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Paying Tax With Art Is Legal In UK & Mexico, Why Not In US?

In the UK, you can pay your taxes with art. You even get full fair market value credit without selling it or paying tax on your gain. It’s pretty slick. Between 2009 and 2013, £124.5 million worth were handed over under arrangements that allow taxpayers to reduce their tax bill with art. It helps the UK collect too, considering that the UK Treasury is owed more than £35 billion in taxes.

The program is called Acceptance-in-Lieu and it’s becoming more and more popular. It dates all the way back to 1910. It was designed so cultural objects could be bequeathed to the nation instead of cash. You get full fair market value off your tax bill.

Once your artwork or artefact is accepted by the Government, it will be given to a public museum, archive or library. In some cases, you can even specify where you would like it to be housed and displayed. Traditionally, the program was used for paying estate taxes. But starting in March 2013, you can give during life to settle your unpaid tax bills.

All sorts of things have followed this path, including original manuscripts handwritten by John Lennon. The threshold for UK inheritance tax is very low at only £325,000. There have been proposals to increase it to £1 million per person, but that’s still proposed.

In Mexico, the tax law goes a step further, allowing painters, sculptors, and other artists to donate part of their annual production of artwork in lieu of paying taxes. In return, Mexico gains a huge collection of contemporary art. Mexico’s program dates to 1957.

You have to admire the simplicity of it too. Say an artist sells one to five pieces of art in one year. He then donates a work of equal value to the state. The more you sell, the more you hand over for taxes, until an artist gives a maximum of six pieces.

The government likes to think it’s encouraging artists. In effect, the government says, ‘Pay your taxes in artwork. Keep on painting.’  Hundreds of artists take part, and it’s hard to find one with even the faintest hesitation. Many hail the program as unique in the world.

The program supposedly grey out of a 1957 encounter between a tax official and David Alfaro Siqueiros, a muralist and painter of social realism. Hey, paying taxes in paintings would be much better than going to jail!. But regardless of its genesis, the program has been in operation since 1957, garnering 4,394 works of art.

A rotating committee of seven artists and curators evaluates proposed donations to see whether they fairly represent the body of work of a given artist. So it’s not just about money. Apart from the value of the art, experts decide if the work is fairly represents the artist.

More than anyone else, it is artists who like Mexico’s program. It has generated good will among artists, and helps to amass an impressive collection of some of Mexico’s most renowned artists. The program also has beautified the walls and open spaces of public buildings.

By Ron I. Wood for Forbes Magazine

Published: September 11, 2014

Will The New Tax Laws Impact Your Divorce Settlement?

Congress passed the American Taxpayer Relief Act (ATRA) on January 1, to stave off federal tax increases on the middle-class and across-the-board spending cuts that were set to occur automatically if no action were taken, and prevent our economy from plummeting over that “fiscal cliff” we’d been hearing about for weeks.

Unfortunately though, if you’re in the middle of negotiating a divorce settlement agreement, some of the provisions of the new tax law could send you over a fiscal cliff of a different kind – not nationally important, of course, but critical to your own financial future nonetheless.

Taking the time to learn how new tax laws might impact your settlement agreement, and negotiating accordingly, could save you tremendously in the long run.

Two major areas require special attention: changes to income and division of assets.

Income from alimony could bump you into a higher tax bracket.

A major provision of ATRA was to raise tax rates on high incomes. Specifically, if you’re a single filer with an annual income greater than $400,000, you will now pay the new 39.6% tax rate (increased from 35%) on income in excess of that $400,000 threshold.

Divorce will mean significant change to your income structure, possibly including alimony. Alimony (also known as spousal support or maintenance) refers to payments made by the “moneyed” spouse to the “non-moneyed” spouse after a divorce is finalized. It is paid in established intervals (typically monthly), for a time period specified in the divorce agreement.

If your proposed divorce settlement agreement includes alimony payments, in most cases, you will have to declare those payments as taxable income. (Although not commonly done, alimony can be structured as non-taxable income to the recipient and a non-deductible expense to the payor). Be sure you know how your tax situation will play out as a result. You want to make sure the settlement you’re agreeing to is the one that makes the most financial sense for the long term. After all, there may be better ways to assure your post-divorce financial stability.

For example, I often encourage clients to consider an upfront lump sum payment – a one-time payment of a fixed amount – in lieu of alimony. These lump sum payments are neither taxable to the recipient nor deductible to the payor, but the paying spouse will typically try to negotiate a lump sum amount that takes into account the loss of deductibility.

There are several reasons a lump-sum payment can be preferable to traditional alimony payments; however, a lump sum payment is not right for everyone. It requires very careful, deliberate financial management if it is to sustain your lifestyle in the long term.

If income from alimony is a tax concern, you may also want to revisit the balance between child support and alimony payments in your settlement. Child support is neither a deductible expense for your husband, nor taxable income for you. Alimony is usually both. (Payors need to be mindful of complicated IRS rules concerning frontloading and recapture of alimony as it relates to alimony vs child support.)

Remember, too, that alimony can be modified, up or down. The fundamental purpose of alimony is to allow the “non-moneyed” spouse to maintain a standard of living somewhat comparable to what she enjoyed during the marriage.  Yes, even today, the “non-moneyed” spouse is typically the woman, and yes, I think alimony, in many cases, remains just as relevant today as it ever was. Why?

Because the non-moneyed spouse often gave up her potential career and earning power and invested her time and labor into the family.

She also directly or indirectly aided her husband’s career by taking care of the home front which allowed him to invest in his career and increase his earning power. Many women have given up educational and employment opportunities and many women have also helped their husbands (financially or otherwise) go through law or med school or to get other professional training.

Then, after several decades he is at the peak of his earning potential (thanks in part to her), and yet she is relatively unemployable, especially if she is in her 50s and has been out of the work force for all those years.

And even though they may be dividing assets 50-50, he, because of his earning power will replace some or all of those assets over time while she, because of her lack of earning power, will be liquidating assets from day one and will ultimately go broke if she lives long enough.

Therefore, in my opinion, the purpose of alimony is to somewhat equalize this disparity.  (And of course, the same could apply to a man, if he were the non-moneyed spouse.)

There are new tax implications for division of investments and other assets.

I’ve written before about how division of assets can be an exceedingly complex part of the divorce process. Tax considerations account for a lot of that complexity, and the new law adds even more factors to evaluate.

For example, ATRA now sets a 3.8% Medicare surtax on capital gains, dividends and other investment income above $200,000 for a single filer. You’ll want to keep the new tax in mind as you are negotiating the division of stock portfolios and other income-producing investments.

Additionally, for filers who fall in that new 39.6% income tax bracket, the federal capital gains tax rate has been increased from 15% to 20% (plus the aforementioned additional 3.8%, which brings the total to almost 24%, not including your state’s capital gains taxes). This can put a significant dent in the amount you hope to realize from selling assets. The capital gains tax hit should be calculated and weighed carefully before agreeing on how your assets should be divided.

Depending on how much the tax burden would lessen the value of a particular asset to you, it may be more sensible to negotiate for something else, instead. For instance, you may want to consider cash or retirement funds (which have no capital gains tax exposure and, except for Roth accounts, will be taxed only when you withdraw the money) instead of stock or real estate. However, note that capital gains tax can take just as big a bite of proceeds from sale of real estate (once you’ve taken into account the $250,000 exclusion on your primary residence) as of stocks. Make sure you have properties expertly appraised.

A qualified divorce financial advisor can help you navigate the potential pitfalls presented by ATRA and other tax laws, with all their subtleties. You’ll need thorough, expert analysis of all your options before you agree to any settlement –and since this is not your attorney’s primary field of expertise, be sure to have a divorce financial professional on your team to assure you the best possible financial outcome of your divorce.

By Jeff Landers for Forbes Magazine

Published: September 8, 2014

Many Reasons to Offer 401(k)s (Including Owner’s Retirement)

Soon after Sabina Gault got her public relations firm up and running in 2008, she asked for a show of hands from employees interested in having a company 401(k) plan. The consensus? “Nobody wanted it,” said Ms. Gault, whose firm, Konnect Public Relations, based in Los Angeles, had just a few employees at the time.

Two years later, with eight people on her payroll, she raised the question a second time. Again, the response was lukewarm. So she waited.

Finally, in 2013, she made an executive decision about the 401(k): “I said, ‘We’re going to do it no matter what, even if it’s just a few of us.’ ”

While the share of small businesses offering 401(k) plans has picked up since 2008 — when just 10 percent offered the benefit — 401(k) plans are still the exception at small companies. Just one in four firms with 50 or fewer employees has such a plan in place, according to Capital One’s ShareBuilder 401k.

Employers point to a lack of interest among employees coupled with the costs of setting up and administering the plans. That is one reason Ms. Gault waited as long as she did. “It didn’t make sense to pay for something people wouldn’t use,” she said, noting that most of her employees are in their early 20s. Had they been a little older, she said, it might have been more of a priority.

Retirement plans typically take a back seat to salary, benefits like health insurance and other more immediate perks, said Sabrina Parsons, chief executive of Palo Alto Software, a 55-employee business planning software company based in Eugene, Ore. Yet when it comes to recruiting and retaining employees over the long term, “not having a retirement plan is a glaring hole,” she said. “It’s like restrooms in the office; you can’t not have them.”

What’s more, a company-sponsored plan is also the most effective way for small-business owners to save for their own retirements, said Leon LaBrecque, chief strategist and founder of LJPR, a wealth management firm in Troy, Mich. Owners can contribute to individual retirement accounts or to a Roth I.R.A., but the contribution limit for these plans is just $5,500 a year ($6,500 for anyone 50 and older). That is one third the maximum allowed for a 401(k) plan. SEP I.R.A.s, while popular among the self-employed and very small businesses, are generally not a good bet for growing companies; they can be costly, and they require owners to contribute the same percentage to employee plans that they contribute to their own plans.

Fortunately, setting up a 401(k) plan is considerably easier and cheaper than it was just a decade ago. Setup and administrative costs vary from one provider to the next — and increase if the plan offers more customized investment options, hands-on advice and other bells and whistles. Many 401(k) providers, including Sharebuilder 401k, offer basic plans that start around $1,000 a year. And there are tax incentives. Companies with fewer than 100 employees can claim up to $500 in tax credits to offset administrative costs for each of the first three years of a first-time plan.

Owners shopping for a plan will want to balance investment options and services with costs paid by the company and fees paid by the employee. Many providers charge a management fee — to employers or employees — on top of fixed administrative fees. Employers should be wary if fees creep above 1 percent of employee assets. (Additional management fees are charged by the mutual funds or other exchange-traded funds used in 401(k) plans.)

One exception, according to Ms. Parsons: It may be worth paying more to bring in a financial adviser to help select investment options and to give employees hands-on investment advice. “Our thinking is, if you take the time to set up a plan, you want to make sure employees are getting the most out of it,” she said. “We work with a planner who does an informational meeting with the company every quarter and also meets with employees individually.”

Having worked in the financial services industry for much of his career, Darius Mirshahzadeh, president of Endeavor America Loan Services, was particularly aware of fees when it came time to set up a 401(k) for his one-year-old business. The plan, which will be available to employees beginning in August, is administered by the Online 401k, a 15-year-old company with more than 7,000 small businesses on its platform. Its most popular option, the Express(k), charges employers with 50 or fewer employees about $1,200 for the year; employees pay an additional flat fee of $4 a month.

For some employers, though, administrative fees are just the beginning of the expense. The bigger concern for many small businesses is the cost of matching benefits. “The biggest misconception is that employers have to do a match,” said Neil Smith, executive vice president at Ascensus, one of the nation’s largest independent record keepers and administrators for retirement plans. “A match is completely optional in a traditional plan.”

Why the confusion? A provision in the Employee Retirement Income Security Act prohibits companies from allowing the highest-paid employees to contribute disproportionately more than the rest of the work force. Specifically, the average contribution of the highly paid group cannot be more than 2 percentage points higher than the average for rank-and-file employees. If the average employee contributes 5 percent of salary to the plan, for example, the average for the highest-paid employees cannot exceed 7 percent.

Nevertheless, to avoid the administrative inconvenience of complying with this rule, many companies choose so-called safe harbor plans. These plans do require an employer contribution — most common is a dollar-for-dollar match, up to 4 percent — but they give all employees carte blanche to contribute as much as they want to the plan, up to the standard limits.

The standard advice is that most companies that can afford to match probably should. A generous retirement package can be an asset for recruiting and retaining employees, said Mr. LaBrecque, who uses a safe harbor plan for his employees. “I always emphasize that this is part of their compensation package,” he said. “When employees look at it that way, they’re more likely to take full advantage of that match.”

Small businesses that are not quite ready to make that commitment, however, can start with the traditional plan. “You can always switch over to a safe harbor plan once you have more consistent revenue coming in the door,” he added.

For now, Ms. Gault is sticking with a traditional plan — though she does offer employees a 10 percent match on contributions of up to 5 percent of their salary. The perk has proved to be more popular than she expected. Today, she said, roughly half of her 30 employees use the plan to save for their retirement years.

By Sarah Max for the New York Times Small Business

Published: September 5, 2014

How to Properly Handle Your Company’s Meeting Minutes

If you have incorporated your business as an S Corporation or a C Corporation, most states require that you keep careful records of the company’s activities. Every time your board of directors meets, your company needs to keep a record on file for regulatory compliance purposes.

There is a long list of possible transaction and resolutions that you might need to keep on record. This can include anything ranging from:

  • The appointment of a new officer.
  • The resignation of a director.
  • Purchasing insurance.
  • Selling stock
  • Obtaining a line of credit/credit card in the company’s name.

Keeping records can be a lot to keep straight, particularly for the small business owner. However, proper meeting minutes are essential to keeping your corporation in good standing and maintaining your personal liability shield. Below are some of the key things you need to know when it comes to keeping minutes of your meetings.

What are Meeting Minutes?

Meeting minutes keep an official account of what was done or talked about at formal meetings, including any decisions made or actions taken.

They are taken during a formal meeting of the board of directors or shareholders of a corporation, such as initial and annual meetings. Typically, meeting minutes are recorded by the corporation’s secretary (or another individual appointed at the meeting).

What Should be Included in Meeting Minutes?

