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Determine if the Net Investment Income Tax Applies to You


If you have income from investments, you may be subject to the Net Investment Income Tax. You may owe this tax if you receive investment income and your income for the year is more than certain limits. Here are some key tips you should know about this tax:

·      Net Investment Income Tax.  The law requires a tax of 3.8 percent on the lesser of either your net investment income or the amount by which your modified adjusted gross income exceeds a threshold amount based on your filing status.

·      Income threshold amounts.  You may owe this tax if your modified adjusted gross income is more than the following amount for your filing status:

Filing Status

Threshold Amount

Single or Head of household


Married filing jointly            


Married filing separately    


Qualifying widow(er) with a child


·      Net investment income.  This amount generally includes income such as:

o    Interest,

o    Dividends,

o    Capital gains,

o    Rental and royalty income, and

o    Non-qualified annuities.

This list is not all-inclusive. Net investment income normally does not include wages and most self-employment income. It does not include unemployment compensation, Social Security benefits or alimony. It also does not include any gain from the sale of your main home that you exclude from your income.

Refer to Form 8960, Net Investment Income Tax, to see if this tax applies to you. You can check the form’s instructions for the details on how to figure the tax.

·      How to report.  If you owe the tax, you must file Form 8960 with your federal tax return. If you had too little tax withheld or did not pay enough estimated taxes, you may have to pay an estimated tax penalty.




Capital Gains and Losses – 10 Helpful Facts to Know

When you sell a capital asset, the sale normally results in a capital gain or loss. A capital asset includes most property you own for personal use or own as an investment. Here are 10 facts that you should know about capital gains and losses:

1. Capital Assets.  Capital assets include property such as your home or car, as well as investment property, such as stocks and bonds.

2. Gains and Losses.  A capital gain or loss is the difference between your basis and the amount you get when you sell an asset. Your basis is usually what you paid for the asset.

3. Net Investment Income Tax.  You must include all capital gains in your income and you may be subject to the Net Investment Income Tax if your income is above certain amounts. The rate of this tax is 3.8 percent. For details, visit

4. Deductible Losses.  You can deduct capital losses on the sale of investment property. You cannot deduct losses on the sale of property that you hold for personal use.

5. Limit on Losses.  If your capital losses are more than your capital gains, you can deduct the difference as a loss on your tax return. This loss is limited to $3,000 per year, or $1,500 if you are married and file a separate return.

6. Carryover Losses.  If your total net capital loss is more than the limit you can deduct, you can carry it over to next year’s tax return.

7. Long and Short Term.  Capital gains and losses are treated as either long-term or short-term, depending on how long you held the property. If you held it for one year or less, the gain or loss is short-term.

8. Net Capital Gain.  If your long-term gains are more than your long-term losses, the difference between the two is a net long-term capital gain. If your net long-term capital gain is more than your net short-term capital loss, you have a net capital gain. 

9. Tax Rate.  The tax rate on a net capital gain usually depends on your income. The maximum tax rate on a net capital gain is 20 percent. However, for most taxpayers a zero or 15 percent rate will apply. A 25 or 28 percent tax rate can also apply to certain types of net capital gain.  

10. Forms to File.  You often will need to file Form 8949, Sales and Other Dispositions of Capital Assets, with your federal tax return to report your gains and losses. You also need to file Schedule D, Capital Gains and Losses, with your tax return.

For more information about this topic, see the Schedule D instructions and Publication 550, Investment Income and Expenses. You can visit to view, download or print any tax product you need right away.




Walk the Path to Tax Savings for 2015

Like many taxpayers, you may have been expecting to encounter a few roadblocks while traversing your preferred tax-saving avenues. If so, tax extenders legislation signed into law this past December may make your journey a little easier. Let’s walk through a few highlights of the Protecting Americans from Tax Hikes Act of 2015 (the PATH Act).


Of interest to individuals

If you’re a homeowner, the PATH Act allows you to treat qualified mortgage insurance premiums as interest for purposes of the mortgage interest deduction through 2016. However, this deduction is phased out for higher income taxpayers. The law likewise extends through 2016 the exclusion from gross income for mortgage loan forgiveness.


Those living in a state with low or no income taxes (or who make large purchases, such as a car or boat) will be pleased that the itemized deduction for state and local sales taxes, instead of state and local income taxes, is now permanent. Your deduction can be determined easily by using an IRS calculator and adding the tax you actually paid on certain major purchases.


Investors should note that the PATH Act makes permanent the exclusion of 100% of the gain on the sale of qualified small business stock acquired and held for more than five years (if acquired after September 27, 2010). The law also permanently extends the rule that eliminates qualified small business stock gain as a preference item for alternative minimum tax (AMT) purposes.


Breaks for businesses

The PATH Act gives business owners much to think about as well. First, there’s the enhanced Section 179 expensing election. Now permanent (and indexed for inflation beginning in 2016) is the ability for companies to immediately deduct, rather than depreciate, up to $500,000 in qualified new or used assets. The deduction phases out, dollar for dollar, to the extent qualified asset purchases for the year exceeded $2 million.


The 50% bonus depreciation break is also back, albeit temporarily. It’s generally available for new (not used) tangible assets with a recovery period of 20 years or less, and certain other assets. The 50% amount will drop to 40% for 2018 and 30% for 2019, however.


In addition, the PATH Act addresses two important tax credits. First, the research credit has been permanently extended, with some specialized provisions for smaller businesses and start-ups. Second, the Work Opportunity credit for employers that hire members of a “target group” has been extended through 2019.


Does your company provide transit benefits? If so, note that the law makes permanent equal limits for the amounts that can be excluded from an employee’s wages for income and payroll tax purposes for parking fringe benefits and van-pooling / mass transit benefits.


Much, much more

Whether you’re filing as an individual or on behalf of a business, the PATH Act could have a substantial effect on your 2015 tax return. We’ve covered only a few of its many provisions here. Please contact us to discuss these and other provisions that may affect your situation.


Sidebar: Good news for generous IRA owners

The recent tax extenders law makes permanent the provision allowing taxpayers age 70½ or older to make direct contributions from their IRA to qualified charities up to $100,000 per tax year. The transfer can count toward the IRA owner’s required minimum distribution. Many rules apply so, if you’re interested, let us help with this charitable giving opportunity.




5 Things to Know About Substantiating Donations

There are virtually countless charitable organizations to which you might donate. You may choose to give cash or to contribute noncash items such as books, sporting goods, or computers or other tech gear. In either case, once you do the good deed, you owe it to yourself to properly claim a tax deduction.


No matter what you donate, you’ll need documentation. And precisely what you’ll need depends on the type and value of your donation. Here are five things to know:


1. Cash contributions of less than $250 are the easiest to substantiate. A canceled check or credit card statement is sufficient. Alternatively, you can obtain a receipt from the recipient organization showing its name, as well as the date, place and amount of the contribution. Bear in mind that unsubstantiated contributions aren’t deductible anymore. So you must have a receipt or bank record.


2. Noncash donations of less than $250 require a bit more. You’ll need a receipt from the charity. Plus, you typically must estimate a reasonable value for the donated item(s). Organizations that regularly accept noncash donations typically will provide you a form for doing so. Keep in mind that, for donations of clothing and household items to be deductible, the items generally must be in at least good condition.


