Do your CPA a favor
Many individuals have circumstances that make the early preparation of their return impossible. Often there is a K-1 from some investment that does not arrive until sometime in March. Do your CPA a favor and turn in everything else when you have it “pulled together”. This will allow them to process the majority of your return and wait for the one or two pieces of information that is needed to complete it for later.
This accomplishes several things.
You can get a “ball-park” on where your return stands and prepare for it. If you are going to owe you have sometime, etc.
Your CPA can work on your return without it being a “rush”.
Your CPA will probably be reviewing it a second time (outside of their normal review process) at a later date and often this will prevent a “forest from the trees” type error that sometimes occurs with “rush jobs”
So do yourself and your CPA a favor.
BY MICHAEL COHN
The number of criminal prosecutions referred by the Internal Revenue Service to the Justice Department has increased 23.4 percent during the Obama administration.
Prosecutions in fiscal year 2013 alone jumped 30.6 percent from the previous year, according to a new report by Syracuse University’s Transactional Records Access Clearinghouse.
Convictions for tax crimes under the Obama administration are also drawing slightly longer average prison terms, 27 months under Obama, compared to 25 months during the George W. Bush administration, according to information obtained by TRAC under the Freedom of Information Act from the Executive Office for United States Attorneys.
Among U.S. federal judicial districts, Alaska registered the highest per capita rate of IRS prosecutions, 53 per million people, compared with 6.4 prosecutions per million nationally. Next in line was the Middle District of Alabama (Montgomery), with 30 per million, followed by the District of Columbia with 27 per million.
For more details, see the report at http://trac.syr.edu/tracirs/latest/342/
WASHINGTON, D.C. (FEBRUARY 4, 2014)
BY MICHAEL COHN
The Internal Revenue Service has updated and improved its IRS2Go mobile app this tax season, adding new features including a way to track the status of a taxpayer’s tax refund.
Version 4.0 of the app, which works on both Apple and Android devices, has been redesigned. It also provides new features for taxpayers and their preparers to access the latest information to help them in prepare their tax returns.
The new refund status tracker feature offers a way to follow a completed tax return throughout the refund process. Taxpayers enter their Social Security number, which will be masked and encrypted for security purposes, then select their filing status and enter the amount of their anticipated refund for their 2013 tax return. Users can check their refund status 24 hours after the IRS acknowledges receipt of an e-filed return, or four weeks after mailing a paper return. The IRS cautioned that the tool is updated just once a day, usually overnight, so there is no reason to check more than once a day.
The newest version of the free mobile app offers several ways for taxpayers to access other tools and up-to-date tax information, including the ability for users to request their tax account or tax return transcript from IRS2Go. The transcript will be delivered via U.S. Postal Service to their address of record.
“The new version of IRS2Go provides taxpayers another way to quickly get information and help around the clock,” said IRS commissioner John Koskinen in a statement. “The IRS is focused on providing taxpayers with convenient self-service tools like IRS2Go, which provides details on everything from tax refunds to free tax assistance.”
There have been approximately 3.5 million downloads of IRS2Go since its inception in 2011. iPhone and iPod Touch users can update or download the free IRS2Go application by visiting the iTunes App Store. Android users can visit Google Play to download the free IRS2Go app.
Taxpayers can also use the app to locate the nearest walk-in sites where they can get free help preparing their taxes from volunteer tax preparers. The IRS Volunteer Income Tax Assistance and the Tax Counseling for the Elderly Programs offer free tax help for taxpayers who qualify. However, the IRS itself is no longer providing free tax prep services at its own walk-in Taxpayer Assistance Centers this tax season. Instead, the tool on IRS2Go will help taxpayers find the VITA site nearest to their home by entering their zip code and selecting a mileage range. By clicking on the directions button within the results, the maps application on the device will load with the address to help them navigate to the location.
In addition to the IRS2Go app, taxpayers can interact with the IRS in other ways online by following the IRS on Twitter, @IRSnews or @IRSenEspanol, watch IRS videos on its YouTube channel, signing up for email updates, or by using the Contact Us feature. For more information on IRS2Go, products and services through social media channels and other media products, visit www.IRS.gov.
Top Ten Tips to Help You Choose a Tax Preparer
Many people hire a professional when it’s time to file their tax return. If you pay someone to prepare your federal income tax return, the IRS urges you to choose that person wisely. Even if you don’t prepare your own return, you’re still legally responsible for what is on it.
Here are ten tips to keep in mind when choosing a tax preparer:
1. Check the preparer’s qualifications. All paid tax preparers are required to have a Preparer Tax Identification Number or PTIN. In addition to making sure they have a PTIN, ask the preparer if they belong to a professional organization and attend continuing education classes.
2. Check the preparer’s history. Check with the Better Business Bureau to see if the preparer has a questionable history. Check for disciplinary actions and for the status of their licenses. For certified public accountants, check with the state board of accountancy. For attorneys, check with the state bar association. For enrolled agents, check with the IRS Office of Enrollment.
3. Ask about service fees. Avoid preparers who base their fee on a percentage of your refund or those who say they can get larger refunds than others can. Always make sure any refund due is sent to you or deposited into your bank account. Taxpayers should not deposit their refund into a preparer’s bank account.
4. Ask to e-file your return. Make sure your preparer offers IRS e-file. Any paid preparer who prepares and files more than 10 returns for clients generally must file the returns electronically. IRS has safely processed more than 1.2 billion e-filed tax returns.
5. Make sure the preparer is available. Make sure you’ll be able to contact the tax preparer after you file your return - even after the April 15 due date. This may be helpful in the event questions come up about your tax return.
6. Provide records and receipts. Good preparers will ask to see your records and receipts. They’ll ask you questions to determine your total income, deductions, tax credits and other items. Do not use a preparer who is willing to e-file your return using your last pay stub instead of your Form W-2. This is against IRS e-file rules.
7. Never sign a blank return. Don’t use a tax preparer that asks you to sign a blank tax form.
8. Review your return before signing. Before you sign your tax return, review it and ask questions if something is not clear. Make sure you’re comfortable with the accuracy of the return before you sign it.
9. Ensure the preparer signs and includes their PTIN. Paid preparers must sign returns and include their PTIN as required by law. The preparer must also give you a copy of the return.
10. Report abusive tax preparers to the IRS. You can report abusive tax preparers and suspected tax fraud to the IRS. Use Form 14157, Complaint: Tax Return Preparer. If you suspect a return preparer filed or changed the return without your consent, you should also file Form 14157-A, Return Preparer Fraud or Misconduct Affidavit. You can get these forms at IRS.gov or by calling 800-TAX-FORM (800-829-3676).
WASHINGTON, D.C. (FEBRUARY 3, 2014)
BY MICHAEL COHN
Changes in the implementation of the Affordable Care Act could pose a challenge for the Internal Revenue Service's customer service, according to a new government report.
The report, from the Treasury Inspector General for Tax Administration, found that while the IRS has developed a customer service strategy that includes sufficient plans to assist individuals in understanding the tax implications of the Affordable Care Act, changes in the law’s implementation will create challenges that could affect this strategy.
For its audit, TIGTA evaluated the IRS’s efforts to provide individuals assistance related to the ACA provisions on obtaining the minimum essential coverage and the tax credit to offset health care expenses.
Signed into law in March 2010, the ACA includes tax provisions that require individuals to maintain minimum essential health care coverage. It also provides a tax credit, known as the Premium Tax Credit, to offset the health care expenses of qualified individuals. The IRS will impose a penalty on any taxpayer who, after calendar year 2013, fails to maintain the minimum essential coverage, for three months or more and does not qualify for an exemption.
Starting in October 2013, individuals who wanted to acquire the minimum essential coverage for calendar year 2014 were offered a choice of health plans and the ability to determine their eligibility for a tax credit through one of the state marketplaces, or the federal marketplace at HealthCare.gov.
The IRS’s customer service strategy is part of a larger government education campaign in which the IRS collaborated with other federal agencies, including the Labor Department and the Department of Health and Human Services.
“Our audit found that the IRS has sufficient plans to provide customer service to taxpayers concerning the tax implications under the Affordable Care Act,” said TIGTA Inspector General J. Russell George in a statement. “However, changes in ACA implementation will create challenges,” he noted. “Depending on the nature of any changes made to ACA tax provisions, the IRS’s strategy and plans to provide customer service, outreach, education, and employee training could be affected. Changes to the provisions could also affect the IRS’s plans to update its tax forms, instructions, and publications.”
TIGTA found that the IRS’s strategy includes sufficient plans to perform outreach and education; update or develop tax forms, instructions and publications; and provide employee training to assist individuals in understanding the requirement to maintain the minimum essential coverage and the tax implications of obtaining the tax credit to offset the cost of health care insurance.
The IRS and the Department of Health of Human Services agreed In a May 2012 memorandum of understanding that HHS would be the lead agency and serve as the “public face” for providing customer service at the health insurance marketplaces until calendar year 2015.
