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May

Deducting business bad debts

If debt collection is a problem for your business, deducting uncollectible (bad) debts from your tax bill may somewhat lessen the sting of simply writing the debt off your books. Here is some basic information on deducting business bad debts.

First, the debt must be legitimate. A bona fide debt arises from a debtor-creditor relationship and is based on a valid and enforceable obligation to pay a fixed or determinable amount of money. For debt creation, the business must be able to show that it was the intent of the parties at the time of the transfer to create a debtor-creditor relationship. In other words, the business must be able to show that, at the time of the transaction, there was a real expectation of repayment, and there was intent to enforce the indebtedness.

While a formal loan agreement is not absolutely necessary to create a bona fide debt, it is a good practice to use written debt agreements. However, giving a note or other evidence of legally enforceable indebtedness is not by itself conclusive evidence of a bona fide debt. For example, if the terms of the note are routinely ignored or penalties for skipped or late payments are not enforced, the IRS could successfully argue that there was not a real debt.

For most businesses, it is common to encounter uncollectible or worthless debts. Two types of bad debt deductions are allowed by the IRS: business bad debts and nonbusiness bad debts. Business bad debts give rise to ordinary losses that can generally offset taxable income on a dollar-for-dollar basis. Nonbusiness (personal) bad debts are considered to be short-term capital losses. Because there is a limitation on deducting capital losses, distinguishing business and nonbusiness bad debts is critical.

Business bad debts generally originate as credit sales to customers for goods delivered or services provided. If a business sells goods or services on credit and the account receivable subsequently becomes worthless, a business bad debt deduction is permitted, but only if the revenue arising from the receivable was previously included in income.

Business bad debts can also take the form of loans to suppliers, clients, employees, and distributors. Additionally, a business bad debt deduction is allowed for any payments made in the capacity as guarantor if the reason for guaranteeing the debt was business related. Here, the guarantor’s payment results in a loan to the debtor, and the taxpayer is generally allowed a bad debt deduction once the loan becomes partially or totally worthless.

Worthlessness can be established when the business sues the debtor, and then shows the judgment is uncollectible. However, when the surrounding circumstances indicate a debt is worthless and uncollectible, and that legal action to collect the debt would in all probability not result in collection, proof of these facts is generally sufficient to justify the deduction.

 

 

 

Tips on handling a will

Here’s a list of things to consider regarding wills:

·      Consult an attorney. Although wills written without legal advice are generally valid, an attorney can help ensure that the will actually accomplishes your objectives.

·      If an attorney is not used, know the requirements for witnessing and executing valid wills in the state. Follow them precisely. A will is more likely to be invalidated for mistakes in execution than for mistakes in writing.

·      Store the original will in a secure place, such as a safe deposit box or home safe, or with an attorney or county probate court. Inform a few trusted friends or family members of the will’s location so it can be found when needed.

·      Review the will periodically. Do not write changes on an existing will or it may be invalidated. To make small changes, sign a formal codicil following the state’s rules for witnessing and executing wills. To make substantial changes, execute a new will.

·      If you move from one state to another, have the will reviewed by an attorney in the new state.

·      Include provisions for alternate dispositions of property in the event the primary beneficiary does not survive or a couple dies simultaneously.

 

 

 

Filing 2014 foreign bank and financial account reports

If you have a financial interest in or signature authority over a foreign financial account exceeding certain thresholds, the Bank Secrecy Act may require you to report the account yearly to the IRS by filing a Financial Crimes Enforcement Network (FinCEN) Form 114 (“Report of Foreign Bank and Financial Accounts (FBAR)”).

Specifically, for 2014, Form 114 is required to be filed if during the year:

1.     You had a financial interest in or signature authority over at least one foreign financial account (which can be anything from a securities, brokerage, mutual fund, savings, demand, checking, deposit, or time deposit account to commodity futures or options, and a whole life insurance or a cash value annuity policy); and

2.     The aggregate value of all such foreign financial accounts exceeded $10,000 at any time during 2014.

The FBAR is filed on a separate return basis (that is, joint filings are not allowed). However, a spouse who has only a financial interest in a joint account that is reported on the other spouse’s FBAR does not have to file a separate FBAR.

The 2014 Form 114 must be filed by June 30, 2015, and cannot be extended. Furthermore, it must be filed electronically through http://bsaefiling.fincen.treas.gov/main.html. The penalty for failing to file Form 114 is substantial — up to $10,000 per violation (or the greater of $100,000 or 50% of the balance in an account if the failure is willful).

Please give us a call if you have any questions or would like us to prepare and file Form 114 for you.

 

 

 

Reporting a name change

Have you recently changed your name? If so, it can affect your taxes. The names on your tax return must match Social Security Administration (SSA) records. If you have married or divorced and changed your name, you must notify the SSA of your name change. Also, notify the SSA if your dependent had a name change (for example, if you’ve adopted a child and the child’s last name changed).

File Form SS-5 (“Application for a Social Security Card”) to notify the SSA of your name change. You can get the form from http://www.ssa.gov or by calling 800-772-1213. The new card will reflect your new name with the same SSN you had before the name change.

 

 

 

Taxation of college financial aid

If your college-age child is or will be receiving financial aid, congratulations. Now, you’ll probably want to know if the financial aid is taxable. Keep in mind that the economic characteristics of financial aid, rather than how it is titled, will determine its taxability. Strictly speaking, scholarships, fellowships, and grants are usually awards of “free money” that are nontaxable. However, these terms are also sometimes used to describe arrangements involving obligations to provide services, in which case the payments are taxable compensation.

Tax-free awards. Scholarships, fellowships, and grants are awarded based on the student’s financial need or are based on scholastic achievement and merit. Generally, for federal income tax purposes, these awards are nontaxable as long as (1) the recipient is a degree candidate, (2) the award does not exceed the recipient’s “qualified tuition and related expenses” (tuition and enrollment fees, books, supplies, and equipment required for courses, but not room and board or incidental expenses) for the year, (3) the agreement does not expressly designate the funds for other purposes (such as room and board or incidental expenses) or prohibit the use of the funds for qualified education expenses, and (4) the award is not conditioned on the student performing services (teaching, research, or anything else).

Work-study arrangements. If the financial aid is conditioned on the student performing services, the amount that represents payment for such services is taxable income and will be reported on a Form W-2 or Form 1099. This is true even if the work is integrated with the student’s curriculum or if the payment is called a scholarship, fellowship, or grant. Students typically work for the school they’re attending. However, they could work for other employers under the auspices of a work-study program.

Student loans. Naturally, student loan proceeds are not taxable income because the borrowed amounts must be paid back. However, some college education loans are subsidized to allow borrowers to pay reduced interest rates. Fortunately, college loan interest subsidies are nontaxable to the same extent as if they were provided in the form of an outright scholarship, fellowship, or grant. An above-the-line deduction (i.e., available whether or not the borrower itemizes) of up to $2,500 is allowed for interest expense paid by a taxpayer on a loan to fund qualified higher education expenses. The deduction is phased out for taxpayers with adjusted gross income exceeding certain amounts.

What happens when financial aid isn’t free? Fortunately, taxable scholarships, fellowships, grants, and compensation from work-study programs count as earned income. Assuming the student is your dependent, this means that for 2015 he or she can offset this income by his or her standard deduction of the greater of (1) $1,050 or (2) earned income plus $350, up to $6,300. Since taxable scholarships, fellowships, grants, and compensation count as earned income, they increase the student’s standard deduction. If the student isn’t anyone’s dependent for 2015, he or she can offset earned income of up to $10,300 with his or her personal exemption ($4,000) and standard deduction ($6,300). (Dependents are not entitled to a personal exemption.)

Taxable financial aid in excess of what can be offset by the student’s personal exemption (if any) and standard deduction is usually taxed at only 10%. (For 2015, the 10% bracket for single taxpayers applies to taxable income up to $9,225.)

Warning: The “kiddie tax” rules may cause investment income (such as interest, dividend, and capital gains) received by students who are under age 24 to be taxed at the parent’s higher rates instead of at the student’s lower rates. The student’s earned income (including taxable scholarships, fellowships, grants, and compensation) is not subject to the kiddie tax.

Please give us a call if you have questions or want more information.

 

 

 

IRA rollovers

An IRA rollover occurs when a taxpayer receives a distribution from one IRA and within 60 days deposits the assets into another IRA. This transfer to the receiving IRA is called a rollover contribution. Any portion of the distribution not rolled over within 60 days is taxed on the date it was received, not on the 60th day after the withdrawal.

Generally, if any part of a distribution from an IRA is rolled over tax-free to another IRA, you must wait one year before you can make another tax-free rollover. Before 2015, the one-rollover-per-year rule applied on a per-IRA basis. Starting in 2015, the one-rollover-per-year rule applies to an individual’s IRAs in the aggregate (rather than on a per-IRA basis). Thus, from now on, individuals who withdraw IRA funds and roll them over tax-free to another IRA can’t withdraw funds from any other IRA during the following 12 months and complete another tax-free rollover. A 2014 distribution properly rolled over in 2015 will not count toward the new one-rollover-per-year rule that’s effective starting in 2015.

Trustee-to-trustee transfers are preferable because they are not subject to the one-year waiting period that applies to rollovers to and from IRAs. Also, since the IRA owner never takes possession of the assets, there is no danger that the distribution will be taxed because it is not rolled over within the required 60-day period.

Roth IRAs and traditional IRAs are basically subject to the same rollover rules. However, a Roth IRA can only be rolled over to another Roth IRA. A traditional IRA can be rolled over to a Roth IRA, but it is taxable as if it were not rolled over.

 

 

 

NFL Will End Its Tax-Exempt Status

BY RICHARD RUBIN

The National Football League’s central office will become a taxable entity, ending its tax-exempt status in a move with minimal financial effect and significant symbolic value.

Commissioner Roger Goodell informed team owners and members of the U.S. Congress of the decision in letters dated Tuesday, saying he was eliminating a “distraction.”