Your meeting minutes do not need to include every little detail. You just need to document the key information and any decisions made or actions taken. In general, your minutes should be detailed enough to serve as your corporation’s “institutional memory.”

Typical minutes will include the following:

  • Basic information about the meeting: date, time, location.
  • Who attended, along with a special note in the cases where attendees came late or left early.
  • Agenda items with a brief description of each item.
  • Voting actions with a detailed account of how each individual voted, along with any abstensions.
  • Time when meeting was adjourned.

In most cases, you don’t need to create minutes from scratch. You can find free templates online to serve as a starting point. Choose your type of minutes/documentations, fill in the blanks, and print it out, and you will have met your recordkeeping obligations.

Who is Required to Keep Meeting Minutes?

The majority of states require both S Corporations and C Corporations to document major business decisions and the major meetings you hold.

At present, the following states do not require minutes to be kept:

  • Delaware
  • Kansas
  • Nevada
  • North Dakota
  • Oklahoma

Additionally, LLCs are not required to keep minutes.

What Should I do With the Minutes After They are Recorded?

Minutes do not need to be filed with the state, but can instead be kept with your other corporate records, such as articles of incorporations, bylaws, and resolutions.

Like other documents, you should keep minutes on hand for at least seven years. Members of the corporation, such as shareholders, officers, and directors, are entitled to review the meeting minutes upon “reasonable request” to the corporation.

While you don’t need to file these documents with the state, they should still be considered important documents and are essential for protecting your corporation’s good standing and your limited liability status.

From SmallBizTrends.com

Published: August 29, 2014

Explaining Obama's myRA

In his State of the Union address, President Obama announced plans to create a new 'myRA' retirement account aimed at helping millions of Americans to start building a nest egg.

Here's a look at how myRAs will work, according to the White House:

Who can open a myRA? The accounts are targeted at the millions of low- and middle-income Americans who don't have access to employer-sponsored retirement plans. That includes roughly half of all workers and 75% of part-time workers.

The White House says it will "aggressively" encourage employers to offer the program, noting that they won't have to administer or contribute to the accounts. myRAs will initially be offered through a pilot program to workers whose employers sign on by the end of the year.

Once the program reaches full implementation, anyone who has direct deposit for their paycheck will be eligible to sign up, Treasury said.

All workers may invest in the accounts, including those who would like to supplement an existing 401(k) plan, as long as their household income falls below $191,000 a year.

How will the account work? The account will function as a Roth IRA, which allows savers to invest after-tax dollars and withdraw the money in retirement tax-free.

But unlike traditional Roth IRAs, the accounts will solely invest in government savings bonds. They will also be backed by the U.S. government, meaning that savers can never lose their principal investment.

Workers will be able to keep the accounts when they switch jobs or contribute to the same account from multiple part-time jobs. They will also be able to withdraw their contributions at any time without penalty. However, anyone who withdraws the interest they earned in the account before age 59 1/2 will get hit with taxes and a possible penalty, just like a Roth IRA.

Another plus: while private retirement accounts of any size can come with a host of administrative expenses, the myRAs will be free of any fees.

"This deals with the small saver problem," said David John, senior strategic policy adviser at the AARP Public Policy Institute. "Very often the administrative costs of those tiny accounts actually eat into the principal."

How much can I invest? Initial investments can be as low as $25 and workers can contribute as little as $5 at a time through automatic payroll deductions. Like a traditional Roth account, savers will be allowed to contribute up to $5,500 a year under current limits.

Once a participant's account balance hits $15,000, or the account has been open for 30 years, she will have to roll it over to a private sector Roth IRA, where the money can continue to grow tax-free. Workers will have the option to switch to a Roth IRA at any time.

What kind of returns can I expectWhile the accounts will offer a safe place for many first-time retirement savers to put their money, they shouldn't expect big returns.

The White House said the accounts will earn the same rate as the Thrift Savings Plan's Government Securities Investment Fund that it offers to federal workers. That fund earned around 1.5 % in 2012, and had an average annual return of 3.6% between 2003 and 2012.

With an average 2% interest rate, for example, a worker contributing $100 a month would accumulate around $6,300 in savings after five years, including around $300 in interest.

"The good news is you don't have any risk on this account," John said. "The bad news is of course you're not going to have a huge amount of earnings on this account either."

Will this help solve the retirement savings crisis? Retirement advocates are cheering the new savings program as an important step. But no one thinks this alone will fix the fact that millions of Americans have little-to-no retirement savings.

Obama's annual budget will again include a separate proposal to automatically enroll workers in IRA accounts, a long-touted plan which would require Congressional approval.

"This is a start," John said. "Without the actions of Congress, there is a limit on what can be done."

By Melanie Hicken for @CNNMoney

Published: August 25, 2014

4 Mid-Year Tax Tips That Could Save You Big Bucks

You may be spending your weekends at the beach or preparing for your upcoming vacation, but summer is a great time to organize your taxes.

Americans tend to scramble at the end of the year, or in the worst case, at the beginning of April, to prepare their taxes, find charity donation receipts or open retirement accounts; but tax planning is an ongoing process, experts say, which should be documented all year long. While it’s anything but fun to spend a July Sunday compiling receipts and shifting investments, it will help you save money in the long run.

“Everybody procrastinates, but people should just take a rainy day and organize their documents from January to June,” said David McKelvey, partner at accounting firm Friedman in New York. “They will save time at the end of the year.”

Here are four steps you can take to help prepare your 2014 taxes:

Manage your taxable income. For 2014, the top income tax rate of 39.6 percent will apply to individuals with taxable income over $406,751, or $457,601 for joint filers. If you expect your 2014 income to be near that threshold, start thinking of ways to reduce your taxable income by deferring income, contributing to pre-tax investments including to a retirement account, or shifting income to family members in lower tax brackets by giving them income-producing investments. “You want to manage your bracket,” said McKelvey. “It can translate into real savings.” 

High-income earners subject to the alternative minimum tax should also pay close attention to their taxable income and in some cases, they may want to accelerate income. As always, your accountant should offer concrete strategies.

Generate investment losses. The stock market has had a strong run so far in 2014 and chances are, you’ve realized some gains. With the capital gains rate for taxpayers in the top bracket at 20 percent, you should keep track of how much capital gains you’ve realized or plan to realize, and consider selling some depreciated investments to generate losses and offset those gains. You can always repurchase these investments if you wait at least 31 days.

Contribute to retirement. It will help reduce your taxable income, as mentioned above, in addition to help you plan for the future. You can contribute to traditional IRAs, which will be tax deductible. Pretax deferrals to employer-sponsored retirement plans such as 401(k)s also help save taxes. “You pay no tax as long as the funds are in the account, which reduces your taxes for years to come,” McKelvey said. “Plus, tax-deferred compounding can help your investments grow more quickly.”

Plan for medical expenses. As of 2013, the threshold for deducting medical expenses increased from 7.5 percent of your adjusted gross income to 10 percent. You can deduct only expenses that exceed that floor. If they don’t, you can save by contributing to a tax-advantaged health care account such as a health savings account, HSA, or a flexible spending account, FSA. While contributions are pretax or tax-deductible and withdrawals are tax free, some rules and limits apply as to what types of medical expenses qualify. Another change for 2014 you can plan for now is the addition of a 3.8 percent Medicare tax, one of the main consequences of Obamacare for most taxpayers. That tax will kick in for married people making over $250,000.

“Tax planning can create a lot of anxiety,” McKelvey said. “The advantage of starting midyear is that you don’t have to rush.”

By Marina Cole for The Fiscal Times

Published: August 21, 2014

Deducting Moving Expenses

If you move because of your job, you may be able to deduct the cost of the move on your tax return. You may be able to deduct your costs if you move to start a new job or to work at the same job in a new location. The IRS offers the following tips about moving expenses and your tax return.

In order to deduct moving expenses, your move must meet three requirements:

1. The move must closely relate to the start of work.  Generally, you can consider moving expenses within one year of the date you start work at a new job location. Additional rules apply to this requirement.

2. Your move must meet the distance test.  Your new main job location must be at least 50 miles farther from your old home than your previous job location. For example, if your old job was three miles from your old home, your new job must be at least 53 miles from your old home.

3. You must meet the time test.  After the move, you must work full-time at your new job for at least 39 weeks the first year. If you’re self-employed, you must meet this test and work full-time for a total of at least 78 weeks during the first two years at the new job site. If your income tax return is due before you’ve met this test, you can still deduct moving expenses if you expect to meet it.

If you can claim this deduction, here are a few more tips from the IRS: 

  • Travel.  You can deduct transportation and lodging expenses for yourself and household members while moving from your old home to your new home. You cannot deduct your travel meal costs.
  • Household goods and utilities.  You can deduct the cost of packing, crating and shipping your things. You may be able to include the cost of storing and insuring these items while in transit. You can deduct the cost of connecting or disconnecting utilities.
  • Nondeductible expenses.  You cannot deduct as moving expenses any part of the purchase price of your new home, the cost of selling a home or the cost of entering into or breaking a lease. 
  • Reimbursed expenses.  If your employer later pays you for the cost of a move that you deducted on your tax return, you may need to include the payment as income. You report any taxable amount on your tax return in the year you get the payment.
  • Address Change.  When you move, be sure to update your address with the IRS and the U.S. Post Office. To notify the IRS file Form 8822, Change of Address.
Published: August 20, 2014

Why Move To Florida? $200,000 in Tax Savings

Florida can brag about a lot more than its warm weather. Its low tax burden has caught the attention of nearly 2 million people over the last couple decades, and they brought more than $100 billion of income to the state.

People from New York, New Jersey and even Wisconsin have been moving to Florida in droves. Yes, the weather is much nicer in Ft. Lauderdale in January than in Green Bay, but keeping more of your own money seems to be a major influence.

I am not talking about small amounts, either. A recent report published by the John K. MacIver Institute for Public Policy and the National Center for Policy Analysis shows there is a big advantage to moving to low-tax states.

According to the study, a 40-year-old married couple who own a home and earn $75,000 a year would gain $223,735 over the rest of their lifetime if they moved to Florida from Wisconsin.

When weather is taken out of the equation, the Dairy State is still at a loss. It would be advantageous for this same couple to move to three of the four states that share a border with Wisconsin. Only Illinois has a worse tax climate.

In fact, if they chose to move to Minnesota, the couple would gain more than $50,000 in lifetime wealth. This hypothetical couple would be better off in different states, but does that mean people are really leaving Wisconsin?

The answer is an astounding yes. Wisconsin loses $136 million annually in adjusted gross income, totaling nearly $2.5 billion in the last 20 years.

An even bigger problem for Wisconsin is the people who are leaving may be the ones paying the most in taxes.

As the study points out, higher-income residents would find it beneficial to move to other states, but it also finds that lower-income individuals are in a different boat thanks to Wisconsin’s progressive tax system.

A 25-year-old renter making $30,000 a year is better off in Wisconsin than Illinois, Iowa and Minnesota. But, as this taxpayer earns more and purchases a home, it becomes advantageous to move to Iowa or Minnesota. Essentially, the state is penalizing taxpayers for being more successful.

Luckily, there is good news for Wisconsinites. Gov. Scott Walker, Wisconsin Republican, and state lawmakers have made it a priority to reform taxes. The tax code has been simplified – eliminating 17 special interest tax credits and reducing the amount of tax brackets from five to four.

Property taxes have been frozen at 2010 levels and income tax rates have been cut for everyone. In total, the state’s residents have seen $2 billion in tax relief since 2011.

Even with this dramatic shift toward tax reform, Wisconsin is still lagging its neighbors and states across the country. If the state wants to be a national competitor for new businesses, investment and job creation, it must keep reforming its tax code and reducing the overall tax burden.

Just see what Florida has been able to do. When looking at a direct comparison to the Sunshine State’s tax climate, it is amazing that more people – and their money – are not moving away from Wisconsin.

Florida’s median property tax rate is 0.97 percent. Wisconsin’s rate is nearly double at 1.76 percent. Florida residents have no state income tax. Wisconsin’s income tax rate tops out at 7.65 percent.

So why have more states not adopted the Florida model?

The simple answer is that government at every level is addicted to spending. Just look at the national debt, which is quickly approaching $18 trillion. We cannot permit the states to travel down this same path.

By Nick Novak for The Washington Times

Published: August 18, 2014

7 Things You Must Know About Corporate Taxes

Politicians are hopping mad because a spate of big U.S. companies are trying to escape higher tax bills by proposing mergers with foreign firms.

But the real problem, most agree, is the corporate tax code, which hasn't kept pace with the transformation of global business over the past 30 years.

Some people think next year might be the year when Congress finally reworks how companies are taxed.

A wonk can dream.

In the meantime, there will be plenty of rhetoric about the issue. Here are 7 key facts to help you keep things straight.

1. Corporate tax revenue accounted for 10% of all federal tax revenue last year. That's less than a third of what it was at its post-war peak, in 1952, according to the Congressional Research Service.

There are a few reasons for the drop-off, CRS notes. Among them, corporations' profits and the percent of their profits paid in taxes have fallen.

Also, many businesses (partnerships, limited liability companies and so-called S corps) have chosen to file under the individual tax code because they get a better deal that way.

2. Only 6% of businesses file under the corporate tax code. And they account for less than half of all business income, according to CRS.

By contrast, in 1980, 17% of businesses paid the corporate tax and generated nearly 80% of business income.

3. Corporate tax breaks cost U.S. coffers about $150 billion last year. That's a lot. But it's a fraction of the more than $1 trillion of individuals' tax breaks in 2013.

One way both are similar: The 10 biggest breaks account for a large majority of the total cost.

4. The U.S. has the highest tax rate among developed economies. Most U.S. corporate income is subject to a 35% federal tax rate. But the "effective" rate companies pay is often lower after accounting for a company's tax credits, deductions and exemptions.

What's more, companies owe U.S. tax on profits they make in the United States and abroad, minus whatever foreign tax they've paid. But a company can put off paying U.S. tax on foreign profits indefinitely, so long as it doesn't bring those profits back to U.S. shores and reinvest them in the business.

Critics say this high-rate, "worldwide" tax system hurts U.S. companies with foreign rivals.In many other countries, companies typically not only face lower rates but don't owe their home country tax on earnings made offshore.