Individuals who contact the IRS for ACA assistance are being referred to HHS’s public troubled Web site, HealthCare.gov, and the agency's toll-free telephone assistance lines. The IRS is also referring individuals to its own recorded telephone messages and self-assistance tools.
The IRS will take the lead In calendar year 2015 to provide customer service when individuals begin filing their 2014 tax returns and must include the amount of any Advance Premium Tax Credit payments on their tax return and reconcile it with the allowable amount. The IRS’s customer service will include providing face-to-face assistance at its 390 Taxpayer Assistance Centers located throughout the United States.
TIGTA made no recommendations in its report. A draft of the report was provided to IRS management for review, but the IRS did not comment on the report to TIGTA.
However, an IRS spokesman later sent a statement from the IRS to Accounting Today, saying, "Since the implementation of the Affordable Care Act (ACA) in 2010, the IRS has coordinated our communication and education efforts and collaborated with multiple federal and state agencies. The IRS agrees that continuous monitoring and careful attention to the ACA implementation are critically important to ensure taxpayers have the information and assistance they need to comply with the law. We appreciate TIGTA’s acknowledgement that these collaborative efforts are effective as we continue to develop and deliver the systems and processes needed to implement these important ACA provisions."
Making your hobby a business
Taxpayers often enjoy their hobby activity more than they do their job. In many cases, they invest a great deal of time and money, and some eventually make their hobby a full- or part-time business activity. Unfortunately, the IRS has a lot to say when it comes to the business vs. hobby decision. It's not a problem as long as the new business turns a profit. And it may be fine as well if the business produces a loss and the taxpayer enjoys the activity—even better if the loss can offset other income. However, if the business consistently generates losses, the IRS could determine that these losses are actually nondeductible hobby losses.
Many hobby loss issues center on the weekend farmer or rancher. However, the hobby loss rules are applicable to any type of activity in which the taxpayer might engage. In any case, to escape the hobby loss taint and avoid ending up with nondeductible losses, the activity must be conducted with the actual and honest intent of making a profit.
There are generally two ways to avoid the hobby loss rules. The first is to show a profit in at least three out of five consecutive years (two of seven years for activities involving horse racing, breeding, or showing). If the safe harbor is met, the burden of proof for lack of profit motive is shifted to the IRS. The second way is to run the venture in a manner that shows you intend to turn it into a profit-making business rather than operate it as a mere hobby. The IRS regulations themselves state that the hobby loss rules won't apply if the facts and circumstances show that you have a profit-making objective.
The best way to prove that you have a profit-making objective is to run the new venture in a businesslike manner. Specifically, the IRS and the courts will look to the following factors: how you run the activity; your expertise in the area (and your advisers' expertise); the time and effort you expend in the enterprise; whether there's an expectation that the assets used in the activity will rise in value; your success in carrying on other similar or dissimilar activities; your history of income or loss in the activity; the amount of occasional profits (if any) that are earned; your financial status; and whether the activity involves elements of personal pleasure or recreation.
In determining whether an activity is engaged in for profit, all facts and circumstances with respect to the activity are taken into account. No one factor is determinative. In addition, it is not intended that only the factors described above are to be considered in making the determination, or that a determination is to be made on the basis that the number of factors (whether or not listed) indicating a lack of profit objective exceeds the number of factors indicating a profit objective, or vice versa.
Coverdell Education Savings Accounts
The Coverdell Education Savings Account (ESA) was created as an incentive to help parents and students save for education expenses. The total contributions for the beneficiary of this account cannot be more than $2,000 in any year, no matter how many accounts have been established. A beneficiary is someone who is under age 18 or has special needs.
Contributions to a Coverdell ESA are not deductible, but amounts deposited in the account grow tax-free until distributed. The beneficiary will not owe tax on the distributions if they are used for qualified education expenses at an eligible institution. This benefit applies to qualified higher education expenses as well as to qualified elementary and secondary education expenses.
If there is a balance in the Coverdell ESA when the beneficiary reaches age 30 (unless the beneficiary is a special needs individual), it must generally be distributed within 30 days. The portion representing earnings on the account will be taxable and subject to the additional 10% tax. The beneficiary may avoid these taxes by rolling over the full balance to another Coverdell ESA for another family member.
Converting a residence to rental property
Recovering real estate values may cause some homeowners to consider converting their personal residence to rental property for investment purposes. The process for making this decision should include an analysis of economic factors, such as the homeowners' marginal tax rate and the potential loss of the ability to exclude up to $250,000 ($500,000, if married) of gain from the sale of their principal residence for federal income tax purposes.
Other economic factors to consider include the expected growth rate for rental property in the area, length of time the house will be rented before being sold, cash flow from renting, effect of passive activity rules (which limit and defer tax deductions), and expected rate of return available on other investments. Generally, the economic advantage of converting a personal residence to a rental rather than selling it is increased as the growth rate of the rental property increases and the rate of return on alternative investments decreases, but each situation should be thoroughly analyzed based on its particular facts and circumstances.
If selling a personal residence would result in a nondeductible loss, the homeowner can seriously consider converting the residence to a rental property. Tax-saving opportunities generally are limited for residential rental conversions, primarily because of the passive activity loss rules. However, converting a personal residence into rental property may allow the homeowner to eventually recognize a loss for tax purposes on the property's subsequent sale if the property continues to decline in value, and thus provide cash flow in the interim.
The fact that a residence is rented at the time of the sale does not automatically preclude gain attributable to such use to be excluded under the gain exclusion rules. Instead, the exclusion of gain depends on whether the homeowner meets the ownership and use requirements and the one-sale-in-two-years test at the time of the sale.
The decision to convert a residence to rental or investment property is complex, and the ramifications of this decision are far-reaching. Please contact us to thoroughly explore the numerous tax and economic issues related to such a conversion.
Date: January 29, 2014
By: Brian Kindle
Through a string of US Justice Department prosecutions, FBI seizures and regulatory guidance from the Financial Crimes Enforcement Network (FinCEN) over the last year, US agencies have made it clear that virtual currency is squarely in their sights.
The arrest this week of leading Bitcoin entrepreneur Charlie Shrem, on charges he laundered more than $1 million destined for the online drug marketplace Silk Road, raises the specter that enforcement agencies may be focusing on a new target – compliance officers of the burgeoning virtual currency industry.
In a criminal complaint unsealed in Manhattan on January 28, federal prosecutors charged Shrem, chief executive and compliance officer of the digital currency exchange BitInstant, and Robert Faiella with money laundering conspiracy and operating an unlicensed money transmitter (Title 18, US Code Section 1956 and 1960). The case is one of the very rare instances in which a compliance officer is directly implicated in a financial crime scheme, and facing individual criminal charges.
Faiella is accused of operating a currency trading service for Silk Road customers, using the name “BTCKing” and offering “easy, cheap [and] fast” exchange of cash for Bitcoin. A “deep web” site that could be accessed only by using anonymizing software, Silk Road became infamous as an online bazaar with virtually no limitation on what could be bought and sold, including drugs. Sellers accepted only Bitcoin as payment. The site was closed in October 2013 after US federal agents arrested its alleged founder and operator, Ross Ulbricht, in San Francisco.
Complaint includes rare criminal charges for failure to file SARs
Faiella’s arrest fits with the recent enforcement actions that target more or less brazenly criminal digital currency exchanges and administrators. Shrem’s alleged role in the money laundering operation is more surprising.
Shrem is the co-founder of BitInstant, and as the chief compliance officer he was largely responsible for designing the company’s AML program. According to the criminal complaint, he was also responsible for thwarting those same AML controls. It is alleged he instructed Faiella on how to avoid drawing attention as he funneled funds to Silk Road users by using multiple emails.
In an unusual charge, the complaint also accuses Schrem of a Bank Secrecy Act criminal violation of “willfully failing to file any suspicious activity report” concerning Faiella’s transactions (Title 31, US Code Sections 5318 and 5322).
A criminal complaint is usually filed in anticipation of an indictment by a federal grand jury. It is typically based on an affidavit filed by an agent of a US law enforcement agency. The Internal Revenue Service Criminal Investigation Division is the lead agency in this case.
In virtual currency, tension between compliance and anonymity
If the government succeeds in its case against Shrem, it would be another setback for a young industry that is still struggling with anti-money laundering and BSA compliance challenges. Bitcoin’s value and number of users have soared recently, and other virtual currencies are also flourishing. The industry’s rise is drawing venture capital funds and other investors, and tying virtual currency businesses more closely to the traditional financial sector.
Yet Bitcoin and other virtual currency still retain certain features, such as the potential for largely anonymous and instantaneous cross-border transactions, which make them highly attractive to financial criminals.
“Can compliance be achieved in the virtual currency industry? Absolutely,” says Dan Friedberg, an attorney at Riddell Williams, in Seattle, and an expert on emerging payment systems.
