Find out if You Qualify for a Health Insurance Coverage Exemption
The Affordable Care Act calls for individuals to have qualifying health insurance coverage for each month of the year, have an exemption, or make a shared responsibility payment when filing his or her federal income tax return.
You may be exempt from the requirement to maintain qualifying health insurance coverage, called minimum essential coverage, and may not have to make a shared responsibility payment when you file your next federal income tax return. .
You may be exempt if you:
The IRS website, IRS.gov/aca, has a comprehensive list of the coverage exemptions.
Before filing your 2013 tax return, did you consult an Internal Revenue Service publication for clarification of some confusing point?
That’s living dangerously.
Or so a U.S. Tax Court Judge declared this week. “Taxpayers rely on IRS guidance at their own peril,” Judge Joseph W. Nega wrote in an order entered on April 15th —an order denying a motion that he reconsider his earlier decision to penalize tax lawyer Alvan L. Bobrow for making an IRA rollover move that IRS Publication 590, Individual Retirement Arrangements (IRAs), says is allowed. Technically, Nega denied the motion as moot, since Bobrow and his wife Elisa had reached a settlement with the government. But the judge wrote in his order that IRS guidance isn’t “binding precedent” or even sufficient “substantial authority” to get a taxpayer excused from penalties if he follows that guidance and the IRS’s interpretation of the tax law turns out to be wrong.
Huh? Sound unfair? Some of the nation’s most prominent tax lawyers sure think so. In a friend of the court brief urging Nega to reconsider his original decision, the Board of Regents of the American College of Tax Counsel had argued that it undermines public confidence in the tax system to tell taxpayers who have followed the IRS’ own guidance that they “have made an error with potentially catastrophic financial consequences.” Nega was unimpressed. He cited in his order Tax Court and Appeals Court decisions holding that IRS published guidance doesn’t count in court and added that he had been well aware of what Pub 590 said before his original ruling.
At issue in the Bobrows’ case is a decades old provision of the tax code—408(d)(3)– that allows IRA owners, once a year, to withdraw funds from an IRA without having the money taxed or subjected to the 10% early withdrawal penalty so long as they redeposit the cash, or roll it over to a different IRA, within 60 days after the date of withdrawal. In proposed (but never finalized) regulations issued in 1981 and in editions of Publication 590 since 1984, the IRS has told taxpayers that the one-a-year restriction applies separately to each IRA. (The restriction doesn’t apply at all to IRA rollovers done in an IRA custodian to IRA custodian transfer—say, whenJPMorgan Chase JPM -0.07% transfers money directly to Fidelity Investments , only to those transfers in which the taxpayer takes possession of the funds, however briefly.)
Alvan Bobrow, a leader of Mayer Brown’s tax practice and former General Tax Counsel for CBS CBS +0.56%, Inc., took $65,064 out of two separate IRAs in 2008 and redeposited the same sum in each IRA within the 60 day window. On the Bobrows’ joint 2008 1040, Alvan treated both withdrawals as qualified rollovers and not taxable distributions. (A fuller explanation of the case is here.)
In his original January decision, Nega ruled that Alva Bobrow’s second 2008 withdrawal wasn’t a qualified rollover because the “plain language” of the law makes it clear that the once a-year rollover restriction applies to all of a taxpayer’s IRAs combined. He also found the Bobrows liable for a 20% substantial underpayment penalty on the extra taxes that resulted from the failed second rollover.
Last month, the IRS issued a notice stating that it intends to adopt Nega’s Bobrow decision and limit 60-day rollovers to one per taxpayer a year, but only beginning on January 1, 2015, to give IRA custodians (and presumably the IRS itself) time to change their materials. In settling the case with the Bobrows, the government agreed to give them the same benefit of a prospective (rather than retrospective) policy change, and to treat both of Alvan’s 2008 rollovers as qualified. The Bobrows, for their part, agreed to payan extra $28,681 in taxes (including a 10% penalty for an early withdrawal before age 59 1/2) and a 20% substantial underpayment penalty of $5,736 for not treating as taxable income yet another2008 $65,064 distribution from Elisa Bobrow’s IRA—one the IRS alleged they failed to repay within 60 days. According to Nega’s original decision, the couple put some of the money back in Elisa’s IRA, but on day 61.
Unpaid Debt Can Affect Your Refund
If you owe a debt that’s past-due, it can reduce your federal tax refund. The Treasury Department’s Offset Program can use all or part of your refund to pay outstanding federal or state debt.
Here are five facts to know about tax refunds and ‘offsets.’
1. The Bureau of Fiscal Service runs the Treasury Offset Program.
2. Debts such as past due child support, student loan, state income tax or unemployment compensation may reduce your refund. BFS may use part or all of your tax refund to pay the debt.
3. You’ll receive a notice if BFS offsets your refund to pay your debt. The notice will list the original refund and offset amounts. It will also include the agency that received the offset payment and their contact information.
4. If you believe you don’t owe the debt or you want to dispute it, contact the agency that received the offset. You should not contact the IRS or BFS.
5. If you filed a joint tax return, you may be entitled to part or all of the refund offset. This rule applies if your spouse is solely responsible for the debt. To request your part of the refund, file Form 8379, Injured Spouse Allocation.
Should the Internal Revenue Service regulate the tens of millions of uncertified, paid tax preparers who operate in the United States?
The Government Accountability Office said in a report this month that those tax-filing experts, who account for 55 percent of all paid preparers, have put their clients at risk of serious enforcement action with incorrect returns.
The congressional watchdog agency reviewed 19 tax preparers through undercover site visits, finding that all but two had incorrectly calculated refund amounts. Among the most common errors: Claiming ineligible children for the Earned Income Tax Credit, not reporting cash tips and not asking the required eligibility questions for a tax credit that helps students cover educational costs in exchange for community service.
The GAO recommended that Congress consider legislation that would allow the IRS to regulate paid tax-filing experts, saying the move “will help promote high-quality services from paid preparers, will improve voluntary compliance, and will foster taxpayer confidence in the fairness of the tax system.”
The IRS tried to impose testing and education requirements for preparers in 2010, but a federal court determined that the agency lacked the statutory authority to carry out its plans. The U.S. Court of Appeals for the District of Columbia affirmed that ruling in February.
President Obama’s 2015 budget proposal calls for legislation that would allow the Treasury Department and IRS to regulate all paid tax preparers.
The GAO found that Oregon, one of only four states that regulate tax-filing experts, had a higher level of accuracy than the rest of the nation on returns. The odds of a paid preparer from the Beaver State filing an accurate return were 72 percent higher than in the rest of the country, the report said.
Ten Things to Know about IRS Notices and Letters
Each year, the IRS sends millions of notices and letters to taxpayers for a variety of reasons. Here are ten things to know in case one shows up in your mailbox.
1. Don’t panic. You often only need to respond to take care of a notice.
2. There are many reasons why the IRS may send a letter or notice. It typically is about a specific issue on your federal tax return or tax account. A notice may tell you about changes to your account or ask you for more information. It could also tell you that you must make a payment.
3. Each notice has specific instructions about what you need to do.
4. You may get a notice that states the IRS has made a change or correction to your tax return. If you do, review the information and compare it with your original return.
5. If you agree with the notice, you usually don’t need to reply unless it gives you other instructions or you need to make a payment.
6. If you do not agree with the notice, it’s important for you to respond. You should write a letter to explain why you disagree. Include any information and documents you want the IRS to consider. Mail your reply with the bottom tear-off portion of the notice. Send it to the address shown in the upper left-hand corner of the notice. Allow at least 30 days for a response.
7. You shouldn’t have to call or visit an IRS office for most notices. If you do have questions, call the phone number in the upper right-hand corner of the notice. Have a copy of your tax return and the notice with you when you call. This will help the IRS answer your questions.
8. Keep copies of any notices you receive with your other tax records.
9. The IRS sends letters and notices by mail. We do not contact people by email or social media to ask for personal or financial information.
10. For more on this topic visit IRS.gov. Click on the link ‘Responding to a Notice’ at the bottom left of the home page. Also, see Publication 594, The IRS Collection Process. You can get it on IRS.gov or by calling 800-TAX-FORM (800-829-3676).
IRS is overwhelmed by identity theft fraud
Billions wrongly paid out as scammers find agency an easy target
Boston GLOBE STAFFTop of Form
WASHINGTON — Rashia Wilson bought a $92,000 Audi, proclaimed herself a millionaire, and announced on her Facebook page that she was “the queen of IRS tax fraud,” as prosecutors told the story.
But even more than her flamboyance, it was the seeming ease of her crime that was most stunning: She and an accomplice were alleged to have hijacked the identities of other taxpayers to get fraudulent refunds. They used stolen Social Security numbers, a computer, and basic knowledge of how to file a tax return, according to the government.
After the Florida mother of three was caught and pleaded guilty last year to crimes totaling at least $3 million, her defense attorney, Mark O’Brien, made his own plea. He said in court that he hoped the “IRS will figure out a way to prevent this from happening in the future, so someone with a sixth-grade education can’t defraud them so easily.”
Across the country, the theft of taxpayer identities has taken off, while receiving far less attention than the loss of credit card information. Even some drug dealers, always with an eye out for easy profits, have turned to taxpayer identity theft after hearing how uncomplicated it was to scam the IRS. A medical assistant at a nursing home stole the identities of hundreds of patients. A prison guard stole the identities of inmates and filed false returns under their names.
All told, in just the first six months of last year, 1.6 million taxpayers were affected by identity theft, compared with 271,000 for all of 2010, according to a recent audit by the Treasury Department’s inspector general. While the IRS said it discovered many of the incidents, the cumulative thefts have resulted in billions of dollars in potentially fraudulent refunds, according to an array of government reports.
“I’ve had a police chief tell me ‘street crime is down because everybody is now filing false IRS returns,’ ” IRS Commissioner John Koskinen,who took office last month, said in an interview.