3. Bigger cash donations mean more paperwork. If you donate $250 or more in cash, a canceled check or credit card statement won’t be sufficient. You’ll need a contemporaneous written acknowledgment from the recipient organization that meets IRS guidelines.


Among other things, a contemporaneous written acknowledgment must be received on or before the earlier of the date you file your return for the year in which you made the donation or the due date (including an extension) for filing the return. In addition, it must include a disclosure of whether the charity provided anything in exchange. If it did, the organization must provide a description and good-faith estimate of the exchanged item or service. You can deduct only the difference between the amount donated and the value of the item or service.


4. Noncash donations valued at $250 or more and up to $5,000 require still more. You must get a contemporaneous written acknowledgment plus written evidence that supports the item’s acquisition date, cost and fair market value. The written acknowledgment also must include a description of the item.


5. Noncash donations valued at more than $5,000 are the most complicated. Generally, both a contemporaneous written acknowledgment and a qualified appraisal are required — unless the donation is publicly traded securities. In some cases additional requirements might apply, so be sure to contact us if you’ve made or are planning to make a substantial noncash donation. We can verify the documentation of any type of donation, but contributions of this size are particularly important to document properly.






Top Five Tips on Unemployment Benefits


If you lose your job, you may qualify for unemployment benefits. While these payments may come as a relief, it’s important to remember that they may be taxable. Here are five key facts about unemployment compensation:


1. Unemployment is Taxable. You must include all unemployment compensation as income for the year. You should receive a Form 1099-G, Certain Government Payments by Jan. 31 of the following year. This form will show the amount paid to you and the amount of any federal income tax withheld.


2. Paid Under U.S. or State Law. There are various types of unemployment compensation. Unemployment includes amounts paid under U.S. or state unemployment compensation laws. For more information, see Publication 525, Taxable and Nontaxable Income.


3. Union Benefits May be Taxable. You must include benefits paid to you from regular union dues in your income. Other rules may apply if you contributed to a special union fund and your contributions to the fund are not deductible. In that case, you only include as income any amount that you got that was more than the contributions you made.


4. You May have Tax Withheld. You can choose to have federal income tax withheld from your unemployment. You can have this done using Form W-4V, Voluntary Withholding Request. If you choose not to have tax withheld, you may need to make estimated tax payments during the year.

5. Visit for Help. If you’re facing financial difficulties, you should visit the page: “What Ifs” for Struggling Taxpayers. This page explains the tax effect of events such as job loss. For example, if your income decreased, you may be eligible for certain tax credits, like the Earned Income Tax Credit. If you owe federal taxes and can’t pay your bill check the Payments tab on to review your options. In many cases, the IRS can take steps to help ease your financial burden.

For more details visit and check Publication 525. You can view, download and print Form W-4V at anytime.




Claiming a Tax Deduction for Medical and Dental Expenses


Your medical expenses may save you money at tax time, but a few key rules apply. Here are some tax tips to help you determine if you can deduct medical and dental expenses on your tax return:

·      Itemize. You can only claim your medical expenses that you paid for in 2015 if you itemize deductions on your federal tax return.

·      Income. Include all qualified medical costs that you paid for during the year, however, you only realize a tax benefit when your total amount is more than 10 percent of your adjusted gross income.

·      Temporary Threshold for Age 65.  If you or your spouse is age 65 or older, then it’s 7.5 percent of your adjusted gross income. This exception applies through Dec. 31, 2016.

·      Qualifying Expenses.  You can include most medical and dental costs that you paid for yourself, your spouse and your dependents including:

o    The costs of diagnosing, treating, easing or preventing disease.

o    The costs you pay for prescription drugs and insulin.

o    The costs you pay for insurance premiums for policies that cover medical care qualify.

o    Some long-term care insurance costs.


Exceptions and special rules apply. Costs reimbursed by insurance or other sources normally do not qualify for a deduction. For more examples of costs you can and can’t deduct, see IRS Publication 502, Medical and Dental Expenses. You can get it on anytime.

·      Travel Costs Count.  You may be able to deduct travel costs you pay for medical care. This includes costs such as public transportation, ambulance service, tolls and parking fees. If you use your car, you can deduct either the actual costs or the standard mileage rate for medical travel. The rate is 23 cents per mile for 2015.

·      No Double Benefit.  You can’t claim a tax deduction for medical expenses paid with funds from your Health Savings Accounts or Flexible Spending Arrangements. Amounts paid with funds from those plans are usually tax-free.

·      Use the Tool.  Use the Interactive Tax Assistant tool on to see if you can deduct your medical expenses. It can answer many of your questions on a wide range of tax topics including the health care law.




Tax Savings from Higher Education Costs 


Money you paid for higher education in 2015 can mean tax savings in 2016. If you, your spouse or your dependent took post-high school coursework last year, there may be a tax credit or deduction for you. Here are some facts from the IRS about key tax breaks for higher education.


The American Opportunity Credit (AOTC) is:

·      Worth up to $2,500 per eligible student.

·      Used only for the first four years at an eligible college or vocational school.

·      For students earning a degree or other recognized credential.

·      For students going to school at least half-time for at least one academic period that started  during or shortly after the tax year. Claimed on your tax return using Form 8863, Education Credits.  


The Lifetime Learning Credit (LLC) is:

·      Worth up to $2,000 per tax return, per year, no matter how many students qualify.

·      For all years of higher education, including classes for learning or improving job skills.

·      Claimed on your tax return using Form 8863, Education Credits.


The Tuition and Fees Deduction is:

·      Claimed as an adjustment to income.

·      Claimed whether or not you itemize.

·      Limited to tuition and certain related expenses required for enrollment or attendance at eligible schools.

·      Worth up to $4,000.



·      You should receive Form 1098-T, Tuition Statement, from your school by Feb. 1, 2016. Your school also sends a copy to the IRS.

·      You may only claim qualifying expenses paid in 2015.

·      You can’t claim either credit if someone else claims you as a dependent.

·      You can’t claim either AOTC or LLC and the Tuition and Fees Deduction for the same student or for the same expense, in the same year.

·      Income limits could reduce the amount of credits or deductions you can claim.

·      The Interactive Tax Assistant tool on can help you check your eligibility.




Navigating EMV Chip Card Technology with Your Business Clients



Credit card fraud is an ongoing concern for consumers, but recent developments will have a significant impact on your business clients if they have not yet invested in new technology supported by the Obama administration.


Recent data security breaches have caused a greater need to protect personal and confidential information and keep it from falling into the wrong hands. As a result, the U.S. has transitioned to EMV (Europay, MasterCard and Visa) chip card technology and credit/debit cards now have a small chip embedded into the plastic.


This secures customer data better than the traditional magnetic strip, making it much harder to steal card numbers and use them at other retail locations. In October 2015, businesses were incentivized to begin using the new chip-enabled credit card terminals that were introduced into the market in recent years.


Businesses now risk paying for fraudulent transactions should they transpire if they have not invested in and implemented EMV chip card terminals. Prior to this initiative, credit card banks and payment processors absorbed monetary losses resulting from fraudulent card use—not the merchants—but this is no longer the case. If your business client does not comply with these changes, they will accept some liability for any fraudulent transactions that originate from their business.