“But there’s an element of Bitcoin [and other currencies] that is fundamentally at odds with the traditional regulatory structure,” he adds, citing the libertarian streak that initially inspired Bitcoin’s creation as an alternative to traditional currencies.
“Ultimately, for Bitcoin to continue to be successful, that point of tension will have to be resolved.”
Arrests come on eve of hearings by NY regulator
Shrem is a well-known figure in the virtual currency field, having served as a vice president of the Bitcoin Foundation, an advocacy group that helps promote the currency and fund the software infrastructure that runs it. He also has been a vocal advocate at industry events for the necessity of compliance programs at virtual currency exchanges and administrators.
His arrest preceded two days of hearings by the New York Department of Financial Services (NYDFS) on virtual currency and the regulatory considerations on January 28 and 29. The case quickly became a topic of conversation at the hearings. Reactions were mixed.
“Bad guys are going to do bad things, and they’ll use whatever technology is available to them,” said Barry Silbert, CEO of the alternative securities trading platform, SecondMarket, at the hearing. Other industry members echoed this view, saying that virtual currency is just another financial instrument, no more vulnerable to financial crime use than currency.
At the hearings, some regulatory representatives noted that even currency transactions occur within the regulatory framework, such as the duty to file Currency Transaction Reports imposed on financial institutions and other businesses concerning transactions above certain thresholds.
Virtual currency regulation still in ‘Wild West’ phase
Virtual currencies are required to comply with the regulations governing United States money services businesses, according to guidance by the Financial Crimes Enforcement Network issued in March 2013. In most other jurisdictions, including the states of the United States, regulations do not exist.
“Right now, the regulation of virtual currency is still akin to a virtual Wild West,” said Benjamin Lawsky, Superintendent of the NYDFS, at the Jan. 28 hearing. He said the hearings would lay the foundation for proposed state regulation of virtual currency later in the year.
The case against Shrem and Faiella and the prosecution of Silk Road may ultimately help accelerate the push for financial crime compliance in the virtual currency industry, says Friedberg.
“Getting rid of Silk Road is a very good thing for Bitcoin,” he concluded. “However, there’s going to be a period of fallout from it. The case [against Shrem] is part of that. It’s an aftershock of Silk Road, not an attack on Bitcoin as a whole.”
Virtual currencies and their financial crime risks will be probed in detail on the panel “New World of Bitcoin and Other Virtual Currencies” at the ACFCS 2014 Conference, February 5 – 7 at the Marriott Marquis in New York. Expert speakers, including a member of the Bitcoin Foundation, a representative of FinCEN, a federal prosecutor and an ediscovery specialist will provide critical knowledge and insights on one of the key financial crime challenges of the time. To register, visithttp://www.financialcrimeconference.com/
October 30, 2013
IRS focusing more resources on S corporation examinations
By Jim Buttonow, CPA, CITP and Jennifer Villarino, J.D.
Many business owners elect S corporation status to minimize or avoid Social Security and Medicare taxes. Minimal or no S corporation wages allow an individual shareholder to avoid self-employment taxes and may allow the corporation to avoid payroll taxes. Many S corporations are companies with one shareholder whose compensation is determined unilaterally and not in an arm’s-length negotiation. With 60% of the 4.5 million S corporations owned by a single shareholder, the IRS is concerned about S corporation reasonable compensation.
Two recent S corporation compensation cases remind us of the pitfalls and costs of not paying and reporting reasonable compensation to S corporation officers. They also remind us that S corporation reasonable compensation is an active issue in IRS small business examinations.
These cases both involve a single-shareholder business that failed to pay the officer a reasonable wage. The results of these cases were substantial employment tax liabilities and penalties assessed to the employer.
In Glass Blocks Unlimited v. Commissioner, T.C. Memo 2013-180 (August 7, 2013), the U.S. Tax Court addressed an S corporation officer, Fredrick Blodgett, who made distributions to himself from the S corporation and did not pay himself any wages. Blodgett, as president and sole shareholder, worked full time for the company, a distributor of glass blocks used in construction, and performed all the work in generating more than $1.5 million in revenue over two years. In these years, Glass Blocks experienced financial difficulties from the real estate downturn and netted less than $10,000 in total ordinary income. Blodgett did not take any wages from Glass Blocks, nor did he report any income other than the S corporation ordinary income reported on his Form 1040 for the two years in question. During the same time period, the S corporation made distributions to Blodgett of more than $62,000, which Glass Blocks characterized as repayment of loans. With little evidence of loan transactions, the IRS took exception, as it often does in similar situations with closely held corporations. The IRS concluded that the payments from Blodgett were capital contributions and not bona fide loans, and the court agreed. The IRS reclassified more than $62,000 as wages.
The court also agreed with the IRS on the assertion of the failure to file and failure to deposit penalties for the S corporation’s now-delinquent Forms 941 for the periods in question. FICA/Medicare taxes and the resulting penalties amounted to a liability of $13,166 to Glass Blocks.
In Sean McAlary Ltd, Inc. v. Commissioner, T.C. Summary Opinion 2013-62 (August 12, 2013), the U.S. Tax Court heard another S corporation reasonable compensation case. McAlary was entering retirement and decided to supplement his income by becoming a real estate broker. In 2003, he set up an S corporation. In 2004, at the advice of his tax preparer, McAlary set up his annual compensation to be a base of $24,000, plus commissions based on the number of associate brokers with whom he could affiliate his real estate company. Similar to Glass Blocks, McAlary was the sole shareholder of the corporation, its only employee, and the only person in the firm who held a real estate license. McAlary worked long days and performed all of the services essential to managing and operating the business. He contracted with associate brokers to generate sales commissions. In 2006, the S corporation made a net income of $231,454, but did not pay McAlary a salary. However, McAlary did receive transfers totaling $240,000 from the corporation to his personal account. On his Form 1040, McAlary did not report wages from any source, nor did he pay any self-employment tax. McAlary did report his ordinary income from the S corporation.
During the trial, the IRS presented a valuation expert who deemed reasonable compensation to be $100,755 for McAlary, based on median wages for a real estate broker in his area. McAlary contended that compensation should be set at $24,000 – the compensation he agreed to when he set up the business. However, the court gave little weight to this argument because the business never paid McAlary the amount. The court reasoned that the compensation was “forgotten, ignored or adopted as mere window dressing,” rather than resulting from an agreement made during an arm’s-length negotiation. Because the court found portions of the IRS expert’s valuation of reasonable compensation unpersuasive, the court concluded that McAlary’s reasonable compensation was $83,200 annually. Social Security, Medicare, income tax withholding and FUTA taxes of $13,694 were assessed to the corporation.
The IRS also asserted the failure to file and failure to deposit penalties. McAlary attempted to argue the penalties, citing his use of ordinary business care and prudence by engaging and relying on the expert advice of a tax professional in determining compensation. However, the court disagreed and sustained the penalty assessments, stating that McAlary could not provide evidence that his tax professional had the background or expertise to justify reliance on his advice. Although not cited by the court, the fact that the corporation did not actually follow the compensation policy, albeit flawed, likely contributed to the court’s stance that McAlary’s argument was without substance.
These two recent Tax Court cases illustrate IRS concerns about the avoidance of paying reasonable compensation to S corporation officers to avoid FICA and Medicare taxes. The two cases involved companies that paid no wages to officers but reported net income and distributions. With more than 90% of S corporations using a tax professional, clients rely on these experts to guide them in this area. Have you substantively addressed and documented reasonable compensation with your clients? Have you meaningfully determined compensation based on services performed? Would your determination hold up to an IRS valuation of reasonable compensation? Has your client adequately documented loans so that the IRS would not recharacterize the loans as capital contributions and determine the repayments to be wages?
With the IRS focusing more of its resources in the next three years on examinations of S corporations, take a second look at whether your S corporation clients are adequately paying themselves reasonable compensation.
This article originally appeared in the October 2013 edition of the NATP TAXPRO Monthly.
Posted by Lori Shepard
Effective January 1, 2014, employers with more than 5 employees will be required to submit their quarterly reports on MiWAM (Michigan Web Account Manager) and by January 1, 2015, all employers will be required to submit their quarterly reports on MiWAM. If an employer is required to submit their quarterly reports on-line, but continues to file a paper return, the employer will receive a letter from the agency notifying them that their return was not processed. The employer will then have 15 days from the mail date to file the return electronically, or late penalties may apply.
We recommend early registration. This process is quick and simple and once registered, returns may be filed, prior returns may be reviewed, prior returns may be amended and any and all correspondence from the Unemployment Insurance Agency may be reviewed. To register, go to https://miwam.unemployment.state.mi.us and “Sign Up for Employer Online Services”. Once registered, the State will send an “Authorization Code” within a week. This code must be entered to fully access your account.
If you do not feel comfortable with paying the tax on-line, there is an “Employer’s Quarterly Tax Payment Coupon” that may be used to remit the payment by mail after the quarterly report has been electronically filed.