While Koskinen stressed that the IRS uses a series of “filters” that are increasingly successful in catching identity thefts before refunds are paid, he acknowledged that “this problem has exploded’’ and that the agency is in a constant race to keep its detection techniques a step ahead of the thieves. “It is,’’ he said, “a little like ‘Whac-a-Mole,’ knock them down here and they come up over there.”
Rashia Wilson posted on her Facebook page that she was “the queen of IRS tax fraud.” This photo of her holding stacks of cash was used as evidence in a case in which she pleaded guilty to theft charges.
Kathryn Keneally, US Assistant Attorney General for the tax division, said her office has an increasing number of prosecutions of taxpayer identity theft underway. She listed one heart-wrenching case after another: military personnel who had their identities stolen while deployed, and parents who learned that their recently deceased child’s identity had been pilfered.
“We have seen drug dealers go into this because it is easy access to money. Gangs go into this because it is easy access to money. Or at least they perceive it that way,” Keneally said, while adding: “Please, if you quote me on saying ‘It is easy access to money,’ include: ‘We are changing that equation and we are adding risk to that.’ ” The average prison sentence for taxpayer identity theft last year was more than three years, and the longest was 26 years.
The problem is that even as prosecutions increase and the IRS improves its ability to stop many false tax returns up front, identity thieves also are increasing their efforts.
“What the identity thieves do is play on volume,” Keneally said. “So if they file 10 returns and 9 are stopped, the 10th one went through and they got the money.”
In case after case, court records show criminals have used tax-filing software to obtain refunds that are in the thousands of dollars, often receiving the funds paid via the US Treasury on debit cards or by direct deposit.
Prisoners at jails across the country have obtained stolen Social Security numbers and filed thousands of false returns. Criminals in foreign locales have pilfered the personal information of Americans and received refunds. Thieves have even stolen the Social Security numbers of thousands of children, as well as tens of thousands of dead people, to obtain fraudulent tax refunds.
A US Treasury audit released last September said that “billions of dollars in potentially fraudulent refunds continue to be paid” as a result of identity theft. If the problem is not stopped, the IRS could issue $21 billion in fraudulent refunds in the next five years, according to testimony by the Treasury Department’s inspector general for tax policy, J. Russell George.
The IRS has disputed that estimate, saying it has improved its ability to detect identity theft. But a spokesman said the agency doesn’t have enough information to provide its own estimate of how much has been paid so far in fraudulent refunds.
One indication of the scope of problem is that the IRS has given 1.2 million taxpayers a special code, known as an identity protection PIN number, to be submitted with a tax return. The personal identification number indicates they have previously been the target of identity theft. Just two years ago, only 250,000 people were classified that way.
The theft of taxpayer identities is different from the mass robbery of credit card numbers, as has happened recently at retail chains such as Target. While credit cards can be quickly canceled and consumers held harmless in some cases, the victim of taxpayer identification theft can face months or years of agonizing problems.
Marcy Hossli of Florida testified last year before the Senate Special Committee on Aging that she didn’t realize she had been a victim of identity theft until she received a letter from the IRS in 2012 telling her that someone had used her personal information to receive tax refunds in the two prior years.
Marcy Hossli testified that she didn’t realize she had been an identity theft victim until the IRS told her that someone had used her personal information to receive tax refunds in the previous two years.
Hossli, a cancer survivor who owed $4,000 in medical bills, was told it would take several months to process her returns. She was then told that she would be among those who receive a special personal identification number, so the IRS would know she had been the victim of identity theft and that any return filed in her name should be checked rigorously to make she it was filed by her.
On the road to obtaining that special number, Hossli testified, she endured a series of runarounds and said she had spoken to “dozens” of different people at the agency. One IRS agent “told me it was my own fault that I hadn’t received my refund,” Hossli, who could not be reached for comment, testified. “. . . She was quite angry with me and made me feel stupid and small because she said I was just one of many people dealing with the same problem. I was near tears on the phone.”
A raft of government reports backs up Hossli’s testimony.
Understaffing and lack of training at the IRS meant that it took an average of 312 days to resolve identity theft cases, subjecting victims to a series of traumatic delays that often were caused by confusion among IRS agents, a Treasury audit said.
IRS officials said they have recently improved their response time to complaints, cutting the average wait of 312 days to resolve identity theft cases to 120 days.
All of this raises the fundamental question: Why does the IRS persist in the practice that enables such schemes — issuing refunds before being certain the money is going to the legitimate taxpayer?
The answer speaks volumes about the outdated nature of the IRS system of processing returns, and the political pressure to get refunds quickly to taxpayers.
Under the current system, the IRS cannot always be certain that a return is filed by the person whose name and Social Security number is on it, but it often pays the refund anyway.
The simplest way to stop most of the fraudulent refunds would be to prevent any payments from being sent until after the April 15 filing deadline has passed.
That would enable the IRS to recognize that more than one person is using the same Social Security number for a return, and prompt the agency to investigate which one is legitimate. But the IRS follows a congressional mandate to pay refunds as soon as possible after a return is received, often within days. While that has been promoted as efficient service, it also has prompted criminals to file false returns as soon as tax filing season begins, hoping to get a refund before the real taxpayer even thinks about filing.
Another way to cut the identity theft would be for Congress to approve a recommendation from the office of the National Taxpayer Advocate to create a “real time” system in which tax returns would be matched up front with third-party financial information such as statements on wages and interest and dividends.
Currently, the IRS often receives the electronic version of that information weeks or months after it has issued a refund.
“When the IRS gets a return that claims a refund, the IRS does not have the ability to check that the taxpayer is entitled to the refund, that it is a real person,” former IRS commissioner Lawrence Gibbs said in an interview. “They don’t have records to say whether the person claiming the refund is entitled to it. They just send the check. The crooks found out it was nirvana, and as a result you have seen a massive influx of fraud.”
Koskinen, the current commissioner, said that he would like to see returns checked up front with financial information, while acknowledging that such a change might take several years to fully implement. It would also likely require Congress to increase IRS funding at a time when it has been cutting the agency’s budget.
Many of the fraudulent tax returns are filed by using the Social Security numbers of people who are not required to file returns and thus don’t realize their identity was used to obtain illicit refunds. For example, potentially fraudulent returns were filed in 2011 using the Social Security numbers of 1,451 children under 14 years old; 19,102 dead people; 37,249 prisoners; and 753,000 people whose income level did not require a tax return.
The ability of criminals to file returns using the names of dead people has been a known problem for years. It has long been easy to get access to what is known as the “Death Master File,” which includes Social Security numbers of recently deceased people.
A criminal can use the Social Security number of a dead child, for example, to claim that person as a dependent in the year of death. It was not until December that Congress passed legislation to restrict the public’s ability to get such information, and it still remains available while regulations are written to implement the new rule.
Koskinen, the IRS commissioner, seemed stunned when he learned at a congressional hearing on Feb. 5 that the Death Master File was still publicly available, saying it represents a “target of opportunity” for criminals to steal identities.
The theft of taxpayer identities has become a thriving business. In one recent case, a Florida nursing home employee and an accomplice were found to have stolen the Social Security numbers and other information of 617 people, assembled the data in a spreadsheet, and then sought to sell it for $28,500. (The “buyer” was an undercover officer.) A California man was found to have stolen personal information from a state agency and filed false returns. An employee of an Alabama state agency was found to have stolen identity information from a database and sold it an accomplice who filed more than 1,000 false returns.
Some of the identity theft is committed by tax preparers from their offices. Preparers have filed returns using a client’s information and then had all or part of the refunds sent to themselves. One-third of the potentially fraudulent returns were filed by paid preparers, many of whom are not regulated, according to a Treasury report.
A government investigation, for example, found that one unnamed tax preparer submitted 5,506 potentially fraudulent returns, which resulted in refunds totaling $26.8 million.
During a Senate hearing last year, an incredulous Senator Claire McCaskill, a Missouri Democrat, asked why the IRS allowed 2,000 refunds to go a single address, an obvious sign of potential fraud. George, the Treasury inspector general for tax policy, responded that the IRS “needs a statutory fix in order to limit . . . the number of returns that are issued to the same bank account, debit account, what have you.”
“No, you’ve got to be kidding,” McCaskill responded.
A number of identity theft cases have been committed by tax preparers who have been accused in broader cases of fraud. For example, Rosa Ivette Colon,who ran a company called X-Press Taxes in Somerville, Mass., prepared hundreds of false returns, including two instances in which “she filed tax returns in individuals’ names without their knowledge,” according to the Justice Department. She was sentenced last year to 61 months in prison and was ordered to pay $400,000 in restitution. Her public defender declined comment.
The case of Rashia Wilson has helped publicize the issue of taxpayer identity theft, in part because of the colorful way the Tampa woman was said by authorities to have boasted about her activities.
She posted on her Facebook page that she was the “queen of IRS tax fraud,” along with a picture that showed her hoisting bound wads of bills, according to court records. She dared the government to catch her, writing on Facebook, “I’m a millionaire for the record, so if U think indicting me will B easy it won’t, I promise you!”, according to prosecutors.
The money piled up as Wilson submitted one false return after another, the indictmentaid. Using the identity of a taxpayer with the initials S.M.W., Wilson on April 15, 2009, obtained a $7,524 refund, the indictment said. Many similar refunds were obtained in the following three years.
Using those refunds, Wilson stayed at hotels, withdrew money from ATMs, and bought furniture, according to prosecutors. Then in May 2012, Wilson bought a 2013 Audi A8L, handing over a cashier’s check for $92,682.67, the proceeds of fraudulent federal tax returns and refunds, according to the indictment.
Wilson’s attorney, Mark O’Brien, said they have served as a wake-up call to the government. “This was a lot worse than most people could possibly comprehend,” O’Brien said in an interview. “The amount of money that has been stolen from the IRS is mind-boggling. I don’t even think they realize how much has been stolen, but they are certainly starting to understand, as you can see from recent investigations and prosecutions.”