5. U.S. corporations are not taxed equitably. The tax code favors some activities and investments over others, and creates opportunities for certain firms that others can't use.

For instance, it's good to be a U.S. company working abroad.

"They have opportunities to shift profits from U.S. operations to tax havens that wholly domestic businesses do not," said Martin Sullivan, chief economist at the publisher Tax Analysts.

Even among U.S. multinationals, the playing field isn't quite level.

"Companies with lots of patents, trademarks and other intellectual property have the greatest ability to shift profits to tax havens. That's why tech, pharma and medical device companies all tend to have such low effective tax rates," Sullivan said.

(See, for example, how Apple lowers its rate.)

6. Many big U.S. companies are swimming in untaxed cash. Since U.S. multinationals only owe U.S. tax on foreign earnings when they bring them back to the United States, there's serious incentive to put off that day of reckoning.

End result: Many companies have built up a serious offshore cash stash. Apple, for instance, has more than $100 billion sitting outside the United States.Microsoft  has roughly $93 billion, while Pfizer has an estimated $69 billion, according to Mindy Herzfeld, a contributing editor at Tax Notes International.

7. The pace of U.S. companies looking to leave has picked up dramatically. Between 1983 and 2003, 29 U.S. companies reincorporated abroad in a process known as "inversion." From 2004 to 2013, there have been 47, according to CRS. And this year alone there have been at least 15 proposed inversion deals, Tax Notes reports.

Many lawmakers believe a lower U.S. corporate tax rate could help deter companies from leaving.

Some in Congress are also pushing for the United States to move away from a "worldwide" tax system to a "territorial" one. In a territorial system, corporations would only owe U.S. tax on profits made in the United States. Any profits they make offshore would be taxed by the countries where those profits were made.

In any case, the tax reform proposals put forth so far by some key lawmakers "would leave considerable advantages" for U.S. companies that move abroad, Sullivan said. "So there probably will still be incentive to invert after tax reform."

By Jeanne Sahadi for @CNNMoney

Published: August 15, 2014

4 Types of Tax Records Businesses Should Keep

In order for small businesses to stay on the right side of the Internal Revenue Service, documents related to tax returns and finances must be kept for a number of years. Thorough maintenance of these important records could mean the difference between thousands of dollars in tax debt or worse, jail time.

If the tax collector ever comes knocking, preparation is key. Meticulously kept financial and tax records that include these four types of documents is the best way to keep your business in good standing with the IRS.

1. Tax Returns

Most importantly, small business owners should keep their company’s tax returns for a minimum of three years. Should your return end up on a fraud investigator’s desk, though, the IRS could examine returns up to six years old. If the IRS can prove fraud, the agency has not statute of limitations and can audit back indefinitely.  It may be in the best interest of business owners to keep “final business income returns and related correspondence” indefinitely, as they can assist in filing future returns. If your business claimed a loss due to worthless securities or bad debt reduction, tax records should be maintained for at least seven years.

2. Up-To-Date Business Asset Records

The equipment, vehicles, and real estate you use in your business are all considered by the IRS to be assets. These assets help you and the IRS determine depreciation, amortization, or depletion deductions, along with any losses or gains that came from the acquisition of the property. Accurate purchase, financing, and ownership records should be maintained as long as the asset is being depreciated or amortized. If the asset is sold, records would need to be maintained until the "period of limitations ends from the year you sold or otherwise disposed of that property."

3. Employment Tax Records

For businesses that employ one or more workers, employment tax records must be kept for at least four years after the date the taxes are due or paid, whichever is later. The personal data you used to maintain payroll, like social security numbers and addresses of your employees, is considered part of these tax records. All wages, tips, insurance, and pension payments must also be maintained for this period of time. It is important to remember that information is extremely sensitive, and should be kept with care.

4. Bank Statements and Financial Documents

Your company’s bank statements and portfolio reports should be retained for at least seven years. Essentially, any time your company is involved in a financial transaction, keep those records. Businesses should also keep receipts and invoices to document payments to and from vendors, suppliers, and customers. These records may need to be kept longer if they are considered “supporting documents” for tax purposes. To stay on the safe side, many experts suggest filing financial documents away for six to ten years. Some, like business ledgers and retirement plan records, should be kept permanently.

Regardless of whether your tax return has been meticulously prepared, your business should still keep track of these important documents. Electronic record keeping can help you cut the clutter inside your office while organizing records for easier access.

From the GPP CPA Blog

Published: August 14, 2014

Summer Job? Time to Start a Roth I.R.A.

When teenagers earn money for the first time, there are so many things they can do with it.

In some families, teenagers contribute to basic costs like housing. In others, parents expect summer earnings to replace a weekly allowance. Many teenagers save for their first car, and few among the college-bound escape the pressure to put money away for tuition.

Some parents dictate the terms, while in other families, there’s a negotiation over how to divide the money once a summer job has ended. It’s rare, however, that families consider the possibility of giving a child a running start on retirement savings.

It’s a shame, too. That’s because the boost that comes from opening a retirement savings account as a teenager instead of a few years after college can lead to hundreds of thousands of extra dollars after a half-century of growth.

Most of us have seen basic compound interest graphs before, so we know how the math works for grown-ups who start setting money aside from their first full-time paycheck. But beginning even earlier supercharges the savings for families that can afford it — or who reel in grandparents and others willing to match a child’s contributions.

The process starts with a Roth individual retirement account, and it will need to be a custodial account, with an adult co-signing, if the teenager is under 18. The nice thing about Roths is that you generally pay no taxes on the withdrawals. So the money will grow for many decades and then come out tax-free as long as the rules don’t change. While there are no tax deductions for deposits, that doesn’t mean much to teenagers whose income is so low that they may not pay any income taxes at all.

If you’re trying to persuade children or grandchildren to save rather than ordering them to do so, you could start with some simple numbers. If you take $5,000 in savings from a few summer jobs and put it in a Roth at age 19, it will grow to $52,006 by the time you’re 67 if it grows at a 5 percent annual rate. Wait until 25 to start with that same $5,000, however, and the balance at age 67 is just $38,808. You can plug your own numbers and investment return assumptions into the Roth I.R.A. calculator at dinkytownnet.

Things get more interesting, however, if you pledge that once a Roth is open, you’ll spend a few years helping a young adult max out the $5,500 contribution each year as long as that person earns the $5,500 necessary to make a deposit of that size. If that 19-year-old starts with $5,000 and makes the maximum contribution each year until 67, the ending balance is $1,164,985 if it grows at a 5 percent annual clip. That’s over $330,000 more than what someone would end up with if they waited just six years, until age 25, to start the Roth and then saved the same amount.

An increase of about a third of a million dollars ought to be enough to get any teenager’s attention, even if a dollar won’t be worth as much 50 years from now. For grandparents, uncles, aunts and others looking for a way to make a meaningful contribution to a child’s future financial stability, this is a nice way to do it while directly rewarding hard work. You might match some or all of what teenagers make and even open the account with them. It’s also fine for you to give them the matching funds for the Roth, while all of their actual earnings go toward the car, college or allowance replacement.

Some families do seem to be catching on to these possibilities. At Charles Schwab, 87 percent of all custodial accounts are Roths. Vanguard reports that about 2 percent of Roth I.R.A. contributors over the last five years have been people younger than 20. According to Fidelity, the number of Roth I.R.A. accounts there owned by people under 20 increased 22 percent from the second quarter of 2013 to the second quarter of 2014.

To parents who can’t simply write checks for college tuition, another car or an allowance, matching or even saving a teenager’s earnings in a Roth will probably seem highfalutin. If you fear that every dollar a teenager saves will lead to a need to borrow that much more money for college tuition, then it will be tempting to forgo the potential long-term winnings to keep the shorter-term loan balances as low as possible.

Other parents may worry about the financial aid implications, given that colleges generally want families to turn over a large chunk of student assets each year. The good news here is that when you’re filling out the Fafsa form to determine eligibility for various forms of federal financial aid, a student’s Roth or other retirement account is not part of the calculation.

Scores of colleges and universities do require families to fill out an additional form known as the CSS/Financial Aid Profile. On it, student applicants must report a single total for all their retirement balances as of the end of the previous year. In theory, these schools could take this number into account when determining how much of their own grant money to award the applicant.

But for now, few, if any, colleges appear to be penalizing students for owning a Roth. Eileen O’Leary, assistant vice president for student financial assistance at Stonehill College in Easton, Mass., said she had seen a financial aid applicant disclose a retirement account only once. As far as she knows, asking students to pay more based on any such balance is not widespread. It may well be that so far at least, it’s mostly affluent families (who don’t need aid) who help their teenagers open Roths. Still, she suggests asking about a college’s policy if a financial aid applicant has a Roth or is thinking about opening one.

Kal Chany, who advises families through his firm Campus Consultants in New York City, has had only a handful of college applicants as clients who also had retirement accounts. Even though some of them have had balances upward of $10,000, he knows of no adverse impact on financial aid so far. Still, he said he feared that might change if lots of families started putting their children’s earnings in Roths or matched those earnings with their own money.

For now, however, the risk seems reasonably small for families applying for financial aid. The potential gain over many decades for all families is enormous, especially if the supervision turns the young adult into a regular saver who maxes out the contributions early in life and continues to do so.

Paying for college is enormously challenging, but that problem may end up paling in comparison to what will happen when millions of pensionless people who didn’t save enough in their workplace retirement accounts and I.R.A.s start running out of money. The earlier we start helping the youngest among us avoid that fate, the better.

By Ron Lieber for The New York Times

Published: August 13, 2014

How to withdraw a Power of Attorney and Declaration of Representative

For the third time in three years, the Internal Revenue Service has changed Form 2848, Power of Attorney and Declaration of Representative, which Circular 230 licensed tax professionals use to represent their clients before the IRS. Several major updates to the form anticipate Affordable Care Act compliance and reflect the retirement of e-Services online tools for tax professionals. However, one important change was not found on the form at all – but, rather, in the instructions.

 The IRS changed Form 2848 instructions to point out to practitioners how to get a list of their active authorizations on file with the agency. Authorizations automatically stay on file with the IRS for seven years. But when your client’s engagement is complete, it’s a best practice to withdraw your authorizations to limit your professional responsibility to the client and the IRS.

When your client’s Form 2848 remains on file with the IRS, the IRS will come to you, as your client’s authorized representative, to speak on behalf of your client – even if you’re not engaged to do so. This can present client challenges and disrupt IRS compliance efforts. The IRS expects tax professionals with a power of attorney authorization to be in a knowledgeable position to represent their clients, or withdraw the authorization.

As the Form 2848 instructions now explain, practitioners can request a list of active authorizations by submitting a Freedom of Information Act request to the IRS Centralized Authorization File unit, which keeps track of practitioners’ filed tax authorizations. This FOIA request is called a CAF77 request.

 Submitting a CAF77 request

The IRS requires a specific format for this request and provides a sample CAF77 request letter as a template. The IRS also requires proof of identity with the letter; attach a copy of your driver’s license or a notarized statement swearing to your identity.  

Fax or mail the request to the FOIA office:

Internal Revenue Service
HQ FOIA
Stop 211
2980 Brandywine Road
Chamblee, GA 30341
Fax: (877) 807-9215

You can request that the IRS provide the listing of your authorizations on a CD (in a Windows Notepad text file) or in a paper document.

The listing will show all clients with active authorizations under a single CAF number. If you have multiple CAF numbers, you should request CAF77 listings for each CAF number. The listing will include all Forms 2848 and Forms 8821, Tax Information Authorization, in effect. It will not include the third-party designee from any filed returns.

It usually takes two to four weeks to receive your CAF77 listing. Once you receive the listing, review it for authorizations you’d like to withdraw.

 Submitting an authorization withdrawal request

You can withdraw authorizations individually using the existing instructions on Form 2848. To withdraw multiple authorizations, it’s easier to use a CAF77 listing. Here’s how:

1. On your CAF77 listing, identify and mark out the clients for whom you want to keep authorizations on file. The remaining authorizations will be withdrawn.

2. Include a cover letter explaining that you want to withdraw authorizations for all clients listed, excluding the client information that is marked out. You, as the client’s representative, must sign and date the letter.

3. Send the cover letter and marked-up CAF77 listing to the assigned CAF unit for the state in which you practice. When the CAF unit receives your request, it should withdraw the authorizations you indicated.

After the CAF unit processes your request, the clients for whom you withdrew authorizations may receive Letter 2675C, Power of Attorney Termination Response. But the IRS is inconsistent in following this procedure. Likewise, you may or may not receive correspondence about whether the CAF unit processed your request. In addition, because this process is still manual, sometimes the IRS doesn’t process withdrawal requests at all, leaving authorizations erroneously in effect.

There’s no immediate, direct way to confirm that the IRS withdrew your authorizations. That is why it’s a best practice to regularly submit CAF77 requests to view your authorizations on file.

Many tax professionals have suggested that the IRS facilitate this process by allowing practitioners to view a complete listing of their authorizations and withdraw them in an online account. The IRS has expressed interest in this solution, but has not provided a timeline for development of this functionality.

As reflected in the IRS changes to Form 2848, withdrawing authorizations is an important practice. It provides needed closure to engagements and defines your professional responsibility to the client and the IRS.

By Jim Buttonow for Accounting Today

Published: August 12, 2014

Sales Tax Holiday Sept. 19 - 21, 2014

Legislation was passed (Chapter 2014-38, Section 21, Laws of Florida) to create a 3-day sales tax holiday that will begin at 12:01 a.m., Friday, September 19, 2014, and end at 11:59 p.m., September 21, 2014. During this holiday period, Florida law directs that no sales tax or local option tax (also known as discretionary sales surtax) will be collected on the first $1,500 of the sales price of a new qualifying Energy Star or WaterSense product. The exemption is limited to a single purchase for each specific type of qualifying item having a sales price of $500 or more. There are no quantity limits on qualifying items with a sales price of less than $500. 

Published: August 11, 2014

Job Hunting Expenses

Many people change their job in the summer. If you look for a new job in the same line of work, you may be able to deduct some of your job hunting costs.