This shift in liability from the payment processor to the merchant is not yet fully known. According to the latest Paychex Small Business Survey, only 56 percent of business owners across all industries are aware of the change, and only 29 percent are equipped to accept EMV chip-enabled cards.


As CPAs, this provides an opportunity for you to discuss the importance of security with your clients. While not all businesses are necessarily impacted by data security breaches that lead to fraudulent transactions, there is a financial risk by not upgrading to this new technology.


Recognizing the responsibility to process transactions correctly is key to preventing fraud losses. Here are three important pieces of information to share with your clients to help them clearly understand how to use EMV technology:


• Employees should be educated on the new procedure, as this is new for consumers as well. Some customers may not realize that their credit card now carries a new chip, and some cards will require the customer to enter a PIN number to complete the transaction. Your clients should educate their staff, as well as prepare them for guiding first-time users through the process.


• In most cases, credit cards will also stay with the customer during the entire transaction. In the past, some payments, including those at restaurants, have typically been processed by taking the credit card from the customer to a remote terminal. Restaurants are now being encouraged to implement terminals that can be brought to the table, allowing the chip card to remain with its owner.


• EMV technology takes a few seconds longer to process a payment. For businesses accustomed to handling longer customer lines during peak shopping seasons such as the holidays, a slight rethinking of the transaction process from start to finish may help improve efficiency.


With the proper equipment and training, the transition to EMV chip cards should be relatively painless for your clients, but they must be educated on the change. Given the financial risk involved, this is an important discussion to have, to help limit fraud in their business.


David Durick is a product marketing manager at Paychex, a leading provider of integrated human capital management solutions for payroll, HR, retirement, and insurance services, as well as credit card processing and other business services.




Half of Free E-File Services Don’t Protect Consumers Enough: Audit



Six of 13 IRS-approved free e-filing services Web sites failed in taking steps to help protect consumers from fraudulent and malicious e-mail, according to a recent audit.


The Online Trust Alliance’s 2016 IRS Free E-File Audit & Honor Roll report evaluates the privacy, security and consumer protection practices of the sites by assessing nearly 50 criteria, standards and internationally accepted privacy practices. The sites that performed specifically well received the honor roll status.


The OTA evaluated the IRS-approved e-filing sites using both its industry-developed methodology and the IRS’s security and privacy mandated standards. Seven sites scored high in all areas of the audit, five failed due to poor consumer protection, and three failed for their site security. Most failing sites did not properly authenticate e-mail addresses, which leaves consumers open to spear phishing and malicious e-mail scams, OTA said.


Based on the IRS security mandates for these tax providers announced in 2010 and updated in 2015, one provider was out of compliance for failing to adopt extended validation SSL certificates, safeguards for assuring a Web site owner’s identity to help prevent spoofing and fraud. Other providers were out of compliance for failing to provide adequate third-party audits of their privacy policy and Web activities, implement anti-botnet protection for fraudulent account signups, and regularly scan their sites for SSL vulnerabilities.


The OTA has been in contact with the IRS regarding the findings. “The failure rate of over one-third should concern customers and the IRS,” said OTA executive director and president Craig Spiezle.




Tax Strategy Scan: Minimizing the Tax Bite in Taxable Accounts

Motley Fool


Our weekly roundup of tax-related investment strategies and news your clients may be thinking about.


Avoid these 10 traps with your taxable account: A taxable account offers liquidity that clients can't find in IRAs and other retirement plans, according to Morningstar. Clients can minimize or circumvent the tax bite from these investments by avoiding 10 possible traps. -- Morningstar


Crazy sounding tax deductions that are still legit: Taxpayers have claimed some unusual expenses that were dismissed by the IRS, but later upheld in Tax Court, according to Forbes. Some of these unusual tax deductions were the cosmetic surgery costs claimed by an exotic dancer, moving expenses for a pet, and the cost of food for wild cats to ward off rats in a junkyard. Tax court also approved child care expenses as charitable contributions, beer as a business expense, and landscaping costs as home office deductions. -- Forbes


What to know when deducting charitable donations:Charitable tax deductions are limited to a certain percentage of a client's adjusted gross income, according to MarketWatch. Clients can carry over the amount of contributions that exceeds their AGI limit over the next five years and deduct the amount from their taxable income. Clients need to produce the required documentation so they can deduct their cash and non-cash donations to charity. -- MarketWatch


Cost basis and your taxes -- Brokerage firms assist, but filing and record-keeping are in your client's court: Clients need to learn the cost basis of their investments to determine their impact on taxes, according to the Motley Fool. The cost basis of bond and stock investments usually covers the amount paid to buy these securities, reinvestment of dividends or capital gains distributions, and commissions and other fees. Investors have to use Form 8949 to report the cost basis of their investments to the IRS. -- Motley Fool




IRS Removes Some Restrictions on Cuba Income



The Internal Revenue Service has followed up on the Obama administration’s opening of diplomatic relations with Cuba by releasing a new revenue ruling that removes certain restrictions on income earned in Cuba.


The previously applicable restrictions denied a foreign tax credit for income taxes paid to Cuba and disallowed deferral on income earned in Cuba through a controlled foreign corporation.

Revenue Ruling 2016-08 removes those restrictions. It modifies an earlier revenue ruling from 2005, which lists countries subject to special rules under sections 901(j) and 952(a)(5) of the Tax Code.


The Code generally allow U.S. taxpayers to claim a foreign tax credit for income, war profits, and excess profits taxes paid or accrued (or deemed paid or accrued) to any foreign country or to any possession of the United States. But the foreign tax credit is subject to various limitations and restrictions under section 901(j)(1), which imposes restrictions in the case of income and taxes attributable to certain countries. Section 952(a)(5) provides that subpart F income includes income derived by a controlled foreign corporation from any foreign country during any period during which section 901(j) applies to that foreign country.




Tax Refund Fraud Continues to Vex Preparers and Taxpayers



With cases of identity theft and tax fraud increasing almost exponentially, tax preparers should educate their clients about the dangers they face in having their information compromised, according to executives at several credit monitoring and identity protection services.


Consumers are increasingly aware that they are potential targets of tax-related fraud, observed Mike Bruemmer, vice president of consumer protection at Experian. “Between 2014 and 2015 there was a 47 percent increase in the number of ID theft cases, with the biggest portion attributable to ID theft that resulted in fraudulent tax returns and refunds,” he said.


But although taxpayer awareness of ID theft is at an all-time high, not many are doing anything differently to protect themselves, particularly those who prepare their own returns rather than use a paid preparer, Bruemmer said. “Only 12 percent of respondents [in a just-released Experian survey] are planning to check their credit report, an important first step in monitoring for fraudulent activity that could indicate identity theft,” he said.


In the survey, 76 percent of respondents said they were aware of ID theft and tax fraud, and 55 percent said they were concerned about becoming a victim. Moreover, 28 percent have been a victim or know someone who has been a victim of tax fraud. Those who have been affected most commonly file a police report (59 percent) and place a fraud alert on their credit reports (58 percent).