Leasing property to a closely held corporation
Shareholders of closely held C corporations routinely lease real estate, equipment, and other property to their corporate entity. These leases can be held directly by the shareholder or through a separate entity, such as a partnership, LLC, or S corporation.
Of course, the corporation could directly purchase the item or lease it from an independent source. However, advantages that can motivate these leasing arrangements include the following:
a. Avoiding payroll taxes. Rental income from real estate is not subject to self-employment (SE) tax. A lease of real estate to a closely held corporation represents the ability to withdraw funds from the corporation without incurring Social Security or Medicare (FICA) taxes.
b. Avoiding corporate-level gain. Retaining ownership of real estate and other valuable tangible or intangible assets outside the corporation avoids the potential for triggering a gain within the corporation at either distribution or liquidation of the assets. If appreciated assets (those with an FMV in excess of adjusted tax basis) are distributed from a corporation, whether in liquidation or other form of distribution, gain must be recognized.
c. Retirement cash flow. Retaining valuable assets outside a controlled corporation allows the shareholder-lessor to continue to receive a cash flow stream in the form of rent or royalties, even though the shareholder is no longer actively employed by the corporation. This can allow a portion of the corporation income to flow to a retired shareholder or a shareholder who is uninvolved in the business operations.
d. Business transition. Retaining assets outside the corporation provides a natural segregation between the ownership of the business and the ownership of business assets. For example, a controlling shareholder-lessor may want to divest ownership and control of the business operations by disposing of some or all of the corporate stock, but retain a portion of the business assets for lease to the entity. This can help transfer ownership and control to a successor by minimizing the value of the corporation (e.g., when the corporation contains only operating assets, such as receivables and inventory, with fixed assets retained by the founder).
As you plan your business operations, keep these potential advantages in mind. It is also important to understand that, as with most areas of tax law, some restrictions and limitations apply to shareholder-to-corporation leasing transactions. Therefore, please contact us to discuss the details of how these arrangements should be structured before you sign the lease.
Taxing a child’s investment income
Some children who receive investment income are required to file a tax return and pay tax on at least a portion of that income (and possibly at the parents’ marginal tax rate). This is often referred to as the kiddie tax. The kiddie tax cannot be computed accurately until the parents’ income is known. Thus, the child’s return may have to be extended until the parents’ return has been completed. Additionally, if the parents’ return is amended or adjusted upon IRS audit, the child’s return could require correction (assuming the changes to the parental return affect the tax bracket). If a child cannot file his or her own tax return for any reason, such as age, the child’s parent or guardian is responsible for filing a return on the child’s behalf.
There are tax rules that affect how parents report a child’s investment income. Investment income normally includes interest, dividends, capital gains, and other unearned income, such as from a trust. Some parents can include their child’s investment income on their tax return. Other children may have to file their own tax return. Special rules apply if a child’s total investment income is more than $2,000. Finally, the parents’ tax rate may apply to part of that income instead of the child’s tax rate.
Note: Higher income individuals subject to the 3.8% net investment income tax (3.8% NIIT) may benefit from shifting income to and having their child claim investment income on the child’s tax return. This may be advantageous because the child receives his or her own $200,000 exclusion from the 3.8% NIIT.
Don't be a charity scam victim
When a natural disaster strikes, thieves often play on the goodwill of people by posing as representatives of real charities to steal money or get information to commit identity theft.
Bogus charities use several different tactics to get money and information from unsuspecting individuals. They may claim to be with, and use the names similar to, legitimate charities. They often use e-mail to steer people to bogus websites that look like real charity websites. Scam artists will contact people by phone or e-mail to get their victims to donate money or give them financial information. To avoid being scammed, don’t give your Social Security number, credit card information, bank account numbers, or passwords to anyone.
Only donations to qualified organizations are tax-deductible. For legitimate charitable contributions, contribute by check or credit card to provide documentation for tax purposes — never donate cash. Finally, if you suspect fraud, report it to the appropriate authorities.
Taxable tip income
If you receive tips on the job from customers, you must include those tips in the computation of your tax liability, if any. This includes tips directly from customers, tips added to credit cards, and your share of tips received under a tip-splitting agreement with other employees. The method for paying out charge tips is determined by the employer. Charge tips can be distributed daily or accumulated and paid through regular payroll. The value of noncash tips, such as tickets, passes, or other items of value, is also subject to income tax.
If you receive $20 or more in tips in any one month, from any one job, you must report your tips for that month to your employer. The report should only include cash, check, and debit and credit card tips you receive. Your employer is required to withhold federal income, Social Security, and Medicare taxes on the reported tips. You are not required to report the value of any noncash tips to your employer, but they are taxable.
Avoiding penalties on IRA withdrawals before age 59½
IRA owners can withdraw money from their account at any time and for any reason because the owner is in total control of this account. Most withdrawals from traditional IRAs will be at least partially taxable. To add insult to injury, the taxable portion of a withdrawal made before age 59½, referred to as an "early withdrawal," will be subject to a 10% penalty tax. (This penalty can be as high as 25% on early withdrawals from a SIMPLE IRA.) Finally, there can even be a 10% penalty tax assessed on a nontaxable portion of some early withdrawals from Roth IRAs.
The 10% penalty tax was implemented to encourage long-term saving for retirement, which is clearly a sound financial objective. But, sometimes financial circumstances make it necessary to withdraw retirement-oriented savings before age 59½. If you must make an early withdrawal, there are some ways to avoid the penalty tax. Early withdrawals from IRAs, including traditional IRAs, SEP accounts, SIMPLE IRAs, and Roth IRAs, can be exempt from the premature withdrawal penalty tax in the following cases:
• Withdrawals that count as substantially equal periodic payments (SEPPs) using an IRS-approved method.
• Withdrawals for medical expenses in excess of specific AGI levels.
• Withdrawals by military reservists called to active duty.
• Withdrawals for IRS levies.
• Withdrawals paid to a deceased plan participant’s estate or beneficiary after death.
• Withdrawals after becoming physically or mentally disabled.
• Withdrawals for first-time home purchases ($10,000 lifetime limit).
• Withdrawals for qualified higher education expenses.
• Withdrawals to pay health insurance premiums during unemployment.
Unlike early withdrawals from a qualified plan (e.g., 401(k)), the penalty exception allowing early withdrawals paid to the plan participant’s spouse or ex-spouse or dependent under a Qualified Domestic Relations Order (QDRO) pursuant to divorce proceedings is not available for early IRA distributions.
Caution: If a taxpayer chooses to take SEPPs, these payments must be calculated correctly using an IRS-approved method and taken for the requisite number of years. Otherwise, all pre-age-59½ withdrawals will be hit with the 10% penalty tax!
In a time of economic need, an IRA can be a source of liquidity even before age 59½. If the need is short-term, an IRA withdrawal and redeposit of the same amount within 60 days can be tax-free. If the need is long-term and before age 59½, the withdrawal may be fully or partially taxable, but one of the previously listed exceptions may be used to avoid the 10% early withdrawal penalty.
Please contact us to discuss IRA withdrawals before age 59½ or any other tax compliance or planning issue.
Taxing Social Security benefits
Some taxpayers must include up to 85% of their Social Security benefits in taxable income, while others find that their benefits are not taxable at all. If Social Security is your only source of income, your benefits probably won’t be taxable. In fact, you may not even need to file a federal income tax return. If you get income from other sources, however, you may have to pay taxes on at least a portion of your Social Security benefits. Your income and filing status will also affect whether you must pay taxes on your Social Security benefits.
A quick way to find out if any of your benefits may be taxable is to add half of your Social Security benefits to all your other income, including any tax-exempt interest. Next, compare this total to the following base amounts. If your total is more than the base amount for your filing status, then some of your benefits may be taxable. The three base amounts are:
• $25,000 for single, head of household, qualifying widow or widower with a dependent child, or married individuals filing separately and who did not live with their spouse at any time during the year.
• $32,000 for married couples filing jointly.
• $0 for married persons filing separately who lived together at any time during the year.
To avoid tax time surprises, Social Security recipients can request that federal income tax be withheld from their benefit payments. Withholding is voluntary and can be initiated by completing IRS Form W-4V (“Voluntary Withholding Request”), requesting to have 7%, 10%, 15%, or 25% (those are the only choices) withheld for federal income tax, and submitting the form to the local Social Security Administration office. Voluntary withholding can be stopped by completing a new Form W-4V.
Congress May Have Violated Taxpayer Confidentiality in IRS Scandal
The House Ways and Means Committee may have broken the law when it publicly disclosed confidential taxpayer information in a letter to Attorney General Eric Holder.
An article by David van den Berg in Tax Analysts discusses whether the House Ways and Means Committee violated Section 6103 of the Tax Code on April 9 when it voted to refer former IRS exempt organizations official Lois Lerner to the Justice Department for criminal investigation. The committee accused Lerner of depriving conservative groups of their constitutional rights, impeding official investigations, and putting confidential taxpayer information at risk.
House Ways and Means Committee chairman Dave Camp, R-Mich., submitted the referral by letter to Holder, and the committee posted it online. The letter included 80 pages of exhibits and three tables listing organizations that had applied for tax exemption, the status of their applications, and any problems the IRS had identified in their submissions.
“Ways and Means staff maintain that the committee acted within its rights when it posted the organizations' names and details online,” van den Berg wrote. “But several practitioners and scholars who spoke with Tax Analysts were skeptical of those assertions. Some said the committee may have broken the law.”
“The consequences of the committee's disclosure could be serious for the affected organizations and for the congressional process, according to some attorneys and academics,” he added.
Congress enacted taxpayer confidentiality protections in the Tax Reform Act of 1976 to address public concern over government agencies' use of taxpayer information. The statute in Section 6103 requires that tax returns and return information remain confidential except in cases when the Internal Revenue Code expressly says otherwise.
You thought about it for a long time. You talked about it for weeks. There were letters and emails and maybe even the occasional phone call. You were counting down the days.
