed to be the third time in a decade, said in a television interview last month that “the big fortunes, if your goal is to go after those, you have to take the capital gains tax, which is far lower at like 20 percent, and increase that.”

 

The revenue, he said, should be used to plug the budget deficit — a different goal from Democrats, who want to use the revenue raised on federal health and child-care programs, among other things.

 

Political fights over capital gains aren’t new. But earlier battles focused directly on changing the rate itself, rather than targeting the fruits of those profits or indexing it for inflation — an idea that Treasury Secretary Steven Mnuchin and Trump briefly floated last year.

 

The capital gains rate has fluctuated from a high of nearly 40 percent in the late 1970s to 28 percent after former President Ronald Reagan’s tax cuts of 1986, and has been at the current 20 percent since 2013.

 

Gates hasn’t gone into detail on how to raise the capital gains rate. His $98.5 billion net worth includes the charitable Bill & Melinda Gates Foundation. With nearly $51 billion in endowment assets as of the end of 2017, the foundation is fueled mainly by profits from Microsoft stock and dividends through Cascade Investment, his holding company.

 

Economists debate whether reducing the rate would spur or retard economic growth and charitable giving.

 

Raising it 5 percentage points to 25 percent would produce less than $25 billion in revenue over a decade through 2027, according to Tax Policy Center estimates. Meanwhile, Sanders estimates that his increase on billionaire estates alone would raise up to $2.2 trillion. Warren’s plan would raise $2.75 trillion over 10 years, according to her campaign.

 

Spiegel, echoing an argument often heard on Wall Street, said that reducing the benefit would prompt wealthy investors to work less. “Chances are the guy making $10 million a year in capital gains and income is working 80 hours a week” — and if top incomes bear more tax, “that guy’s not going to work more, and instead go hang out on the tennis court or boat all day.”

 

 

 

 

Now is the best time to get right with the IRS

By Jim Buttonow

 

About 16 million individual taxpayers owe back taxes to the IRS. If left unresolved, unpaid taxes can bring headaches to taxpayers and their tax professionals. Taxpayers who owe back taxes are likely to experience held or offset refunds and mounting penalties. Even worse, taxpayers can face Internal Revenue Service enforcement through streams of collection notices and enforcement action such as liens, levies, and passport restrictions.

 

Taxpayers with unpaid taxes need a plan — and the best time to execute the plan is during tax season. Why? In order to get in good standing with the IRS for back taxes, taxpayers must be in both filing and payment compliance. For those who owe and cannot pay each year, tax filing season is the easiest time of the year to get back into both filing and payment compliance with the IRS and to get into an agreement with the IRS that will break the noncompliance cycle.

 

Filing compliance requires that the taxpayer has filed all required past returns. Taxpayers who are not in filing compliance cannot enter into an agreement with the IRS on their tax debts. IRS policy states that filing compliance is met if the taxpayer files a tax return for the current year and the past six years. For example, taxpayers are currently considered compliant if they have filed 2012-2017 (the past six years) and the current 2018 tax year by its due date.

 

Tax filing season offers tax professionals the perfect opportunity to address unfiled returns and get in the position to stop future noncompliance. Taxpayers who will continue to owe for 2018 should not procrastinate and incur additional penalties. It is critical for balance-due taxpayers to file on time to avoid a very costly failure-to-file penalty in addition to the taxes owed.


Payment compliance is easier earlier in the year

Once filed, the second requirement is for the taxpayer to be in payment compliance. Payment compliance is defined as having adequate withholding and/or estimated tax payments so that the taxpayer does not owe again in the future. Payment compliance is easiest to achieve in the first part of the year because the taxpayer can make the first quarter of required estimated tax payments or change their withholding so that they will not owe for the following year.

 

It is often very difficult for taxpayers to catch up on estimated tax payments or withholding later in the year. Taxpayers often cannot make up overdue estimated tax payments or adjust withholding later in the year to make sure that they do not owe at the end of the year.

 

Once the taxpayer is in filing and payment compliance, they can get into good standing with the IRS and avoid IRS enforcement by getting into one of the many collection options offered by the IRS. These options include payment plans, hardship status (called currently not collectible), or in some cases a tax settlement called an offer in compromise.

 

Payment compliance is not just an IRS requirement. If a taxpayer is in payment compliance, they can stop the root cause of their tax problem and avoid year-after-year issues with the IRS as a result of filing a new tax return with an unpaid balance owed. New unpaid balances default prior IRS agreements and bring the taxpayer back under scrutiny of the IRS — angrier than ever because of the taxpayer’s continuous non-compliance.


An illustration

Tax filing season is a great time for tax debtors to resolve their problems. It is easier for them to file back returns with their current year return. It is also the least expensive time to get back into payment compliance. Let’s look at a typical repeat tax debtor situation to illustrate:

 

The facts: John has a day job as an electrician. He also drives for Uber at night. He owes the IRS $22,000 in back taxes from 2015, 2016 and 2017. John owes every year because he has not increased his withholding on his day job or made estimated taxes to offset the $12,000 a year he makes as an Uber driver. John is about to file his 2018 return and owe $6,000 in additional taxes, mostly caused by his Uber earnings. John has an unfiled return for 2014 on which he believes he will also owe. John has contacted the IRS on several occasions to make arrangements on the amount he owes. However, the IRS will not let John into a payment arrangement (called an installment agreement) because he has not filed his 2014 return (not in filing compliance) and will owe again for 2018 — and likely for 2019 in the following year (not in payment compliance).