A majority of survey respondents don’t plan to take the IRS-recommended steps to protect themselves, according to Bruemmer.


“Of those who file their own return, 8 percent will file on a protected Internet connection,” he said. “So 92 percent will file on an open Wi-Fi or public Wi-Fi that is unprotected. That’s very dangerous.”


Slightly over half (56 percent) of the respondents prepare their own return. That’s close to the IRS filing season statistics as of Feb. 26, 2016, which show that so far this season, 27,372,000 returns were self-prepared, while 27,709,000 returns were completed by tax professionals.


For those who use paid professionals, Bruemmer recommends questioning them on the security measures they have in place. For all taxpayers, he recommends they enroll in credit monitoring.

“The Dark Web is the underground trading site where criminals who have stolen information will buy or sell the information for financial gain,” he explained. “There are certain protocols to get in there. We search those sites and determine what information is being bought and sold out there. If your information is for sale, it’s a sure indication your identity has been compromised.”

Last year Experian serviced about 3,500 data breaches, according to Bruemmer. “They include Fortune 50 companies, government entities, all the way down to small businesses and individuals. There were pretty close to 26,000 cases of ID theft over that same period.”


For those who are victims of fraud, the time and effort involved in straightening things out can be enormous, Bruemmer noted. “Last year our fraud resolution team helped a consumer work through the issues that occurred when a tax lien was filed against an LLC they owned. We saw the report and investigated. Our agent was able to unwind everything with the IRS and get the lien taken off. If the consumer didn’t have one of our experts that work directly with the IRS, it would likely have taken months to clear up, but in this case it was cleared up in a matter of weeks,” he said.


To avoid tax fraud, the rules are similar to any sort of credit card fraud, according to Mary Ann Miller, senior director and fraud executive advisor at NICE Actimize.


“Preparers should tell their taxpayers to be vigilant and cynical and just don’t give out Social Security numbers to anyone,” she said. “That is one card that you leave home without. And don’t respond to any email that looks like it is from the IRS, your bank or any other agency with personal information. And if you receive a phone call stating that they are from the IRS or any other agency, do not give out personal information. If it is a legitimate call, the agency will already have the details.”




IRS's Delays in Responding to Taxpayer Correspondence Take Mounting Toll



The Internal Revenue Service’s delays in processing taxpayer correspondence are lengthening, leading to delayed tax refunds and bigger interest payments from the IRS, according to a new report.


The report, from the Treasury Inspector General for Tax Administration, found inconsistent use of “over-age” correspondence lists by some managers at the IRS causes delays in processing taxpayers’ correspondence, creating a burden for taxpayers who must wait longer for assistance and, in some cases, their tax refunds. 


The IRS’s internal guidelines specify that correspondence from taxpayers is generally considered over-age if it has not been resolved within 45 days. Customer satisfaction surveys found taxpayers were dissatisfied with the length of time the IRS took to resolve their cases. The delays can result in the IRS unnecessarily paying interest to taxpayers, estimated at more than $27.6 million in fiscal year 2014. Over-aged correspondence has steadily increased from 40 percent in fiscal year 2012 to 49 percent in fiscal year 2015.


In previous reviews, TIGTA recommended the IRS should develop a consistent process to ensure that managers complete their reviews of Automated Age Listings—that is, correspondence over-age reports.


The IRS has taken some actions to improve correspondence inventory management, the report acknowledged. For example, the IRS developed and implemented a phased approach on all its office campuses during fiscal year 2014, with the objective of closing as many cases as early as possible to reduce inventory and improve the timeliness of case resolutions.


The IRS also initiated a pilot program in February of last year to develop a consistent process for monitoring over-age reports. However, despite these actions, the percentage of over-age correspondence has continued to increase, partly because some IRS managers are not following internal guidelines requiring the use of over-age reports to monitor and reduce the inventory of unanswered correspondence.


TIGTA’s analysis of eight customer service representatives’ over-age reports for three consecutive weeks found that 16 to 82 percent of their over-aged assigned cases remained unresolved. In response to previous TIGTA reports on this issue, IRS management said they would ensure managers completed these reviews and would develop a consistent process to ensure managers completed correspondence over-age report reviews. However, some managers continue to not adhere to the required use of over-age reports, contributing to the IRS’s inability to effectively reduce the inventory of unanswered correspondence.


“Delays in processing correspondence create a burden for taxpayers, who must wait to obtain assistance and, in some cases, receive refunds,” said TIGTA Inspector General J. Russell George in a statement. “For the IRS, the delays can result in the unnecessary payment of interest. In FY 2014, the IRS paid more than $27.6 million to taxpayers as a result of not timely processing or resolving correspondence cases.”


TIGTA recommended the IRS ensure that managers provide and receive annotated over-age reports from their employees on a weekly basis. The IRS agreed with TIGTA’s recommendations and plans to re-assess its procedures to develop a consistent process for dealing with over-age reports.


The IRS’s limited resources after years of budget cuts are also contributing to the delays. In response to the report, Debra Holland, commissioner of the IRS’s Wage and Investment Division, pointed to the agency’s limited resources. “The same employees who work correspondence cases also staff our toll-free telephone service lines and, during peak periods, our resources are strained to handle both of these critical workloads,” she wrote. “Factors that can contribute to inventory aging, including waiting on additional information from taxpayers, issue complexity and competing priorities, can significantly impact the ability to resolve and conclude correspondence matters within desired timeframes.”


While she emphasized that the most significant factors in inventory aging are overall workload demand and the availability of resources to address that demand, she said the IRS is committed to continually improving its responsiveness to taxpayer inquiries.




The Story of the Camel and the Counter



The following is a short story I distribute to my beginning undergraduate accounting students and those graduate students who are finishing their master’s degrees. It is intended to stimulate their reading comprehension and ignite their critical thinking as to how numbers play such an important role in business as in life. It was influenced by a sermon a priest delivered many years ago at a service I once attended:


Many, many, many years ago, there lived in Egypt a very wise and wealthy man who had three sons. One day the wise man called his sons together to tell them how proud he was of each of them.


He also knew it was time to allocate his great wealth. He informed his sons that all he asked for in return for the riches they would inherit was that they always care for their mother. After allocating all of his other assets he was left to distribute his prized camels, of which there were 17. He decided to give half of his camels to his oldest son, a third to his middle son and a ninth to his youngest son. He further directed his sons, that should there ever be a dispute or a problem that they could not resolve, they should seek the advice of the town’s counter.


A short time after making his wishes known to his sons, the wise and wealthy man died. After giving their father a funeral fit for a king, the sons began to take possession of the assets pursuant to their father’s directions. However, a problem arose. The wise man left 17 camels to his sons, with specific instructions on how they were to be distributed. Unfortunately for the sons, 17 was not easily divisible by two (a half), three (a third) or nine (a ninth). After fretting for days over their problem, they remembered what their father had told them about the town’s counter.


The three sons went into the town to seek out the help of the counter. When they met with her they explained their dilemma and told her what their father had said. She immediately said there was no problem at all for there was a simple solution. She had one camel, which their father had given her as a gift a year earlier. She would give the camel to the three sons so they would now have 18 camels to allocate. Since 18 was easily divisible by two, three and nine the problem would be solved. The three sons agreed they could not take the camel from the counter. However, the counter insisted that it would be their father’s wish that they follow her instructions.