And then it happened. You filed your taxes. You got your copies (and maybe a little refund on the side).
But now that’s it’s over, maybe you’re feeling a little let down. You haven’t heard from your tax professional in a while. And you’re getting the sense that maybe she* wants to move on. Spoiler alert: She probably does.
Let me break it down for you: taxes may be complicated but tax professionals are not. Tax professionals don’t send mixed messages. When it comes to yours, the truth may be that she’s just not that into you. Here are 11 reasons why:
1. You lie about what you’ve been doing. I don’t care what you told IRS or your mother or your wife. You need to tell your tax professional the truth. No matter how ugly it is.
Those of us who have been in the business for awhile are pretty quick to spot a lie. Those fake receipts? Those suspicious looking tip logs that are remarkably all in the same color of ink? The way you break out into a little sweat every time we ask about freelance income? We’ve got it all figured out. And we’ve seen and heard worse. But you looking us in the eye and telling us a lie? It’s insulting. And it doesn’t get you anywhere.
2. You don’t call like you said you would. These days, it’s so easy to call or send a quick email at almost any time of day. But when you’re taking days – or weeks – to return calls or emails, your tax professional know something’s up. And she doesn’t have the time and energy to keep chasing you. She’s got other clients who will treat her better.
3. You call too often. If, on the other hand, you have your tax professional on speed dial, you might want to rethink things. It’s good to check in – once in awhile. But you don’t need to call in the middle of the night because you’re worried about the state of your depreciation schedule. If your tax professional said she’d have something for you on Friday, don’t call on Tuesday to see how it’s going (it’s fine). If the IRS hasn’t called about an audit, that’s a good sign. And no, your tax professional can’t make your refund come any faster.
4. You always stand her up. Nobody wants to talk about taxes… Well, except maybe tax professionals. But when you set an appointment to talk, your tax professional expects you to show up. And you’re expected to bring all of the things you were asked to bring. Surprisingly, it’s impossible to talk about an audit reconsideration for a denial of mileage when your tax professional still hasn’t see your mileage logs. And that Power of Attorney you were supposed to sign? If you don’t sign it, your tax professional can’t talk to IRS on your behalf. And those deadlines in those IRS letters? Those are real. They’re not suggestions. So if you’re thinking that you can try again next week, you’re wrong. Your tax professional doesn’t want to talk about it next week, she wants to talk about it now.
5. You’re cheap (a/k/a You don’t pay your bills). Your tax professional has likely seen your books and she knows about your income. She also knows about your spending habits. She knows you just paid $250 for a steak dinner at Capital Grille. She knows that you showed up for your audit discussion in a Lexus . She knows that you just had your house re-roofed (it’s a capital improvement). Tax professionals aren’t nonprofits: they’re professionals. So pay your bills.
6. You complain about your bills. When your tax professional took you on as a client, she should have outlined exactly what the fee structure would be. It might be a flat fee for a project or it might be hourly. But you knew what the scoop would be. So don’t complain about it after the fact. If the work is done, then it’s time to pay up. Don’t explain that you could get the same work done cheaper down the street. And don’t try to bargain down the bill after the fact. You don’t walk into the Gap GPS -1.42% and ask to pay $19 for $48 jeans. Again, see #5.
7. You complain about your tax bills. Paying taxes can be painful. And it’s the job of your tax professional to help you pay the right amount: not too much, not too little. But tax professionals aren’t magicians or miracle workers. Nobody can (honestly) turn a $10k tax liability into a refund. The very best tax professional can only do what she can with the information you’ve provided. If you’ve underpaid during the year, if you lost your receipts, if you’ve made other mistakes? It happens. But those tax penalties are yours. And that liability is yours. It’s not the end of the world and it can be fixed. But first, you have to stop complaining.
8. You’re sloppy. Ugh. I know you’ve been doing this on your own for awhile but there comes a time when your financial records should not resemble the contents of a junior high locker. No one expects perfection but there has to be a line. And that line is somewhere between a neat, Quickbooks file and wading through fast food liners and Christmas letters in an effort to find business receipts. It’s not unusual to find “interesting” items while plucking through records (including the gold tooth a fellow tax professional found in a client’s forms this year) but it’s not fun. Show a little bit of self-respect and clean your records up a bit.
9. You’re too needy. Relationships can be tough. And it’s natural that during the course of preparing your taxes, you’re going to share some pretty personal stuff with your tax professional. But it’s a pretty big jump from “Here’s a copy of my receipt for my charitable contributions” to “I’m cheating on my wife.” Your tax professional is not your therapist or your marriage counselor. Your tax professional is not your priest, your doctor or your fortune teller. Don’t make things awkward by saying too much. We need to be able to look you in the eye after the fact.
10. You live by your own rules. I know. You like to keep things exciting. It’s fun to step out on your own. But here’s the thing: tax professionals like rules. We don’t like to color (or print) outside the lines. When we’re offering you professional advice, we expect that you’re going to follow it unless you tell us different. And those “sign here” stickies are there for a reason. Use them.
11. You sneak around. Don’t think we don’t know what you’re up to… When you’re on the phone with IRS, we hear about it. All of those promises you made to IRS? Those eventually come back to haunt you. Those whispered conversations when you said you could arrange your own installment agreement (when really you couldn’t)? Yeah, we know. The powers granted to your tax professional under a federal form 2848 (Power of Attorney) are fairly broad and unless specifically excluded on the form, include the right to receive and inspect confidential tax information and to talk to the IRS about your tax matters. So if you’re talking to both of us at the same time – but you’re not sharing – we’re going to find out about it.
(And don’t think we don’t know when you’ve been fooling around with TurboTax. We can smell the laser jet ink on you.)
Listen, I get it. It’s tough to find the one. You know, the one that you can imagine spending the rest of your financial life with. But don’t force it. Sometimes, it’s just not going to happen.
Relationships – of all kinds – are a two way street. If you, as the client, realize that things aren’t working out, it’s time to walk away. But be kind. After all, tax professionals have feelings, too.
* With no disrespect meant to my male tax professional colleagues for the use of the feminine pronoun: they’re just as eager to break up with you as the ladies…
Kelly Phillips Erb Forbes Contributor
Employers Given PINs to Verify Federal Tax Deposits Made by Third-parties: But it does not absolve Employers from penalties:
Amit Chandel CPA Principal, Focus CPA Group, Inc
Employers Given PINs to Verify Federal Tax Deposits Made by Third-parties: The IRS recently issued Personal Identification Numbers (PINs) to approximately 500,000 employers that use third-party providers to make deposits on their behalf. The PINs were issued so that employers whose deposits are made using bulk and batch processing can verify that deposits were made on their behalf by the third-party providers. [ Editor's Note: The employer is responsible for depositing the payroll taxes and can be subject to the Section 6672 penalty.] These PINs generally only allow employers to monitor when the deposits are made. This is part of a campaign to minimize instances of third-party service providers failing to pay the federal taxes of employers. See www.irs.gov/uac/EFTPS-The-Electronic-Federal-Tax-Payment-System for more information on the "EFTPS Inquiry PIN."
The answer to both questions is the same: it depends. For example, my uncle has a simple tax return and pays $250 in preparation fees. On the other hand, I had a client whose return took over a week to prepare when I worked in a large firm, which cost the client around $100,000.
A good CPA may cost you more upfront but will pay off in the long run because he or she is thorough. Anyone can drop numbers in software. However, a CPA will analyze the situation to look for tax savings opportunities and help you plan for next year – in short, they become your trusted advisor. I once had a client whose former preparer had cost her an additional $4 million in taxes because he didn’t consider accelerating her fourth quarter estimated tax payment to December from January.
If you are on a budget (and who isn’t?), there are actions you can take to make working with a CPA more affordable:
So if you want to ease your stress, save money and work with someone who understands and keeps up with tax law, consider a CPA. If you are asking yourself if you should hire a CPA, I happen to think a CPA is a wise investment. For help finding a CPA, go to the AICPA’s 360taxes.org, which offers tax resources, tips, FAQs, checklists and much more.
Melanie Lauridsen, Technical Manager - Taxation, American Institute of CPAs
“Use the force, Luke.”
We may all need the force soon.
Suppose the House Ways and Means Committee asked the IRS for your tax returns and released them to the public without your consent. Everyone in the Empire would know a whole lot more about you than you would want them to know. Impossible, you say? Well, maybe, maybe not.
In early April, House Ways and Means Committee Chair Dave Camp sent a letter to Attorney General Eric Holder to refer former IRS official Lois Lerner to the Justice Department for criminal investigation. Lerner is at the center of the IRS’s abusive treatment of conservative groups that were applying for tax-exempt status as social welfare organizations. And House Republicans are obsessed with her.
Camp posted that letter online. And here’s the problem — the letter included an attachment of more than 80 pages. Within those pages were three tables listing organizations that had applied for tax exemption, the status of their applications, and problems the IRS screeners indentified in their submissions. Camp and the committee did this on a party-line vote, and they say they had the authority to disclose the information.
Some of the groups – like Crossroads GPS – are politically active and involved in the controversy about how the IRS was handling conservative organizations. But information was also disclosed regarding what appear to be innocent bystanders. I mean, I don’t think the Miss America Foundation and the World Wildlife Fund are run by Karl Rove.
Section 6103 of the Internal Revenue Code, provides for the confidentiality and disclosure of tax returns and return information. Section 6103 was enacted in 1976 as a direct response to the abuses of the Nixon administration. In complying with the tax laws, we are required to turn over a lot of information to the government. And the government is required, by law, to protect that information. So, this is a statute that I value deeply. And it’s also a statute the IRS has been very good at protecting and enforcing. You see, it remembers Nixon, too.
The House Ways and Means Committee is one of only three committees that has the direct authority — under section 6103(f) — to require the IRS to turn over specific taxpayer information. The other two are the Senate Finance Committee and the Joint Committee on Taxation. That gives these committees great power. And as Winston Churchill is credited with saying, with great power comes great responsibility.