Here are some key tax facts you should know about if you search for a new job:

  • Same Occupation.  Your expenses must be for a job search in your current line of work. You can’t deduct expenses for a job search in a new occupation.
  • Résumé Costs.  You can deduct the cost of preparing and mailing your résumé.
  • Travel Expenses.  If you travel to look for a new job, you may be able to deduct the cost of the trip. To deduct the cost of the travel to and from the area, the trip must be mainly to look for a new job. You may still be able to deduct some costs if looking for a job is not the main purpose of the trip.
  • Placement Agency. You can deduct some job placement agency fees you pay to look for a job.
  • First Job.  You can’t deduct job search expenses if you’re looking for a job for the first time.
  • Work-Search Break.  You can’t deduct job search expenses if there was a long break between the end of your last job and the time you began looking for a new one.
  • Reimbursed Costs.  Reimbursed expenses are not deductible.
  • Schedule A.  You usually deduct your job search expenses on Schedule A, Itemized Deductions. You’ll claim them as a miscellaneous deduction. You can deduct the total miscellaneous deductions that are more than two percent of your adjusted gross income.
  • Premium Tax Credit.  If you receive advance payment of the premium tax credit in 2014 it is important that you report changes in circumstances, such as changes in your income or family size, to your Health Insurance Marketplace. Advance payments of the premium tax credit provide financial assistance to help you pay for the insurance you buy through the Health Insurance Marketplace. Reporting changes will help you get the proper type and amount of financial assistance so you can avoid getting too much or too little in advance.

For more on job hunting refer to Publication 529, Miscellaneous Deductions.

Published: August 8, 2014

Basic Tax Tips about Hobbies

Millions of people enjoy hobbies that are also a source of income. Some examples include stamp and coin collecting, craft making, and horsemanship.

You must report on your tax return the income you earn from a hobby. The rules for how you report the income and expenses depend on whether the activity is a hobby or a business. There are special rules and limits for deductions you can claim for a hobby. Here are some tax tips you should know about hobbies:

1. Is it a Business or a Hobby?  A key feature of a business is that you do it to make a profit. You often engage in a hobby for sport or recreation, not to make a profit. You should consider certain factors when you determine whether your activity is a hobby. Make sure to base your determination on all the facts and circumstances of your situation. For more about ‘not-for-profit’ rules see Publication 535, Business Expenses.

2. Allowable Hobby Deductions.  Within certain limits, you can usually deduct ordinary and necessary hobby expenses. An ordinary expense is one that is common and accepted for the activity. A necessary expense is one that is appropriate for the activity.

3. Limits on Hobby Expenses.  Generally, you can only deduct your hobby expenses up to the amount of hobby income. If your hobby expenses are more than your hobby income, you have a loss from the activity. You can’t deduct the loss from your other income.

4. How to Deduct Hobby Expenses.  You must itemize deductions on your tax return in order to deduct hobby expenses. Your expenses may fall into three types of deductions, and special rules apply to each type. See of Publication 535 for the rules about how you claim them on Schedule A, Itemized Deductions.

Published: August 6, 2014

House Approves Bill to Allow Tax-Free Savings for Disability Costs

The House Ways and Means Committee approved bipartisan legislation that would allow families and individuals to participate in tax-free savings programs in order to pay the health care, transportation, housing and educational costs for disabled individuals. The Achieving a Better Life Experience Act of 2013 (HR 647), also known as the ABLE Act, passed the committee by a voice vote on July 31. Chairman Dave Camp, R-Mich., and ranking member Rep. Sander M. Levin, D-Mich., agreed they would find an offset for the bill’s $2-billion cost before it reaches the House floor for a vote.

“I am committed to working with and finding agreement with the ranking member in order to make this bill a reality,” Camp said. “Given the over 370 cosponsors in the House and over 70 cosponsors in the Senate, we owe it to our colleagues – and more importantly, to those with disabilities and their families– to come up with a solution.”

Under the legislation, contributions may be made to an ABLE account to meet the qualified disability expenses of the designated beneficiary, according to an explanation provided by the Joint Committee on Taxation (JCX-95-14). ABLE accounts cannot receive aggregate contributions during a tax year in excess of the amount allowed under Code Sec. 2503(b), approximately $14,000 for 2014. The contributions are also exempt from the generation-skipping transfer tax.

Levin also voiced support for the measure, saying it will provide economic security for millions of disabled Americans and their families. “Whether it is costs associated with transportation or housing or health prevention and wellness, this legislation aims to ease the financial burden by encouraging and assisting families to save money for disability-related expenses,” Levin said.

By Stephen K. Cooper, CCH News Staff

Published: August 5, 2014

Florida Sales Tax: Taxpayer’s Business Activities Established Substantial Nexus With Florida

By making numerous sales and deliveries to Florida consumers, and also systematically and deliberately targeting in-state consumers by advertising in a Florida publication, the taxpayer, a retail heavy equipment dealer located in Georgia, established substantial sales and use tax nexus with the state of Florida. The taxpayer’s physical presence in the state during the audit period was regular and substantial. The taxpayer made numerous sales and deliveries to Florida consumers using its employees and transport equipment. In addition, equipment located in Florida was often accepted by the taxpayer in trade and the taxpayer’s employees retrieved that equipment and contemporaneously delivered new equipment. Most significantly, the taxpayer deliberately and systematically targeted Florida customers by advertising in a Florida publication specifically circulated to potential Florida customers, a successful exploitation of the Florida consumer market. The taxpayer’s sales met the definition of “mail order sales” in that the orders were telephonically received in Georgia, but resulted in the transport of tangible personal property to Florida customers. Moreover, those sales subject the taxpayer to Florida’s taxing authority since two of the statutory indicia of nexus were met: (1) orders were placed by Florida residents for delivery in Florida; and (2) magazine advertising in Florida. As such, the taxpayer’s business activities established a substantial nexus with Florida.

Rhinehart Equipment Co. v. Department of Revenue, Florida Department of Revenue, DOAH Case No. 11-2567 (DOR 2014-002-FOF), August 4, 2014, ¶205-945

Originally Publshed by CCH

Published: August 4, 2014

House Passes the Child Tax Credit Improvement Bill

Married couples with children would no longer face a tax penalty when claiming the child tax credit under a House bill passed on July 25. House lawmakers voted 237 to 173 to approve the Child Tax Credit Improvement Bill of 2014 (HR 4935), introduced by Ways and Means Committee member Lynn Jenkins, R-Kan. The bill would eliminate the marriage penalty in the child tax credit by increasing the income phase-out threshold for couples filing joint tax returns from $110,000 to $150,000 ($75,000 for individuals and married taxpayers filing separately).

The bill would also index for inflation (to the nearest multiple of $50) the phase-out threshold for the $1,000 credit beginning in calendar year 2015. To combat fraud, taxpayers would be required to include their Social Security numbers on tax returns in order to receive the Additional Child Tax Credit (ACTC), which is refundable.

Ways and Means Chairman Dave Camp, R-Mich., noted that the Treasury Inspector General for Tax Administration has reported that the number of filers for the ACTC without a Social Security number grew from 62,000 filers (claiming $62 million in benefits) in 2000 to 2.3-million filers (claiming $4.2 billion in benefits) in 2010. “This is a common-sense provision that will help safeguard taxpayer dollars from fraud, and put it in line with other refundable tax credits, like the Earned Income Tax Credit, which require a Social Security number,” he said.

House Rules Committee Chairman Pete Sessions, R-Tex., said Republicans are fighting to make sure that hardworking American families keep more of their paychecks. “That’s why today the House passed legislation to provide common-sense reforms to ensure that the child tax credit keeps up with the rising cost of living,” ” he said.

According to the Joint Committee on Taxation (JCT), eliminating the marriage penalty in the child tax credit and adding the inflation adjustment would cost $114 billion over the next decade (JCX-92-14). Part of that cost would be offset, in the amount of $24 billion, by requiring the use of Social Security numbers for the ACTC. In total, the JCT estimates that HR 4935 would cost $90.3 billion.

Democrats criticized the bill using arguments about income inequality. “Sadly, this Republican bill would allow provisions that most directly support low-income working parents to expire while expanding the credit to families making up to three times what an average household brings home,” said House Minority Whip Steny H. Hoyer, D-Md. “How perverse, how predictable.”

Under the bill, a married couple making $160,000 with two children would get an additional $2,200 in their 2018 tax refund, according to a study by the Center on Budget and Policy Priorities (CBPP), cited by Ways and Means ranking member Sander M. Levin, D-Mich. The CBPP study estimates that a single mother of two making $14,500 would see her refund cut by $1,750 under the legislation, Levin stated.

The White House has threatened to veto the bill if it passes Congress. The measure would raise taxes for millions of struggling working families while enacting expensive new tax cuts without offsetting their costs, reflecting fundamentally misplaced priorities, the administration said in a July 24 statement. “If Republicans want to show they are serious about helping working families through the Child Tax Credit, they should start by extending current provisions past 2017,” the statement reads.

By Stephen K. Cooper, CCH News Staff

Published: August 1, 2014

This job has the world's worst tax return...

Think filing your tax return is a pain? You've got nothing on American pilots who live abroad.

As they crisscross the globe, IRS rules require expat American pilots to record exactly how long they're flying over the U.S., foreign countries and international waters. Once they land, the pilots have to track exactly when they're working, and when they're off the clock.

Here's why: If they ever face an IRS audit, the pilots will have to prove -- using flight plans or other documents -- exactly how much money they've earned in each jurisdiction, on land or in the air.

For this small slice of the American population, following the IRS rules to the letter means a tax headache that lasts 365 days a year.

"It's insane," said a Hong Kong-based airline pilot, who asked to remain anonymous over fears he would lose his job. "On every flight, I have to log the time I'm over foreign countries, and the time I'm over international waters and the U.S."

In fact, anyone who works abroad on a plane or a ship -- flight attendant, merchant mariner or cruise ship dancer -- can be required to produce those records.

"The IRS wants to see how much of the pilot's time was spent over international waters and in the U.S.," said Sue Folkringa, an accountant at Wolcott & Associates, a firm that specializes in aviation taxes. "Typically, the pilot will have to go through their flight records -- not a welcome task."

Unlike most countries, the U.S. requires its citizens living abroad to file and pay taxes each year. Since expats already pay local taxes, the IRS grants an exemption on the first $97,600 earned in a foreign country.

But here's the catch -- the U.S. government says money made working in or over international waters doesn't count as foreign income.

Take the example of an American expat pilot who flies a 13-hour direct route from Hong Kong to Los Angeles.

Money made during the three flying hours over Asia qualifies as foreign income, but payment earned during the remaining 10 hours over the Pacific Ocean does not. This means the pilot is liable for U.S. tax on about 77% of earnings during that flight.

"Every flight I go on, 12 months a year, I have to sit there and take notes," the Hong Kong-based pilot said. "It just doesn't make sense."

The pilot said he pays an accountant $1,300 a year to prepare his 60-page tax return, because the laws are just too complex.

Folkringa said that while it's up to the pilots to keep records, many don't know they have to until they're targeted by an IRS audit.

The regulations are so obscure that some tax professionals don't even know they exist. Even for specialists, there are plenty of gray areas.

Accountants, for example, say that the U.S. definition of "international waters" is far too vague -- and even contradictory.

Lack of clarity leads some accountants to conclude that international waters begin three miles off the coast, while others say the boundary starts 200 miles offshore. The pilots, meanwhile, are expected to keep track of every entry and exit with pinpoint accuracy.

The IRS did not respond to a request for comment, but the agency website does have some tips. One guide encourages individuals to obtain flight or ship plans in order "to plot the geographical points and determine the actual planned time spent flying over foreign countries."

"Who has that kind of calculation capability at their fingertips?" asked Folkringa.

Vincenzo Villamena, managing partner of Online Taxman, recalled one particularly difficult IRS audit -- his client was working on a Maersk cargo ship hijacked in 2009 by Somali pirates.

Needless to say, the kidnapping made it hard to prove when the sailor was in international waters. (The incident was later turned into a movie called Captain Phillips, starring Tom Hanks).

"It was like, 'Come on, don't you have any sympathy?'" Villamena said. "He was working, and then he wasn't working -- he was kidnapped."

By Sophia Yan for @CNNMoney Hong Kong

Published: July 31, 2014

Florida 1.3% Hurricane Tax to End in January

Florida regulators announced they are ending a 1.3 percent assessment on property insurance premiums 18 months ahead of schedule. The monies had been used to pay off bonds issued by the state’s hurricane catastrophe fund in 2010.

The Florida Hurricane Catastrophe Fund serves as a state-backed reinsurer that provides reinsurance coverage to Citizens Property Insurance Corp. and all insurers providing property insurance in the state. The Cat Fund is required to reimburse property insurers for hurricane losses up to $17 billion per storm season. That coverage is triggered after the insurers collectively reach an aggregate retention of an estimated $7.075 billion for the 2014 hurricane season.

Although no new Cat Fund assessments will be applied to new or renewal business come January 2015, some assessments will continue to be collected. Policies issued or renewed between January 1, 2011 and December 31, 2014 will remain assessed at 1.3 percent and a one percent assessment will also apply to all new and renewal policies issued between January 1, 2007 and December 31,2011

The Cat Fund is currently in the strongest financial position since it was created in the wake of Hurricane Andrew in 1992.

For the 2014 hurricane season, the Cat Fund is projected to have $12.95 billion that consists of an estimate year-end cash balance of $10.95 billion and another $2 billion in pre-event bonds. In the event the Cat Fund needed to raise more money it could do so by issuing post-event bonds that would be backed by an emergency assessment.

The maximum emergency assessment is capped at six percent of all direct written premiums for any given year and up to 10 percent for losses sustained over multiple years.

The so-called “hurricane tax” has been assessed on all property and casualty lines of business covered by both admitted insurers and surplus lines. The only exceptions are workers’ compensation policies, accident and health policies, and medical malpractice policies. Also excluded are policies issued under the National Flood Insurance Program and Federal Crop Insurance Program.

The 1.3 emergency assessment was being collected to pay off the last of a series of bonds the Cat Fund had to issue after the 2004 and 2005 hurricane season when eight hurricanes caused damage in the state.

The 2010A post-event revenue bonds raised $675 million, which was slated to be paid off in the amounts of $342 million in 2015 and $333 million in 2016.