“Every dollar of income generated through television rights fees, licensing agreements, sponsorships, ticket sales, and other means is earned by the 32 clubs and is taxable there,” Goodell wrote. “This will remain the case even when the league office and Management Council file returns as taxable entities, and the change in filing status will make no material difference to our business.”

The league’s decision pre-empts a move by lawmakers to revoke the tax break, which has gained some momentum in recent years though not enough to pass either the House or the Senate. It removes a point of leverage for Congress in its continuing inquiries into the league’s handling of concussions and domestic violence.

For the NFL, the costs of losing the tax break are minimal, an estimated $109 million over the next decade. There are benefits too, including the end of federal disclosure requirements that put Goodell’s salary and some other league information in the public domain.

Tax Returns

The U.S. requires that nonprofit groups file annual federal tax returns and make portions of them public. Goodell received $35 million in salary and bonuses in 2013.

The NFL is the biggest sports league in the U.S., with a record $10 billion in revenue in 2013, up from $7 billion when Goodell took over as commissioner in 2006. Much of that revenue goes to the teams, which face taxation.

According to Goodell’s letter, the league has been studying its tax status for more than a year and the full ownership approved the decision in March.

“The big question is: Why now?” said Andrew Brandt, former vice president of the Green Bay Packers. Brandt is an NFL business analyst at ESPN television and director of the Jeffrey S. Moorad Center for the Study of Sports Law at Villanova University in Pennsylvania. “It seems like Congress has been making a big deal out of it. Without this status there’s no requirement to disclose, which helps in the PR battle.”

‘Real Revenue’

“My understanding from having worked in the league is that the status is based on the league office being a pass-through and that the real revenue comes into the clubs,” Brandt said.

The NFL’s move mirrors one made by Major League Baseball in 2007. The National Basketball Association never was tax exempt. The National Hockey League is now the only major professional sports league in North America with the status.

The Internal Revenue Code specifically provides a tax exemption to “professional football leagues” under section 501(c)(6), the same portion of the law used by the U.S. Chamber of Commerce.

The only way to change that would be an act of Congress or a decision by a league to forgo the tax exemption.

“The NFL doesn’t need this public perception headache,” said Paul Swangard, managing director of the Warsaw Sports Marketing Center at the University of Oregon. “With little effect on its bottom line, it was an appropriate move.”

—With assistance from Scott Soshnick and Eben Novy-Williams in New York.

 

 

 

AICPA survey: 68 percent of Americans regret how they financed college

BY SEAN MCCABE

A new AICPA survey found that an increasing majority (68 percent) of Americans with loans or whose children have loans expressed some regret about the way they paid for that education - representing an eight percentage point increase from the 2013 survey when 60 percent had regrets.

However, the survey also found that 68 percent of adults without a degree said they would have gone to college to get a better-paying job if they had a second chance.

The telephone survey was conducted for the AICPA by Harris Poll in March among 1,010 adults in support of National Financial Capability Month.

The survey found that more than four-in-five (84 percent) adults said they would make at least one change to their education choices, given the chance to do things differently. Popular options included attending a less expensive college (54 percent) and going to a trade school for a specific profession (43 percent). Twenty-seven percent also would have delayed starting college in order to build up savings and reduce the amount of student loans needed– with Millennials (35 percent) being more likely to delay than any other age group.

“There is no question that higher education affords people greater earning potential. However, as the cost of college continues to increase, the debt often required to get a degree can be stifling to new graduates,” stated Ernie Almonte, chair of the AICPA’s National CPA Financial Literacy Commission. “Students need to ensure they have a clear understanding of the amount of debt they’re taking on and what their repayment options will be once they graduate.”

According to the Federal Reserve Bank of New York, the total amount of outstanding student loan debt in the U.S. more than doubled from 2006 to 2012 – with one-third of that debt being held by Americans 30 years or younger.

Increasing student loan debt may not be translating into increasing financial opportunity. According to the survey, more than half of adults (52 percent) stated that Millennials have less upward financial mobility than previous generations. Of those, the primary reasons cited for this decreased mobility included an uncertain U.S. job market (21 percent), more jobs requiring higher education (14 percent) and rising student loan debt (11 percent). These results highlight the difficult choices students must make about college, as well as the complicated relationship between education, employment and debt.

“Deciding how much education you can reasonably afford and how to fund it is likely one of the most important decisions a person will make in their lifetime. Carefully considering all the available options increases the likelihood you can pay off your student loans, and that your higher education decision will pay off in the long run,” Almonte added.

The National CPA Financial Literacy Commission offers the following tips to help Americans decide how to pay for college and successfully pay down their student loan debt once they graduate:

Before deciding to take out a loan:

  • Explore all available grant and scholarship opportunities before resorting to loans.
  • Ensure you have a clear understanding of what the monthly payments will be and when you will be required to start paying back the loan.
  • Calculate your potential salary upon graduation to determine if you’ll earn enough to pay off the loan, and how long it will take you. The longer it takes you to pay off your debt, the more interest you will end up paying.
  • Speak with the Financial Aid office at any prospective schools before (and after) taking on debt.

When paying off a student loan:

  • Use the Student Loan Consolidation and Debt Payoff calculator on the AICPA’s Feed the Pig website—a free resource offered in partnership with the Ad Council—to manage student loans in conjunction with other outstanding debt to make the most cost-effective repayment decisions.
  • Speak with a CPA financial planner, who can provide strategies for managing student loan debt.

For more financial tips, head to the AICPA’s 360 Degrees of Financial Literacy site here.

 

 

 

Middle-Class Families Shrink Their College Fund Contributions

BY SUZANNE WOOLLEY

Fewer parents are finding the money to save for their kids' college. And those who are saving, are saving less.

After a 30 percent jump in the level of average savings for 2013, the day-to-day cost of living, combined with lower earnings and unexpected expenses, helped push the amount parents have saved for their kids' college down 25 percent in 2014, according to a new survey. The average savings level of $10,040 is the lowest in three years.

Parents still value college as much as ever, according to a report released on Wednesday by Sallie Mae. Many still couldn't match 2013's savings. The share of middle-class families that saved for college dropped to 46 percent, from 51 percent, the first time in the survey's five-year history that it fell below 50 percent.

Among the income groups broken out, middle-class households also had the highest share saying they'd cut back on household expenses to add to savings in the past year, at 27 percent. (Middle-class families are defined in the survey as having between $35,000 and $100,000 in income.)

On a more positive note, single-parent families are saving a surprising amount, and even saving more than multiparent families. Single parents have put away an average $11,868 for their children's college costs, compared with $10,341 for parents who live together. 

When choosing how to save, about half of all families rely on basic savings accounts, which, as anyone with a savings account knows, yield next to nothing. And 32 percent of lower-income families use checking accounts. These are dangerous places for would-be savers to plunk money, because they're easy to tap.

A tax-advantaged 529 college savings account invested largely in equities—depending on how far off college payments are—could be a better way to save. In the 2014 survey, which looked back on a year when the Standard & Poor's 500 Index rose about 27 percent, Sallie Mae says the 30 percent increase in the average amount saved for college was driven by gains for middle- and high-income families in the value of those savings. The S&P 500 gain college savers looked back on in this year's survey was about 11 percent.

Households making $100,000 or more, which are the top income group broken out in the survey, are big users of 529s. Just under 50 percent use them, up from 45 percent in the prior year's survey. The average amount saved in them: almost $19,000, up from $16,500 last year.

The far lower use of 529 plans among lower- and middle-income families may be due in part to confusion. In the survey, many people thought they wouldn't have enough money to start an account or just didn't understand how they worked, says Rich Castellano, Sallie Mae's vice president of corporate communications.

The plans, which do have complicated rules, allow earnings to grow tax-free, and investment earnings aren't taxed as long as they're used for educational expenses. Fees on the plans have been falling, and some states, such as Louisiana, offer subsidies that mean there is no fee at all on a basic plan for residents.

While lower college savings are bad news, there was some good news in the survey. People are improving their savings habits, with more using direct deposit to save, more setting aside money each pay period, and more putting part of a tax refund toward college savings. If incomes continue to rise, more people may be primed to save

 

 

 

Tax issues with marijuana

BY GEORGE G. JONES AND MARK A. LUSCOMBE

As more and more states legalize either the recreational use of marijuana or the medical use of marijuana, more tax advisors will be encountering issues with respect to the representation of these businesses and recreational or medical marijuana users. The main issues stem from the fact that, even though states are legalizing these businesses and activities, at the federal level marijuana remains a Schedule I drug under the Controlled Substances Act of 1970. These legal businesses and activities under state law remain illegal businesses and activities under federal law. The Supreme Court has ruled that federal law takes precedence over state law.

The Justice Department under the current administration is taking a generally hands-off approach to these state law experiments, but the Obama administration has expressed no strong desire to change the legal status of marijuana at the federal level and has warned of possible enforcement activity if the marijuana activities involve criminal elements, sales to minors, sales across state lines, other illegal drugs, or use of public lands or federal property.

The Internal Revenue Service follows the federal law in viewing these businesses as illegal businesses for tax purposes. This creates a number of tax issues for representing these clients, as well as criminal exposure and possible ethical issues with respect to the professional licenses that a particular tax advisor may hold.

THE SCOPE OF STATE LEGALIZATION

Currently 27 states and the District of Columbia have legalized some form of marijuana use, from decriminalizing possession to legalizing marijuana sale, production and use for medical purposes, to legalizing marijuana sale, production and use for recreational purposes. Several additional states are looking at the issue.

For most of these states, the changes are relatively new and procedures and rules are still being created, and problems and solutions are still being identified. These states include some of the largest states in terms of population: California, Illinois, Massachusetts, Michigan and New York.

BUSINESS EXPENSES

Code Sec. 280E specifically denies tax credits or deductions to businesses trafficking in controlled substances. Marijuana remains a Schedule I controlled substance under federal law. The result is to effectively make the income tax on a marijuana business a tax on gross income rather than net income, a considerable burden to a marijuana business.