Some think the Ways and Means Committee may have broken the law when it released the tax information it did here. If it did, the taxpayers involved can probably do nothing about it.
Tax Analysts broke a great story on this today. David van den Berg reports that this episode raises several questions: What are the rules governing the taxwriting committees’ power of disclosure? Are there limits to what they can release? And how can taxpayers whose information is released seek redress?
It can be argued that what Ways and Means released is or is not confidential tax information. But I believe this leads us down a dangerously slippery slope. When Congress doesn’t respect taxpayer confidentiality, it doesn’t respect taxpayers.
And I’m not giving Democrats a pass on this. Oh, the Democrats on Ways and Means said some great things as Camp was getting ready to disclose the information on these groups. “The very disclosure that you put to vote today violates the very taxpayer protections this committee meant to create,” said Ways and Means ranking minority member Sander M. Levin, a Democrat who, like Camp, is from Michigan. Let’s see what the Democrats have to say when they are back in power and going after the Koch brothers. It’s less and less about us taxpayers and more and more about the power of the Washington elite.
I would agree with Alan J. Wilensky, a Minneapolis tax lawyer and former acting Treasury assistant secretary for tax policy, who told van den Berg, “I don’t know that they violated the letter of the law, but it seems to me they have violated the spirit of the law.”
I don’t know Dave Camp, but I respect him. I’ve heard him speak and have been greatly impressed. He pushed for tax reform at a time when it was all but impossible and persevered. If we get tax reform in the future, it will be because he provided the base for it. So I can’t understand why he would do this. Could he possibly have a black helmet complete with face shield and complex breathing apparatus?Star Wars – Darth Vader (Photo credit: Wikipedia)
“Luke, I am your father.”
Good grief. May the force be with us all.
Congress Asks IRS to Probe Doctor Identity Thefts and Tax Fraud
WASHINGTON, D.C. (MAY 12, 2014)
The Indiana congressional delegation has sent a letter to Internal Revenue Service Commissioner John Koskinen asking for an investigation into reports that hundreds of Indiana doctors and health care professionals have been victimized by identity theft.
They said the identities of medical professionals in Indiana have been used to fraudulently obtain federal and state tax refunds. The report follows on the heels of similar concerns from lawmakers in New Hampshire last month, who also asked the IRS identity theft and tax fraud involving over 100 physicians and health care providers in that state (see Physicians and Health Providers Hit by Tax Fraud).
In the letter from the Indiana delegation, which was sent last Friday, the lawmakers wrote, “We respectfully request that you fully investigate this matter and keep us informed of progress regarding this grave situation, including safeguards your agency plans to implement to prevent further victimization of taxpayers.”
They noted that the situation was brought to their attention by the Indiana State Medical Association. After they received this information, the lawmakers learned that someone from the IRS Criminal Investigation Division had contacted the medical association about the fraud and has been helpful.
“While we are heartened by this development, we believe that all levels of the IRS responsible for detecting, investigating, prosecuting and preventing patterns of fraud like this should be fully engaged,” the lawmakers wrote. “Any single case of identity theft is troubling and should be investigated, but fraud on such a large scale is especially worrisome and deserves the full attention of the IRS. To the extent allowed by law and applicable regulations, we respectfully request that you fully investigate this matter and keep us informed of progress regarding this grave situation, including safeguards your agency plans to implement to prevent further victimization of taxpayers.”
Yul Brynner’s Tax Spat Augurs Rush to Give Up U.S. Passports
ZURICH (MAY 12, 2014)
BY CATHERINE BOSLEY
Almost 50 years after Oscar-winning actor Yul Brynner gave up his passport at the U.S. embassy in the Swiss capital, the number of Americans relinquishing their citizenship jumped 47 percent in the first quarter.
Expatriates giving up their nationality climbed to 1,001 in the three months through March from 679 a year earlier, according to Federal Register figures released May 2. The number tripled to 3,000 in 2013 from the previous year, Internal Revenue Service data shows.
While Brynner, the star of “The Magnificent Seven,” renounced his American citizenship in Bern following a dispute with the IRS, tougher asset-disclosure rules being introduced in July are prompting more of the estimated 6 million Americans living overseas to weigh giving up their passports. The appeal of U.S. citizenship for expatriates dimmed further as 106 Swiss banks prepare to turn over account data on American clients to avoid prosecution for helping tax evaders.
“I feel caught in the battle between the government and the banks,” said John Annen, a 46-year-old American mathematician who has lived for more than decade in Switzerland. “The U.S. government is the biggest threat to my style of living.”
The U.S., the only nation in the Organization for Economic Cooperation and Development that taxes citizens wherever they reside, stepped up the search for tax dodgers after UBS AG, Switzerland’s biggest bank, paid a $780 million penalty in 2009 and handed over data on about 4,700 accounts.
While Zurich-based Annen said his American citizenship makes him an “unwanted customer” of Swiss banks, he hasn’t considered relinquishing his passport.
That makes him an exception. More than two-thirds of 400 U.S. expatriates surveyed in November by Zurich-based deVere Group said they had considered giving up their passports.
Banks in Switzerland, the largest cross-border financial center with $2.2 trillion of assets, have discovered that thousands of their clients have dual U.S.-Swiss citizenship, obliging them to make voluntary disclosures, said Matthew Ledvina, a U.S. tax lawyer at Anaford AG in Zurich.
“Those banks have been checking through accounts and informing clients they have a big tax problem,” said Ledvina. “The number of people renouncing their citizenship will probably rise as the banks enforce U.S. tax rules.”
The U.S. has allowed some Swiss banks seeking to avoid prosecution for handling undeclared American money a two-month extension until the end of June to deliver account data.
Some institutions reject certain American clients “for reasons of risk or cost evaluation,” said Sindy Schmiegel, spokeswoman of the Basel-based Swiss Bankers Association, which represents more than 300 banks.
Both UBS and Credit Suisse Group AG, the biggest Swiss banks, said they offer Americans checking and savings accounts. UBS also will grant mortgages, though not accounts for securities transactions.
While it’s fair for the U.S. to pursue tax evaders, the Foreign Account Tax Compliance Act, which will compel foreign banks to share the account details of American clients, is “causing a lot of problems,” said Marylouise Serrato, executive director of Geneva and Washington-based American Citizens Abroad, which campaigns for taxation based on residency. The more than 20,000 Americans living in Switzerland have faced particular challenges, given the country’s tradition of bank secrecy, she said.
The July 1 implementation of FATCA “is a reflection of the misunderstanding in Washington what it means to be an average American living and working overseas,” she said.
FATCA requires U.S. financial institutions to impose a 30 percent withholding tax on payments made to foreign banks that don’t agree to identify and provide information on U.S. account holders.
When Zurich’s Iowa-born mayor, Corine Mauch, gave up her U.S. passport last year, she said that while the move wasn’t motivated by U.S tax rules, she wouldn’t “miss the U.S. tax bureaucracy either.”
The U.S. Embassy in Bern declined to comment for this story.
Brynner, who won an Academy Award for his role in “The King and I,” renounced his American citizenship in 1965, saying he wanted to be closer to his family who lived in Switzerland, according to the 1989 biography—“Yul: The Man Who Would be King”—by his son, Rock Brynner.
“It’s really simple to run afoul of the law,” said Martin Naville, chief executive officer of the Swiss-American Chamber of Commerce in Zurich. While most banks have some kind of offer for Americans, “you’re not really welcomed with opened arms,” he said.
The additional compliance costs for companies to ensure that Americans they hire are filing the correct U.S. tax returns and asset-declaration forms are $7,000 per person, according to Ledvina. For individuals, U.S. accounting costs are about $4,000 per year.
“For every person who has actually given up their citizenship there are 100 Americans abroad who are throwing up their hands at their tax situation,” said David Kuenzi, founder of Madison, Wisconsin-based Thun Financial Advisors. “It's not about people not wanting to pay their taxes—it’s about the infuriating difficulty of paying your
Shareholders to Pressure Google on Tax Payments
BY MICHAEL COHN
MAY 13, 2014
A group of Google investors is expected to push for a shareholder resolution at the search giant’s annual general meeting Wednesday in Mountain View, Calif., to pay more than $2 billion in taxes worldwide.
Google has come under fire, particularly in Europe, from advocates who want the company to increase the amount of taxes it pays. The company uses tax strategies dubbed the “Double Irish” and the “Dutch Sandwich” to route profits through Ireland and the Netherlands. The company has also been accused of using shell companies in Bermuda and other low-tax countries to shelter at least $33 billion of revenue.
Ahead of the shareholder meeting on Wednesday, more than 134,000 people from around the world have signed onto a petition in support of the resolution urging Google to pay more taxes. The petition was signed by more than 2,000 Google shareholders, joined by nearly 11,000 investors with Vanguard, Fidelity and iShares, which are among the four largest institutional investors in Google.
The petition claims that Google exploits cross-border tax loopholes across the world and says that in the U.K., Google only paid £11.6 million ($19.5 million) despite making a £5.5 billion ($9.25 billion) profit channeling its profits through Ireland to Bermuda where no taxes are levied.
In the U.S., Google has been investigated by Sen. Carl Levin, D-Mich., for deferring taxes on over $24 billion of revenue. In Italy, the company is being audited by the Tax Police for its tax avoidance strategies, and its offices have been searched. In France, Google's tax avoidance prompted the government to institute policies to prevent tax evasion by Internet giants, and the French government recently assessed back taxes on Google equivalent to $1.38 billion for the past decade.
The shareholder resolution states, “Shareholders request the board of directors adopt a set of principles to address the impact of Google’s tax strategies on society, with particular focus on Google’s employees, customers and suppliers. In addition, the board should publish annual reports to shareholders, at reasonable cost, omitting proprietary information, discussing the implementation of these principles, beginning December 2014.”
The proponents behind the resolution said Google has not been willing to speak to them about the issues raised in their proposal, but they said the company has filed a statement in opposition.