Collectively, the post 2004-2005 bonds, the first ever issued by the Cat Fund, caused a one percent assessment starting in 2007. However, that was increased to 1.3 percent in 2011. All told, the assessments raised $2.9 billion as of May 31, 2014.

Office of Insurance Regulation Spokesman Harvey Bennett said there are several reasons the Cat Fund was able to pay off the 2010A bonds early.

First, Bennett said, is that the Cat Fund settled claims with insurers at lower levels than anticipated. Second, more people have bought property insurance and automobile coverage in the state.

"This really reflects the health of the Cat Fund that they have the ability to pay off the assessment earlier,” Bennett.

Property Casualty Insurers Association State Government Relations Counsel Donovan Brown said the end of the emergency assessments is more good news for the property market.

“Today’s announcement is proof that the Florida property market is moving in the right direction,” said Brown in a statement. “Barring a major catastrophe, PCI and its members are cautiously optimistic that the Florida property market is making great strides.”

By Michael Adams for Insurance Journal

Published: July 30, 2014

Businesses Add 218,000 Jobs in July

Businesses added 218,000 jobs in July, payroll processor ADP said Wednesday, possibly signaling that the government this week will report yet another month of strong employment gains.

That makes July the fourth straight month of private-sector gains above 200,000 but it's fewer than June's 281,000.

Even so, the new numbers add to evidence of the job market's steady improvement, said Moody's Analytics chief economist Mark Zandi, whose firm helps ADP compile its report.

"At the current pace of job growth unemployment will quickly decline. Layoffs are still receding and hiring and job openings are picking up. If current trends continue, the economy will return to full employment by late 2016," he said.

ADP's report came minutes before the Commerce Department announced the economy grew at an seasonally adjusted annual pace of 4% in the second quarter, better than economists expected, after a first quarter contraction that was the worst in five years.

Economists had estimated ADP would report 230,000 new private sector jobs. They expect the Labor Department on Friday to tally a similar number of payroll additions in its more closely watched survey, which includes businesses and federal, state and local governments.

While the two reports capture similar trends, ADP's totals have differed from Labor's private-sector job count by an average of 37,000 a month since Moody's Analytics began working with ADP to compile the data in 2012, according to High Frequency Economics.

Labor reported 288,000 job gains last month and an average 231,000 in the first half of the year, up from 194,000 in 2013, despite mixed economic news in recent months.

ADP's report showed medium-sized businesses, those with 50-499 employees, led the way in hiring with 92,000 more jobs. Small businesses added 84,000 and big businesses had 41,000.

Professional and business services -- a broad employment sector that includes accounting, advertising, legal services and business management -- added 61,000 jobs. Trade, transportation and utilities gained 52,000. Construction increased by 12,000 jobs, financial activities by 9,000; manufacturing, 3,000.

By Doug Carroll and Paul Davidson for USA TODAY

Published: July 29, 2014

A Summer Adjustment Can Prevent a Tax-Time Surprise

When it comes to filing a federal tax return, many people discover that they either get a larger refund or owe more tax than they expected. But this type of tax surprise doesn’t have to happen to you. One way to prevent it is to change the amount of tax withheld from your wages. You can also change the amount of estimated tax you pay. Here are some tips to help you bring the amount of tax that you pay in during the year closer to what you’ll actually owe:

New Job.   When you start a new job, you must fill out a Form W-4, Employee's Withholding Allowance Certificate. Your employer will use the form to figure the amount of federal income tax to withhold from your pay. Use the IRS Withholding Calculator on IRS.gov to help you fill out the form. This tool is easy to use and it’s available 24/7.

Estimated Tax.  If you get income that’s not subject to withholding you may need to pay estimated tax. This may include income such as self-employment, interest, dividends or rent. If you expect to owe a thousand dollars or more in tax, and meet other conditions, you may need to pay this tax. You normally pay it four times a year. Use the worksheet in Form 1040-ES, Estimated Tax for Individuals, to figure the tax.

Life Events.  Make sure you change your Form W-4 or change the amount of estimated tax you pay when certain life events take place. A change in your marital status, the birth of a child or buying a new home can change the amount of taxes you owe. You can usually submit a new Form W–4 anytime.

Changes in Circumstances.  If you receive advance payment of the premium tax credit in 2014 it is important that you report changes in circumstances, such as changes in your income or family size, to your Health Insurance Marketplace. You should also notify the Marketplace when you move out of the area covered by your current Marketplace plan. Advance payments of the premium tax credit provide financial assistance to help you pay for the insurance you buy through the Health Insurance Marketplace. Reporting changes will help you get the proper type and amount of financial assistance so you can avoid getting too much or too little in advance.

Published: July 25, 2014

Fines Capped for Not Buying Health Insurance

Federal officials have capped the amount of money scofflaws will be forced to pay if they don't buy insurance this year at $2,448 per person and $12,240 for a family of five.

The amount is equal to the national average annual premium for a bronze level health plan. But only those with an income above about a quarter of a million dollars would benefit from the cap. Those making less would still have to pay as much as 1 percent of their annual income.

The penalty for the first year starts at $95 per adult or $47.50 per child under 18. The penalty for not buying insurance increases to 2 percent of income or $325, whichever is higher, for 2015. The fines are due when people file their 2014 taxes.

The figures, released late Thursday, are important because the White House has only provided theoretical caps in the past. Conservative lawmakers and groups that are critical of the Affordable Care Act encouraged consumers to skip buying insurance, arguing it would be cheaper to pay a $95 penalty, but often failed to mention the 1 percent clause.

The uninsured will owe 1/12th of the annual payment for each month they or their dependents don't have either coverage or an exemption, according to the IRS.

Federal researchers predict that about 4 million people, including dependents, could be hit with fines by 2016. The Congressional Budget Office had previously projected 6 million would pay fines, but dropped the estimate because more people will be exempt from the law, partly due to changes in regulations.

More than 8 million people signed up for insurance under the Affordable Care Act and many Americans already had insurance through their employers and were not affected by the fine.

If someone is due a tax refund, the IRS can deduct the penalty from the refund. Otherwise, the IRS will let people know what's owed or hold back the amount of the penalty fee from future tax refunds, but there are no liens or criminal penalties for failing to pay.

Some residents, including prison inmates, are exempt from the penalties and others can file for hardship conditions. If people don't earn enough money to have to file a federal tax form, they don't have to buy coverage. The threshold for filing a federal tax return is $10,150.

Premium prices vary widely based on age, gender and zip code so the premium for a bronze plan in South Florida could be much different than the cost of a bronze plan in Kansas.

From The Associated Press

Published: July 24, 2014

Five Basic Tax Tips for New Businesses

If you start a business, one key to success is to know about your federal tax obligations. You may need to know not only about income taxes but also about payroll taxes. Here are five basic tax tips that can help get your business off to a good start.

1. Business Structure.  As you start out, you’ll need to choose the structure of your business. Some common types include sole proprietorship, partnership and corporation. You may also choose to be an S corporation or Limited Liability Company. You’ll report your business activity using the IRS forms which are right for your business type.

2. Business Taxes.  There are four general types of business taxes. They are income tax, self-employment tax, employment tax and excise tax. The type of taxes your business pays usually depends on which type of business you choose to set up. You may need to pay your taxes by making estimated tax payments.

3. Employer Identification Number.  You may need to get an EIN for federal tax purposes. Search “do you need an EIN” on IRS.gov to find out if you need this number. If you do need one, you can apply for it online.

4. Accounting Method.  An accounting method is a set of rules that determine when to report income and expenses. Your business must use a consistent method. The two that are most common are the cash method and the accrual method. Under the cash method, you normally report income in the year that you receive it and deduct expenses in the year that you pay them. Under the accrual method, you generally report income in the year that you earn it and deduct expenses in the year that you incur them. This is true even if you receive the income or pay the expenses in a future year.

5. Employee Health Care.  The Small Business Health Care Tax Credit helps small businesses and tax-exempt organizations pay for health care coverage they offer their employees. A small employer is eligible for the credit if it has fewer than 25 employees who work full-time, or a combination of full-time and part-time. Beginning in 2014, the maximum credit is 50 percent of premiums paid for small business employers and 35 percent of premiums paid for small tax-exempt employers, such as charities.

For 2015 and after, employers employing at least a certain number of employees (generally 50 full-time employees or a combination of full-time and part-time employees that is equivalent to 50 full-time employees) will be subject to the Employer Shared Responsibility provision.

Get all the tax basics of starting a business on IRS.gov at the Small Business and Self-Employed Tax Center.

Published: July 23, 2014

5 Tax Planning Tips for Your Small Business

We’re more than half way through 2014: Where does your business stand in terms of taxes?

Last week, a client of mine had an ugly surprise when I finished his tax return and disclosed he owed a lot of money to the IRS. His first reaction was to be mad at the messenger. However, upon careful reflection, he stated, “Well, I should have come to see you last year when my new product took off the way it did. I knew I was making a lot more money.”

He’s right. Whenever there is a substantial change to your business’s bottom line (in either red or black), it’s time for a visit to your tax pro. In fact, anyone who owns a small business should take advantage of the mid-year off season to sit down with a tax pro to discuss their financial statements and potential tax liabilities.

It’s infinitely easier to strategize and put a plan in place now than to run around at year end upending pails of water on all the little fires that have been brewing all year.

Here are some tips to discuss with your tax pro to improve your tax situation and hopefully keep working capital in your bank account rather than in Uncle Sam’s pocket:

Start a retirement plan. If you’re finally a few bucks ahead and don’t have a retirement fund, now’s the time to start one. Here’s the bonus: it’s deductible!

Consult with a bona fide financial advisor or a representative from your bank to determine whatkind of plan best suits your needs. There are a wide range of vehicles from Individual 401(k) plans to SEP IRAs to SIMPLE plans that may or may not require you to include employees in the plan.

If a plan requires employee participation, do not automatically dismiss it. Opening a retirement plan for your employees could be a meaningful way to give raises that don’t require the additional cost of employer paid payroll taxes. Read IRS Publication 560 for more information.

Analyze your legal structure. Take the time to evaluate whether your business is operating optimally in its existing entity structure. You may have started out as a sole proprietorship and have outgrown it. It is especially important to analyze entity structure if your business is now netting more than $100,000 per year.

Keep in mind that if you incorporate, you will now be required to take money out of the business via payroll rather than simple draws. There is a lot more paperwork involved under this status, but the tax benefits and protection that a corporation offers may prove more beneficial. Always discuss these options with your attorney and tax pro before making a decision.

Provide employee benefits. Employees are our most valuable business asset and should be treated accordingly. There are many employee benefits that are not taxable to either the employee or the business. Check out IRS Publication 15-B, Guide to Fringe Benefits for more information on this topic. You will save money in payroll taxes while you create a happier working environment for your people.

Purchase furniture and equipment. The IRS has always rewarded outlays for capital assets by providing the Section 179 Deduction. This special deduction allows the immediate expensing of capital assets rather than depreciating them over their useful lives. Be warned however. This year, the threshold for purchases decreased from $500,000 to $25,000. However, Congress will be looking at extending that ceiling probably sometime during fourth quarter. You can begin putting money aside for the purchases now.

Perform projections. Take a good look at your financial statements. Run a profit and loss and compare it to the prior year profit and loss through June 30. Are there significant changes? Are you anticipating an increase or decrease in sales and/or expenses through the end of the year? It’s a simple matter to export your data from QuickBooks into Excel where you can play with the numbers to determine what your yearend bottom line will be. Share that information with your tax pro to find out if you must adjust your estimated tax payments accordingly.

By Bonnie Lee for FOX Small Business Center

Published: July 22, 2014

8 Questions Small Businesses Should Ask Their Accountant

For businesses on the search for a new accountant, selecting the right one shouldn’t be taken lightly. For a small business, an accountant can play a critical role in the company’s successes and can lessen an owner’s headaches and stresses.

The process in selecting an accountant can be a difficult one, but it can also be a simple one if you take the right steps initially. First, you need to put together an outline of your accounting needs. Do you have international dealings that complicate things? Do you need to provide audited financial statements to a third party? Basically, is there anything about your financial situation that should warrant a specialist of some type? These questions all factor into what type of accountant you will need.

Next, personal recommendations are often one of the best ways to finding a few potential accountants. Ask those around you – friends, family, an old college contact, etc. – for recommendations of a great accountant. No luck? Try researching local accountants in the area.

Then comes the most important stage – the interview process. Below are eight key areas to consider when conducting your accountant interviews:

  1. What “language” do they speak? You need to be able to be very honest about your level of financial expertise. For some reason, people often feel “embarrassed” if they can’t keep up with an accountant’s financial lingo so they don’t ask questions when they don’t know what they are talking about. It will make for a much better relationship if you are clear up front about your level of financial understanding and ensure the accountant can meet you where you are.
  2. What’s important to you? Set clear expectations of what you’re looking for. If you want someone to provide ongoing financial guidance and this accountant is a once-a-year tax preparer, then you’ve got the wrong person.
  3. Look for value vs. compliance. Remember it’s not all about compliance. Sure, an accountant has to be able to ensure you remain compliant with the government, but there is so much more a great accountant can offer. They can offer business and tax advice throughout the year which can save you money, they can help you budget for the future to ensure your business stays profitable, and they can help you navigate your way out of a challenging time. Don’t just think compliance when you’re looking for an accountant – think valuable (and even priceless) advice. When you’re interviewing a potential accountant, make sure you ask what value they bring beyond compliance.
  4. Ask for references. Don’t be afraid to ask the accountant for some references from other business clients that are happy with their services… and then call them. Ask what they like and don’t like about working with the accountant. Share what you are looking for in an accountant to gauge their reaction on whether or not they think their accountant would be a good fit for you too.
  5. Who will your point of contact be at the firm? Sometimes the accountant does a great job of getting your business… and then you never talk to them again. It’s just you and the receptionist sorting out your business finances. If a more junior person in the firm will be your point of contact, ask how often you will be meeting with the accountant themselves.
  6. How do they price their services? Many people prefer an accountant who provides “value pricing” and doesn’t charge you for every minute they are working on your finances. If you think you may not call your accountant if they bill by the hour (or the minute), seek out someone whose firm has implemented value pricing.
  7. What technology do they use? Believe it or not, DOS is still alive and well in some old-school firms to this very day. There are so many advantages that new technology, especially cloud technology, brings, and if your accountant is stuck in the old ways of doing business they may not be able to advise you on new technologies you could harness to improve your own workflow. Look for someone progressive that is keeping up with the times.
  8. How do they stay current with shifting trends in the market and the accounting profession? You want an accounting firm that is always looking for new ways to do things and is open to change and new ideas. Find a firm that is constantly educating themselves not just on tax, but in ways that they can bring new ideas to your business as well.