There is an exception under the legislative history of Code Sec. 280E for cost of goods sold. Some marijuana businesses could try to allocate as much expense as possible to inventory to preserve their deduction. For example, the expenses related to producing and storing marijuana could be allocated to inventory. Since for most businesses there is an interest in deducting expenses, rather than allocating them to inventory, most of the IRS guidance is focused on restricting expenses. There are relatively few restrictions on voluntarily allocating more expenses to inventory than are required.

The direct costs are relatively easy to allocate to inventory. With respect to indirect costs, the full absorption rules under Code Sec. 471 and the uniform capitalization (UNICAP) rules under Code Sec. 263A come into play. Voluntarily complying with these rules, even if not required to do so, would generally be beneficial for a marijuana business that cannot otherwise claim deductions and credits.

There would still be some limits on the ability to allocate indirect costs to cost of goods sold. There is a general requirement in the regulations that the allocations not result in a material distortion of income. Some costs, such as selling, marketing and advertising costs, would generally not be allocable to cost of goods sold. There are indications that the IRS is taking a fairly strict look at what expenses can be properly allocated to cost of goods sold by marijuana businesses.

There is also litigation in Colorado with respect to the disallowance of deductions that could go to trial in the summer of 2015.

Another approach might be to try to segregate businesses to isolate the marijuana business from other activities and therefore protect the deduction of expenses related to the other activities. Whether the IRS will recognize the separate businesses will depend on a facts and circumstances analysis. Factors taken into account include whether the businesses had separate origins, whether they are conducted in the same location, to what extent each business supports the other, whether there are shared management and employees, and whether there are shared books and records.

ELECTRONIC FILING

The IRS requires certain taxes to be paid electronically. However, because of the federal view of marijuana and money laundering regulations, it is difficult for marijuana businesses to get bank accounts or utilize credit cards. They are usually run on a cash basis. The IRS has sought to impose substantial penalties on marijuana businesses that tried to pay their taxes in cash, the businesses contending that they could not file electronically.

Allgreens LLC had sued the IRS in Tax Court challenging the IRS’s determination that the inability to get a bank account did not excuse the failure to pay employee withholding taxes electronically. In a settlement of the case, the IRS agreed to abate the penalties, but stated that the settlement should not be viewed as precedent for future cases. The settlement may give the IRS an opportunity, however, to come up with a system to resolve the problem.

MEDICAL EXPENSE DEDUCTION

For the individual utilizing marijuana for medical purposes, the federal law treatment of marijuana also creates problems for the medical expense deduction. Revenue Ruling 97-9 determined that amounts paid for marijuana for medicinal use are not deductible, even if permitted under state law, since they were not legally procured under federal law. A similar analysis would probably apply to health flexible spending accounts, health savings accounts, health reimbursement accounts, and Archer Medical Savings Accounts.

AN ILLEGAL ACTIVITY

Under federal law, a person who aids, abets, counsels, commands, induces or procures the commission of a federal offense is punishable as a principal. The issue is whether rendering tax advice or preparing tax returns qualifies as aiding or abetting an illegal activity. Preparing a tax return may be safer than rendering tax advice since the tax return preparation would be generally focused on past activity, while rendering tax advice would generally be more associated with future activity, and therefore more likely be viewed as contributing to that activity. If the Justice Department is taking a generally hands-off approach to state experiments with marijuana businesses as long as they do not start to interfere with other federal priorities, the Justice Department is also likely to take a similar hands-off approach to anyone who could possibly be viewed as aiding or abetting that activity.

A number of national and state professional organizations have issued guidance with respect to the role that a licensed accountant or lawyer can play with marijuana businesses.

Tax advisors would be well advised to consult with the professional organizations with which they are affiliated or by which they are licensed to review those guidelines on professional conduct or ethics rulings to see how they apply in your particular state. The rulings seem to have relatively little consistency from state to state.

REMEDIES

As more and more states start to adopt marijuana legalization statutes, the conflicts with federal law will continue to expand. Federal legislation has been proposed to remove marijuana from the list of Category I or II controlled substances.

Such a step would go a long way to resolving the issues discussed herein. The administration has not at this point been pushing the legislation, and there is considerable opposition in Congress.

Over time, either through regulatory changes or court decisions, the tax issues involved with representing marijuana businesses and users should eventually start to be resolved. In the meantime, however, tax advisors should tread carefully through the legal minefield in representing marijuana businesses and users.

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

 

 

 

4 Reasons the Apple Watch Is a Waste of Money

BY GENE MARKS

The Apple Watch, as you may well know, is Apple’s biggest product launch since the iPad. It’s projected to sell between 30 and 40 million units in its first year and that may be a conservative estimate, according to some analysts. It’s a very, very big deal in the tech industry.

Like most, I haven’t seen it or tested it. But I’ve watched the videos, gazed at the photos and read close to a million words about it. And I’m not going to buy one. Not only that, but I don’t think as many people as projected will either. Sure, it’s cool. It’s fun. It’s Apple. But sorry, it just isn’t worth the money. Why? Here are four reasons.

1. The Apple Watch doesn’t replace anything. I want fewer gadgets, not more. But after shelling out between $200 and $400 for the Apple Watch I would still be stuck with all of my current Apple hardware. I will continue to need my iPhone to make phone calls, listen to music and conduct messaging on a screen big enough that it won’t cause future blindness. I will need my iPad to read, watch TV shows and movies, FaceTime with my kids and browse the Web. I will still need something to take good photos and videos and get driving directions and tweet and Instagram and Snapchat and do every other ridiculous thing I find myself doing on these devices during my ridiculous day. I can’t do many of these things on the Apple Watch. And, at least for now, I can’t do any of them better than on my iPhone or iPad.

Not only that, but I will still need my MacBook to write and do work. None of these devices go away. And by the way … they all have clocks on them.

2. The Apple Watch adds more complexity to my life, not less. Do you find yourself in front of the TV checking your text messages on your iPhone while reading on your iPad … and then pulling out your MacBook to update a spreadsheet? Yup, that’s me. And now we’ll have the Apple Watch on our arms to remind us that we’ve only done 8,000 steps today (a fact that can also just as easily be ascertained through a hundred apps on my iPhone). So now we’ve just got another blinking device to make our lives more complex. Another device to constantly keep charged and worry that it will run out of power in a day. Another device to constantly keep updated, synched and replaced every year when the next fantastic version comes out because you know that Apple’s crack marketing team will make us feel like complete, out-of-touch losers unless we get the latest and greatest Apple Watch.

It’s more money that we’ll be spending on hardware and apps. It’s something else that I’m going to forget in a hotel room or lose in transit somewhere. It’s just another headache in my life, and I’ve already got three kids and two pets.

3. The Apple Watch won’t make me more productive. Smartphones and tablets existed before the iPhone and iPad, but those devices and the App Store literally changed millions of lives. They introduced a generation of productivity applications that have enabled us to communicate with others, find things, go places, buy stuff, and give and get information faster than ever before — and “fast” means productivity. The Apple Watch, at least for now, does very little of this — or at least nothing different than my iPhone or iPad except being smaller and harder to read.

In the end, it’s just telling us the time, with a lot of promises about “the future” of wearables, which is a future that I’m not dismissing, or even doubting — just still waiting for.

4. The Apple Watch won’t make me healthier. Can we all admit that today’s fitness gadgets, from the FitBit to the FuelBand, have really cool brands but are nothing more than goofy fads like the Pet Rock and Rubik’s Cube? I do not know a single person who has given me a rational reason why I should purchase these things. Just because there are fitness apps for the Apple Watch doesn’t mean I’ll suddenly be living longer and healthier. So what if you know your sleep patterns from the night before? Like you can change that? And what exactly are you doing with your hourly heartbeat or daily calorie intake data? Are you running faster or eating differently? You need an app to tell you this?  You need an app to vibrate if you’ve been sitting too long? Really? Maybe someday the data will be more relevant and our doctors (if there are any doctors remaining) will have 24/7 access to all of our bodily functions, but let’s be honest now — it’s fun and cool, but are these devices really impacting your life today? You really needed to spend $150 on a glorified wrist band, or even more on an Apple Watch, to tell you all of this?

The people who bought the Apple Watch when it was released last month did so because they’re bored, they want to be cool, and they’ve got $350 lying around and would rather give it to Apple than, say, a charity or — God forbid — their savings account. And that’s fine. I don’t begrudge what people spend their money on. But Version 1.0 of the Apple Watch is a waste of money. That doesn’t mean that someday it won’t trigger a whole new generation of similar products that actually will make people’s lives less complex, more productive and healthier. And I hope it does. And when it does, that’s when I’ll buy it.

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

 

 

 

Why the IRS Won’t Tell Fraud Victims What Identity Thieves Stole

BY KERI GEIGER AND MARGARET COLLINS

Tim Loo learned early this year that his name and Social Security number had made their way onto a fraudulent tax return, and immediately wondered whether the identity thief might also have his bank-account details or his kids’ Social Security numbers.

To survey the extent of the damage, Loo asked the Internal Revenue Service for a copy of the bogus return. It refused. TurboTax, whose tax-filing software the criminals had used, told him they couldn’t share the fake return with him either, for “privacy reasons.”

The Boston-based physician wondered: Whose privacy?

Loo is among the ranks of U.S. taxpayers—several million and rising sharply—who have had returns falsely filed in their name in recent years. New consumer-protection rules were supposed to make it easier for people like him to figure out what thieves have stolen. But there’s a catch: Other IRS rules encourage its workers to keep a tight grip on the bum returns. Employees face the specter of felony charges for giving out private details—including, possibly, those of the identity thieves—to those who aren’t authorized.

“It’s a shocker finding out that information can be stolen,” Loo said. “But the real frustration is with trying to get the information that you need to manage the situation.”

Neither the IRS nor Intuit Inc., the maker of TurboTax, track how many people have sought the returns wrongly filed in their names, much less how many of those have been turned down.