If an employer receives a form UIA 1107 – Notice of Error in Reported Wages/Taxes, a response must be received within 14 days of the date on the notice or a $50 penalty will be assessed. A $250 penalty will be assessed for failure to correct identified wage errors on the UIA 1107 by the next quarter end date.
When paper returns are filed, the Unemployment Insurance Agency manually enters the social security number, name and wage amount for each employee that is reported on Form UIA 1028. Input errors are very common, but once the incorrect information has been entered, a notice is automatically created and sent to the employer. By filing on-line, the employer knows that Form UIA 1028 is correct, as it can be viewed prior to submitting.
2014 SOCIAL SECURITY WAGE BASE
The Social Security Administration announced that the wage base for computing Social Security tax for 2014 will increase to $117,000 from the 2013 wage base of $113,700. This means that, for 2014, the maximum OASDI portion of the FICA tax an employee will pay is $7,254 ($117,000 x 6.2%), and employers will match the employee's contribution. There is no wage base on the Medicare portion of the tax, so both employers and employees will pay Medicare tax on all wages at a rate of 1.45%. Employees with wages greater than $200,000 will pay an additional Medicare tax of 0.9%. It is estimated that, of the 165 million workers who will pay Social Security taxes in 2014, about 10 million will pay higher taxes because of the increased wage base.
IRS MODIFIES FSA USE-IT-OR-LOSE-IT RULE
Health Flexible Spending Account (FSA) contributions left over at the end of a plan year are forfeited to the employer under the "use-it-or-lose-it rule," although a plan can provide a grace period extending the period for incurring expenses for qualified benefits to the 15th day of the third month after the end of the plan year (i.e., March 15 for a calendar-year plan). However, the IRS will allow employers, for the first time, to amend their Section 125 cafeteria plan to allow up to $500 of unused amounts remaining at the end of a plan year to be paid or reimbursed to plan participants for qualified medical expenses incurred during the following plan year, provided the plan does not also have the grace period rule
ADDITIONAL 0.9% MEDICARE TAX
Individuals must pay an additional 0.9% Medicare tax on earned income above certain thresholds. The employee portion of the Medicare tax is increased from 1.45% to 2.35% on wages received in a calendar year in excess of $200,000 ($250,000 for married couples filing jointly; $125,000 for married filing separately). Employers must withhold and remit the increased employee portion of the Medicare tax for each employee whose wages for Medicare tax purposes from the employer are greater than $200,000.
There is no employer match for this additional Medicare tax. Therefore, the employer's Medicare tax rate continues to be 1.45% on all Medicare wages. An employee is responsible for paying any of the additional 0.9% Medicare tax that is not withheld by an employer. The additional tax will be reported on the individual's federal income tax return.
Because the additional 0.9% Medicare tax applies at different income levels depending on the employee's marital and filing status, some employees may have the additional Medicare tax withheld when it will not apply to them (e.g., the employee earns more than $200,000, is married, filing jointly, and total annual compensation for both spouses is $250,000 or less). In such a situation, the additional tax will be treated as additional income tax withholding that is credited against the total tax liability shown on the individual's income tax return.
Alternatively, an individual's wages may not be greater than $200,000, but when combined with a spouse's wages, total annual wages exceed the $250,000 threshold. When a portion of an individual's wages will be subject to the additional tax, but earnings from a particular employer do not exceed the $200,000 threshold for withholding of the tax by the employer, the employee is responsible for calculating and paying the additional 0.9% Medicare tax. The employee cannot request that the additional 0.9% Medicare tax be withheld from wages that are under the $200,000 threshold. However, he or she can make quarterly estimated tax payments or submit a new Form W-4 requesting additional income tax withholding that can offset the additional Medicare tax calculated and reported on the employee's personal income tax return.
For self-employed individuals, the effect of the new additional 0.9% Medicare tax is in the form of a higher self-employment (SE) tax. The maximum rate for the Medicare tax component of the SE tax is 3.8% (2.9% + 0.9%). Self-employed individuals should include this additional tax when calculating estimated tax payments due for the year. Any tax not paid during the year (either through federal income tax withholding from an employer or estimated tax payments) is subject to an underpayment penalty.
The additional 0.9% Medicare tax is not deductible for income tax purposes as part of the SE tax deduction. Also, it is not taken into account in calculating the deduction used for determining the amount of income subject to SE taxes.
Please contact us if you have questions about the additional 0.9% Medicare tax or any other tax compliance or planning issue.
Individual is responsible for paying the additional 0.9% Medicare tax
Josh and Anna are married. Josh's salary is $180,000, and Anna's wages are $150,000. Assume they have no other wage or investment income. Their total combined wage income is $330,000 ($180,000 + $150,000). Since this amount is over the $250,000 threshold, they owe the additional 0.9% Medicare tax on $80,000 ($330,000 - $250,000). The additional tax due is $720 ($80,000 x .009). Neither Josh's nor Anna's employer is liable for withholding and remitting the additional tax because neither of them met the $200,000 wage threshold. Either Josh or Anna (or both) can submit a new Form W-4 to their employer that will result in additional income tax withholding to ensure the $720 is properly paid during the year. Alternatively, they could make quarterly estimated tax payments. If the amount is not paid until their federal income tax return is filed, they may be responsible for the estimated tax penalty on any underpayment amount (whether the underpayment is actually income taxes or the additional Medicare taxes).
STRUCTURING A TAX-FREE INCORPORATION
When forming a corporate entity, one method of capitalization is through a tax-free (actually, tax-deferred) exchange. Properly transferring property to a corporation delays the recognition of any gain on that property until a taxable event occurs (e.g., sale of the property or stock of the corporation, or liquidation of the corporation).
Generally, the transfer of assets and liabilities to a newly formed corporation solely in exchange for stock does not result in recognition of gain or loss by the transferor/shareholder or transferee/corporation. The nonrecognition of gain or loss is mandatory rather than elective.
There are four requirements for a tax-free incorporation:
The IRS has proposed, but not finalized, a fifth requirement that the property have net value; i.e., the property's value exceeds any debt on the property.
Property transferred to the corporation can include items such as cash, fixed assets, corporate stock, partnership or LLC interests, oil and gas interests, goodwill, and patents. However, property cannot include services rendered or to be rendered. Stock does not include securities (debt obligations), stock warrants or rights, or nonqualified preferred stock. If any shareholder receives property other than stock in exchange for property transferred to the corporation, a taxable gain may need to be recognized by that shareholder.
Please contact us if you have questions concerning a tax-free incorporation or a related matter.
Tax Deduction Audit Risk
When is an itemized deduction high enough to catch the attention of IRS auditors? The tables below give you an idea.
Many things can make a tax return look suspicious, but outsized deductions are easy for a computer to catch. The tables show the average deductions claimed by taxpayers. A deduction that is well above the normal for a given income level is a red flag.
The government publishes statistics on deductions, and these are available in many tax publications and in tax software like TurboTax. But what you usually get is a blurred view from 40,000 feet up: All the returns in an income range of, say, $200,000 to $500,000 are lumped into a single average. That kind of number is useless. A $13,000 charity deduction that would be unexceptional on a $490,000 return would stick out at the $200,000 level.
The numbers in these tables are fine-tuned. I’ve used the IRS stats and the fact that incomes and deductions fall into predictable patterns to interpolate deductions at different income levels. (One example of a pattern: High incomes fall off in frequency much the way billionaires thin out as you progress up the wealth ladder of the Forbes Rich List.)
The number displayed for one kind of deduction is the average for all returns at that income level that claim that particular deduction. Consider the $26,587 medical deduction average on $300,000 returns. Very few taxpayers even claim this deduction, because it is available only to the extent medical costs exceed a floor amount. The average is for the 1 in 35 returns where there’s at least one dollar of medical costs above the floor.
My numbers are based on returns filed for the 2011 tax year. They lump all kinds of returns (married joint, married separate, single, head of household) together at each level of adjusted gross income. The deduction for state and local taxes combines what is claimed for income taxes (or sales taxes, where taxpayers chose that deduction instead) with what is claimed for property taxes.
Some things to consider when you contemplate whether your Schedule A list of itemized deductions will look excessive to an IRS computer program:
Your geography. Oppressive property taxes are the norm in New Jersey. They are not in Kentucky. I presume that the audit software knows this.
Your W-2. It shows the amount withheld for state and city income tax. If the amount you claim for income tax is pretty close, this part of your 1040 probably won’t trigger an audit, even if it is high. (Bear in mind that taxpayers can’t inflate this deduction with excessive withholding, since state refunds are reported to the IRS as income.)
Your age. I’ll wager that a large fraction of returns claiming medical deductions on Schedule A are for taxpayers residing in nursing homes. If you are young and claiming medical costs you may get flagged as a troublemaker even your number is close to the average in the table.