Asking these eight questions can help steer you clear of road bumps you may have encountered after selecting an accountant you initially thought was right for your needs. Remember to take your time. You may think you have found the right accountant upon your first interview, only to later find that you like the second or third accountant even better. Getting the accounting results you hope for stems from a solid relationship – starting with the first meeting and clearly establishing your goals together.

By Jennifer Warawa for CPA Practice Advisor

Published: July 21, 2014

Tips on Travel While Giving to Charity

Do you plan to donate your services to charity this summer? Will you travel as part of the service? If so, some travel expenses may help lower your taxes when you file your tax return next year. Here are five tax tips you should know if you travel while giving your services to charity.

1. You can’t deduct the value of your services that you give to charity. But you may be able to deduct some out-of-pocket costs you pay to give your services. This can include the cost of travel. All out-of pocket costs must be:

• unreimbursed,

• directly connected with the services,

• expenses you had only because of the services you gave, and

• not personal, living or family expenses.

2. Your volunteer work must be for a qualified charity. Most groups other than churches and governments must apply to the IRS to become qualified. Ask the group about its IRS status before you donate. 

3. Some types of travel do not qualify for a tax deduction. For example, you can’t deduct your costs if a significant part of the trip involves recreation or a vacation. For more on these rules see Publication 526, Charitable Contributions.

4. You can deduct your travel expenses if your work is real and substantial throughout the trip. You can’t deduct expenses if you only have nominal duties or do not have any duties for significant parts of the trip.

5. Deductible travel expenses may include:

• air, rail and bus transportation,

• car expenses,

• lodging costs,

• the cost of meals, and

• taxi or other transportation costs between the airport or station and your hotel.

For more see Publication 526, Charitable Contributions or as your tax professional. 

Published: July 18, 2014

Home Office Deduction Limitations for S-Corp Shareholder-Employees

25 years ago Congress enacted a law prohibiting the deduction of expenses related to the rental of a portion of one’s home to their employer.  The law was enacted in response to a Supreme Court decision allowing a CPA to offset rents received from his employer with the deduction of insurance, utilities, city charges, pest control, repairs, maid service, and depreciation allocable to the portion of his residence used in the employer’s business activity [Feldman v. Commissioner].  The rental arrangement was viewed as an attempt to circumvent the purpose of Internal Revenue Code Section 280A, which limits deduction of expenses allocable to the business use of one’s home.

Given that office-in-the-home expenses are not allowable if the office is rented to one’s employer, an S Corporation shareholder-employee could deduct office-in-the-home expenses like those enumerated above as miscellaneous itemized deductions.  Often such deductions are of little or no value because of the limitations imposed on Schedule A, and the add back of such deductions in computing alternative minimum taxable income. 

Rather than claiming an office-in-the-home deduction as a miscellaneous itemized deduction, an S Corporation shareholder-employee could have the corporation reimburse the expenses properly allocable to the business use of the home.  Reimbursement of business expenses is provided for under Internal Revenue Code Section 132.  Pursuant to regulations applicable to Section 132, out-of-pocket business expenses should be documented and reimbursed on a current, monthly basis.
 
However, under Section 280A, the deduction for expenses (referring back to the kind enumerated in the first paragraph, above) allocable to the business use of the home is limited to the net income derived from the business activity.  The application of this limitation involving an S Corporation was provided in a 1996 Tax Court Memorandum Decision [Cunningham v. Commissioner]. 

In that instance, the taxpayer’s wholly owned S Corporation deducted expenses allocable to real property owned by the taxpayer and used by the S Corporation as its sole business location.  There was no rental agreement between the taxpayer and the S Corporation.  The Internal Revenue Service argued, and the Court agreed, that the deduction of the expenses allocable to that real property were subject to the income limitation imposed by Section 280A.  [The taxpayer had unsuccessfully argued that the business use portion of the property was separate from the residence portion of the property, which would have exempted the property from the 280A limitations.]  The S Corporation’s deduction of the home office expenses were disallowed because the S Corporation had reported net losses for the years under review.  But all was not lost, because expenses disallowed due to the income limitation would carry-over to subsequent years and could be deducted to the extent of S Corporation net income in those years.

If you may be entitled to an office-in-the-home deduction, confer with a tax professional for proper application of the rules in your particular circumstances.

By Stephen Kimball for HHCPA's Tax Insight Blog

Published: July 16, 2014

Report Required for Sellers of Alcohol and Tobacco Products to Florida Retailers

Every seller (manufacturer, wholesaler, or distributor of alcoholic beverage or tobacco products who sells to a retailer in Florida) must submit a report electronically each year to the Department of Revenue. This annual report is due on July 1st for the preceding reporting period and is late after September 30th.

The report for state fiscal year 2013-14 must include sales to Florida retailers from July 1, 2013 – June 30, 2014. The report is due on July 1, 2014, and will be late after September 30, 2014.

Sellers must submit the reports electronically using the Department's website. Each seller received a notice with their assigned user ID and password to access the system. After logging into the system, you may submit your report by entering your data or importing a data file into the system. 

The electronic filing requirement may be waived under certain circumstances. Contact the Department if you are unable to report electronically. 

What Are the Reporting Requirements?

Each report must contain:

  • The seller's name.
  • The seller's beverage license or tobacco permit number.
  • The retailer's name.
  • The retailer's beverage license or tobacco permit number.
  • The retailer's address, including street address, city, state, and ZIP code
  • The general item type, such as cigarettes, cigars, tobacco, beer, wine, spirits, or any combination of those items
  • The net monthly sales total, in dollars sold to each retailer.

What if I Don't Sell to Retailers?

If you are a licensed wholesaler, distributor, or manufacturer who does not sell alcoholic beverages and/or tobacco products to retailers in Florida, you are not required to submit an annual report to the Department. However, we have no way of knowing that you do not sell alcoholic beverages and/or tobacco products to retailers in Florida. As a result, you may receive a delinquency notice at which time you will need to contact the Department to explain your situation in order to avoid penalty.

We recommend that you submit a zero report showing that you did not sell alcoholic beverages and/or tobacco products to Florida retailers between July 1, 2013 and June 30, 2014. Submitting a zero report serves as notification and enables the Department to avoid issuing you a delinquency notice.

Submitting a zero report is easy:

  • Login to the reporting site with the provided user ID and password,
  • Fill in the requested information and indicate that you did not sell to retailers during this reporting period,
  • Click on Next and then Submit,
  • Save or print the confirmation page for your records.

Why Do Sellers Have to Report This Information?

Section 212.133, Florida Statutes, imposes this annual reporting requirement on sellers of alcoholic beverage or tobacco products to Florida retailers. This information report will be used by the Department of Revenue to identify Florida retailers who may be underreporting sales and use tax on alcoholic beverage and tobacco product sales. For example, the Department will compare net wholesale sales of alcohol and tobacco products with the amount of sales and use tax reported and paid by the retailers.

How Does This Affect Retailers?

Only sellers of alcohol and tobacco products are required to file this information report. Retailers should continue to report and pay sales and use tax electronically or by filing paper returns.

retailer is defined as a person engaged in the business of making sales at retail and who holds a license according to Chapters 561 through 565, Florida Statutes, (F.S.) or a permit under Chapters 210 and 569, F.S.

Published: July 11, 2014

Florida's Back-to-School Sales Tax Holiday Starts Aug. 1

Prepare to legally cheat the tax man Aug. 1-3 when Florida's sales-tax holiday gets underway in time for back-to-school shopping.

New this year, clothing items exempted from the state’s 6-percent sales-tax increases to $100 per item and for computers and accessories, the first $750 or less is now tax-free, according to the Florida Department of Revenue.

Published: July 10, 2014

Answers to Small Businesses Questions About Obamacare

Question: I have two employees in my business and I want to know how I can offer medical insurance to them. Is it something that can be done through Obamacare?

Answer: Two employees constitutes a group for insurance purposes, so you can certainly buy group insurance that will cover you and your employees, says Marcus Newman, vice president of employee benefits at GCG Financial. You aren’t mandated to provide it because you have fewer than 50 employees, but “the products you’ll have to choose from will all be ACA-compliant group plans,” he says.

There is a Small Business Health Options Program (SHOP) exchange under the ACA, specifically for employers with up to 50 employees to offer group health coverage. However, some features of the federal and state SHOPs were delayed late last year as officials shifted focus to the bungled individual marketplace rollout.

If online SHOP enrollment is currently unavailable for your state, you can buy coverage for your workers if you go through a certified broker, Blumberg says. Enroll by the 15th of the month for coverage that starts as soon as the beginning of the following month.

It may be worth investigating the SHOP options, depending on the average wage of your employees. You could be “eligible for significant tax credits to pay the employer portion of the premiums, so that is definitely worth checking out,” Blumberg says.

Adapted from Karen E. Klein's "Smart Answers" for Bloomberg BusinessWeek. 

Published: July 9, 2014

What to Do When the IRS Makes a Mistake

Question: I paid the balance due in full of a 2011 business tax debt in May 2013, but the Internal Revenue Service mislabeled the money and used it to offset another debt my company had incurred. The IRS says I still owe, but I don’t understand how or why I’m responsible for repaying them money they lost, due to mistakes within their own system. What to do?

Answer: In this situation, a lot depends on whether you designated the payment you sent in to be applied to your 2011 business tax debt. If you specified that the money was for payment of that debt, the IRS was required to apply it according to your instructions. If you didn’t designate it, they will put it where it serves their best interest. And they tend to apply it to things like penalties and interest first, so you’re out of luck.

However, if you did designate it and they misapplied it, there are some avenues you—and additional business owners who want to challenge the tax man—can take.

Give them a call. Maybe all it will take is a friendly chat to get your problem resolved. The toll-free business help line operates from 7 a.m. to 7 p.m. on your local time at 800-829-4933.

Pay them a visit. Chat doesn’t go so well? Drop into a taxpayer assistance center near you. The wait could be five minutes or several hours. The way to fasttrack this process is the practitioner priority line, which won’t be open to you. Maybe this is the time to get a pro involved in your case? A benefit of turning to your CPA to resolve these issues are the separate avenues we have to streamline and expedite resolving these issues.

File an appeal. The Office of Appeals is another independent branch within the IRS but another area where you would want to involve a tax professional. Appeals can be heard face-to-face or over the phone. As a firm, we've had success with client appeals: It depends on what you need them for and what your case is. A recent small business client, who was audited and assessed tens of thousands of dollars in additional taxes, won his appeal after a process that took several months. The tax agency doesn’t reimburse winners for the cost of the appeal, but they do “sometimes” pay interest on funds they’re ordered to return.

Take it to court. The end of the line is U.S. Tax Court. It is more formal than the appeals office and, while taxpayers can represent themselves, they are advised to hire attorneys specially licensed to practice there. It’s used when you’ve exhausted everything else.

You may consider investigating those companies that run commercials promising to resolve your dispute with the IRS, but don’t bother. The Federal Trade Commission calls them fraudsters. They charge upfront fees—a major red flag—and hawk programs that don’t work for most taxpayers, if they even take the time to actually work on your behalf after they get your money. Take your issues up with a liscened CPA whom you can trust. 

Adapted from Karen E. Klein's "Smart Answers" for Bloomberg BusinessWeek

Published: July 8, 2014

Summer Weddings Mean Tax Changes

Taxes may not be high on your summer wedding plan checklist. But you should be aware of the tax issues that come along with marriage. Here are some basic tips that can help keep those issues to a minimum:

Name change. The names and Social Security numbers on your tax return must match your Social Security Administration records. If you change your name, report it to the SSA. To do that, file Form SS-5, Application for a Social Security Card. 

Change tax withholding.  A change in your marital status means you must give your employer a new Form W-4, Employee's Withholding Allowance Certificate. If you and your spouse both work, your combined incomes may move you into a higher tax bracket. 

Changes in circumstances.  If you receive advance payment of the premium tax credit in 2014, it is important that you report changes in circumstances, such as changes in your income or family size, to your Health Insurance Marketplace. You should also notify the Marketplace when you move out of the area covered by your current Marketplace plan. Advance payments of the premium tax credit provide financial assistance to help you pay for the insurance you buy through the Health Insurance Marketplace. Reporting changes will help you get the proper type and amount of financial assistance so you can avoid getting too much or too little in advance.

Address change.  Let the IRS know if your address changes. To do that, file Form 8822, Change of Address, with the IRS. You should also notify the U.S. Postal Service. You can ask them online at USPS.com to forward your mail. You may also report the change at your local post office.

Change in filing status.  If you’re married as of Dec. 31, that’s your marital status for the whole year for tax purposes. You and your spouse can choose to file your federal income tax return either jointly or separately each year. You may want to figure the tax both ways to find out which status results in the lowest tax.

Note for same-sex married couples: If you are legally married in a state or country that recognizes same-sex marriage, you generally must file as married on your federal tax return. This is true even if you and your spouse later live in a state or country that does not recognize same-sex marriage. 

Published: July 7, 2014

Those Who Stash Money Overseas Face A Bigger Penalty

New IRS rules raise penalties for some tax evaders but also ease up on those who accidentally failed to report foreign income or assets.

U.S. taxpayers who mistakenly fail to report income or assets held overseas will soon be getting a break from the Internal Revenue Service, while tax evaders who refuse to turn themselves in will face harsher penalties.

The IRS issued rule changes on Wednesday in a move that affects U.S. taxpayers living abroad as well as U.S. residents with offshore accounts. The point of the rule tweaks is to reduce the pressure on taxpayers who fail to report foreign income or assets, but who come forward and admit their error in a timely fashion.