Millions of Returns

But the potential pool is big. About 2.4 million U.S. taxpayers’ names or Social Security numbers appeared in falsified returns in 2013, the most recent year available, according to a March report from the Treasury’s Inspector General for Tax Administration. That’s a nearly tenfold increase from 2010, according to the inspector general’s study.

That steep rise came even before the wave of fraudulent returns that prompted TurboTax, one of the largest tax-preparation firms in the world, to suspend filing state forms for customers in February.
In 2013, the IRS estimates it paid out about $5.8 billion on returns it later determined were fraudulent, and prevented more than four times that amount.

The IRS is careful not to release documents that could inadvertently include others’ private information, it said in a statement. The agency also works—with victims’ consent—with law enforcement agencies, which requested copies of nearly 7,000 returns last year, according to the e-mailed statement.

Fraud victims can get a copy of the return from TurboTax after submitting a written request and verifying their identity, said Julie Miller, a spokeswoman for Intuit. Of Loo’s situation, Miller said by e-mail: “He may have connected with an agent(s) who was not familiar with our policy.”

IRS Letter

Loo’s troubles started earlier this year, he said, when the IRS sent him a letter saying that his 2014 taxes had been filed in February. At that point, neither he nor his spouse had filed, he said.

Loo, who said he has been using the desktop version of TurboTax for five years, wanted to know whether the returns included his details that would require him to conduct further identity-scrubbing, he said. For months, he paid visits to offices of the local police and Social Security Administration, filed reports to several government agencies, including an Identity Theft Affidavit, Form 14039, to the IRS, to manage the fallout.

Victims’ Rights

What he really wanted was the bogus return, and there were a couple arguments in his favor.

Tax-fraud victims may be entitled to a copy of the “bad return” and information associated with it, the IRS’s legal department wrote in a 2012 memorandum available on the agency’s website. Loo said he also referenced the victims’ bill of rights, part of the 2012 Fair Credit Reporting Act, which says victims of identity fraud have the right to obtain documents relating to fraudulent transactions made or accounts opened using personal information.

Over several calls, Intuit maintained they couldn’t release the forms, for privacy reasons, he said. The company referred him to the IRS, he said, which told them it was against its policy to grant his request.

The IRS, in its statement, pointed to a section of the tax code that limits the release of taxpayer information to third parties. Fraudulent returns could include the private information of other victims, such as another person falsely claimed as a dependent, or of the criminal, it said. The IRS didn’t respond to a question about why it can’t redact such information.

Section 6103

Thanks to that stretch of the tax-code—section 6103, created by Congress in 1976 after revelations that President Richard Nixon had sought IRS audits of his political opponents—IRS workers can face criminal penalties for unauthorized disclosure of personal information. The penalty, as laid out in the tax and criminal codes, is up to five years in prison and a $250,000 fine.

IRS officials invoked section 6103 more than two dozen times to explain their silence during hearings in 2013, when lawmakers asked whether people at the agency unfairly scrutinized groups that advocated shrinking the government.

The IRS’s in-house ombudsman, the Taxpayer Advocate Service, has called for minimizing the burden and anxiety on identity-theft victims. The IRS “in many ways treats the victim as someone experiencing a minor inconvenience instead of a frightening personal disaster,” it said in a report to Congress last year.

Flickering Hopes

It’s understandable that victims of tax-related identity theft would want to learn what information was stolen to guard against future misuse of personal data, said National Taxpayer Advocate Nina Olson.

“We are currently assessing how much information we believe the IRS can provide” and may make a recommendation later this year, she said in an e-mail.

Meanwhile, Loo continues to try to get his hands on the return filed in his name. His hopes briefly flickered a few weeks ago when he received a letter from TurboTax. It was a bill, for the bogus return filed in his name, for $37.18.

Such charges can be corrected, Intuit spokeswoman Diane Carlini said in an e-mail, who explained that TurboTax attempts to collect on those bills because the government doesn’t tell the company when a return is fraudulent.

—With assistance from Richard Rubin in Washington.

 

 

 

States Extend Tax Grab

BY ROGER RUSSELL

States are increasingly taxing corporations’ economic presence, not just their physical presence, according to Bloomberg BNA’s 15th Annual State Tax Survey.

Previously, states used physical presence as the determining factor as to whether or not an out-of-state business is liable for collecting sales or use tax for products sold within the state, indicated Steven Roll, managing editor of Bloomberg BNA State Tax and Accounting. In response to the digital economy, states are increasingly looking at economic presence, and are also adopting new rules aimed at taxing out-of-state companies’ receipts from services and intangibles that are attributable to in-state customers.

Roll and his colleagues at Bloomberg BNA have just completed the 15th Annual Survey of State Tax Departments (available for free here), in which states are asked to clarify their position on gray areas of corporate income tax and sales and use tax administration. All 50 states, the District of Columbia, and New York City participated in the survey.

New portions of the survey address the nexus consequences of registering with state agencies versus actually doing business in the state, drop-shipment transactions, and trailing nexus for sales tax purposes.

“We asked questions aimed at a state’s position on nexus policies and the sourcing of receipts for income tax purposes,” said Roll.

The rules that matter

Nexus is the minimum amount of contact between a taxpayer and a state, which allows the state to tax a business on its activities. It arises from two clauses in the Constitution. The Commerce Clause prohibits a state from unduly burdening interstate commerce, and the Due Process Clause requires a minimum connection between a state and the entity it wishes to tax. Public Law 86-272 further limits the states’ power to impose income tax by prohibiting taxing businesses whose only activity in the state is the solicitation of orders, so long as the orders are accepted at and delivered from a point outside the state.

Although the constitutional and legislative standards exist, states nevertheless vary in determining what particular activities performed within their borders trigger nexus for income taxation, according to Roll.

Part of the reason for this is that a key constitutional question remains undecided by the Supreme Court -- whether the states making corporate income tax nexus determinations must use the physical presence test established by the court in Quill. While the Supreme Court in Quill established a physical presence test for sales tax nexus, it left unanswered the question as to whether the physical presence test must also be used for income tax nexus. Almost from the time of the 1992 decision, the results have been varied and contradictory.

A number of state appellate courts have found that the physical presence standard established by Quill is limited to sales and use tax nexus, applying instead an economic presence test for income taxation.

As states continue to broaden their definition of economic nexus in their drive to increase state revenues, it is more important than ever for American corporations to be aware of these continuing changes, according to findings from the survey.

For corporate income tax purposes, most states have moved away from the traditional physical presence standard for determining whether an entity has nexus with the state. This year, only seven jurisdictions indicated that they apply Quill (i.e., require that a corporation have a physical presence in the state in order to create income tax nexus).

For sales tax purposes, due to the rise of affiliate, or “click-through” nexus, the physical presence standard also appears to be eroding, Roll observed.

“Corporations and businesses need guidance on where they are subject to tax based on evolving business trends,” said George Farrah, editorial director of Bloomberg BNA Tax and Accounting. “The Bloomberg BNA Survey of State Tax Departments is designed to do just that, enabling companies and tax practitioners to evaluate their tax exposure and help ensure they are complying with ever-changing state tax rules.”

“A minority of states (11 for income tax nexus and 10 for sales tax nexus) said they would find nexus if an out-of-state corporation registered to do business with their jurisdiction’s secretary of state,” Roll said. “About the same number of states said they apply their secretary of state’s definition of ‘transacting business’ or ‘doing business’ for purposes of nexus determinations. Typically, the secretary of state’s definition provides a list of activities that will trigger a registration requirement, while the tax definition is vague or merely references the U.S. Constitution.”

Other types of registrations are also likely to trigger nexus, according to Roll: “Sixteen states said they would find sales tax nexus if a corporation registered as a government vendor or contractor.”

State nexus policies also vary significantly with respect to complex multi-party transactions, according to Roll. “Drop shipments involve three parties – a customer, a retailer and a third-party supplier that delivers goods directly to the customer,” he said. “While these arrangements are common, they can raise issues as to whether the out-of-state retailer is required to collect sales tax.”

The number of states that would find nexus for drop shippers varied greatly in the survey, based on the specific facts of each scenario, he indicated. “For example, 17 states said that nexus would be created when a manufacturer ships tangible personal property by a common carrier to in-state customers based on orders received from a distributor where the distributor itself has nexus with the state.”

By contrast, no states would find nexus for the manufacturer if the distributor lacked nexus.

“Where a distributor uses an in-state manufacturer as a fulfillment agent in the state to pack and ship orders by common carrier to in-state customers, 21 states said they would find nexus if the manufacturer holds title to the inventory until the corporation directs the manufacturer to ship the order,” Roll said. “A larger number of states – 33 – said they would find nexus if the corporation itself holds title to the inventory until directing the manufacturer to ship the order.”

The new nexus

One of the main areas that was addressed in the survey this year was corporate income tax sourcing, Roll indicated. “This refers to the rules a state uses to determine if it will impose its corporate income tax on an activity that is conducted in more than one jurisdiction.”

 “Sourcing is the new nexus,” he said. “For corporate income tax purposes, nexus is often a foregone conclusion for many types of transactions,” he explained. “The focus now is on determining which states are owed tax on multijurisdictional sales of services or intangibles. Depending on each state’s sourcing rules, a transaction could escape state tax or be taxable in more than one state.”

The survey found increased attention to the sourcing of receipts from sales of intangible property and services. Previously, nearly all of the states’ sourcing rules were based on the location where the majority of the costs of performance were incurred. More recently, there has been a growing minority of states using a market-based approach that focuses on sales made to customers within its borders.

“The sourcing rule that a state applies is driven by how it characterizes a transaction,” said Roll. “The survey found that states are characterizing new or emerging products or business models such as the sale of digital goods or intangibles to fit within the definitions of long-established taxable transactions,” he said. “For example, the characterization of cloud computing varies among states and is often counter-intuitive. While most states characterize cloud computing transactions as the sale of intangibles or services, Utah treats these transactions as the sale, lease or license of tangible personal property.”

“Unlike previous years, most states chose only one approach to characterizing these receipts,” Roll said. Receipts from cloud computing are characterized as services in 12 states; the sale, lease, license or rental of intangible personal property in five states, and the sale of tangible personal property in one state.