What else besides deductions might cause the IRS to pull your bags out for inspection? The tax collectors aren’t about to say, but one can make educated guesses. On my list: self-employment or small-business income (it’s so easy to cheat); property rented to noncommercial tenants (who don’t have to report the rent on a 1099); non-cash donations that are high in relation to cash donations; a Schedule C business loss for a pleasant activity like winemaking; anything that looks like a tax shelter.
The Forbes 2014 Tax Guide has advice about tax rates, extensions, education benefits, audit risks, IRAs, the alternative minimum tax, charitable donations and several dozen other topics.
Individual Income Taxes May Soon Generate Half of All Federal Tax Revenue
Howard Gleckman, Contributor
Over the next decade, the individual income tax will be the fastest growing source of federal revenue, according to new estimates by the Congressional Budget Office. In fact, the individual income tax will pretty much be the only revenue source likely to increase significantly over the next decade. As a result, it will generate more than half of all federal revenue for the first time since the turn of the 21st century.
Overall, CBO figures total federal revenues will grow from their recent recession-battered low of 14.6 percent of Gross Domestic Product in 2009 and 2010 to about 18.4 percent in 2024. CBO projects revenues this year will rebound to 17.5 percent of GDP. Over the decade, revenues will average about 18.1 of GDP, which is pretty close to the historic post-WW II average.
But the really interesting story is in the composition of revenues. Nearly all the projected increase in taxes will come from the individual income tax: CBO projects the levy will rise from 8.0 percent of GDP this year to 9.4 percent by 2024.
As a result, CBO figures that a decade from now, the individual income tax will account for nearly 52 percent of all federal revenue. The last (and only) time the individual tax generated half of all federal revenues was in 2001, just before the dot.com bubble burst and Congress passed the first of the huge George W. Bush-era tax cuts.
Moreover, the federal government has rarely collected as much as 9.4 percent of the total economy in individual income tax. According to the Office ofManagement & Budget, this happened only in 1944, 1981 (just before President Reagan’s tax cuts), and during the stock market boom in 1998-2001.
While individual taxes are expected to increase, other major sources of revenue will barely change as a share of the economy. For instance, the payroll taxes that fund Social Security and Medicare will remain flat through the next decade, CBO figures. They represented 5.7 percent of GDP last year, 6.0 percent this year, and are projected to fall to 5.8 percent in 2016 and stay at that level.
The corporate income tax will rise as a share of GDP for the next few years and then drift down. On average it will hover at about 2.0 of GDP for the next decade. And it will average only about 11 percent of all federal revenue through the period. That’s a significant increase from the depths of the recession when corporate taxes collapsed to barely 6 percent of total revenues. But it is a far smaller share than in the 1960s, when it averaged one-fifth.
What will drive these changes? It is the proverbial long story. But CBO identifies a few culprits.
CBO explains much of the rise in individual income taxes by expected increases in real incomes produced by a recovering economy, including higher wages, salaries, capital gains, and income to owners of pass-through firms, who report their taxes on their individual returns. CBO also expects a significant increase in distributions from retirement accounts for at least the next few years, driven in part by higher asset values.
Two other reasons: Higher tax rates for upper-income households (including the surtax in the Affordable Care Act) and the phenomenon known as real bracket creep. Tax brackets are adjusted for inflation but not economic growth. For at least the next few years, CBO figures incomes will grow faster than those inflation-adjusted brackets.
On the corporate side, CBO projects a bump in tax revenues through 2017, but a fall-off after that. A key reason is that CBO assumes that dozens of business tax breaks (the so-called extenders) will disappear (they technically expired at the end of 2013). If they are extended, as is likely, corporate tax revenues are likely to fall below CBO’s forecast.
I suspect these projections will be something of a Rorschach test for lawmakers. Anti-tax conservatives will see them as a reason to cut individual taxes. Progressives will use them to oppose cuts in corporate tax rates and justify increases in the Social Security payroll tax cap. But whatever you want to read into them, these projections are pretty interesting.
By Joe Harpaz, using data from the Tax & Accounting business at Thomson Reuters, here are some of the wackiest tax laws from 2013.
Consumer tax season officially kicked off last Friday when the IRS began accepting individual returns for processing. Though my posts are generally focused on corporate tax issues, the looming personal tax deadline got me thinking about the current tax situation for individuals and just how confusing it can be for a single person – let alone a multinational corporation – to file their taxes accurately each year. One of the benefits of working in a large company is that I have access to lots of interesting data and information from our internal teams. With the individual tax return deadline in mind, I thought I’d share some of the wacky taxes that the Thomson Reuters indirect tax team recently shared with me. Some of the “quirkiest” tax laws of 2013:
The Sandwich Tax: Hungry for revenue, two Massachusetts cities increased the tax on meals from 6.25% to 7%. The cities? Sandwich and Salisbury.
Another Reason to Smile: Straighter teeth just got cheaper in Arizona. Orthodontic devices are no longer subject to sales and use tax.
Ahoy Greenwich: Connecticut did away with its luxury tax on yachts, and tax is exempted all together if the boat is docked 60 days or less a year.
Cracked Backs & Tax: In North Carolina, chiropractors must collect sales tax on nutritional supplements and vitamins provided as part of a patient’s treatment plan, and students must pay sales tax on meals purchased on college campuses.
Drink Up in the Ocean State: Rhode Islandeliminated sales and use tax on wine and spirits sold at package and liquor stores from Dec. 1, 2013 through March 31, 2015.
Half-Baked: In Washington state, hiring a personal chef is a taxable service, and the chef is required to collect sales tax. However, if a meal is prepared with raw or undercooked eggs, fish, meat or poultry and refrigerated or frozen for consumption at a later time, and cooked prior to consumption to prevent food-borne illness, then the tax is waived.
Eight Tax Savers for Parents
Your children may help you qualify for valuable tax benefits. Here are eight tax benefits parents should look out for when filing their federal tax returns this year.
1. Dependents. In most cases, you can claim your child as a dependent. This applies even if your child was born anytime in 2013. For more details, see Publication 501, Exemptions, Standard Deduction and Filing Information.
2. Child Tax Credit. You may be able to claim the Child Tax Credit for each of your qualifying children under the age of 17 at the end of 2013. The maximum credit is $1,000 per child. If you get less than the full amount of the credit, you may be eligible for the Additional Child Tax Credit. For more about both credits, see the instructions for Schedule 8812, Child Tax Credit, and Publication 972, Child Tax Credit.
3. Child and Dependent Care Credit. You may be able to claim this credit if you paid someone to care for one or more qualifying persons. Your dependent child or children under age 13 are among those who are qualified. You must have paid for care so you could work or look for work. For more, see Publication 503, Child and Dependent Care Expenses.
4. Earned Income Tax Credit. If you worked but earned less than $51,567 last year, you may qualify for EITC. If you have three qualifying children, you may get up to $6,044 as EITC when you file and claim it on your tax return. Use the EITC Assistant tool at IRS.gov to find out if you qualify or see Publication 596, Earned Income Tax Credit.
5. Adoption Credit. You may be able to claim a tax credit for certain expenses you paid to adopt a child. For details, see the instructions for Form 8839, Qualified Adoption Expenses.
6. Higher education credits. If you paid for higher education for yourself or an immediate family member, you may qualify for either of two education tax credits. Both the American Opportunity Credit and the Lifetime Learning Credit may reduce the amount of tax you owe. If the American Opportunity Credit is more than the tax you owe, you could be eligible for a refund of up to $1,000. See Publication 970, Tax Benefits for Education.
7. Student loan interest. You may be able to deduct interest you paid on a qualified student loan, even if you don’t itemize deductions on your tax return. For more information, see Publication 970.
8. Self-employed health insurance deduction. If you were self-employed and paid for health insurance, you may be able to deduct premiums you paid to cover your child under the Affordable Care Act. It applies to children under age 27 at the end of the year, even if not your dependent. See Notice 2010-38 for information.
Yes, Olympic Wins Are Taxable (And Should Stay That Way)
Quick. Name three millionaires on the American Winter Olympic team at Sochi.
It’s tough. According to Bankrate, the top five American Olympic athletes(NHL athletes excluded) at Sochi are Shaun White, Bode Miller, Ted Ligety, Hannah Teter and Lindsey Jacobellis; the latter two barely crack the $1 million mark.
It’s a far cry from the millions and millions that, according to Forbes, were earned by athletes who appeared at the Summer games. Even if you throw those NHL players back into the mix, our summer Olympic athletes tend to earn more than their winter counterparts (NBA players out earn NHL playersby a ratio of more than 2 to 1).
While the Olympics have officially allowed professional athletes to participate in the games since 1986, many Olympic athletes – especially those at the winter games – aren’t professional athletes by trade. Instead, they earn their sports-related income from endorsements, appearance fees, book deals and cash prizes. And even then, securing additional income can be tough: when is the last time you paid to see a professional curler? Or a luger? An ice bocce player?
That’s why I have a bit more sympathy for the winter athletes when it comes to taxation of U.S. Olympic prize winnings than I did for those at the summer games. But don’t get too excited: I still don’t believe in giving Olympic athletes a free pass on taxes, despite the fact that Sen. Marc Rubio (R-FL) and the President support such an exemption. I don’t think it’s appropriate and I don’t think it’s necessary.