Upon arriving home with the eighteenth camel in tow, the three sons set out to allocate the camels, just as their father wished. The oldest son would get a half, i.e. nine, the middle a third, i.e. six, and the youngest a ninth, i.e. two. Then the sons realized what had happened. Nine plus six plus two equaled 17.


Their father had taught them a final lesson. All things are possible with numbers, if you know how to count.

By the way, the sons joyfully returned the counter’s camel.


Charles J. Pendola, CPA, ESQ, FHFMA, FACHE, CMC, CFE, CFF, CGMA, is director of Graduate Management Studies Programs at St. Joseph's College in Patchogue, N.Y.







Why You Don’t Need to Worry about Taxes in Retirement


As a tax accountant, I am programmed to think about taxes. To worry about people paying too much in taxes. To obsess over tactics that allow clients to grind down their federal and state payroll and income tax liabilities.


In short, if there’s a personality type that worries too much about taxes, I’m in that group. But with that said, let me endorse and underscore something that William Bernstein, the Portland physician, financial writer and investment adviser, said in a recent interview with the International Business Times (see here).


Bernstein said people shouldn’t worry about the taxes they’ll pay in retirement because they’ve saved a bunch of money inside their tax-deferred accounts.


Thank you, Dr. Bernstein. Taxes on retirement accounts are not something that many people need to worry about. And because people do worry about them too much, I want to share some additional tax-related thoughts to amplify his remark.


Most People Are in the Great Majority

Let’s get the most significant reason—and the most awkward reason—out here first: Most people don’t save anywhere near enough for retirement to worry about the taxes they’ll owe when they withdraw money from their tax-deferred accounts.


Note: This reality explains why most people should not use a Roth-style account, something we’ve discussed in other posts at this blog, including here.


You can get data from a bunch of different sources that elaborates on this awkward reality. And the data doesn’t all perfectly sync up, but just to start with one reasonable source: Look at the savings data reported by the Employee Benefits Retirement Institute in a fact sheet based on 2014 data. (See, for example, figure 3 on page 2 of this document.) The median retirement savings of someone in the 55-or-older age group—people either on the doorstep of retirement or in retirement—equals about $50,000. That savings level may produce around $2,000 a year of retirement income, but surely that income won’t be taxable.


And the fact is, even retirees who’ve saved a lot more won’t often pay much in income taxes during retirement. Let me dig into this a bit because people often don’t do a thorough job with their accounting.


Remember that Social Security benefits often aren’t taxable. Benefits only get taxed when the sum of any non–Social Security income plus half of any Social Security benefits exceeds $25,000 (or $32,000 for a married couple filing jointly). This means, however, that when you combine typical Social Security benefits with withdrawals from even nicely sized IRAs and 401(k)s, most people just don’t have much tax to worry about.


The accounting gets complicated, but we have mocked up realistic tax returns in our office where a single taxpayer with $25,000 of Social Security benefits who is withdrawing required minimum distributions from a $450,000 IRA pays no income taxes.


We’ve done the same thing for a married couple with $32,000 in Social Security benefits who are withdrawing required minimum distributions from a $600,000 IRA, and again our calculations show this couple pays no income taxes.


It is tricky to accurately calculate the percentile rank of someone with these retirement savings balances. (There’s an online calculator you can use here that estimates the percentile rank of various retirement savings balances based on Federal Reserve data.) But I feel comfortable guessing that these balances put someone in the top 10% or very close to the top 10%.


Note: In another post here we talk about what Federal Reserve and IRS data suggest the top 10%, top 5% and top 1% look like.


The bottom line? Most of us simply don’t save enough for retirement to pay much income tax during retirement.


Why the Top 10% Probably Doesn’t Need to Worry, Part 1


If you or you and your spouse have done a really outstanding job saving for retirement—say you’ve amassed a big six-figure or even a seven-figure nest egg—I still don’t think you need to worry. Or at least not too much.


But first, a digression: Let’s not lose sight of the fact if you’ve amassed a big six-figure or a seven-figure nest egg that you’ve adequately prepared for retirement. Outstanding work. You’ve accomplished the tough part. Sure, you’ll pay some taxes. Somebody has to, right?

But even though you will pay some taxes on retirement account withdrawals, you quite likely won’t pay as much as you might worry.


If you’ve accumulated so much money in your retirement accounts that you’re worried about income taxes, for example, you will probably actually leave substantial amounts of savings, intact and untaxed, inside your IRA and any similar accounts.


In other words, and not to put too fine a point on this, but you or you and your spouse will probably die before you deplete your savings. (Again, remember that the scenario we’re talking about here is where you’ve amassed some rather substantial nest egg, so you do, in fact, need to pay rather substantial amounts of tax on withdrawals.)


Whatever you leave untaxed after you’re gone, however, is irrelevant. You are not, by definition, going to pay that tax. Maybe your heirs will. Maybe. But note that if you split something like an IRA among several beneficiaries (like kids and grandkids), you probably solve most of the theoretical tax problem we’re worrying about that way.


A $2,000,000 balance in a bunch of different tax-deferred accounts (a balance that’s pretty tough to hit if you work out the numbers) becomes five “mere” $400,000 retirement accounts if you bequeath your savings to your three kids, your little sister, and that special-needs grandchild.

The tax on a $400,000 account, as we’ve discussed, is just not that bad if it’s drawn down in retirement.


Why the Top 10% Probably Doesn’t Need to Worry, Part 2


Okay, so what if you or your spouse does live an absurdly long time. Long enough that you guys do seriously begin to erode some gigantic account balances. That does mean you’re drawing down tax-deferred accounts and that you will pay bigger tax bills as you withdraw this money.

Is this where things all get ugly? Well, maybe not—at least in a discussion about taxes.


If you live into your late eighties or nineties or beyond, you will probably begin to load up your tax return both with big required minimum distributions and with significant medical expense itemized deductions for stuff like assisted-living care. But here’s the thing people miss about this scenario: This income and these expenses may net out against each other on your tax return and mean you don’t need to worry about taxes on distributions.


In other words, if you’re paying, say, $100,000 a year for assisted care, that will shelter the income taxes on nearly 90% of $100,000 of retirement account withdrawals. (Medical expense itemized deductions are only deductible to the extent total medical expenses exceed 10% of the taxpayer’s adjusted gross income and only if the taxpayer itemizes deductions. Accordingly, you won’t be able to shelter 100% of a $100,000 withdrawal via $100,000 of medical itemized deductions—only a generous chunk of the withdrawal.)


Only a Small Lucky Cohort Needs to Worry

So who’s left to worry about their taxes on retirement income? People who save a bunch, live a long time, get a lucky streak in their investments and then stay healthy and independent to the very end.


No offense, but I don’t think you want to worry about falling into this group. Gosh, we should be so lucky.





Surge Pricing on Your Tax Return: Tax Companies Squeeze Procrastinators


There are really two tax seasons every year, marked by two very different attitudes.


In January and February, taxpayers tend to have simple situations, know they're due a refund, and want that money as soon as possible. They're in a pretty good mood.