“The survey results also indicate that market-based sourcing is the predominant approach to sourcing cloud-based transactions,” he noted.

“There is little uniformity across states from sourcing the income on services, intangibles and cloud computing, resulting in compliance confusion,” Roll observed. “Despite the shift towards a service-based economy decades ago, states are still unable to reach a consensus on how to source these transactions.”

Owning or leasing a Web server located within a state will likely produce both income tax and sales tax nexus with the state, according to the survey. Thhirty-eight states, plus the District of Columbia and New York City would find income tax nexus resulting from a Web server within their jurisdiction. Most of these jurisdictions also would find sales tax nexus based on a Web server in the state, according to the survey.

 

 

 

The 4 Most Common Mistakes in Tax Planning (Revised and Updated)

Ricardo da Palma Borges

Based on my experience in tax planning, in both domestic and international settings, with a focus on real estate and income taxes, I decided to list the four most common mistakes in tax planning.

1. "I have entered into this contract, whereby I will do this on that date. Now help me avoid adverse tax consequences."

“Plans are nothing; planning is everything” - Dwight D. Eisenhower

Planning, also called forethought, is the process of, in anticipation, thinking and organizing the activities required to achieve a desired goal. Tax planning is in essence just planning. Ex post facto requests such as the one in commas are absolutely naïf: tax is a consequence that falls on reality. When the facts are definitely set there is no possible planning ahead.

Legal reality is plastic in the sense that different types of contracts or structures may achieve similar goals with different tax consequences. For instance, if you have a company that owns a business you can structure a sale either as a share deal, whereby you sell the company itself, or as an asset deal, whereby only all or part of the assets are sold, the company remaining with you as an owner. 

Additionally, tax laws change constantly, partly due to the cat and mouse nature of the tax loophole game, partly due to the use of tax incentives or tax increases in the different stages of the economic cycle. Timing is, therefore, crucial and anticipating or postponing a transaction can sometimes prevent greater tax leakage or enhance post-tax returns.

In short, if you want to tax plan you have to consult an experienced professional in advance and preferably at the start or at an early stage of any sale negotiation or restructure intention.

2. There is no "one-size fits all" tax planning

“I've got the luxury to tailor-make the songs so I can sing them”. - Glenn Tipton

Different people or businesses can reduce the tax bill through a variety of means. Normally, this would involve reducing the income, increase deductions, and taking advantage of tax benefits. However, the opposite may also be true: if you have tax losses carry forward expiring you may want to accelerate ways to generate income (for instance selling fully depreciated assets or making non-tax neutral mergers).

Some low-visibility entities may consider setting up special purpose vehicles in tax havens but this can be unacceptable, even if fully legal, for high profile businesses that engage directly with consumers, which may be intolerant to more aggressive tax planning. Strategic tax behavior involves risks due to the grey areas and ever moving nature of the law. Not all taxpayers view tax risk equally, and some are more adverse to it than others vis-à-vis possible advantages.

In short, tax planning should be tailored to the individual or company profile.

3. Implementation is everything

"In theory there is no difference between theory and practice. In practice there is." - Yogi Berra

There is sometimes a huge gap between having a good tax saving idea and its successful implementation. Ideas tend to be generated by reading the law and finding loopholes. They are born as theory. In order to explore these ideas, however, a proper legal framework for implementation (contracts, entities, financial flows) must exist, the tax forms must enable it, the Revenue IT system must process the tax statement which embeds them, etc.

Some great tax ideas will never live to see daylight because there just is no practical way to make them feasible. Tax planning is always an exercise in reality check.

The devil is in the detail, and in tax there is usually a lot of details. Improper implementation of fine tax ideas renders them less beneficial, totally useless or even dangerous. 

Advisers advise and clients decide but only implementers can fully supply, as far as tax is concerned. I was a teacher, a consultant and an of counsel before being a lawyer. Life was certainly easier back then: I stated the theory but it was not up to me to see how that converted into practice. Nowadays, I feel that for Clients, at the end of the day, only results matter and ideas are only worthwhile if they are brought to the finishing line. Although being a lawyer is more demanding it is also more rewarding as I know exactly when, by properly implementing, I am adding value to my Client's tax position.

4. Aggressive tax planning that looks and smells as such is likely to fail

“If it sounds too good to be true, it probably is” - old adage

The more trivial tax planning strictly follows the guidelines provided by the law or the safe havens set by the tax administration. Therefore, by looking as such, as it should, it provides both the taxpayer and the taxman with the certainty that the said guidelines and safe havens aimed for.

Nevertheless, as far as aggressive tax planning is concerned, the look-test and the smell-test should not be underestimated. This type of tax planning revolves around loopholes and mismatches which exist in every national tax system or in the international interaction of different such systems. It takes a clever person to find them. But it takes a really clever person (i) to guess which such loopholes and mismatches are worth pursuing and (ii) to tax plan around them in a way that it does not show.

Firstly, the best tax ideas are not gimmicks, free floating in the air. They are grounded in something. For instance, in accounting principles or rules that the tax legislator did not fully understand the implications of, so as to deviate from them. A tax-saving idea without such a clear base or root is more likely to challenge.

I once discussed whether I should pursue a tax litigation case with a late friend, a most brilliant lawyer, ten years my senior. He told me that the law was on my side but that justice probably was not, and he believed that judges would take the side of perceived justice. I litigated anyway… and I ultimately lost, at the Portuguese Constitutional Court.

Justices are not immune to social perception and their communities’ feeling. After the 2008 financial crisis I still hold my personal view that tax law is more a domain of positive law than of natural justice, but I would not bet my clients’ stakes in a court of law assuming it shares that assumption. If tax planning is too aggressive it may be seen as unjust, and with constitutional principles, sniper-specific anti-abuse measures and shotgun general anti-abuse clauses judges tend to have enough leeway to counter what they view, rightly or not, as offensive.

Secondly, the best tax planning that I have seen does not seem to be the product of human design. In fact some of it is so counter-intuitive that it actually made the taxpayer pay more taxes! How is that tax planning, you may ask? Well, the taxpayer paid more taxes in the first years of the process but saved a lot more later on

(Revised and updated on May 5, 2015)

 

 

 

2015 Brings a Big Jump In the Penalty For Not Having Health Insurance

Ken Riter, CPA

With the coming of the Affordable Care Act, a penalty began to be assessed on any taxpayer that did not have minimum essential health insurance coverage for themselves and the members of their tax family. The amount of that penalty in 2014 was the greater of $95 per adult and $47.50 per child under the age of 18, with the maximum penalty allowable totaling $285 per family, or one percent of household income minus the family’s tax filing threshold amount. The law included an increase to that penalty that would take effect in 2015, and the jump is significant. In 2015 the penalty will be the greater of $325 per adult and $162.50 per child with a maximum penalty allowable totaling $975, or two percent of household income minus the family’s tax filing threshold amount.

Determining household income correctly is essential to figuring out the amount of the penalty owed, and is done by adding up the modified adjusted gross income (MAGI) of every member of the tax family for whom a dependent exemption is being taken and who is required to file taxes. If a dependent child earns $7,000 in babysitting money, that number exceeds their filing threshold so the child would have to file a tax return, but since the parents are claiming the child as a dependent, they would have to include the child’s income within the household figure.

Calculating modified adjusted gross income is simply adjusted gross income combined with non-taxable interest and dividends, nontaxable Social Security benefits and any excluded foreign income added back in. An individual’s tax filing threshold consists of their standard deduction and personal exemptions combined with those of their spouse.

Calculating the penalty owed by a family without insurance is fairly simple. First you calculate the flat penalty, which is $325 per adult and $162.50 per child. The maximum amount is $975, so families with more than two children are not penalized. A family consisting of two parents with one child would have a flat rate penalty of $812.50. That amount would then be compared to the percentage of income amount. A family that earns $65,000 in total would have a tax-filing threshold of $20,600, which is the standard deduction for married filing jointly of $12,600, plus each of the parents’ individual personal exemptions of $4,000. Though the $65,000 household income includes the aforementioned $7,000 in babysitting income earned by the dependent child, the individual personal exemption and standard deduction may not be included in the threshold amount for the penalty calculation. The penalty would be figured as $65,000 minus $20,600 equals $44,400 times two percent, or $888.

Because $888 is the greater number (the flat rate penalty was $812.50), it is the amount that the family would owe in penalties for not having minimum essential health insurance. This calculation would change if the period of having been uninsured is less than the full year, and is determined on a prorated monthly basis which is determined as the penalty amount divided by 12, or in this case, $74 for each month that insurance is not in place.

The calculation of penalties can be very complicated, and it is a good idea to seek professional help. For more information about this subject contact Salt Lake CPA Ken Riter at (801) 613-0900.

 

 

 

Find out how ACA affects Employers with fewer than 50 Employees

 

Most employers have fewer than 50 full-time employees or full-time equivalent employees and are therefore not subject to the Affordable Care Act’s employer shared responsibility provision.

If an employer has fewer than 50 full-time employees, including full-time equivalent employees, on average during the prior year, the employer is not an ALE for the current calendar year.  Therefore, the employer is not subject to the employer shared responsibility provisions or the employer information reporting provisions for the current year. Employers with 50 or fewer employees can purchase health insurance coverage for its employees through the Small Business Health Options Program – better known as the SHOP Marketplace.  

Calculating the number of employees is especially important for employers that have close to 50 employees or whose workforce fluctuates throughout the year. To determine its workforce size for a year an employer adds its total number of full-time employees for each month of the prior calendar year to the total number of full-time equivalent employees for each calendar month of the prior calendar year, and divides that total number by 12.

Employers that have fewer than 25 full-time equivalent employees with average annual wages of less than $50,000 may be eligible for the small business health care tax credit if they cover at least 50 percent of their full-time employees’ premium costs and generally, after 2013, if they purchase coverage through the SHOP.