I’ll tackle the last bit first. In addition to the fair market value of the medals, U.S. athletes also take home bonuses for their wins. Those are valued at $25,000 for gold, $15,000 for silver and $10,000 for bronze (other countries may pay more or less). Additionally, some sports may offer extra pay for medals – and some companies may kick in bonus pay, too. It is certainly true that those bonus prizes – as well as the value of those medals – that Olympic athletes take home are reportable and taxable.
But chances are, many of those U.S. athletes who medal in Sochi will not actually pay any tax on their medals and bonuses. Here’s why: if an athlete treats participation in their sport as a business, related business expenses are deductible on a federal income tax return. Those deductions, so long as they meet the “ordinary and necessary” criteria that applies to all taxpayers would be offset by income – including the value of prizes. So all of those training expenses? Travel? Coaches? Equipment? Deductions against income. And if those deductions exceed related income – which is likely the case for many Olympic athletes – the excess can be carried forward or backward.
If an athlete doesn’t treat participation in their sport as a business, but rather as a hobby, deductions are still allowed – but only to the extent there is income to offset those winnings and only if a taxpayer itemizes. If that’s the case, deductions are treated as “miscellaneous itemized deductions” on Schedule A and are limited to the total of deductions in excess of 2% of AGI (adjusted gross income). Any excess deductions can’t be carried forward or backward to other years.
But as I’ve indicated before, I don’t think you get to be Ashley Wagner or Bode Miller by treating sport as a hobby. Have you seen Julia Mancuso fly down the alpine ski trails? Or Sage Kotsenburg rotate through the air during the men’s Slopestyle? You don’t reach that level (or height in the air) by training occasionally.
That also doesn’t mean that you have to have to train every.single.minute of the day. Having a “day job” doesn’t disqualify you from treating another part of your life as a business though, depending on the circumstances, IRS could argue that the lack of time spent on your craft makes it a hobby and not a business. Even so, you don’t have to earn a regular paycheck in your sport a la Patrick Kane who rakes in an estimated $6.5 million per year with the Chicago Blackhawks to call it a business so long as you meet the other criteria. You can still work at the Gap or be a lawyer or a pilot or any other occupation (although Olympic athlete is far cooler to talk about on Career Day at your kid’s school).
The reality is that no matter whether our athletes consider training for the Olympic a business or hobby, some portion – or all – of those training expenses would be deductible. That means that the income related to those medals isn’t creating an economic hardship.
Despite the fact that would result in no federal income taxes directly attributable to winning an Olympic medal for most athletes (I’m not counting appearance fees and endorsements), taxing those winnings still leaves a bad taste in some taxpayers’ mouths. It caused such an uproar in 2012 that Sen. Rubio spearheaded a move to exempt it, saying, “We can all agree that these Olympians who dedicate their lives to athletic excellence should not be punished when they achieve it.”
His proposal for an exemption fell as flat as Italy’s Paul Bonifacio Parkinson (don’t worry, he’s fine). And it was the right choice by Congress.
I think we all agree that Olympians should not be punished for achieving their goals. It’s an amazing accomplishment.
And likewise, I think we all agree that Olympic athletes are pretty cool. I can barely stand up in ice skates without falling, much less do a triple axel.
But should that be enough to merit an exemption from income tax? I’m not sure why that makes sense. We don’t exempt other prize winners in their fields, such as Nobel, Pulitzer and Oscar winners (yes, I’m comparing Clooney to Kofi Annan). Nor do we exempt other taxpayers who sacrifice their time represent our country all over the world – from ambassadors to rescue workers and our military. Why should Olympic athletes be any different?
From the taxgirl blog
What You Should Know about AMT
Have you ever wondered if the Alternative Minimum Tax applies to you? You may have to pay this tax if your income is above a certain amount. The AMT attempts to ensure that some individuals who claim certain tax benefits pay a minimum amount of tax.
Here are some things from the IRS that you should know about AMT:
1. You may have to pay the tax if your taxable income, plus certain adjustments, is more than the AMT exemption amount for your filing status. If your income is below this amount, you usually will not owe AMT.
2. The 2013 AMT exemption amounts for each filing status are:
• Single and Head of Household = $51,900
• Married Filing Joint and Qualifying Widow(er) = $80,800
• Married Filing Separate = $40,400
3. The rules for AMT are more complex than the rules for regular income tax. The best way to make it easy on yourself is to use IRS e-file to prepare and file your tax return. E-file tax software will figure AMT for you if you owe it.
4. If you file a paper return, use the AMT Assistant tool on IRS.gov to find out if you may need to pay the tax.
IRS Tips about Taxable and Nontaxable Income
Are you looking for a hard and fast rule about what income is taxable and what income is not taxable? The fact is that all income is taxable unless the law specifically excludes it.
Taxable income includes money you receive, such as wages and tips. It can also include noncash income from property or services. For example, both parties in a barter exchange must include the fair market value of goods or services received as income on their tax return.
Some types of income are not taxable except under certain conditions, including:
Here are some types of income that are usually not taxable:
For more on this topic see Publication 525, Taxable and Nontaxable Income.
IRS Employee Charged with Tax Fraud and Identity Theft
PHILADELPHIA (FEBRUARY 12, 2014)
BY MICHAEL COHN
An Internal Revenue Service employee who also prepared taxes on the side has been charged with tax fraud and aggravated identity theft.
Sherelle Pratt, 49, of Philadelphia, was charged by an indictment, unsealed Tuesday, with filing false tax returns, aiding and assisting other individuals in preparing and filing false tax returns, theft of government property, and aggravated identity theft, according to the office of U.S. Attorney Zane David Memeger. Pratt was arrested Tuesday.
Pratt is an IRS contact center representative who allegedly prepared federal income tax returns for a number of individuals from tax years 2006 through 2008. She caused the refunds, and stimulus payments that the filers were supposed to receive, to be deposited into her personal bank account, according to prosecutors. In some cases, she gave the filers a portion of the refunds and stimulus payments. In other instances, according to the indictment, Pratt kept the refund and stimulus payments.
She allegedly stole nearly $29,000 in tax refunds intended for nine tax clients, according to the Philadelphia Inquirer. She also allegedly filed for a $3,524 tax refund in another client's name without telling him.
If convicted, Pratt faces up to 33 years in prison, including a two-year minimum mandatory sentence, a fine of up to $2.25 million, a special assessment of $900, and two years of supervised release.
The case was investigated by the Treasury Inspector General for Tax Administration, Philadelphia Field Office and the IRS’s Criminal Investigation unit and is being prosecuted by Assistant U.S. Attorney Floyd J. Miller. They began investigating her in 2009 when the father of one of her clients became suspicious about a missing tax refund and stimulus check.
An indictment, information or criminal complaint is an accusation, Memeger’s office noted, and a defendant is presumed innocent unless and until proven guilty.
It’s official: taxpayers, especially those in the State of New York, really love their cars.
After making threats and sending out nasty notices, lawmakers in New York have found one way of getting delinquent taxpayers to pay up: take away their keys.
Last year, New York passed a law which allowed the state to suspend driver’s licenses for those taxpayers who owed more than $10,000 in state taxes until the debt was paid. At the time, the New York State Tax Department estimated that the program would increase collections by $26 million in this fiscal year. They were wrong.
It turns out that collections are nearly double expectations. Tax Commissioner Tom Mattox has announced that revenues attributable to the program have reached nearly $48 million. To quote Jon Lovitz from A League Of Her Own, “[t]his would be more, wouldn’t it?
The first round of notices were mailed out to 16,000 delinquent taxpayers late last year. Those folks had 60 days to arrange for payment on their tax bills. If they didn’t pay, they were in the second round of notices – the “we really, really mean it” letters. After that, those that had not still not paid up had their driver’s license suspended.
The threat of walking, taking public transit or *horrors* having to carpool with mom sent 5,700 delinquent taxpayers to the taxing authorities. They have either paid up in full or entered into a payment agreement.
Those that didn’t pay up were cut off: 7,850 drivers have had their licenses suspended by the New York State Department of Motor Vehicles (DMV). An additional 3,500 are next if they don’t resolve their liabilities soon.
That could be the start of their worries. Skirting the driving laws in the Empire State can be expensive and could possibly land you in jail. Depending on the circumstances, driving without a license can be punishable by a mandatory fine of $200–$500 plus a surcharge and jail or probation of up to 30 days. If you do it more than once, the fines and jail time increase pretty significantly – do it repeatedly and you can also lose your car. You can check out the specific punishments by checking out the NY DMV’s handy pamphlet (downloads as a pdf) where – and I’m not kidding – they break the word suspension down by syllables for you and remind you that’s a noun.