Senate Moves Forward To Extend Tax Breaks For 2014
Kelly Phillips Erb Contributor Forbes
If you’re still smarting from writing out that check to pay your 2013 tax bill, some relief might be on the way: the tax extender bill is back.
After initially backing away from renewing a number of expired tax breaks (for a list of those provisions which expired at the end of 2013,check out this prior post), the Senate has agreed to consider the provisions again. That’s the good news for taxpayers. The bad news? If they give all of the tax breaks the thumbs up, it would add about $85 billion to the budget deficit.
If you feel like you’ve heard this one before, you have. This notion of letting tax breaks expire – and then extending them retroactively is nothing new. It’s become quite the fashion in Congress to let tax breaks expire so that they can talk about costs saved and then plug them back in – but only for a little while. Most of the time, tax extenders last just a year or two. The current bill would extend the breaks for 2014 and 2015.
The bill, S. 2260, cleverly named the EXPIRE (Expiring Provisions Improvement Reform and Efficiency) Act, is sponsored by Sen. Ron Wyden (D-OR). It was introduced on April 28, 2014, and has moved through the Senate Finance Committee. Today, the Senate moved to consider the bill with only Sens. Tom Coburn (R-OK), Jeff Flake (R-AZ) and Mike Lee (R-UT) voting no.
Here are a few extenders highlights for individual taxpayers:
The bill also contains a host of provisions for businesses including extensions for extending Empowerment Zone tax incentives and the renewing the Work Opportunity Tax Credit.
And, just in time for the Preakness, Congress has rushed to extend the three year cost recovery period for all race horses (whew, right?).
Most significantly, for business owners, the bill would extend the 50% bonus depreciation for certain qualified property and would increase the amount expensed under section 179.
The Senate version of the bill, as written, is 82 pages long. You can read the entire bill as proposed here (downloads as a pdf). Whether it will make it through the Senate is not certain. It’s even less clear how it will be received in the House. The House has been hammering away at its own version of the bill with an eye towards making many of the breaks permanent (as it did with research and development tax breaks recently). The problem, of course, with making these breaks permanent, is that the result is a dip in tax revenues and an increase to the deficit.
Should the priority be to cut taxes or the deficit? The bill, as currently proposed, can’t do both. Expect to see more debate about these provisions in the next few weeks.
Tax Inspectors Uncover a Stolen Van Gogh Painting
BY MICHAEL COHN
MAY 14, 2014
A group of tax inspectors in Spain were surprised to find a long-lost painting from the brush of Vincent Van Gogh inside the safety deposit box of a tax scofflaw.
Spanish authorities have been cracking down on tax delinquents as the country slowly emerges from recession. As part of the effort, the tax authorities got access to 542 bank safety deposit boxes of 551 individuals who owed over 300 million euros in taxes in an effort to seize some of their hidden assets.
They found a secret prize in the safety deposit box of one tax debtor, an 1889 Impressionist landscape entitled “Cypress, Sky and Country,” which went missing from a museum in Vienna nearly 40 years ago, according toReuters.
The 13.7- by 12.5-inch painting has not yet been authenticated, but so far the tax authorities have managed to seize about 2 million euros worth of assets from the safety deposit boxes they’ve been able to open so far. Over a hundred of the boxes have not been opened yet because of court challenges, according to Artnet News. A photo of the recovered painting is shown in the Artnet article. The self-portrait in this article is a public domain image of one of Van Gogh's paintings, which thankfully remains on exhibit at the Van Gogh Museum in Amsterdam.
BY ROGER RUSSELL - Accounting Today
Choosing the "right" entity type is a crucial decision for businesses that comes right at the beginning of the entity lifecycle.
Although taxes are a significant driver in determining which entity structure to select, they are far from the only factor to consider, according to Barbara Weltman, author of J.K. Lasser's Small Business Taxes and a contributing author to the Your Income Tax series. "Among the consequences to consider are tax rates, access to capital, liability, nature and number of owners, Social Security and Medicare taxes, restrictions on accounting methods, the owner's payment of company expenses, filing deadlines and extensions, multistate operations, and exit strategy," she said.
"If your business owes money, you might be at risk if you are a sole proprietor or a general partner in a partnership," Weltman indicated. "In all other cases, you do not have personal liability." She also noted that a C corporation may make it easier to raise money. "Equity crowdfunding, which allows businesses to raise small amounts from numerous investors, is effectively limited to C corporations," she explained. "S corporations cannot have more than 100 investors, while partnerships and LLCs would have difficulty in divvying up ownership among an ever-changing number of owners." A C corporation can also be a vehicle for rewarding employees with ownership through an employee stock ownership plan, she added. "You have to have a corporation for that."
HOW MANY OWNERS?
"There are factors to consider when choosing the proper business structure, which include evaluating the risk of significant liabilities resulting from the business and measuring tax consequences," agreed Theresa Racek, CPA, a senior manager at Top 100 Firm ParenteBeard LLC. Furthermore, near-term gains and losses, as well as personal wealth, should be assessed, along with identifying how much capital will be necessary.
One key factor of determining who will own the business may, by necessity, dictate some of the options. For instance, as it relates to S corporations, the number of shareholders impacts an individual's options and a person is required to be a U.S. citizen if they are considering a shareholder position.
Regarding sole proprietorships, there are various advantages as it relates to reporting and filing, Racek indicated. "However, the disadvantages of no liability protection and self-employment taxes are something to consider. Moreover, by definition, a sole proprietorship applies to one person - except in some cases involving a husband and wife. Otherwise, if there are two individuals, some type of partnership is required."
"You have to rank the factors in order of what's most important to you," suggested Roger Harris, president of Padgett Business Services. "There are different things to consider, including taxes, legal protection, and the complexity that an entity may put on you regarding how you pay yourself. In some cases, tax may be the driving reason, while in other cases, legal protection may be. If you talk to a lawyer, you may hear one suggestion, your tax advisor may have another suggestion, while a businessperson may give you a third recommendation."
If you're starting from scratch, you have to consider the nature of the start-up contributions, said Harris. "Does one provide better entity structure or tax benefits based on what you are contributing to start the business? How do you anticipate dividing future profits and losses? These all have to be discussed."
Harris cautioned that the most important thing is to get with someone who is knowledgeable before you do it and understand what it is you are doing.
Regardless of the entity, Harris said, it is vital that anytime you have more than one person, always negotiate a buy-sell agreement immediately and put it in writing. "This is the most optimistic you will ever be about this business. If you can't negotiate an agreement today when you're optimistic, based on the positive belief that all will work out perfectly, how do you think you can possibly negotiate when the business is not going well, or negotiate with a spouse because someone passes? No matter what entity, if two or more are in it, make sure you negotiate a buy-sell agreement while you're still friends."
"I ask new start-ups what type of business they are looking to create," said Salim Omar, president of the Cliffwood, N.J.-based Omar Group CPAs. "If it will be a small business run out of the home with no liability issues, then they don't really need liability. I'll advise them to run the business as a sole proprietorship to get started, since often you don't know if it will be viable. If it takes off, you can go with forming an LLC or an S corporation."
"A sole proprietorship is a very inexpensive way of getting started. And if you need to dissolve it, you can just walk away from it. With a corporation or an LLC, you need to go through a formal dissolution."
"With a partnership, there's no liability protection," he noted. "If it's small, it can be two owners with an operating agreement or a partnership agreement. ... It makes sense to have the operating agreement or partnership agreement down on paper, rather than have the members think or assume what their responsibilities are."
"If there are liability issues, go right into an LLC since you'll need legal protection," he said. "Where the choice is between an LLC and an S corporation, the benefit of the S corporation is some saving on self-employment tax. For example, let's say the business makes a $100,000 profit, and the owner takes a salary of $75,000, and a dividend of $25,000. He would save 15.3 percent times $25,000, or $3,825. Of course, the salary paid to the owner must be reasonable - he can't just underpay himself in order to escape the self-employment tax."
START WITH STRATEGY
"Don't let the tax tail wag the entity dog," advised Kathi Mettler, director at WTP Advisors. "It shouldn't be the tax structure that governs the business strategy."
"Often, tax planners get so caught up in saving taxes that they miss the overall scope of the business strategy. Entity selection and the 'check the box' [on Form 8832] election make it so much more flexible, but you still need to make sure you're looking at the big picture and not planning in a vacuum," she said. "Most businesses start out as a mom and pop or sole proprietorship. A sole proprietor might find some desire for products outside the U.S., and engage in export sales while still a sole proprietor. Eventually, as they grow, at some point they will consider incorporating."
"Things have evolved," observed Larry Gradzki, director of taxation at New York and New Jersey-based firm SaxBST. "The entity of choice in the 1980s was the S corporation, now it's the LLC. It gives the protection of a corporation, but the flexibility of a partnership."
In fact, single-owner LLCs are taxed as a sole proprietorship, and multiple-owner LLCs are taxed like partnerships, so there are no tax consequences per se. However, some states may impose added taxes on LLCs in the form of a franchise tax, in addition to the state income tax. "There is more flexibility with the LLC and the partnership than with an S corporation," Gradzki noted. "There's no cookie-cutter solution where one size fits all," he explained. "You go through a decision tree where you evaluate what the business goals are, who the owners are going to be, what kind of growth you foresee, where will you expand, and numerous other factors."
Tax Information for Students Who Take a Summer Job
Many students take a job in the summer after school lets out. If it’s your first job it gives you a chance to learn about the working world. That includes taxes we pay to support the place where we live, our state and our nation. Here are eight things that students who take a summer job should know about taxes:
1. Don’t be surprised when your employer withholds taxes from your paychecks. That’s how you pay your taxes when you’re an employee. If you’re self-employed, you may have to pay estimated taxes directly to the IRS on certain dates during the year. This is how our pay-as-you-go tax system works.