Then, as the deadline looms, another group of Americans gets around to filing their taxes. These people tend to owe the IRS, have more complex finances, and need to collect many more forms before they can even start their 1040s. Many are lucky to get everything done by the middle of April. They're not in such a good mood.


"Because they've waited until the last minute, they're less patient," said Lance Dunn, co-founder of the online discount tax prep company TaxAct. If there are any last-minute problems, the typical late filer gets even crankier, Dunn said. "He's got the panic button fully pressed."


That's the taxpayer who is probably going to get charged a lot more for online, do-it-yourself tax preparation.


TurboTax, H&R Block and TaxAct have practiced their own form of surge pricing for years. They offer cheap, sometimes even free services to early filers. Then, usually in late March, they slap customers with price hikes of 30 percent or more. Sometimes they continue ratcheting prices up in the days before the deadline. You would expect people with more complicated taxes to pay a preparer more—but all categories of taxpayers get hit with price increases as the deadline nears, including those with very basic tax situations.


Much-advertised "free filing" options, aimed at those with the simplest tax situations, disappear by late in the tax season, according to historical price data provided by Oppenheimer & Co. analyst Scott Schneeberger. Last year, TurboTax ended its "Absolute Zero" offering—charging nothing for both federal and state returns for taxpayers with the simple 1040EZ and 1040A forms—in mid-February. This year, TurboTax and TaxAct, which has matched its competitor's offer, were still offering free federal and state filing as of March 8. H&R Block's online product charges for a state return, but its free federal return covers a wider swath of simple tax situations than the 1040A and 1040EZ.


These free products are an effort to win over young, entry-level tax filers before their finances get more complicated. When that happens, tax preparers can start making real money. For filers who need to report investment activity to the Internal Revenue Service, for example, TaxAct was charging $40 as of March 8, while H&R Block cost $72 and TurboTax charged $92.


As we get closer to April 18, the deadline this year, the prices will rise higher still, if past years are any guide.


Prices for other categories, including those for homeowners, the self-employed, and business owners, also can jump by a third in late March, Oppenheimer data show.


H&R Block didn't respond to requests for comment on its online pricing strategy. At TurboTax, lower prices early in the tax season "encourage taxpayers to file as early as possible," helping spread tax filing away from its peak times and ensuring the firm delivers good service "during our busiest times," said Julie Miller, a spokeswoman for Intuit Inc., TurboTax's parent company.

TaxAct points out that it offers a "price lock guarantee," which lets customers start a return early in the season and lock in a low price even if they finish it later.


Many Americans have trouble just thinking about their taxes. From January to April, they carry around a dread of what they might owe and what the IRS might do to them if they make a mistake. Then, again and again, they put tax time off—to tomorrow night, to next weekend—until the task can't be delayed any longer.


For these taxpayers, some willpower early in the season would not only prevent four months of torture. It would save them a few bucks, too.




Consumer Alert: Scammers Change Tactics, Once Again


Aggressive and threatening phone calls by criminals impersonating IRS agents remain a major threat to taxpayers, but now the IRS is receiving new reports of scammers calling under the guise of verifying tax return information over the phone.


The latest variation being seen in the last few weeks tries to play off the current tax season. Scam artists call saying they have your tax return, and they just need to verify a few details to process your return. The scam tries to get you to give up personal information such as a Social Security number or personal financial information, such as bank numbers or credit cards.


“These schemes continue to adapt and evolve in an attempt to catch people off guard just as they are preparing their tax returns,” said IRS Commissioner John Koskinen. “Don’t be fooled. The IRS won’t be calling you out of the blue asking you to verify your personal tax information or aggressively threatening you to make an immediate payment.”


The IRS reminds taxpayers to guard against all sorts of con games that continually change. The IRS, the states and the tax industry came together in 2015 and launched a public awareness campaign called Taxes. Security. Together. to help educate taxpayers about the need to maintain security online and to recognize and avoid “phishing” and other schemes.


The IRS continues to hear reports of phone scams as well as e-mail phishing schemes across the country.


“These schemes touch people in every part of the country and in every walk of life. It’s a growing list of people who’ve encountered these. I’ve even gotten these calls myself,” Koskinen said.


This January, the Treasury Inspector General for Tax Administration (TIGTA) announced they have received reports of roughly 896,000 phone scam contacts since October 2013 and have become aware of over 5,000 victims who have collectively paid over $26.5 million as a result of the scam. Just this year, the IRS has seen a 400 percent increase in phishing schemes.


Protect Yourself


Scammers make unsolicited calls claiming to be IRS officials. They demand that the victim pay a bogus tax bill. They con the victim into sending cash, usually through a prepaid debit card or wire transfer. They may also leave “urgent” callback requests through phone “robo-calls,” or via a phishing email. They’ve even begun politely asking taxpayers to verify their identity over the phone.


Many phone scams use threats to intimidate and bully a victim into paying. They may even threaten to arrest, deport or revoke the license of their victim if they don’t get the money.


Scammers often alter caller ID numbers to make it look like the IRS or another agency is calling. The callers use IRS titles and fake badge numbers to appear legitimate. They may use the victim’s name, address and other personal information to make the call sound official.


Here are some things the scammers often do but the IRS will not do. Any one of these five things is a tell-tale sign of a scam.


The IRS will never:

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

·      Call or email you to verify your identity by asking for personal and financial information.

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

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

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

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


If you get a phone call from someone claiming to be from the IRS and asking for money or to verify your identity, here’s what you should do:


If you don’t owe taxes, or have no reason to think that you do:

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

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

·      Report it to the Federal Trade Commission. Use the “FTC Complaint Assistant” on Please add “IRS Telephone Scam” in the notes.


If you know you owe, or think you may owe tax:

·      Call the IRS at 800-829-1040. IRS workers can help you.


Stay alert to scams that use the IRS as a lure. Tax scams can happen any time of year, not just at tax time. For more, visit “Tax Scams and Consumer Alerts” on





Tax Court: Attorney Can't Write Off Travel Costs for Books She Wrote



The Tax Court agreed with the Internal Revenue Service in disallowing an attorney’s attempt to write off her family’s travel costs as an expense for some books she wrote.


Lisa Fisher, a practicing attorney in New York, was asked to travel to the Czech Republic for an extended period at the request of a client. Since her husband, also a practicing attorney, could not take time off to tend to their three children, all under nine years old, she took them with her on the trip.


Concerned about entertaining the children on the long car rides she anticipated taking during the trip, she came up with the idea of writing a book about the country that would be informative and hold the children’s interest, or, as she testified, “keep them busy” while traveling by car. She later decided to develop a series of travel books for children.


During 2006-2008 Fisher created some “prototype” books, some of which she sold by “word of mouth” in response to specific requests from friends and clients who planned to travel with their children. On her Schedule C for the years in question, Fisher reported losses of $21,897, $31,971, and $20,157 generated, in part, by “other expenses” for lodging, airfare, and entrance fees incurred in travelling with the children.