Not paying your taxes isn’t the only offense that can result in a suspended license in New York. In addition to the obvious driving violations (like speeding or reckless driving while on probation or driving while under the influence), your license can be suspended for other bad behaviors like bouncing a check to the DMV or failing to pay child support.
Clearly, most taxpayers need to be able to work in order to pay down their tax liabilities. If that’s the case and your license is suspended, you may be able to apply for a conditional or restricted license that allows you to commute to and from work. The DMV will notify taxpayers eligible for these kinds of licenses by mail.
Of course, it would probably take more than a few trips to the office to get some taxpayers to settle up. As of February 2014 (report downloads as a pdf), New York’s five most delinquent taxpayers owe more than a cool $25 million. I’m guessing they’ll have to stick to cabs.
taxgirl blog Kelly Phillips Erb Contributor
Important Reminders about Tip Income
If you get tips on the job from customers, the IRS has a few important reminders:
For more information, see Publication 1244 or Publication 531, Reporting Tip Income.
IRS Releases the “Dirty Dozen” Tax Scams for 2014; Identity Theft, Phone Scams Lead List
The Internal Revenue Service today issued its annual “Dirty Dozen” list of tax scams, reminding taxpayers to use caution during tax season to protect themselves against a wide range of schemes ranging from identity theft to return preparer fraud.
The Dirty Dozen listing, compiled by the IRS each year, lists a variety of common scams taxpayers can encounter at any point during the year. But many of these schemes peak during filing season as people prepare their tax returns.
"Taxpayers should be on the lookout for tax scams using the IRS name,” said IRS Commissioner John Koskinen. “These schemes jump every year at tax time. Scams can be sophisticated and take many different forms. We urge people to protect themselves and use caution when viewing e-mails, receiving telephone calls or getting advice on tax issues.”
Illegal scams can lead to significant penalties and interest and possible criminal prosecution. IRS Criminal Investigation works closely with the Department of Justice (DOJ) to shutdown scams and prosecute the criminals behind them.
The following are the Dirty Dozen tax scams for 2014:
Tax fraud through the use of identity theft tops this year’s Dirty Dozen list. Identity theft occurs when someone uses your personal information, such as your name, Social Security number (SSN) or other identifying information, without your permission, to commit fraud or other crimes. In many cases, an identity thief uses a legitimate taxpayer’s identity to fraudulently file a tax return and claim a refund.
The agency’s work on identity theft and refund fraud continues to grow, touching nearly every part of the organization. For the 2014 filing season, the IRS has expanded these efforts to better protect taxpayers and help victims.
The IRS has a special section on IRS.gov dedicated to identity theft issues, including YouTube videos, tips for taxpayers and an assistance guide. For victims, the information includes how to contact the IRS Identity Protection Specialized Unit. For other taxpayers, there are tips on how taxpayers can protect themselves against identity theft.
Taxpayers who believe they are at risk of identity theft due to lost or stolen personal information should contact the IRS immediately so the agency can take action to secure their tax account. Taxpayers can call the IRS Identity Protection Specialized Unit at 800-908-4490. More information can be found on the special identity protection page.
Pervasive Telephone Scams
The IRS has seen a recent increase in local phone scams across the country, with callers pretending to be from the IRS in hopes of stealing money or identities from victims.
These phone scams include many variations, ranging from instances from where callers say the victims owe money or are entitled to a huge refund. Some calls can threaten arrest and threaten a driver’s license revocation. Sometimes these calls are paired with follow-up calls from people saying they are from the local police department or the state motor vehicle department.
Characteristics of these scams can include:
After threatening victims with jail time or a driver’s license revocation, scammers hang up and others soon call back pretending to be from the local police or DMV, and the caller ID supports their claim.
In another variation, one sophisticated phone scam has targeted taxpayers, including recent immigrants, throughout the country. Victims are told they owe money to the IRS and it must be paid promptly through a pre-loaded debit card or wire transfer. If the victim refuses to cooperate, they are then threatened with arrest, deportation or suspension of a business or driver’s license. In many cases, the caller becomes hostile and insulting.
If you get a phone call from someone claiming to be from the IRS, here’s what you should do: If you know you owe taxes or you think you might owe taxes, call the IRS at 1.800.829.1040. The IRS employees at that line can help you with a payment issue – if there really is such an issue.
If you know you don’t owe taxes or have no reason to think that you owe any taxes (for example, you’ve never received a bill or the caller made some bogus threats as described above), then call and report the incident to the Treasury Inspector General for Tax Administration at 1.800.366.4484.
If you’ve been targeted by these scams, you should also contact the Federal Trade Commission and use their “FTC Complaint Assistant” at FTC.gov. Please add "IRS Telephone Scam" to the comments of your complaint.
Phishing is a scam typically carried out with the help of unsolicited email or a fake website that poses as a legitimate site to lure in potential victims and prompt them to provide valuable personal and financial information. Armed with this information, a criminal can commit identity theft or financial theft.
If you receive an unsolicited email that appears to be from either the IRS or an organization closely linked to the IRS, such as the Electronic Federal Tax Payment System (EFTPS), report it by sending it to email@example.com.
It is important to keep in mind the IRS does not initiate contact with taxpayers by email to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels. The IRS has information online that can help you protect yourself from email scams.
False Promises of “Free Money” from Inflated Refunds
Scam artists routinely pose as tax preparers during tax time, luring victims in by promising large federal tax refunds or refunds that people never dreamed they were due in the first place.
Scam artists use flyers, advertisements, phony store fronts and even word of mouth to throw out a wide net for victims. They may even spread the word through community groups or churches where trust is high. Scammers prey on people who do not have a filing requirement, such as low-income individuals or the elderly. They also prey on non-English speakers, who may or may not have a filing requirement.
Scammers build false hope by duping people into making claims for fictitious rebates, benefits or tax credits. They charge good money for very bad advice. Or worse, they file a false return in a person's name and that person never knows that a refund was paid.
Scam artists also victimize people with a filing requirement and due a refund by promising inflated refunds based on fictitious Social Security benefits and false claims for education credits, the Earned Income Tax Credit (EITC), or the American Opportunity Tax Credit, among others.
The IRS sometimes hears about scams from victims complaining about losing their federal benefits, such as Social Security benefits, certain veteran’s benefits or low-income housing benefits. The loss of benefits was the result of false claims being filed with the IRS that provided false income amounts.
While honest tax preparers provide their customers a copy of the tax return they’ve prepared, victims of scam frequently are not given a copy of what was filed. Victims also report that the fraudulent refund is deposited into the scammer’s bank account. The scammers deduct a large “fee” before cutting a check to the victim, a practice not used by legitimate tax preparers.
The IRS reminds all taxpayers that they are legally responsible for what’s on their returns even if it was prepared by someone else. Taxpayers who buy into such schemes can end up being penalized for filing false claims or receiving fraudulent refunds.
Taxpayers should take care when choosing an individual or firm to prepare their taxes. Honest return preparers generally: ask for proof of income and eligibility for credits and deductions; sign returns as the preparer; enter their IRS Preparer Tax Identification Number (PTIN); provide the taxpayer a copy of the return.
Beware: Intentional mistakes of this kind can result in a $5,000 penalty.
Return Preparer Fraud
About 60 percent of taxpayers will use tax professionals this year to prepare their tax returns. Most return preparers provide honest service to their clients. But, some unscrupulous preparers prey on unsuspecting taxpayers, and the result can be refund fraud or identity theft.
It is important to choose carefully when hiring an individual or firm to prepare your return. This year, the IRS wants to remind all taxpayers that they should use only preparers who sign the returns they prepare and enter their IRS Preparer Tax Identification Numbers (PTINs).
The IRS also has a web page to assist taxpayers. For tips about choosing a preparer, details on preparer qualifications and information on how and when to make a complaint, visit www.irs.gov/chooseataxpro.
Remember: Taxpayers are legally responsible for what’s on their tax return even if it is prepared by someone else. Make sure the preparer you hire is up to the task.
IRS.gov has general information on reporting tax fraud. More specifically, you report abusive tax preparers to the IRS on Form 14157, Complaint: Tax Return Preparer. Download Form 14157 and fill it out or order by mail at 800-TAX FORM (800-829-3676). The form includes a return address.
Hiding Income Offshore
Over the years, numerous individuals have been identified as evading U.S. taxes by hiding income in offshore banks, brokerage accounts or nominee entities and then using debit cards, credit cards or wire transfers to access the funds. Others have employed foreign trusts, employee-leasing schemes, private annuities or insurance plans for the same purpose.
The IRS uses information gained from its investigations to pursue taxpayers with undeclared accounts, as well as the banks and bankers suspected of helping clients hide their assets overseas. The IRS works closely with the Department of Justice (DOJ) to prosecute tax evasion cases.
While there are legitimate reasons for maintaining financial accounts abroad, there are reporting requirements that need to be fulfilled. U.S. taxpayers who maintain such accounts and who do not comply with reporting requirements are breaking the law and risk significant penalties and fines, as well as the possibility of criminal prosecution.