2. As a new employee, you’ll need to fill out a Form W-4, Employee’s Withholding Allowance Certificate. Your employer will use it to figure how much federal income tax to withhold from your pay. The IRS Withholding Calculator tool on IRS.gov can help you fill out the form.
3. Keep in mind that all tip income is taxable. If you get tips, you must keep a daily log so you can report them. You must report $20 or more in cash tips in any one month to your employer. And you must report all of your yearly tips on your tax return.
4. Money you earn doing work for others is taxable. Some work you do may count as self-employment. This can include jobs like baby-sitting and lawn mowing. Keep good records of expenses related to your work. You may be able to deduct (subtract) those costs from your income on your tax return. A deduction may help lower your taxes.
5. If you’re in ROTC, your active duty pay, such as pay you get for summer camp, is taxable. A subsistence allowance you get while in advanced training isn’t taxable.
6. You may not earn enough from your summer job to owe income tax. But your employer usually must withhold Social Security and Medicare taxes from your pay. If you’re self-employed, you may have to pay them yourself
Top Individual income tax brackets from around the world.
Top 10 Weirdest Taxes
In the mix of some really strange laws out there are some equally weird tax penalties and breaks. Here are the world’s top 10 weirdest taxes.(3)
10. Tethered hot air balloon tax, U.S.
Have a hot air balloon? Sure you do, who doesn’t? Well, taking that puppy for a ride every now and again will keep you from having to pay taxes on it. Untethered hot air balloons qualify for a tax break in some states. But be careful: If it goes unused over the course of a year, you’ll be paying property taxes on it.
9. South Africa’s World Cup tax bubble
Your country wants to bid on hosting the FIFA World Cup? Make sure the leaders know that they must agree to exempt the event and all proceeds from all national and local taxes in order to do so.
8. Switzerland’s banking tax havens
We all know about Swiss bank accounts. But did you know why they’re so popular among the well-to-do? Tax regulations. If you’re making millions of dollars, storing it all in a Swiss bank account could keep you from having to pay your country’s personal income tax on all that dough.
7. Ireland’s exempted artists
If you’re looking to quit your day job and take up writing, painting or sculpting, think about moving to Ireland. Though certain criteria must be met, artists creating and making money from original work are subject to an exemption of up to about $55,000.
6. British film tax deduction
The U.K. is pretty into keeping its culture alive. So any film created that bears the title “culturally British” will be eligible for tax deduction. But it’s not as simple as waving a British flag; in order to get the deduction, directors must submit their film to a committee that ranks it based on a point system. Films have to score at least 16 out of 31 points to be eligible for a 25% deduction rate.
5. Denmark’s cow flatulence tax
This needs little explanation. With a mind for “going green,” Denmark has vowed to cut down on Europe’s methane gas emissions, which account for 18% of the continent’s greenhouse gasses. Slaughterhouses and farms owe a tax per cow, and in Denmark they have the highest rate: $110.
4. Swedish baby names
Choosing a name for your new baby is hard enough; but choosing a name that Sweden’s tax agency will approve of is harder. All baby names must first be approved or parents can face a fine.
3. Canada’s cereal toys tax break
No, this rule isn’t about claiming your Cheerios as an exemption. In Canada, cereal companies can get tax breaks for placing toys in their boxes. Probably the weirdest thing about this tax law is the addendum that the toys included can’t be in the category of “beer, liquor or wine.”
2. Russia’s beard tax
This law doesn’t exist in Russia today, but it’s still weird enough to make the list. In the 1700s, Peter the Great, the then czar of Russia, wanted his male population to look more like the clean-shaven men of Europe. So obviously, the answer was to tax men based on their beards.
1. China’s smoking tax revenue
In the U.S., we think of cigarette companies as facing harsh taxes and their product being taxed higher than any consumer good in the country. But in certain parts of China in 2009, the exact opposite was true. To counter an economic crisis, whole villages were given quotas of cigarette cartons to buy; the idea was to make money off the taxes and kick-start the economy. China is still facing health dilemmas regarding this weird tax law, including the World Health Organization’s estimate that Chinese people now smoke one out of every three cigarettes in the entire world.
IRS Tells Employers Not to Put Workers in Health Insurance Exchanges
WASHINGTON, D.C. (MAY 27, 2014)
The Internal Revenue Service has ruled that employers are not in compliance with the Affordable Care Act if they simply reimburse employees for buying insurance through one of the exchanges instead of establishing a health insurance plan for employees.
The ruling effectively prevents employers from “dumping” their employees into the new health exchanges rather than providing workers with health coverage, according to The New York Times.
The IRS posted the information in the form of questions and answers on its Web site this month, asking, “What are the consequences to the employer if the employer does not establish a health insurance plan for its own employees, but reimburses those employees for premiums they pay for health insurance (either through a qualified health plan in the Marketplace or outside the Marketplace)?”
In response, the IRS pointed out that under IRS Notice 2013-54, such arrangements are described as employer payment plans and generally do not include an arrangement under which an employee may have an after-tax amount applied toward health coverage or take that amount in cash compensation. Thus, employers may be subject to penalties of up to $100 per day per employee if they simply reimburse employees for getting their own health insurance through one of the health care exchanges rather than setting up a health insurance plan for employees.
“As explained in Notice 2013-54, these employer payment plans are considered to be group health plans subject to the market reforms, including the prohibition on annual limits for essential health benefits and the requirement to provide certain preventive care without cost sharing,” said the IRS. “Notice 2013-54 clarifies that such arrangements cannot be integrated with individual policies to satisfy the market reforms. Consequently, such an arrangement fails to satisfy the market reforms and may be subject to a $100/day excise tax per applicable employee (which is $36,500 per year, per employee) under section 4980D of the Internal Revenue Code.”
Notice 2013-54 also explains how the Affordable Care Act’s market reforms apply to certain types of group health plans, including health reimbursement arrangements, health flexible spending arrangements and certain other employer health care arrangements, including arrangements under which an employer reimburses an employee for some or all of the premium expenses incurred for an individual health insurance policy, the IRS pointed out.
For further information, the Labor Department has also issued a similar notice, DOL Technical Release 2013-03, the IRS noted, and the Department of Health and Human Services plans to issue guidance soon to reflect Notice 2013-54. On Jan. 24, 2013, the Labor Department and HHS issued frequently asked question documents that addressed the application of the Affordable Care Act to health reimbursement arrangements.
ObamaCare Weighing Less on Hiring Plans
RALEIGH, N.C. (MAY 27, 2014)
The effects of the Affordable Care Act may be weighing less heavily on the hiring plans of U.S. privately held companies this year, according to a survey of accountants who work with small businesses.
The financial information company Sageworks found that slightly more than half of accountants working with privately held businesses said that the ACA is making it less likely that their clients will hire in the next 12 months. That is a smaller percentage than Sageworks found in a previous survey it conducted last summer in which two-thirds of the respondents said the ACA was making it less likely that private companies would hire in the year ahead.
In addition, a slightly larger percentage this year predicted the ACA would have no impact on hiring in the next year. Of the more than 500 firms surveyed in April and May of this year, 19 percent foresaw no impact on hiring, 20 percent were unsure and 5 percent noted that the implementation of the ACA will lead to more hiring in the next 12 months.
Unless there are further delays, the employer mandate requiring employers with over 50 full-time employees to provide health insurance to full-time workers is scheduled to begin in 2015 for businesses with more than 100 employees and in 2016 for businesses with 50 to 99 employees.
“Private companies in the United States are continuing to grow at a healthy rate, and while planning for the Affordable Care Act is still impacting many businesses’ plans for hiring, it is causing significantly fewer businesses to slow hiring in the coming year in comparison to last year, which is positive," said Sageworks chairman Brian Hamilton in a statement,
Sageworks’ new survey also asked accountants about their business clients’ general hiring plans for the next 12 months. More than half said businesses plan to maintain their headcount. Just over 17 percent said businesses are planning to add employees, and 12 percent responded that businesses are planning to reduce headcount. In the summer 2013 survey, over 60 percent of respondents noted that their clients planned to maintain their headcount, and only 13 percent responded that businesses planned to increase hiring.
Man Convicted of Threatening to Kill IRS Agent and His Family
PROVIDENCE, R.I. (MAY 27, 2014)
A Rhode Island man has been convicted of threatening to assault and murder an Internal Revenue Service revenue agent and his family.
Andrew A. Calcione, 49, of Cranston, R.I., was found guilty Friday of the charges by U.S. District Court Chief Judge William E. Smith, who presided over a trial on May 21. Calcione faces up to 20 years in prison when he is sentenced in September.
“The vast majority of Americans understand the payment of their federal taxes is part of their civic responsibilities,” said U.S. Attorney Peter F. Neronha in a statement. “A very small number do not, and an even smaller number not only refuse to pay their taxes, but engage in the kind of outrageous, threatening, and frankly bizarre behavior involved here. This office will continue to protect and seek justice for government officials simply trying to do their jobs on behalf of the people of the United States. Suffice it to say that we will be seeking the toughest, appropriate sentence in this case.”
According to prosecutors, an IRS revenue agent was assigned to examine Calcione’s personal federal tax returns for 2008, 2009 and 2010 and estimated that a $330,000 tax liability would be assessed against Calcione.
In April 2013, while continuing to work on the audit, the IRS revenue agent requested that Calcione and his ex-wife sign a consent form to extend the time to assess their taxes. Calcione signed the form, but his ex-wife did not. On July 12, 2013, the revenue agent left a voice mail message for Andrew Calcione asking about the status of the executed form.
Three days later, the revenue agent received two voice mail messages from Calcione. In the first message, Calcione allegedly threatened that if the agent called him again, he would show up at the agent’s home and torture him, rape and kill his wife and injure his daughter while the agent watched, before killing the agent. A second message left by Calcione requested the agent to disregard the first message, which Calcione said was left in error.\
Knowingly and intentionally threaten to assault and murder an IRS revenue agent with intent to interfere with the official in the performance of official duties, and knowingly and intentionally threaten to assault and murder a member of the immediate family of an IRS revenue agent are each punishable by statutory penalties of up to 10 years in federal prison and a fine of up to $250,000.