 

The plan: John contemplates his options — he sees no way to stop the continuous cycle of noncompliance. He has no funds to pay the 2018 balance and make payments for the current year so he does not owe again. Here is the best option for John:

 

1.   Get into filing compliance: John needs to file 2014 and 2018 immediately. Add the amount owed to the current balance of $22,000. All required returns will be filed, and John will be filing compliant.

2.   Get into payment compliance: Rather than pay the 2018 return balance that will cause him to not have enough funds to make estimated tax payments so he will not owe in 2019, John should focus his limited resources on making an estimated tax payment for the first quarter of 2019. John can get into an installment agreement that includes the 2018 balance owed. By focusing on future payment compliance, John will stop his pattern of repeat file/owe and avoid inevitable future default of his installment agreement. Most importantly, because John is in the first quarter of 2019, he will only need to make his first estimated tax payment to be in payment compliance with the IRS. Obviously, John will need to continue making payments in the subsequent three quarters to make sure he will not owe at the end of the year.

3.   Get into an agreement with the IRS on the balances owed: With filing and payment compliance solved, John will be in a position to both consider all collection options and enter one of the options with the IRS. When John gets an IRS collection option, he is in good standing with the IRS and will avoid enforced collection.

4.   Look for opportunities to lower the balances owed: Not facing IRS enforcement, John can now look at prior balances owed for any missed deductions or credits. He can look for opportunities to file an amended return to lower the balances owed. Also, John can evaluate whether he qualifies for penalty abatement, including first-time abatement, to lower amounts owed.

5.   Stay in filing and payment compliance and complete the terms of the agreement: John will need to stay in good standing. John will need to file on time to avoid added penalties, pay according to his installment agreement, and avoid an unpaid balance due return in the future, especially by making estimated tax payments. If John entered into an installment agreement as his collection option and his financial situation gets worse (for example, he becomes unemployed), John can renegotiate the agreement with the IRS (perhaps currently not collectible status).

 

Stopping the cycle of IRS problems: John files his 2014 and 2018 returns. He adds $14,000 of penalties and interest to his current $22,000 balance owed. His total balance owed is $36,000. John focuses on not owing in the future and starts making estimated tax payments for the first quarter of 2019. His estimated payment is $1,500 for each quarter so that he will not owe at the end of the year.

 

After filing and making his first estimated tax payment, John is now in good standing and he qualifies to enter into a collection alternative with the IRS. John determines that his best alternative is an IRS streamlined installment agreement to pay over 72 months. (For more on IRS installment plans, see “Getting to know the IRS payments plans.”) John will have a monthly payment to the IRS of $500. John later discovers he qualifies for first-time abatement for the 2014 tax year — and requests abatement of $2,400 for his failure-to-file and failure-to-pay penalties. He continues to make monthly payments on his installment agreement and quarterly estimated tax payments. In 2019, John files his return with a small balance owed of $110. He pays the balance with the return and avoids defaulting his agreement. John is back on track to resolving his tax problems and has stopped his repeated cycle of IRS problems.

 

The importance of resolving during tax season

In our example, John is much more likely to be able to get caught up in the first quarter of the year. He can start making estimated tax payments and not have to catch up on back quarters to avoid owing in the following year. He also has tax filing on his mind and a tax professional as a resource to help him get back into filing compliance by filing late returns.

 

Tax season is the best time for tax debtors who owe each year to reverse the noncompliance cycle. Waiting past tax season just puts more obstacles to getting filing and payment complaint — and running the risk that the problems lasts again for another year.

 

 

 

 

Buffett’s advice has NFL star OK with higher taxes

By Scott Soshnick and Eben Novy-Williams

 

National Football League veteran Ndamukong Suh has always mixed football with finance, considering things like state taxes when weighing where to play.

 

Florida has no state income tax, which is one reason Suh, a 6-foot-4, 305-pound defensive lineman, said he chose to play for the Miami Dolphins after leaving the Detroit Lions following the 2014 season.

 

Prior to this past season, however, Suh signed with the Los Angeles Rams, and California’s tax rate is among the highest in the nation. The 32-year-old did so on the advice of longtime friend Warren Buffett, who told the former University of Nebraska star that all cities aren’t equal, particularly to an athlete-investor with interests in restaurants, technology and real estate.

 

“As Mr. Warren Buffett has always said: There’s intrinsic value in certain cities,” Suh said on the Bloomberg Business of Sports podcast. “So, even though L.A. and the state of California have very high taxes, there’s a lot of intrinsic value that I’ve been able to lean on.”

 

Suh signed a one-year, $14 million contract with the Rams and said he pocketed about half of that. He said being in L.A. has allowed him to develop relationships with people like Dodgers part-owner Magic Johnson and Mandalay Entertainment Chairman Peter Guber, also an investor in the Dodgers, as well as basketball’s Golden State Warriors and Los Angeles Football Club of Major League Soccer.

 

“I’ll take a hit in taxes to be able to have the opportunity to be close to those people,” said Suh, whose principal residence is in Texas, which also has no state income tax.

 

Suh is a free agent, meaning he can sign with any NFL team. Should he want advice on what to do next, he said the multibillionaire Berkshire Hathaway Inc. chairman, whom he met as a senior in college, is always available.

 

“All you have to do is pick up the phone and he’s always there to answer,” said Suh — who, by the way, said he owns “plenty” of Berkshire Hathaway shares, declining to be specific. “I’ve learned a handful of things from him and continue to do so.”

 

 

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

 

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