Since 2009, tens of thousands of individuals have come forward voluntarily to disclose their foreign financial accounts, taking advantage of special opportunities to comply with the U.S. tax system and resolve their tax obligations. And, with new foreign account reporting requirements being phased in over the next few years, hiding income offshore is increasingly more difficult.
At the beginning of 2012, the IRS reopened the Offshore Voluntary Disclosure Program (OVDP) following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs. The IRS works on a wide range of international tax issues with DOJ to pursue criminal prosecution of international tax evasion. This program will be open for an indefinite period until otherwise announced.
The IRS has collected billions of dollars in back taxes, interest and penalties so far from people who participated in offshore voluntary disclosure programs since 2009. It is in the best long-term interest of taxpayers to come forward, catch up on their filing requirements and pay their fair share.
Impersonation of Charitable Organizations
Another long-standing type of abuse or fraud is scams that occur in the wake of significant natural disasters.
Following major disasters, it’s common for scam artists to impersonate charities to get money or private information from well-intentioned taxpayers. Scam artists can use a variety of tactics. Some scammers operating bogus charities may contact people by telephone or email to solicit money or financial information. They may even directly contact disaster victims and claim to be working for or on behalf of the IRS to help the victims file casualty loss claims and get tax refunds.
They may attempt to get personal financial information or Social Security numbers that can be used to steal the victims’ identities or financial resources. Bogus websites may solicit funds for disaster victims. The IRS cautions both victims of natural disasters and people wishing to make charitable donations to avoid scam artists by following these tips:
Call the IRS toll-free disaster assistance telephone number (1-866-562-5227) if you are a disaster victim with specific questions about tax relief or disaster related tax issues.
False Income, Expenses or Exemptions
Another scam involves inflating or including income on a tax return that was never earned, either as wages or as self-employment income in order to maximize refundable credits. Claiming income you did not earn or expenses you did not pay in order to secure larger refundable credits such as the Earned Income Tax Credit could have serious repercussions. This could result in repaying the erroneous refunds, including interest and penalties, and in some cases, even prosecution.
Additionally, some taxpayers are filing excessive claims for the fuel tax credit. Farmers and other taxpayers who use fuel for off-highway business purposes may be eligible for the fuel tax credit. But other individuals have claimed the tax credit although they were not eligible. Fraud involving the fuel tax credit is considered a frivolous tax claim and can result in a penalty of $5,000.
Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish claims to avoid paying the taxes they owe. The IRS has a list of frivolous tax arguments that taxpayers should avoid. These arguments are wrong and have been thrown out of court. While taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the law or disregard their responsibility to pay taxes.
Those who promote or adopt frivolous positions risk a variety of penalties. For example, taxpayers could be responsible for an accuracy-related penalty, a civil fraud penalty, an erroneous refund claim penalty, or a failure to file penalty. The Tax Court may also impose a penalty against taxpayers who make frivolous arguments in court.
Taxpayers who rely on frivolous arguments and schemes may also face criminal prosecution for attempting to evade or defeat tax. Similarly, taxpayers may be convicted of a felony for willfully making and signing under penalties of perjury any return, statement, or other document that the person does not believe to be true and correct as to every material matter. Persons who promote frivolous arguments and those who assist taxpayers in claiming tax benefits based on frivolous arguments may be prosecuted for a criminal felony.
Falsely Claiming Zero Wages or Using False Form 1099
Filing a phony information return is an illegal way to lower the amount of taxes an individual owes. Typically, a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 is used as a way to improperly reduce taxable income to zero. The taxpayer may also submit a statement rebutting wages and taxes reported by a payer to the IRS.
Sometimes, fraudsters even include an explanation on their Form 4852 that cites statutory language on the definition of wages or may include some reference to a paying company that refuses to issue a corrected Form W-2 for fear of IRS retaliation. Taxpayers should resist any temptation to participate in any variations of this scheme. Filing this type of return may result in a $5,000 penalty.
Some people also attempt fraud using false Form 1099 refund claims. In some cases, individuals have made refund claims based on the bogus theory that the federal government maintains secret accounts for U.S. citizens and that taxpayers can gain access to the accounts by issuing 1099-OID forms to the IRS. In this ongoing scam, the perpetrator files a fake information return, such as a Form 1099 Original Issue Discount (OID), to justify a false refund claim on a corresponding tax return.
Don’t fall prey to people who encourage you to claim deductions or credits to which you are not entitled or willingly allow others to use your information to file false returns. If you are a party to such schemes, you could be liable for financial penalties or even face criminal prosecution.
Abusive Tax Structures
Abusive tax schemes have evolved from simple structuring of abusive domestic and foreign trust arrangements into sophisticated strategies that take advantage of the financial secrecy laws of some foreign jurisdictions and the availability of credit/debit cards issued from offshore financial institutions.
IRS Criminal Investigation (CI) has developed a nationally coordinated program to combat these abusive tax schemes. CI's primary focus is on the identification and investigation of the tax scheme promoters as well as those who play a substantial or integral role in facilitating, aiding, assisting, or furthering the abusive tax scheme (e.g., accountants, lawyers). Secondarily, but equally important, is the investigation of investors who knowingly participate in abusive tax schemes.
What is an abusive scheme? The Abusive Tax Schemes program encompasses violations of the Internal Revenue Code (IRC) and related statutes where multiple flow-through entities are used as an integral part of the taxpayer's scheme to evade taxes. These schemes are characterized by the use of Limited Liability Companies (LLCs), Limited Liability Partnerships (LLPs), International Business Companies (IBCs), foreign financial accounts, offshore credit/debit cards and other similar instruments. The schemes are usually complex involving multi-layer transactions for the purpose of concealing the true nature and ownership of the taxable income and/or assets.
Form over substance are the most important words to remember before buying into any arrangements that promise to "eliminate" or "substantially reduce" your tax liability. The promoters of abusive tax schemes often employ financial instruments in their schemes. However, the instruments are used for improper purposes including the facilitation of tax evasion.
The IRS encourages taxpayers to report unlawful tax evasion. Where Do You Report Suspected Tax Fraud Activity?
Misuse of Trusts
Trusts also commonly show up in abusive tax structures. They are highlighted here because unscrupulous promoters continue to urge taxpayers to transfer large amounts of assets into trusts. These assets include not only cash and investments, but also successful on-going businesses. There are legitimate uses of trusts in tax and estate planning, but the IRS commonly sees highly questionable transactions. These transactions promise reduced taxable income, inflated deductions for personal expenses, the reduction or elimination of self-employment taxes and reduced estate or gift transfer taxes. These transactions commonly arise when taxpayers are transferring wealth from one generation to another. Questionable trusts rarely deliver the tax benefits promised and are used primarily as a means of avoiding income tax liability and hiding assets from creditors, including the IRS.
IRS personnel continue to see an increase in the improper use of private annuity trusts and foreign trusts to shift income and deduct personal expenses, as well as to avoid estate transfer taxes. As with other arrangements, taxpayers should seek the advice of a trusted professional before entering a trust arrangement.
The IRS reminds taxpayers that tax scams can take many forms beyond the “Dirty Dozen,” and people should be on the lookout for many other schemes. More information on tax scams is available at IRS.gov.
Chiropractor Arrested for Bribing IRS Auditor
BOSTON (FEBRUARY 18, 2014)
BY MICHAEL COHN
A chiropractor has been arrested for attempting to bribe an Internal Revenue Service auditor who questioned deductions the chiropractor had claimed for payments to two female patients who had accused him of inappropriately touching them.
Stephen Jacobs, 55, of Lowell, Mass., was arrested last Thursday for bribery of a public official. The complaint alleges that Jacobs paid an IRS auditor $5,000 in cash to ignore two deductions he improperly took on his 2011 income tax form. The deductions were actually payments that Jacobs had made to two different women because he touched them inappropriately during medical treatments in 2011 and 2012, according to prosecutors.
The IRS agent audited Jacobs last August and questioned several of the deductions he had claimed, including student loan expenses and business expenses, when the deductions for the two female patients came up, according to the Lowell Sun. The auditor disallowed the expenses, prompting Jacobs to ask the agent, “You are on the front line. Can’t we just deal with this?”
The agent then set up a secretly recorded call with Jacobs in which he suggested they could deal with the deductions at their next meeting. At the next meeting in September, Jacobs was told again that the expenses were disallowed and was asked for documentation for some of his other expenses. Jacobs then allegedly asked the auditor, “Do you want a bribe? Do you want me to pay you?”
The next meeting was secretly recorded on audio and video, allegedly showing Jacobs handing over $5,000 in cash to the auditor and receiving in exchange a no-change audit letter.
A probable cause hearing is scheduled for March 5. The case is being prosecuted by Eugenia M. Carris of U.S. Attorney Carmen Ortiz’s Public Corruption Unit. Ortiz and Robert O’Malley, special agent in charge of the Treasury Inspector General for Tax Administration, announced the arrest.
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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