All employers, regardless of size, that provide self-insured health coverage must file an annual information return reporting certain information for individuals they cover. The first returns are due to be filed in 2016 for coverage provided during 2015.  

For more information, visit our Determining if an Employer is an Applicable Large Employer page on IRS.gov/aca. 

 

 

 

 

IRS Creates Cybercrime Unit to Battle Identity Theft

BY MICHAEL COHN

 

The Internal Revenue Service’s Criminal Investigation division has created a cybercrime unit to combat the growing trend of identity theft-related tax fraud as the problem morphs into data breaches and becomes more international in scope.

 

“We are creating a cybercrimes unit within CI to really focus on some large-scale cybercrime-related cases, specifically focused on identity theft and the impact on tax administration,” said Richard Weber, chief of IRS Criminal Investigation, in a conference call with reporters Monday.

 

 

He noted that cases sometimes start with a smaller dollar amount, but then lead into much larger types of theft. “We are looking at not just dollar amounts initially, but whether or not cases are multijurisdictional,” said Weber. “We have 25 field offices across the country. If the cases have an international component to them, that would be something else we would look at, and then the amount of targets or defendants that would be connected.”

 

Weber said the new unit is not the result of the recent publicity this past tax season over tax refund fraud involving TurboTax.

 

“This is something we’ve been looking at over the past nine months to a year,” he said. “We’ve seen an evolution of identity theft.”

 

An IRS-affiliated website that is used by charities for filing their Form 990-N "e-Postcards" was hit by a data breach in February, however (see IRS-Affiliated Site for Charities Hit by Data Breach). The site is operated by the Urban Institute's National Center for Charitable Statistics.

 

The Darknet 
 

When Weber arrived at IRS CI three years ago, he estimates the agency was spending less than 3 percent of its time on identity theft cases across the country. “We are now working on a national level an average of 18 percent of our time on ID theft,” he said. “In some areas like Tampa and Miami, Florida, where we have field offices, we’re working close to 50 percent of our time just on identity theft. When the problem first started, we were working on a lot of street-level type cases, where someone might be in their basement or sitting on a beach with a laptop and trying to ping our systems, and quite frankly getting in a lot easier than today. That morphed into more of a data breach issue, where we saw over the last year in particular more data breach identity theft type cases, as well as cases that had some type of international component. That was really when we started to realize that we should pull some of our resources and have a focus on the cybercrime, the ‘Darknet’ issue and really look at this problem specifically as it relates to cybercrime ID theft.”

 

Data breaches are occurring at various types of businesses such as payroll companies, department stores and medical facilities. “We’re looking at probably hundreds of millions of records that have been breached from companies across America,” said Weber.

 

Personally identifiable information, such as Social Security numbers, account numbers and W-2 information, have been stolen from companies and that information is then used to attack the IRS system, he noted. Hackers are able to use the information they glean from data breaches to get around the various filters that the IRS has set up to detect identity theft.

 

So far this year there have been at least 270 data breaches, exposing more than 100 million records, according to Weber. “Those records could potentially be used to hit the IRS system or to impact the tax system,” he said.

 

He noted that this February, there was a large-scale data breach at a health insurer, exposing 80 million customer records, including addresses, Social Security numbers and income data, the exact same data that’s needed to file for a tax refund.

 

“That is primarily the reason why we want to focus on cyber and the Darknet because of what is happening,” said Weber. “The Darknet, which I describe as the underbelly of the Internet, is really what criminals are using today to commit a host of crimes, not just tax refund fraud, which is why all the law enforcement agencies are trying to work better together on this issue because of what’s out there.”

 

On the Darknet, the IRS has seen various connections to international organized crime rings, particularly in Russia and other Eastern European countries. “One particular crime syndicate had amassed over 1 billion user names, passwords and email addresses,” said Weber. “When this is happening on the Darknet, it’s really only going to be used for criminal activity. There’s no legitimate use of this information that exists on the Darknet.”

 

Impact of Budget Cuts 
 

However, the effort to build a cybercrime unit has been hampered by budget cuts at the IRS in the past five years. The IRS CI division has approximately 2,500 special agents today, but that’s down from 3,300 agents a few years ago, due to budget cuts.

 

“We’re at an all-time low,” said Weber. “We’re at the same levels we were at in the 1970s. We haven’t hired anybody this year, and it doesn’t look like we’re hiring anybody in the coming year, depending on what Congress does with our budget. Yet the crime problem is advancing and spiraling in terms of the Internet, cybercrimes and the Darknet.”

 

In fiscal year 2014, IRS CI conducted 4,297 investigations, including 1,063 related to identity theft. The previous year, in fiscal 2013, IRS CI conducted 5,314 investigations, including 1,492 related to ID theft.

 

IRS CI plans to start the cybercrimes unit with a group of agents in its Washington, D.C., field office that will develop cases and work with other field offices across the country to develop and support cases.

 

“We’ll have a specialized group in D.C. and then we’ll have points of contact in every field office working with this group in D.C.,” said Weber. “We’re also working with some of the law enforcement agencies. Then we’ll see where this takes us and the types of cases that we’re going to be able to bring.”

 

The IRS currently doesn’t have the budget to hire any new cybercrime experts, but over the years Weber said IRS CI has hired a number of special agents with cyber-technology investigative skills. It is also working with other agencies such as the Secret Service, the FBI, the Justice Department and the Department of Homeland Security that have expertise in these types of investigations. While IRS CI focuses on cases involving tax administration, identity theft and money laundering, other agencies can focus more on the data breach itself.

 

Liberty Reserve, Silk Road and Bitcoin 
 

Among the recent cases where IRS CI has worked with other agencies on cybercrime investigations include ones involving Liberty Reserve, a digital currency provider whose network was used to facilitate crimes such as drug trafficking and child pornography, and Silk Road, whose founder, Ross Ulbricht, was found guilty in February on seven charges of using his network to facilitate drug trafficking via Bitcoin transactions.

 

“At the end of 2013 we led the case against Liberty Reserve, which was a digital currency company that was involved in international money laundering,” said Weber. “We led that case with the Secret Service and Homeland Security. This case was a $6 billion international money-laundering case. It was probably one of the world’s largest digital currency services at the time, and seven individuals were indicted.”

 

The case is ongoing against both the company and the individuals. “The crimes that they were involved in laundering really were a smorgasbord of criminal activity, involving computer hacking, identity theft, investment fraud, child pornography and narcotics trafficking,” said Weber. “There was really all types of crimes involved in this operation. It was a case that I think started our efforts looking at the cyberworld and the way money moved throughout the world.”

Weber recalled that back in 2013, he was quoted as saying that if Al Capone were alive today, this is how he would be laundering his criminal proceeds.

 

 

 

 

Top 10 Myths and Realities about W-2 and 1099 Reporting

Beware of some common reporting mistakes of W-2 and 1099 reporting to avoid tax penalties.

 

Myth vs. Reality

 

Greatland, a provider of W-2 and 1099 products for business, receives thousands of calls each year from customers who often mistakenly believe in one of the many tax myths that plague the industry. Failing to understand the real truth behind these myths can cost a business the cost to refile or potentially steep fines if reporting is not completed correctly. Breaking down fact vs. fiction can help companies and tax clients be better prepared. 

 

1. State 1099 Reporting

Myth: State 1099 reporting is not required if there is no state tax withheld. 
Reality: Check your state’s 1099 filing requirements. Many states require 1099s to be filed even if there is no state tax withheld.

 

2. Black Ink

2. Myth: Copy A of Form 1099 can be printed in black ink and filed with the IRS. 
Reality: Copy A of Form 1099 must be printed in red drop-out ink in order to be properly processed by the IRS. 

 

3. Health Plans

3. Myth: All employers offering coverage under an employer-sponsored group health plan must report the cost of the coverage on the employee’s W-2. 

Reality: Until the IRS issues final guidance for this W-2 reporting requirement, reporting is not mandatory for those employers who filed less than 250 W-2s.

4. Identity Theft Truncation

Myth: In order to prevent identity theft, the taxpayer identification number (TIN) can be truncated (ex: XXX-XX-1234) on Form W-2. 

Reality: TIN truncation applies to any federal tax-related payee statement unless prohibited by the Internal Revenue Code, regulations, or guidance. TIN truncation is prohibited on Form W-2, but is acceptable on payee statements for Form 1098 series, Form 1099 series, and Form 5498 series. TINs that may be truncated include social security numbers (SSNs), individual taxpayer identification numbers (ITINs), adoption taxpayer identification numbers (ATINs), and employer identification numbers (EINs). 

 

5. Independent Contractors

Myth: If an employer gives a worker freedom to act, the worker should be classified as an independent contractor. 
Reality: The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done. An individual is an employee if the employer can control what will be done and how it will be done even if the employer gives the employee freedom of action. 

 

6. Combined Filing

Myth: Using the combined federal/state 1099 filing program meets all the state’s 1099 filing requirements. 
Reality: Not all states participate in the combined federal/state program, and many states that do participate in the program still require 1099s with state withholding to be sent directly to the state. 

 

7: E-file Threshold

Myth: The e-file threshold for state W-2/1099 filing is the same as the federal e-file threshold. 
Reality: Each state can set its own e-file threshold. Check your state’s requirements to ensure that you are in compliance. 

 

8: Paper Filing

Myth: When filing on paper, one Form 1096 can be used for one submission of multiple 1099 form types. 
Reality: A separate Form 1096 is required for each 1099 form type being submitted to IRS on paper. (Example: If filing both 1099-INT and 1099-DIV forms, two 1096 forms would be required.) 
 

9. Official Forms

Myth: When filing W-2s and 1099s on paper, a filer is required to use the official forms supplied by the IRS. 
Reality: Substitute W-2 and 1099 forms are acceptable for filing as long as they meet the specifications outlined in IRS Publications 1141 and 1179 respectively. 
 