All penalties will be waived for U.S. taxpayers living abroad who mistakenly failed to report their foreign accounts. Meanwhile, taxpayers in the U.S. who have foreign accounts will face fines of only 5% of the total of the assets at issue. Previously, the offshore voluntary compliance programs were not available to taxpayers living in the U.S., while taxpayers living overseas could only take advantage of the reduced penalties if they owed less than $1,500 in unpaid taxes.

The IRS is also increasing penalties for those who evade taxes on their foreign accounts and then don’t come forward quickly. Those who wait until after it becomes clear that federal officials are investigating the bank holding their accounts face penalties of 50% of the balance in those accounts, up from 27.5% previously.

IRS Commissioner John Koskinen said Wednesday that the changes are the result of the IRS’s determination that it was imposing penalties that were “were too harsh or restrictive.” The U.S. government has been pushing for better overall tax compliance from taxpayers with accounts overseas for roughly five years and those efforts have led to the IRS collecting roughly $6.5 billion in taxes, interest and penalties from more than 45,000 taxpayers in that time. But, as The Wall Street Journal reported earlier this week, some of the government’s strong-arm tactics have also resulted in a record number of U.S. citizens living abroad and green-card holders renouncing their allegiance to the U.S. to avoid what they see as overly harsh penalties.

“Our aim is to get people to disclose their accounts, pay the tax they owe and get right with the government. At the same time, for important categories of these non-willful people with offshore issues, a compliance regime that is too harsh won’t net the desired result,” Koskinen said in a statement.

By Tom Huddleston, Jr. for Forbes Magazine

Published: July 3, 2014

Florida Lease Tax Draws Fire in Pensacola

Florida economic developers are in a constant quest for new business that’s being undermined by its sales tax on commercial real estate leases, making it the only state with such a levy.

But Tuesday former Florida House of Representatives Speaker Bo Johnson told a meeting of commercial realtors and others at Pensacola’s Gopher Club that he’s helping document examples of how that tax is costing the state new business, as well as the revenue, jobs and additional taxes that would accompany more enterprise.

“Pensacola and all of Northwest Florida are particularly hurt by the commercial property lease tax because we compete with states right on our borders for new business,” said Johnson, now a commercial real estate broker in Pensacola.

“I look forward to any report that Bo Johnson and commercial Realtors are able to put together,” Florida Sen. Don Gaetz, R-Destin, told the News Journal. But the influential legislator and immediate past Florida Senate president cautioned that any move to reduce the tax must “can’t just be based on a consultant’s study. It must make a case about jobs and other benefits to a wide range of the population.”

The tax has been debated in the Florida Legislature for years but proposals to elminate or reduce it haven’t emerged from various committees to be voted on in either the Senate or House, despite support from Gov. Rick Scott.

The 6 percent tax generates about $1.2 billion in state revenue a year. Thus the main challenge to rescinding it is how to replace that money, said Greater Chamber of Pensacola President Jerry Maygarden. “The tax hurts us in Florida and in Pensacola, but the state will have to get that money from somewhere else. The question is where?”

Johnson said that he’s currently working with other members of Florida’s arm of the national Commercial Real Estate Development Association to document how much potential economic improvement Florida has been losing of late because of the commercial lease tax. Adding to the tax burden, Escambia County tacks on another 1.5 percent to the lease tariff, he said.

“It’s an add-on for business expansion that no other state has,” Johnson said.

But Gaetz said advocates of eliminating or reducing the tax lacked significant legislative support. “Apparently a persuasive enough case has not been made that the tax affects families.”

As an example of such tax relief, Gaetz cited the 2014 Florida Legislature’s passage of a reduction in vehicle registration taxes that’s projected to save drivers more than $200 million a year.

Still, Gaetz said that he supports a reduction in the sales lease tax. “One approach that may have some traction is to eliminate it in stages,” Gaetz said. But bills introduced in the most recent legislative session to trim the tax to 5 percent from 6 percent stalled.

By Rob Johnson for Tallahassee Democrat 

Published: July 2, 2014

New Florida Laws Go Into Effect

Today, the state's record-setting, $77 billion election-year budget went into effect, along with 157 other bills approved by the Legislature and signed by Gov. Rick Scott.

The laws range from the "Florida GI Bill," which is intended to make Florida the most military-friendly state in the nation, to lowering college costs and banning the sale of electronic cigarettes to minors.

Also, starting July 1, private information of people involved with animal research at public research facilities will no longer be public, insurance companies will be prohibited from denying coverage or increasing rates based on a customer's gun ownership, and the state's unpaid poet laureate position will no longer be a lifetime appointment.

A measure (SB 156) to reduce the cost of motor vehicle registration fees goes into effect Sept. 1, while another 34 bills — including one (HB 59) that creates new penalties for those who harm an unborn child at any stage of development — become law on October 1.

For the year, lawmakers sent 255 bills to Scott, with just one getting vetoed: SB 392, which would have allowed the Florida Department of Transportation to raise the speed on some highways by 5 mph.

Here are highlights of the laws that took effect July 1:

Budget

HB 5001, the spending plan, the largest in state history, spreads around a hefty surplus, adding new money to public schools, state colleges and universities, environmental projects and child welfare while leaving room for about $500 million in tax and fee cuts that are already being used as a centerpiece for Scott's re-election campaign.

Military

HB 7015, called the "Florida GI Bill," provides university tuition waivers for veterans, pays for military and guard base improvements, is expected to help increase employment opportunities for veterans. The more than $30 million package requires Visit Florida to spend $1 million a year on marketing aimed at veterans and allocate another $300,000 to a new nonprofit corporation, Florida Is For Veterans, Inc. that would be used to encourage veterans to move to Florida and promote the hiring of veterans.

Guns

HB 523 allows tax collectors' offices to handle concealed-weapon license applications.

HB 525 expands a public-records exemption that shields the identities of people who apply for and receive concealed-carry licenses from the state.

Charities and Marketing

HB 629 gives consumers more information about what charities are doing with their contributions — especially those that raise large amounts of money. The law bars groups that broke laws in other states from soliciting money in Florida, bans felons from raising money for charity, increases reporting requirements for larger charities and requires information from companies that solicit donations for charities by phone.

SB 450 adds unsolicited text messages to the "Do Not Call' program designed to prevent Floridians from receiving unwanted calls from salespeople.

Sports

HB 231 expands to Major League Soccer all-star games an admissions-tax exemption that already applies to events such as all-star games hosted by Major League Baseball, the National Basketball Association, the National Hockey League and the National Football League.

By Jim Turner of The News Service of Florida for FloridaToday

Published: July 1, 2014

On July 1, Many States Will Cut Taxes

Indiana and Rhode Island businesses will see a drop in their corporate tax rates on July 1. In Idaho, people and businesses purchasing software through the "cloud" will be spared sales taxes. And starting tomorrow, Maryland is beefing up tax credits related to cybersecurity, biotechnology and research and development to encourage companies to relocate to the state.

July 1 is the start of most states' fiscal years, and for the first time in years, governors and legislators are cutting some taxes, taking advantage of an improved revenue outlook and banking on the financial breaks to encourage business and job growth in their states. While a few fees and certain sales taxes will go up, the general trend has been to use corporate tax cuts to get the economy churning, said Brian Sigritz, director of state fiscal studies at the National Association of State Budget Officers.

"In 2010, we really saw a lot of tax and fee increases to bring revenues into cash-strapped state coffers," Sigritz said. "This year was the first year (since then) governors actually proposed tax and fee decreases. We've definitely seen a movement to try to reduce taxes and fees and encourage job growth."

While budgets have been tight, the time is right to give businesses a break so they can hire people, said Raymond E. Gallison, Jr., chair of the Rhode Island House Committee on Finance. "The economy's only going to get better if we have businesses creating jobs. One of the biggest problems they've had is access to capital," Gallison said, and the tax relief will free up the cash.

Consumers are getting a bit of a break in some states as well.

In Connecticut, nonprescription drugs will be free from sales taxes, while in Florida, youth bicycle helmets, child restraint systems and booster seats will be tax exempt. California drivers get a 3.5-cent decrease in the gasoline tax. Rhode Islanders will be spared a controversial 10-cent toll on the Sakonett Rover Bridge (although a future, scheduled increase in the gas tax will be levied to pay for upkeep on the structure). And local farmers in Arkansas will see a drop in certain sales taxes associated with agriculture and energy used by farmers.

In other states, sales taxes and fees will go up: North Carolinians will pay a higher sales tax for electricity and a new tax on natural gas, while New Hampshire drivers will pay 4.2 cents more per gallon of gas to fund highway improvements.

"The tax code is one of the few things businesses care about when they're looking for new places to invest," said Scott Drenkard, an economist at the Tax Foundation, a Washington-based research group. "I do think people recognize you can be more competitive as a state (through) the tax code."

By Pew/Stateline for USA Today

Published: June 30, 2014

Understanding Small Business Income Tax Structuring

Some keys to understanding your various tax choices is important for running your business:  

Planning your taxes and selecting your business form:

  • Tax planning. This process evaluates options to determine when, whether, and how to conduct business and personal transactions for minimal taxes. As an individual taxpayer, and as a business owner, you generally can complete a taxable transaction by multiple methods, choosing whichever results in the lowest legal tax liability. While tax avoidance is expected, tax evasion—reducing tax through deceit or concealment—is not.
  • Forming your business. Whether you form a sole proprietorship, a partnership, a limited liability company, or a corporation, there are significant income tax consequences that flow from each. Don't forget to weigh the tax issues against the non-tax issues, such as which form will best help you operate and grow, or which will make it easier for you to pass along the business to your heirs.

Defining your trade or business:

To deduct business expenses, you must be engaged in a "trade or business;" an activity carried on for livelihood or profit. According to the IRS, to constitute a trade or business, a profit motive must be present and some type of economic activity conducted. "Profit" means you’re aiming for a real economic profit, not just tax savings.

Choosing tax year and accounting methods:

As a small business owner, your decisions often have tax implications - whether or not you realize it. Suppose you buy a car for business use, rather than lease it. You can't deduct the purchase price (as you can a lease payment), but you can deduct a portion of the cost annually as depreciation. Some tax-related choices have a more general effect on your business income, namely:

  • Tax year. This determines the time period for which your taxable income will be computed. All the income received or accrued within a single year is reported on that year's return, along with expenses paid or accrued. The end of the tax year is the cut-off point for many tax-saving strategies.
  • Accounting method. Whether you’re a sole proprietor filing Schedule C or a partnership or LLC filing Form 1065, you must report your accounting method to the IRS. There are two basic methods available to most small businesses: Cash and Accrual. In some cases, you may be able to use a hybrid that combines elements of both. Also, owners of certain types of businesses can use special accounting methods under the tax law.
Adapted from BizFilings.com

Published: June 27, 2014

Business Gifts

For many businesses gift giving is just as important as taking clients to lunch. Try telling that to the IRS. There is a $25 limit, per donee, per year, on gifts to individuals. It's pretty hard to find a gift that will impress clients that costs $25 or less. You can of course, give items worth more, you just won't be able to deduct the amounts over $25.

There aren't many loopholes here, but there are some points to consider:

  • A gift to the company that's intended for the eventual personal use of an individual will be deemed an indirect gift to the individual.
  • A gift to the spouse of a business customer is an indirect gift to the customer. There's an exception here. If you have a bona fide business connection the spouse, the gift will qualify as one to the spouse. For example, Sue and Fred Flood both work for Madison Inc. Sue is the president and Fred the chief purchasing agent. You could give both Sue and Fred gifts worth $25 each.
  • If you and your spouse both give gifts, both of you are treated as one taxpayer, even if you have separate businesses, or each of you have independent connections with the recipient. If a partnership gives gifts, the partnership and the partners are treated as one taxpayer.
  • If you provide a client with tickets to a dinner and/or a show, it's considered a gift. On the other hand, if you accompany him to the show, it's entertainment and not subject to the $25 limitation.

Incidental costs are not included in the $25 limit. For example, the cost of engraving, insuring, packaging or shipping the gift. A cost is incidental if it doesn't add to the value of the gift. Ornamental packaging isn't incidental if it has substantial value compared with the cost of the fruit, flower, etc.

The $25 rule doesn't apply to an item that costs $4 or less and has your name clearly and permanently imprinted on the gift and its one of a number of identical items you widely distribute. For example, tote bags with your name. It also doesn't apply to signs, display racks, or other promotional material to be used on the business premises of the recipient.

There are recordkeeping rules here too. You've got to be able to document:

  • The cost of the gift,
  • Date of the gift,
  • Description of the gift,
  • Business reason for the gift,
  • Occupation or other information to show the business relationship to the recipient.

Gifts to employees come under a different rule. De minimis gifts (noncash gifts with a small value such as a holiday turkey) aren't taxable. Otherwise the gift is taxable unless it qualifies as an employee achievement award for service, performance, etc. Special rules apply to these awards.

You've got to be creative to provide some benefits to your clients without running into the limitation. For example, rather than giving holiday gifts, invite them to a party that can be deducted. If you own a women's apparel store, throw a fashion party. A marketing firm could host a seminar at a local restaurant. Review the rules with respect to meals and entertainment first.

Look at your own situation and try to arrive at an approach that will gift you the most mileage for your money.

From Small Business Taxes & Management by the A/N Group, Inc. 

Published: June 26, 2014

Even Small Business Owners Can Use These Tax Breaks

Do you have the right tax structure? 

Consider the IRS data for 2012 tax returns: 1.9 million companies filed as some form of C Corporation, 3.6 million filed partnership returns (presumably many of them being LLCs) and an impressive 4.6 million filed as S Corporations. Before worrying about what big company moved which assets where, have you made sure you are not paying double taxes by being a C Corp? Could you save on payroll taxes if your LLC files as a corporation and elects S Corp status? Have you structured your business to be active, versus passive, in order to avoid the Net Investment Income tax?

Are you using the tax breaks often available to small businesses? 

Have you considered the Small Business Health Care Credit? It has been reported that this credit has low utilization in part because of its complexity. There are a number of available government and association tools that can make calculating this credit less daunting. Are you aware that the rules for the Home Office deduction have been liberalized, and can be utilized by more self-employed business owners? Similarly, are you still taking the per mile deduction for travel when it may be more advantageous to itemize your transportation expenses? What about hiring your spouse and children to work in your business? In many cases, there are ways to legitimately save taxes by having family members on the payroll.