The IRS disallowed the all but $479 of the expenses, which allowed Fisher to reduce her income from the activity to zero but not below. In a summary opinion (Fisher v Commissioner, T.C. Summary Opinion 2016-10), the Tax Court upheld the IRS’s determination without applying the Hobby Loss rules of Code section 183, which require an actual profit objective. Instead, the court said, to be deductible the business must have actually commenced. Assuming without finding that Fisher did conduct her book-writing activity with a profit motive, the business itself had not begun.





States Work to Stay Afloat in a Sea of ID Theft

The feds aren’t the only ones taking measures to protect taxpayers


Like a surfer evading overcrowded tourist surf spots, stolen identity refund fraud, or SIRF, is migrating away from better-protected federal turf and heading to the local point breaks: state income tax refunds.


In 2015, state revenue agencies were flooded with stolen identity tax returns—so much so that they collaborated with the IRS and tax preparation and software companies to implement a few quick fixes to better protect state and federal refunds for the 2016 tax season.


Taxpayers and tax professionals may have already noticed some of these efforts, such as requests for information from state-issued driver’s licenses or heavier password requirements and security questions within do-it-yourself tax prep software. But for some states, that wasn’t enough. Many went further to establish their own SIRF countermeasures.

What states are doing?

Like the IRS, state tax agencies are employing SIRF-prevention tactics before filing and targeting suspicious returns before issuing refunds. Many states are extending processing times during the 2016 filing season to allow for more filtering of potentially fraudulent returns before issuing refunds. Additionally, here are some specific measures that states are using to fight SIRF:


Identity verification letters. After taxpayers file their state returns but before they receive their refunds, they might receive a letter from their state revenue agency asking them to:

·      Take an online quiz about themselves to verify their identity;

·      Go online and enter a PIN from the letter they received to confirm that they filed a return; or,

·      Submit copies of their driver’s license and other documents to the revenue agency to verify their identity.


Receiving a letter like this will generally delay taxpayers’ refunds, but if taxpayers pass the quiz or enter the PIN promptly, the delay should be minimal, and ultimately it will help ensure that refunds end up in legitimate taxpayers’ hands.


Mailing refund checks. Sometimes, a bogus tax return looks just like a real one, except for different direct deposit information. So, some states will mail taxpayers a check if their returns look suspect.


Holding all refunds until the state can verify wages. This is a relatively new tactic that Utah legislators first established, and Illinois and South Carolina quickly followed suit. The gist is that these three states held all refunds until March 1, at which point the revenue agencies expected to have received wage and withholding information from employers and compared it to the information on taxpayers’ returns.


Identity theft indicators on taxpayer accounts. Generally, an indicator on a taxpayer’s account means that states will closely review every return filed with the taxpayer’s Social Security number. Some states go big and automatically delay the refund for weeks while they verify the return’s legitimacy. Other states go even bigger and require taxpayers with an indicator on their account to file a paper return.


Many states allow taxpayers to proactively request an indicator on their account. But before requesting an indicator, taxpayers should make sure they know exactly what that would mean for filing their state tax return and for any associated refunds.


Alerting taxpayers when a return is filed under their SSN. Alabama and Georgia are innovating new techniques for residents who set up taxpayer accounts with the state revenue agencies. Once taxpayers create an account, they can opt in to receive an alert if the state accepts a return filed with their Social Security number. If taxpayers receive an alert but haven’t filed yet, they can contact the agency, which will then stop the fraudulent return before issuing the refund.


These are just a few of the tactics that some state tax agencies are putting in place to better combat the rapid proliferation of SIRF. If taxpayers find out that they have already become a SIRF victim, there are several steps they should take.

How to recover from a tax ID theft wipeout

Like a big-wave surfer thrashed by a 25-footer, SIRF victims eventually have to come up for air and get back on the board. The IRS and Federal Trade Commission offer great resources to walk taxpayers through the process of mending their federal tax account and credit record, but state SIRF is less straightforward.


A state SIRF victim not only has to address identity theft and any resulting tax compliance issues in the states where they are required to file a return, but they also have to worry about other states where a fraudster may try to file a bogus return using the taxpayer’s identity. If that happens, those other states will eventually contact the taxpayer, usually because of compliance issues resulting from the fraudulent return.


State revenue agencies provide various methods to report identity theft at the state level, from online-fillable forms to fraud department phone lines. It’s a good idea for taxpayers to start by visiting their state revenue agency’s Web site and searching for identity theft. More likely than not, taxpayers will find instructions or a phone number to call. If all else fails, taxpayers should call the general customer service phone line.


Here are the generally recommended steps taxpayers should take when they find out that they’ve become victims of identity theft:

·      File Form 14039, Identity Theft Affidavit, with the IRS.

·      File a police report.

·      File an identity theft report with the Federal Trade Commission.

·      Check their credit reports for unauthorized activity.

·      Request a freeze or fraud alert on their credit.

Depending on the state, taxpayers may also need to submit a paper tax return, documents verifying their identity, and a police report. Again, taxpayers should begin the state restoration process by visiting their state revenue agency’s Web site.

Coming out the other end of the pipeline

The proliferation of data breaches in recent years has exposed sensitive taxpayer information and left taxpayers vulnerable to a tax identity theft wipeout. However, using available preventative measures and following an informed plan of corrective action in the event of SIRF are important practices for taxpayers to protect their state and federal refunds. And with every tax season, the IRS, state revenue agencies, and the entire tax industry will continue working together to refine strategies to combat the rising tide of SIRF.

Ben Deneka, JD, is The Tax Institute’s industry operations liaison, working closely with the IRS and representing H&R Block in various industry associations, including the Security Summit, a government-industry coalition formed to combat stolen identity refund fraud.





Foreign Account Filings Top 1 Million; Taxpayers Need to Know Their Filing Requirements

WASHINGTON – Strong and sustained growth of taxpayers complying with foreign financial account reporting reflects improving awareness and compliance of this important part of offshore tax rules, the Internal Revenue Service said today.


"Taxpayers here and abroad need to take their offshore tax and filing obligations seriously," said IRS Commissioner John Koskinen. "Improving offshore compliance has been a top priority of the IRS for several years, and we are seeing very positive results."


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

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


Filings of IRS Form 8938, Statement of Specified Foreign Financial Assets, are another sign of growing awareness of foreign reporting requirements. Taxpayers filed more than 300,000 Forms 8938 with their tax returns for tax year 2014, roughly the same as the prior year and up from about 200,000 for tax year 2011, the first year of the form.


Form 8938 resulted from the Foreign Account Tax Compliance Act, known as "FATCA." The filing thresholds are much higher for this form than for the FBAR.


Filing Requirements

Taxpayers with an interest in, or signature or other authority over, foreign financial accounts whose aggregate value exceeded $10,000 at any time during 2015 must file FBARs. It is due by June 30 and must be filed electronically through the BSA E-Filing System website.


Generally, U.S. citizens, resident aliens and certain non-resident aliens must report specified foreign financial assets on Form 8938 if the aggregate value of those assets exceeds certain thresholds. Reporting thresholds vary based on whether a taxpayer files a joint income tax return or lives abroad. The lowest reporting threshold for Form 8938 is $50,000 but varies by taxpayer. See the form's instructions for more information. provides the best starting place for international taxpayers to get answers to their important tax questions. The International Taxpayers page on is packed with information. The web site also features a directory that includes overseas tax preparers.