"The Treasury Inspector General for Tax Administration works aggressively to protect IRS employees from individuals who seek to impair the integrity of tax administration by threatening harm or committing violent acts," said TIGTA Inspector General J. Russell George in a statement.
1 out of 4 Americans Not Saving for Retirement
BLOOMINGTON, ILL. (MAY 21, 2014)
Twenty-five percent of Americans across all age groups admit they are not saving at all for retirement, or are unsure, according to a new survey.
The Country Financial Security Index found that 38 percent of those 40 and older said they regret decisions they have made with their retirement savings, with 47 percent of them admitting they did not start to save early enough. Nearly half (46 percent) of the survey respondents said it is not possible for a typical middle-income family to save for a secure retirement.
“It’s a real wake-up call to see that so many Americans are not putting money towards their nest egg and are, in turn, generally concerned about retirement prospects,” said Country Financial director of wealth management Troy Frerichs in a statement. “My advice to those Americans who haven’t begun saving, and to those who have is save early and save often. Making retirement a priority is an important step in achieving long-term financial security and avoiding what appears to be the coming retirement crisis.”
A 55 percent majority of those surveyed said they either are not participating in a 401(k) plan or do not know. While 29 percent said a 401(k) is the primary way they are saving, most lack a diversified retirement portfolio as just 17 percent said they are using at least two different savings vehicles. Of the 45 percent who do have a 401(k), 30 percent do not know where their contributions are invested. However, 43 percent of the survey respondents said they check the health of their retirement savings every few months.
Twenty and thirty-somethings were more pessimistic about their retirement prospects than older respondents. Thirty-two percent of the respondents between the ages of 18 to 29 are not saving for retirement or are not sure, more than any other age group. More adults ages 30 to 39 said it’s not possible for a typical middle-income family to save for a secure retirement than any other age group (47 percent). Of the 44 percent of 18 to 29 year-olds who do participate in a 401(k) plan, 39 percent said they do not know where their contributions are invested.
Businesses Lose 5 Percent of Revenues to Fraud
AUSTIN, TEXAS (MAY 21, 2014)
Organizations across the globe are losing an estimated 5 percent of their annual revenues to occupational fraud, according to a new report from the Association of Certified Fraud Examiners, with total losses estimated at about $3.5 trillion.
The median loss caused by the occupational fraud cases in the ACFE study was $145,000. Nearly one-fourth (24 percent) of the cases caused losses of at least $1 million.
The frauds in the study, ACFE’s 2014 Report to the Nations on Occupational Fraud and Abuse, lasted a median of 18 months before being caught, and in some cases lasted years. Occupational fraud is far more likely to be detected by a tip than by any other method.
More than 40 percent of all cases were detected by a tip—with the majority of them coming from employees of the victim organization.
Organizations with hotlines were much more likely to catch fraud through tips, which are the most effective way to detect fraud. These organizations also experienced frauds that were 41 percent less costly, and they detected frauds 50 percent more quickly.
The presence of anti-fraud controls generally reduced fraud losses and the duration of the fraud . Fraud schemes that occurred at organizations that implemented some of the most common anti-fraud controls were significantly less costly and were detected much more quickly than frauds at organizations lacking these controls.
While the ACFE found fraud trends differing slightly from region to region, most of the trends in fraud schemes, perpetrator characteristics and anti-fraud controls were similar no matter where the fraud occurred.
High-level fraudsters did the most damage to their organizations. The median loss among frauds committed by owners and executives was $500,000, considerably higher than the median loss of $130,000 for frauds committed by managers and $75,000 for frauds committed by other employees.
Collusion helps employees evade independent checks and other anti-fraud controls, allowing them to steal larger amounts. The median loss in a fraud committed by a single person was $80,000, but as the number of perpetrators increased, the losses rose significantly. In cases with two perpetrators the median loss was $200,000, for three perpetrators it was $355,000 and when four or more perpetrators were involved the median loss exceeded $500,000.
Small businesses face increased risk from fraud. The smallest organizations in the study suffered disproportionally, with a median loss of $154,000—higher than the overall median loss for fraud cases in the study ($145,000). These organizations typically employ fewer anti-fraud controls than their larger counterparts, which increases their vulnerability to fraud.
The banking and financial services, government and public administration, and manufacturing industries continue to have the greatest number of cases reported in the ACFE’s research, while the mining, real estate, and oil and gas industries had the largest reported median losses.
The report also details findings such as how organizations were affected based upon industry, how the implementation of anti-fraud controls affected exposure to fraud, the breakdown of fraud statistics by geographical region and the most common behavioral traits observed among fraud perpetrators.
Information from Certified Fraud Examiners in more than 100 nations was included in the report, which the ACFE has been issuing on a biannual basis since 1996.
The 2014 Report to the Nations is available for download online at www.ACFE.com/RTTN.
Detoxify Your Work Environment with Authentic Appreciation
MAY 21, 2014
BY PAUL WHITE
Keeping your staff happy and feeling appreciated is one of the primary challenges facing accounting managers today.
When employees don’t feel valued, negative results follow: staff dissatisfaction, tension within the office, increased errors, poor customer service and higher staff turnover.
Given the increased workloads in most firms, communicating “thanks” to team members often gets lost in the busyness of the workday. Additionally, managers must understand that not everyone is encouraged in the same way. While financial reward, achievement and public recognition may drive many professionals, these factors do not motivate many support team members.
Many of the staff members who help make accounting practices successful are not primarily motivated by increased compensation, or even promotion to a higher level of responsibility. For example, many support staff clearly do not want public recognition in front of a group for doing a good job (40 to 50 percent in a typical office setting.)
If you don’t understand and accept that not everyone feels valued in the same ways that you do, eventually you will have a disgruntled staff and experience a lot of turnover.
Importance of Appreciation
Feeling appreciated by their supervisor and colleagues has been shown to be critical to employees’ job satisfaction, but the evidence is clear that most Americans don’t feel valued at work:
• 79 percent of the people who quit their jobs cite not feeling valued as one of the key reasons they leave. Similarly, when accountants don’t enjoy their current workplace, they are more likely to seek employment elsewhere.
• Over 65 percent of workers in North America report that they have received no recognition in the last 12 months for doing a good job.
• While 52 percent of managers believe they do a good job of showing recognition to their staff, only 17 percent of staff members themselves report that their supervisor does a good job of recognizing them for doing good work.
Recognition and Appreciation are not Equivalent
While over 80 percent of all businesses in the U.S. have implemented some form of employee recognition in the past decade, employee engagement has been declining at the same time. In fact, a recent Gallup poll indicated that up to 70 million U.S. employees are minimally engaged or totally disengaged at work. When we talk with employees about their company’s recognition program, the most common responses we receive are cynicism and sarcasm. Staff members report they rarely hear anything positive from their supervisor and that they mainly receive criticism.
Employee recognition programs used by many businesses are not effective for a variety of reasons. Most are based on actions that are generic (everyone gets the same holiday card and gift card), general (“Thanks for all you do for the organization”), infrequent (during their performance review), and group-based (“Our billable hours have increased—way to go!”). Ultimately, employee recognition is viewed cynically because it is perceived as being inauthentic.
Fortunately, we do know how to help employees feel truly valued. Four core conditions are necessary for people to actually feel appreciated (rather than just being given generic recognition). Team members feel appreciated when it is: (a) communicated regularly; (b) in the language and actions important to the recipient; (c) delivered individually and is about them personally; and (d) when the appreciation is viewed as being authentic.
The 5 Languages of Appreciation in the Workplace
Based on the concepts from the New York Times #1 best seller, The 5 Love Languages, we have found that employees need appreciation communicated in the way that is important to them. Some people highly value words of affirmation—which can be a simple compliment. (“Jill, thanks for getting your report to me in time for my presentation.”) However, other individuals don’t value praise because to them “words are cheap.”
One employee reported, “My supervisor compliments everyone all the time and that’s fine. But what I really would like is 15 minutes of his undivided attention, where I can talk to him without distractions.” A third language of appreciation is “acts of service.” One team member shared, “It’s not that encouraging to me to be praised for all the work I’ve done while I continue to work long hours to complete what it is supposed to be a ‘team project’. A little practical help would be quite encouraging.”
For some individuals, a small tangible gift can be quite meaningful. However, this is not the same as bonuses or additional compensation. Rather, it is a small gift that shows that you’re getting to know your colleagues, what they like, and what is important to them in their life outside of work. It can be something as small as one of their favorite cups of coffee, or a magazine about a hobby that they enjoy (for example, gardening), or sports memorabilia for the college team that they follow. Appropriate physical touch is the final language of appreciation that can be utilized in the workplace. While it is critical that any physical touch is appropriate (not being sexualized or unwanted), physical touch is actually common in many workplaces and cultures. “High fives” when a project is completed, a “fist bump” given when a problem is solved, or a congratulatory handshake when an important sale is made are all examples of appropriate physical touch in work-based relationships.
Because of the importance of knowing the language and actions that are important to each employee, we created the Motivating by Appreciation Inventory, which gives an individualized report identifying each person’s language and actions that are most meaningful to them. This allows others to be able to communication encouragement in a way that “hits the mark.” This eliminates guessing, and wasting your time and energy by trying to communicate appreciation in a way that’s ineffective.
Don’t forget—your team members feel valued in different ways than you do. If you begin to communicate appreciation to them in the ways that are important to them, you will begin to see a positive transformation occur before your eyes.
Paul White, Ph.D., is a psychologist, speaker, and consultant. He is co-author of the 5 Languages of Appreciation in the Workplace with Dr. Gary Chapman, author of the New York Times #1 Best Seller, the 5 Love Languages. For more information on how to communicate authentic appreciation in your workplace, go towww.appreciationatwork.com or contact Dr. White at email@example.com.
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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