10. Payments to Corporations

Myth: Payments made to corporations are not reportable on Form 1099-MISC. 
Reality: Generally, payments made to corporations are not reportable on Form 1099-MISC; however, there are exceptions. The following payments made to corporations must be reported on Form 1099-MISC: 
• Medical and health care payments 
• Fish purchases for cash 
• Attorneys’ fees 
• Gross proceeds paid to an attorney 
• Substitute payments in lieu of dividends or tax-exempt interest 
• Payments by a federal executive agency for services 
 

 

 

 

 

How Far Back Can IRS Claim Tax Evasion?

Robert W. Wood

Opinions expressed by Forbes Contributors are their own.

 

If you are hiding income from the taxman, consider how long you are at risk. Three years, six, more? Even if you did your best with your taxes, you might be worried as taxes are horribly complex. The line between aggressive tax planning and tax evasion is sometimes less clear than you might think. In fact, even innocent activities can sometimes be interpreted as suspect.

It can help your peace of mind to know how far back you can be asked to prove your income, expenses, bank deposits and more. For all of these reasons, it’s good to know about the normal IRS statute of limitations, and how a tax evasion or fraud claim from the IRS can turbo-charge a case. Start with the basic rule that the IRS usually has three years after you file to audit you.

 

If you omit more than 25% of your income, the IRS gets double that time, six years. But statutes are often extended, sometimes voluntarily. Frequently, the IRS says it needs more time to audit and asks you to sign a form extending the statute, usually for a year. Most tax advisers generally advise clients to agree.

 

However, get some professional advice about your own situation. You may be able to limit the time or scope of the extension.

 

But what if you file a false return under-reporting income or willfully fail to file? The rules for how long you must worry–and the stakes–go up materially, including potential criminal charges and prison. Section 6531(2) of the tax code says the statute is six years commencing once the return is filed, or from the time you willfully failed to file a return.

 

In a case of alleged criminal tax evasion, that means the statute hasn’t run if the taxpayer is indicted within six years after “willfully attempting in any manner to evade or defeat any tax or the payment thereof.” In some cases, though, the statute is “tolled”–so stops running. For example, the statute stops running if the target is outside the U.S. or is a fugitive.

 

Ten Facts About Fighting IRS Tax Bills

 

What’s more, even when the alleged tax crime is committed can be hard to pinpoint. Does filing a false return start the six year clock? What about failing to file by the due date? How about covering it up later, hiding money, or lying about it?

 

All are potential problems that might occur many years after the tax return was filed or should have been filed. That means you may have to worry for many years beyond six. The issue is especially important if any later act keeps the statute open. Some courts have concluded that the six year statute doesn’t even start to run until the last act of tax evasion.

 

For example, in United States v. Irby, the court held the six year statute began to run on the last act of evasion. Mr. Irby used nominee trusts to conceal his assets many years after he failed to file. He may have thought he only had to worry for six years, but his use of nominee accounts delayed when his six years commenced. That meant he could still be indicted, prosecuted and convicted.

 

Finally, you often hear people say that the statute of limitations never runs on fraud. For civil tax fraud, that’s true. The IRS can come after you any time. But it’s still rare for the IRS to go back too far. Problems of proof are too great, and the IRS bears a high burden of proof in fraud cases, even civil fraud.

 

Timing may not be everything, but it’s terribly important in tax cases. No one wants to be in the position of lying low and worrying about being caught. Fortunately, sometimes these issues can be resolved in less painful and less expensive ways than you might think. Within the protection of attorney client privilege, it can pay dividends to get some professional advice.

For alerts to future tax articles, follow me on Forbes. You can reach me at Wood@WoodLLP.com. This discussion is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.

 

 

 

 

 

For U2, Taxes Move in Mysterious Ways

BY MICHAEL COHN

Members of U2 defended the Irish rock band’s tax strategy as the band kicked off its world tour.

 

The Edge and Bono 
 

Lead singer Bono told Sky Newsthat the band pays “a fortune in tax” and explained that it was following “sensible” tax advice in moving some of its assets to the Netherlands, which like Ireland is considered to be a relatively low-tax country.

 

“It is just some smart people we have working for us trying to be sensible about the way we are taxed,” he said. “We pay a fortune in tax, a fortune, just so people know, and we’re happy to pay a fortune in tax. Because you’re good at philanthropy and because I am an activist people think you should be stupid in business and I don’t run with that.”

 

His band mate, the Edge, pointed out, “So much of our business is outside of Ireland so it is ridiculous to make a big deal out of it.”

 

Bono attracted some criticism last year when he remarked that Ireland’s corporate tax laws had brought his country “the only prosperity we’ve ever known” as Ireland continued to deal with a lingering recession.

 

The band is expected to profit handsomely on its 70-date “Innocence and Experience” tour, as its previous tour shattered prior box office records. The tour will be the first on which U2 will play songs from its album “Songs of Innocence,” which debuted last year as a free download for iTunes users that showed up unexpectedly in iTunes users’ library. Bono was forced to apologize last year to any iTunes users who were irate at getting the surprise addition to their music library. He was seriously injured in a bicycle accident last November that kept the band from touring to promote the new album until this month.

 

The new tour features a stage layout that will allow the musicians to get closer to the audience across vast stretches of the arena. However, the narrow catwalks proved to be perilous for the Edge, who fell off the platform at one point during their debut outing on Thursday night in Vancouver, B.C., but without injury. The Edge got back up right after slipping off the edge of the catwalk, returned to the stage and finished the concert.

 

 

 

 

Mobile Workforce Act Would Provide 30-Day Safe Harbor

BY ROGER RUSSELL

 

Lawmakers have introduced legislation that would provide a month-long safe harbor from income tax and withholding requirements for traveling employees and their employers.

 

The Mobile Workforce State Income Tax Simplification Act of 2015 was introduced in the House on Thursday as H.R. 2315 by Rep. Mike Bishop, R-Mich., and Hank Johnson, D-Ga. Both lead sponsors are members of the House Judiciary Committee, where H.R. 2315 will likely be referred.

 

Joining them as original co-sponsors are Rep. Jason Chaffetz, R-Utah, Lamar Smith, R-Texas, Mark Walker, R-N.C., Dennis Ross, R-Fla., Patrick Murphy, D-Fla., David Cicilline, D-R.I., and Eric Swalwell, D-Calif.

 

The legislation would set a 30-day safe harbor from personal income tax and withholding obligations for traveling employees and their employers, including businesses, associations, governments and unions. Employees traveling to a nonresident state for fewer than 30 days would incur no personal income tax liability in the nonresident state, and the employer would have no withholding obligation.

 

Employers and employees would continue to fulfill their tax obligations to the state of residency during the 30-day safe harbor. The language of the bill is identical to one that passed the full House of Representatives in May 2012 (H.R. 1864).

 

"We're very pleased that Representative Bishop and Representative Johnson have introduced H.R. 2315, the Mobile Workforce State Income Tax Simplification Act of 2015,” said Douglas L. Lindholm, president and chief executive of the Council On State Taxation (COST), the association leading the 270-plus member coalition of supporting organizations.  

 

“This important bill strikes a balance between state sovereignty and the need to ensure that the mobility of our national workforce is not encumbered by 50 separate state rules applicable to nonresident traveling employees and their employers,” he said. “We look forward to working with our sponsors to move the bill forward this Congress,”

 

The Senate companion bill, S.386, was introduced on Feb. 5, 2015 by Sen. John Thune, R-S.D., and Sherrod Brown, D-Ohio.

 

The bill would not affect issues such as those highlighted in the Hillenmeyer v. Cleveland Board of Review case, in which an NFL player contested the “Games Played” allocation by Cleveland of his salary subject to local tax, according to Lindholm (see Cleveland Appeals Denial of ‘Games Played’ Allocation for Former NFL Player in ‘Deflategate’ Motion).

 

“It does not cover athletes, entertainers and other prominent individuals who are paid on a per event basis and therefore should be well aware of their tax obligations,” he said.

 

 

 

 

 

Alabama Woman Charged with Filing Thousands of Fraudulent Tax Returns

BY MICHAEL COHN

 

An Alabama woman has been charged with filing more than 3,000 tax returns over a two-year period claiming over $7.5 million in fraudulent tax refunds.

 

Talashia Hinton, aka LayLay and LaLa, of Phenix City, Ala., was arrested Tuesday after she was indicted on April 28 by a federal grand jury sitting in the Middle District of Alabama on charges of conspiracy to defraud the United States, wire fraud and aggravated identity theft.

The indictment charges Hinton with one count of conspiracy to defraud the United States, five counts of wire fraud and five counts of aggravated identity theft.

 

Hinton participated in a large-scale stolen identity tax refund scheme in which more than 3,000 false tax returns for 2012 and 2013 were filed that claimed more than $7.5 million in fraudulent federal income tax refunds from the Internal Revenue Service. Hinton worked with others who supplied her with IRS electronic filing identification numbers and stolen identities that included personal information so that Hinton could prepare and file false tax returns to claim refunds using those stolen names. Hinton directed the IRS to pay the refunds by issuing U.S. Treasury checks and direct deposits onto prepaid debit cards.   

 

If convicted, Hinton faces up to 20 years in prison for each wire fraud count, up to five years in prison for the conspiracy count and up to two years in prison for aggravated identity theft. Hinton also faces monetary penalties, including fines, forfeiture and restitution.

 

 

 

 

 

Cleveland Appeals Denial of ‘Games-Played’ Allocation for Former NFL Player in 'Deflategate' Motion

BY ROGER RUSSELL

 

In a case that could have repercussions for the taxation of professional athletes, the Supreme Court of Ohio handed down a ruling that provoked a response citing the New England Patriots’ “Deflategate” scandal.

 

The case involves Hunter Hillenmeyer, a former linebacker for the Chicago Bears, who challenged the method by which Cleveland’s municipal income tax was imposed on his earnings during tax years 2004 to 2006. In each of those seasons, the Bears played one game in Cleveland, for which Hillenmeyer was present in Cleveland for two days.

 

For each of these years, the Bears withheld and paid the municipal tax from his compensation according to Cleveland’s allocation method, known as “games-played,” under which the taxable portion of a professional athlete’s income is based on the number of games the athlete played in Cleveland in relation to the total number of games played that year.