International taxpayers will find the online IRS Tax Map and the International Tax Topic Index to be valuable sources of answers. The IRS also has videos to assist international taxpayers. See IR-2016-03 for more.


By law, Americans living abroad, as well as many non-U.S. citizens, must file a U.S. income tax return. In addition, key tax benefits, such as the foreign earned income exclusion, are only available to those who file U.S. returns.


The law requires U.S. citizens and resident aliens to report worldwide income, including income from foreign trusts and foreign bank and securities accounts. In most cases, affected taxpayers need to complete and attach Schedule B to their tax return. Part III of Schedule B asks about the existence of foreign accounts, such as bank and securities accounts, and usually requires U.S. citizens to report the country in which each account is located.


More information on the tax rules that apply to U.S. citizens and resident aliens living abroad can be found in, Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad.




Liberty Tax Franchisees Hit with More Charges


A federal court has barred the owner of a dozen Liberty Tax Service franchises in the Los Angeles and Las Vegas areas after discovering rampant tax fraud, while a Maryland grand jury has indicted the owner and several tax preparers at some Liberty Tax franchises in Baltimore.

The cases are only the latest in a string of problems at Liberty franchisees this season, but Liberty’s chief compliance officer said the company itself brought the cases to light years ago.

“These are both situations where we terminated the franchisee, and they both relate to situations where we actually reported the franchisee to the IRS,” said Jim Wheaton, general counsel, chief compliance officer and vice president of legal and governmental affairs at Liberty Tax.


In the first case, the U.S. District Court for the Central District of California permanently barred Stacy John Sanchez of Orange County, Calif., last week from preparing federal tax returns for others, according to the Justice Department. The civil injunction order prohibits Sanchez from acting as a federal tax return preparer and from owning, operating, or profiting from tax-return preparation businesses. Sanchez agreed to the entry of the injunction but did not admit the allegations in the civil complaint against him.


According to the complaint, Sanchez owned and operated 12 Liberty Tax Service franchise locations, primarily in the Los Angeles and Las Vegas areas. At these locations, Sanchez and his employees prepared federal income tax returns that, among other things, contained bogus Schedules C (Profit or Loss from Business), fake Form W-2 (Wage and Tax Statement) information and falsely claimed dependents, the suit alleged. These fraudulent returns improperly generated federal income tax refunds and tax credits, such as the Child Tax Credit and Earned Income Tax Credit, for Sanchez’s clients, according to the complaint.


In addition, the complaint alleged that Sanchez and his employees prepared fraudulent income tax returns using stolen names and Social Security numbers and kept the bogus refunds generated by these identity theft returns. The estimated loss to the U.S. Treasury from Sanchez and his employees’ misconduct is at least $14 million, according to the complaint.


Wheaton said he doesn’t know why it took over three years for the government to resolve the case. “I don’t think the consent order that the guy entered into made it clear, but he was terminated three years ago by us,” said Wheaton. “He sued us for wrongful termination. There were some lawsuits back and forth, but we had also reported him and a number of other people who worked for him to the IRS back in 2013.”


The Maryland indictment relates to suspensions of tax preparers announced last month by Maryland Comptroller Peter Franchot (see Maryland Suspends Liberty Tax Service Franchisees and Maryland Halts Returns from More Preparers).


Last week a Baltimore grand jury indicted nine people in connection with one of the fraud schemes, which involved enticing homeless people and others to file false income tax returns to generate preparation fees for their company. The charges stem from a scheme allegedly perpetrated by the owner and tax preparers of several Liberty Tax franchises in Baltimore, who are charged with generating fraudulent returns which specifically exploited a portion of the tax code known as the Earned Income Tax Credit.


According to a joint investigation by Comptroller Franchot’s office and the Office of Maryland Attorney General Brian Frosh, Liberty Tax preparers operating from certain Baltimore locations owned by the same individual would direct marketing efforts at homeless shelters, transitional housing and drug rehabilitation centers, with a promise of $50 if filers arrived for a return to be prepared. The tax preparers would then create a fraudulent return that maximized the credit the filer could receive.


“This owner and her associates targeted the most vulnerable—the homeless, disabled, drug addicts, and poor people already struggling for stability,” Franchot said in a statement. “They lured victims by paying them $50, then submitted false tax returns to make a profit without regard to the consequence to their clients.”


In every case, according to the indictments, the tax preparers created tax returns showing that the filers earning income as household employees in exactly the range needed to obtain the highest refund, or between $6,450 and $8,150. In each instance, preparers listed income from several sources, each under the limit that would have triggered Social Security or Medicare taxes being withheld by the employer.


In a typical case, the tax return would show that the filer was eligible for a combined $620 in federal and state credit. But most of the money, more than $400, would go to the Liberty franchise for filing fees and other charges.


That system was used more than 1,100 times during the 2015 tax season across six franchise locations owned by a single individual, Lateisha Vanessa Kone, according to the indictments. Preparers generated fees for the franchise owner and were eligible to receive bonuses based on the number of returns they filed and the amount of the fees they generated.


Because of security checks in place by the Office of the Comptroller and the Internal Revenue Service, the returns were flagged as suspicious, prompting the investigation. Liberty Tax’s parent corporation cooperated with the investigation.


“In the Maryland case this is a former franchisee that we terminated after identifying some anomalies last February,” Wheaton told Accounting Today on Friday. “Likewise, we reported both the franchisee and, I believe, about seven of the preparers, all of whom were among the people they indicted, to the IRS a year ago.”


Wheaton said the company noted anomalies on the Maryland returns last year through data analysis.


“Our ability to do data analysis on returns and identify problems has gotten better,” he said. “In the Maryland situation, early in the season last year we identified an anomaly or more than one anomaly and had somebody on the ground there reviewing returns before Maryland actually came in and had some concerns a few days later. But we were already there and had already turned off some of their filing capabilities. Our ability to analyze that stuff more recently has gotten better.”


Even though both cases came to light in prior tax seasons, Virginia Beach-based Liberty is making more of an effort to screen its franchisees and the tax returns they prepare, and is planning to beef up its training. In many states, franchisees and preparers are not required to have professional tax preparation credentials.


“We’re certainly looking into all of the training requirements and everything else that needs to happen,” said Wheaton. “The franchisees run tax schools every year in order to find tax preparers, and they do most of the training. In Maryland this year, we imposed some supplemental training requirements after some questions arose there. We’re certainly looking at the overall training obligations and at additional things we want to do.”


He pointed out that the tax extenders legislation passed by Congress last December also requires extra due diligence that should help catch fraudulent returns and require additional training for preparers next tax season.


“The PATH Act has some additional diligence requirements for things like the child credit and the education credit,” said Wheaton. “We certainly expect there to be additional requirements that the IRS will impose by the end of the year that we’re also going to be doing. In some of these areas, we’re also looking at technology solutions that would essentially allow us to have greater transparency into individual returns. Generally speaking we’re doing a lot of data analysis, but if we can be more effective by doing data analysis at the individual preparer and return level, which is what we’re working on now, that would give us even a better ability to screen for anomalies that we need to deal with.”






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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