 

The Supreme Court of Ohio determined, in an opinionfiled on April 30, 2015, that the “games-played” method of allocating a nonresident professional athlete’s income to the city resulted in the taxation of income from work performed outside of the city in violation of the player’s right to due process.

 

In a motion to the court to reconsider its decision, the City of Cleveland argued that the court’s finding is in conflict with U.S. Supreme Court precedent that an apportionment method may be based on any measurement so long as the measurement is reasonable and that no single apportionment method is required.

 

Additionally, the motion noted that the Supreme Court has held that states and local jurisdictions have wide latitude in the selection of apportionment formulas and that a formula-produced assessment will only be disturbed when the taxpayer has proved by clear and convincing evidence that the income attributed to the state is in fact out of all appropriate proportion to the business transacted in the state or has led to a grossly distorted result.

 

The motion makes reference to the recent “Deflategate” scandal in which the New England Patriots was accused of deflating footballs during an AFC Championship game in January against the Indianapolis Colts.

 

“And the suggestion that a single practice day, meeting day or even travel day equates to a game day is wholly unreasonable,” attorneys for Cleveland wrote on May 11. “The NFL has just completed its investigation of ‘Deflategate,’ the controversy where the New England Patriots and its star quarterback Tom Brady have been implicated in regards to deflating footballs (which are apparently easier to throw and catch). If Tom Brady is ultimately disciplined as a result of this controversy with a suspension—he will clearly be suspended from games. And as Cleveland has repeatedly emphasized in this case, every important right or benefit that a player may be eligible to receive like free agency, player minimum salary, retirement benefits, etc., is based on one thing—the games, not practice, not meetings, not promotional events or anything else that NFL teams may require a player to do.”

 

The NFL announced Monday that Brady would be subject to a four-game suspension and the Patriots will be fined $1 million and lose their first-round draft pick in the 2016 NFL draft. Brady’s agent has said he planned to file an appeal.

 

 

 

 

GOP 'Silly' to Release Post-Ruling Plan before King v. Burwell Decision

BY BRIAN M. KALISH

EMPLOYEE BENEFIT ADVISER

 

It is “silly” for Republicans to put together a response to the Supreme Court’s expected June ruling on the legality of subsides in the federal health care exchange, the health policy director at the CATO Institute, which helped launch the lawsuit, said Monday.

 

Speaking at a HIX policy summit in Washington, Michael Cannon said should the ruling make subsides illegal, it is hard to predict where things will end up, as the two sides are so polarized on the issue.

 

“It’s silly for Republicans for to put together a response at this point because [they] don’t know what will happen and how the administration will respond,” he said. “The administration is saying, ‘There is nothing we can do. We don’t have backup plans.’ Everyone in this room will agree they are lying.”

 

“They don’t want this to be so disruptive,” Cannon added. If the subsides are ruled illegal in the case, King v. Burwell, the 72 percent of Americans who receive a subsidy will have to pay 100 percent. That outcome will likely lead to a bad risk pool, as the sick will pay for coverage and the healthy will stop paying altogether, he said.

 

Speaking separately at the conference, Kevin Counihan, Healthcare.gov CEO, repeated the Obama administration’s talking points on a post-ruling plan, saying Health and Human Services Secretary Sylvia Burwell believes “we are on the right side of this issue.” He added that “they’ve given me enough to do to keep the trains working. I don’t need to worry about this issue,” joking it was way above his pay grade.

 

“Keep in mind subsidies don’t lower cost, they shift cost,” Cannon said. “People are not going to like having full cost, but it is unlikely that the president or Republicans are going to like the other ones first choice” on a new plan. Rather, it’s is going to be a “great, big confusing mess,” he added.

 

Another impact if the subsidies are ruled illegal and there is no quick fix is that insurance companies may run into solvency problems, said Timothy S. Jost, law professor at Washington and Lee University School of Law in Lexington, Va.

 

“You are going to have millions of people lose insurance very quickly because their premiums will go up 200 percent to 700 percent,” he said. “Now the non-group market is one large risk pool. It will not only [impact] people on the exchange but the entire non-group market.”

This article originally appeared in Employee Benefit Adviser.

 

 

 

Talk of Ryan-Obama Tax Deal Roils Republican-Business Alliance

BY RICHARD RUBIN

 

The “job creators” are fighting back on tax policy—against their Republican allies.

 

Small-business groups that have been among the Republicans’ loyal backers are warning their friends in Congress against cutting a deal with President Barack Obama on lowering corporate taxes.

 

The prospect of a fractured business community makes it even harder to see a path to major changes to the U.S. tax code this year.

 

The hostility towards an effort spearheaded by top Republican leaders to reduce the corporate tax rate is particularly unusual because it comes from groups such as the National Federation of Independent Business, which tend to skew their political giving overwhelmingly toward Republican candidates and committees. Organizations now trying to stymie a potential deal between Obama and Representative Paul Ryan, a Republican who chairs the tax-writing Ways and Means Committee, gave the president's party $1 for every $14 they gave Republican candidates.

 

They represent the building contractors, wholesalers and restaurant owners who are active in local Republican circles and often have the ear of their hometown representatives.

 

“The politics of this are fraught, I think, and that’s what we’ve been trying to convey,” said Liam Donovan, director of legislative and political affairs at Associated Builders and Contractors, which gave $1.6 million in contributions in the 2014 cycle, none to Democrats, according to the Center for Responsive Politics. “Given the option, this or nothing, nothing is better for our members.”

 

The simmering conflict spilled into the open in a series of testy letters last month between the groups and the top Republican tax writers, followed by private meetings.

 

Cutting Tax Rates
 

Leaders of small-business groups say they object to any deal that would help big companies by cutting the corporate tax rate without lowering the individual income tax rates that apply to millions of small businesses across the country.

 

That’s exactly the kind of deal that Ryan and Senate Finance Committee Chairman Orrin Hatch, a Utah Republican, have been considering. They’re looking for a long-shot bipartisan agreement on lowering the corporate tax rate, curtailing targeted breaks and revamping how the U.S. taxes multinational companies. Small businesses and others outside the corporate income tax would receive help with targeted breaks but not a rate cut.

 

“We would prefer them to do it all together or not at all,” said Elizabeth Taylor, vice president for federal government relations at the International Franchise Association. “Or just small business. Do small business first if you’re going to do something first.”

 

Ryan has said he won’t leave small businesses behind in tax-law changes, and he hasn’t done anything yet to sever the decades-long link between small businesses and Republicans on tax policy. Still, he’s been testing it.

 

Limited Time
 

Ryan has been coy and noncommittal about exactly how he would protect small businesses without cutting rates, and he doesn’t have much time to figure it out. Ryan has said he wants to make major progress within the next few months before presidential-campaign politics overwhelm Congress.

 

The rift between top Republicans and their usual allies in Washington’s world of small business trade groups stems from a disagreement on tactics, not policy. They all want to cut marginal tax rates for corporations and individuals.

 

The individual rates are what matter to small businesses and some large ones such as law firms and private equity firms, because the owners of S corporations and partnerships pay their business taxes on their individual tax returns. The companies are known as “pass-throughs,” because the income flows through them to the individual returns.

 

Bush Tax Cuts
 

When Republicans tried in late 2012 to extend all of George W. Bush’s tax cuts–with a top rate of 35 percent–they relied heavily on small business groups, which represent enterprises like restaurants and hardware stores that would be hurt by higher marginal rates.

 

Obama prevailed, and the top rate returned to 39.6 percent, a level that Democrats won’t give up.

Ryan’s taking a get-what-you-can-now approach. He sees Obama’s refusal to budge on individual rates as an opening for a two-stage approach to the biggest tax code changes in 30 years. The idea: Take the first bite now on business taxes and do the rest after Obama leaves office.

 

“He wants to do what’s achievable and we want to do what’s good for our members, and they’re not necessarily in line at this point,” Donovan said. “You can imagine the sort of united front of populists on both sides looking at a corporate rate cut financed by small businesses as something that would draw cries.”

 

Representative Vern Buchanan, a Florida Republican and a member of the Ways and Means Committee, said the current debate is a chance to have tax ideas vetted by interest groups and others.

 

Push for Parity
 

“I’m going to continue to push to try to get some parity,” he said. “The thought is this year, maybe all we can get done is the corporate side. And in ’17 the dynamics might change and there might be a lot more opportunities.”

 

For the small business groups, no deal is better than the one Ryan and others are contemplating. The prospect of a top individual rate of 39.6 percent along with a corporate rate of 25 percent or 28 percent would give corporations an edge, they say. Corporate income does, however, face a second layer of taxation, on capital gains and dividends.

 

Administration officials have been talking about expanding cash accounting and businesses’ ability to write off capital expenses as ways to placate small businesses. Donovan said he didn’t

think lawmakers would be able to find a solution– other than a rate cut–that would work.

 

No Retribution?
 

“The imperative here is avoiding it being introduced, and that’s what we’re focused on right now,” Donovan said.

 

Ryan and Hatch wrote to business groups last month, asking for ideas and insisting that they have told Obama that pass-throughs and small businesses must be helped in any deal.

Some groups have responded by saying there are some solutions that would work for them, said a Ryan aide who spoke on condition of anonymity to discuss the private meetings.

 

Jeff Shoaf, senior executive director of government relations at the Associated General Contractors, said they haven’t planned what they would do if Ryan and Hatch manage to reach a deal with Obama.

 

“I don’t know exactly what Ryan and Hatch will come up with in the end,” he said. “I can’t see a mixture that starts with the sentence ’Hey, support us now because in a couple years we’ll get individual rate reduction for everybody else,’ being a good sales pitch.”

One thing that probably won’t change is a donation pattern from the groups that favors Republican lawmakers.

 

“We’re still going to be supporting the members that support our positions,” Taylor said. “Now, that could be reevaluated at any time. But for the most part, we’re not a single-issue organization.”

 

 

 

 

 

 

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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