Have you maximized what you can do with fringe benefits? 

There are some basic blocking and tackling techniques with fringe benefits that can save taxes. Whether it is life insurance, disability income insurance or long-term care insurance, there are ways to structure and pay for these benefits that can benefit your personal taxes. And, qualified plans offer a myriad of designs that can be tax-smart as well.  Contrary to popular opinion, there are legitimate qualified plan designs that can disproportionately favor older and/or higher paid employees.

Adapted from Steve Parrish for Forbes Magazine

Published: June 25, 2014

How Washington Spends Your Taxes

Broadly speaking, for every dollar you pay in federal income taxes, about half goes to military spending (27%) and spending on federal health programs (22.7%). The latter covers everything from Medicare and Medicaid to the Children's Health Insurance Program.

The next biggest chunk of your income taxes (13.8%) goes to paying interest on U.S. debt.

After that, 9.8% is used to support unemployment and jobs-related programs, such as career training and temporary assistance for needy families.

Veterans benefits get about 5% of your federal income taxes, as do food and agriculture programs.

Running the government, including overhead costs and spending on various agencies and offices, such as the FBI and immigration services, comes in at 4.5%.

Four percent, meanwhile, goes to housing programs, such as community development block grants, while 2% is spent on education, including everything from Head Start programs to Pell Grants.

And less than 2% is spent on each of the following: science, international affairs, transportation, and energy.

By Jeanne Sahadi for @CNNMoney

Published: June 23, 2014

House Approves Permanent Small-Business Tax Break

The House voted Thursday to make permanent a tax break allowing small businesses to write off up to $500,000 in new equipment purchases.

While the move adds to momentum for congressional efforts to extend a range of now-temporary tax breaks, it also sharpens a conflict between the House and Senate over whether to extend the breaks permanently or temporarily.

Thursday's vote was 272-144, with several dozen Democrats joining Republicans to support the measure.

The list of temporary tax breaks, many of which expired at the end of 2013, has grown over the years and now includes over 50 separate provisions affecting businesses as well as individuals.

By now, the cost of making them all permanent is proving to be prohibitive—almost $1 trillion over the next decade. But many of the breaks are so popular or important that lawmakers are reluctant to eliminate them.

House Republicans are trying to make permanent some of the most significant ones, such as the expensing provision, in an effort to give certainty to businesses as well as government budget writers. The expensing provision gives small businesses the ability to write off equipment purchases up front, rather than depreciating them over a period years. The amount has been set at $500,000 since 2010, but without congressional action would fall to about $25,000 for 2014.

"It's time to make it a permanent part of the tax code," said Rep. Dave Camp (R., Mich.), chairman of the Ways and Means Committee, on Thursday. "Why not do something good for America?…What we really need is permanent policy."

Democrats said House Republicans' effort would force cuts in spending, especially from social programs. They also said putting expensive business breaks on a permanent footing would make it harder to rewrite the tax code.

"This is piecemeal and an ill-considered way to do tax reform," said Rep. Richard Neal (D., Mass.).

The House also passed a second bill, 263-155, to ease the tax burden somewhat on firms that convert from taxable corporate status to small-business status. Small businesses generally are organized so they don't pay a corporate-level tax; instead, the owners pay tax on the profits through their individual returns.

The Obama administration said it opposed making the two provisions permanent. "Republicans are imposing a double standard by adding to the deficit to fund tax breaks for businesses, while insisting on offsetting the cost of measures that help middle-class and working Americans," such as extending emergency unemployment insurance, the White House said.

Senate Democrats want to extend virtually all the breaks for another two years, a path that could be politically easier in a year when major policy changes are proving almost impossible in Congress. The conflict over the so-called extenders appears likely to drag on for much of the year, perhaps until after the November elections.

By JOHN D. MCKINNON for the WALL STREET JOURNAL

Published: June 20, 2014

Supreme Court Issues Decision on IRS Summons Enforcement

On Thursday, the U.S. Supreme Court vacated and remanded a decision of the Eleventh Circuit, in which the appeals court held “that a bare allegation of improper purpose [in issuing a summons] … entitle[s] a taxpayer to examine IRS officials” (Clarke, No. 13-301 (U.S. 6/19/14),  slip op. at 1). Instead, the Court directed the Eleventh Circuit to consider on remand whether the taxpayer has “pointed to specific facts or circumstances that plausibly raise an inference of improper motive” (id.). The unanimous decision explained that every other court of appeals has rejected the Eleventh Circuit’s view.

The summons dispute arose in connection with an IRS examination of the tax returns of Dynamo Holdings Limited Partnership for 2005 to 2007, during which the IRS was focusing on large interest expenses for those years. Although Dynamo agreed twice to extend the statute of limitation during the exam, it refused the third request. After the refusal, the IRS issued summonses to four individuals who the IRS believed had information about Dynamo, none of whom complied with the summonses. The IRS also issued a final partnership administrative adjustment (FPAA), proposing changes to Dynamo’s tax returns for the years at issue. Dynamo challenged the FPAA in Tax Court, and that proceeding is still pending.

When the IRS issued a summons enforcement action in federal district court, Michael Clarke, who had been Dynamo’s chief financial officer, objected that the summonses were issued for improper purposes. The two improper purposes he alleged were that (1) the summonses were issued in retaliation for Dynamo’s refusal to extend the statute a third time and (2) they were issued, after Dynamo had filed suit in the Tax Court, to evade the Tax Court’s limits on discovery.

The district court rejected Clarke’s allegations, holding that his allegation that the summonses were issued in retaliation for the refusal to extend the statute of limitation was “mere conjecture,” and pointing out that the second theory failed as a matter of law because the validity of a summons must be tested when it is issued and Dynamo had not yet commenced its Tax Court case when the summons was issued. The Eleventh Circuit, however, reversed the district court and held that, under its precedent, “a simple ‘allegation of improper purpose,’ even if lacking any ‘factual support,’ entitles a taxpayer to ‘question IRS officials concerning the Service’s reasons for issuing the summons’” (Clarke, slip op. at 5 (citations omitted)). 

As the Supreme Court explained, the Eleventh Circuit’s holding was overbroad and conflicted with precedent in all the other circuits. The Court held that a taxpayer has a right to conduct an examination of IRS officials regarding their reasons for issuing a summons, but only when the taxpayer points to specific facts or circumstances plausibly raising an inference of bad faith. The Court explained that, “Naked allegations of improper purpose are not enough: The taxpayer must offer some credible evidence supporting his charge.” However, the Court further stated that circumstantial evidence can be used to meet this burden (Clarke, slip op at 6). 

In its remand order, the Supreme Court gave the Eleventh Circuit instructions on the deference it should give to the district court’s opinion in its reconsideration of the case. The Court explained that the district court’s decision was entitled to deference, but only if it is based on the correct legal standard, and that the district court’s latitude did not extend to “legal issues about what counts as an illicit motive” (Clarke, slip op. at 8).  

BY SALLY P. SCHREIBER, J.D. for the JOURNAL OF ACCOUNTANCY   

Published: June 19, 2014

Senators Propose 12-Cent Gas Tax Increase

Two senators unveiled a bipartisan plan Wednesday to raise federal gasoline and diesel taxes for the first time in more than two decades, pitching the proposal as a solution to Congress' struggle to pay for highway and transit programs.

The plan offered by Sens. Chris Murphy, D-Conn., and Bob Corker, R-Tenn., would raise the 18.4-cents-a-gallon federal gas tax and 24.4-cents-a- gallon diesel tax each by 12 cents over the next two years, and then index the taxes to keep pace with inflation. The increase would be applied in two increments of 6 cents each.

The plan also calls for offsetting the tax increases with other taxes cuts. Senators said that could be done by permanently extending six of 50 federal tax breaks that expired this year, but they indicated they would be open to other suggestions for offsets.

The plan was immediately embraced by industry and transportation advocacy groups seeking a long-term means to keep the federal Highway Trust Fund solvent. However, it would require a lot of heavy lifting from Congress in the politically-charged atmosphere of an election year to pass such a plan before late August, when the trust fund is forecast to go broke.

Senate Finance Committee Chairman Ron Wyden, D-Ore., has indicated he's looking for means to shore up the fund for about the next six months while working on a long-term plan. That would move debate on a gas tax increase or some other revenue-raising scheme to after the mid-term election in November.

Revenue from gas taxes and other transportation user fees that for decades hasn't kept pace with promised federal transportation aid promised to states. People are driving less per capita and cars are more fuel efficient, keeping revenues fairly flat. At the same time, the cost of construction has increased, and nation's infrastructure is aging, creating greater demand for new and rebuilt roads and bridges.

The last time federal gas and diesel taxes were increased was in 1993 as part of plan to reduce the federal budget deficit. Republicans castigated Democrats for the tax increase, and it was a factor in the GOP takeover of the House and Senate the following year.

Since then, lawmakers have been reluctant to raise fuel taxes despite calls from several blue-ribbon commissions to do so.

"For too long, Congress has shied away from taking serious action to update our country's aging infrastructure," Murphy said in a statement. "We're currently facing a transportation crisis that will only get worse if we don't take bold action to fund the Highway Trust Fund."

Sen. Tom Carper, D-Delaware, who attempted to increase the gas tax increase in 2010, said he was glad to see the idea "gaining more bipartisan support."

Since 2008, Congress has repeatedly dipped into the general treasury for money to keep the trust fund solvent, sometimes waiting until the government was the verge of slowing down payments to states. States have complained that the uncertainty over whether federal aid will be forthcoming has limited their ability to commit to larger projects that take years to plan and construct.

"Congress should be embarrassed that it has played chicken with the Highway Trust Fund and allowed it to become one of the largest budgeting failures in the federal government," Corker said.

The six expired tax breaks identified by the senators as possible offsets for fuel tax increases are a research and development tax credit, certain expensing by small businesses, the state and local sales tax deduction, increasing employer-provided transit benefits to the same level as parking benefits, a deduction for spending by teachers on classroom supplies, and an increased deduction for land conservation and easement donations.

By Joan Lowy for ABC News

Published: June 17, 2014

How To Invest $100, $1,000, Or $10,000

Whether you have $100, $1,000, or $10,000 to invest, you can get started in investing. 

I have $100 to invest:

Buy one share of a stock market Exchange-Traded Fund (ETF) and a good introductory book on investing such as "The Elements of Investing," by Malkiel and Ellis.

Which ETF should you buy and where?

Let me make it easy. Open an account with TD Ameritrade. Opt into the commission-free ETF program. Buy one share of the Vanguard Total World Stock ETF (VT) for about $59.

Congratulations! You now own (a piece of) 5,351 different stocks from about 50 countries.

Now, read the investing book and keep saving money.

Why TD Ameritrade? They make it easy to get started with a low balance without zinging you with fees.

Another option: Betterment.com has a extremely simple sign-up process and will let you invest the whole $100.

They do charge higher fees than TD and require you to invest an additional $100/month minimum until you hit $10,000.

I have $1,000 to invest:

Open an account at Vanguard (make it an IRA or Roth IRA if you’re eligible to contribute to one) and put $1,000 in the target-date fund of your choice.

These funds are cheap and own a diversified mix of stocks and bonds.

Go ahead and drop another $20 on that investing book (or get it from the library). You’ll learn that even with a low-cost, diversified portfolio, sometimes you’ll lose money. Sometimes a lot of money.

That’s no reason to avoid investing.

It’s a good reason to control what you can (keep costs low, diversify, and avoid active management), invest according to your risk tolerance (don’t own 100% stocks if you won’t be able to sleep at night), and stay calm when everyone else is panicking.

I have $10,000 to invest:

The Vanguard target-date fund is still an excellent choice. In fact, it would still be an excellent choice if you had $1 million to invest.

Wealthy folks have access to special investment opportunities that the rest of us don’t.

Lucky for us, those special opportunities (such as hedge funds) are usually much worse than the boring mutual funds and ETFs we have to settle for.

Another option: Wealthfront is a snazzy automated investment management site with a $5,000 minimum and no fees for the first $10,000.

It’s easy to get started, and they offer some tax management features that Vanguard doesn’t.

Keep in mind:

If you have a 401(k) at work, you’re probably better off investing there than in your own account. You might get an employer match, and once you set up payroll deduction, you’ll keep saving automatically without thinking about it.

"The Elements of Investing" can help you choose good funds in your 401(k).

As you accumulate more money in your investment accounts, the rules of good investing don’t change. They just get more important. There’s a big different between losing $100 and losing $10,000 (or $100,000, or more).

By Matthew Amster-Burton for Business Insider

     
Published: June 16, 2014

IRS: 4.7 Million Made At Least $200,000

Close to 5 million tax filers reported adjusted gross income of at least $200,000 in 2011, according to data released Monday by the IRS.

That represents 3.2% of all federal income tax returns.

The vast majority ended up owing U.S. income tax. Roughly 1.8 million paid between 15% and 20% of their income in taxes. Nearly 1.5 million paid between 20% and 25%. And about 900,000 paid more than 25%. Most Americans' effective tax rates are well below 15%.

Not every top-AGI household owed money, however.

Of the high-income returns, 19,563 of them -- or 0.4% -- had no U.S. income tax liability. That's thanks largely to tax deductions, exclusions and credits, all of which combined can eliminate what is owed to Uncle Sam.

But because AGI doesn't cover all income, the 19,563 returns don't reflect all high-income households that owed nothing, said Roberton Williams, a fellow at the Tax Policy Center.

For instance, a high-income household may bring in $500,000 a year, but $400,000 of it comes from tax-exempt income, and therefore is not counted as AGI. And various tax breaks may reduce or eliminate the tax owed on the remaining $100,000.

Published: June 13, 2014

5 Most Common Tax Mistakes

Don't delay your refund by making these common mistakes on your tax return. 

An Unsigned Return

It's the easiest part about doing your taxes, but some people still forget to do it. When you file online you won't be able to submit the return without your typed signature -- two signatures if you're filing jointly.

But when filing on your own, this is often overlooked. "An unsigned tax return is like an unsigned check -- it's not valid," the IRS says.

Wrong Social Security Number

While you should have your own Social Security number memorized by now, taxpayers often enter the wrong numbers for their children or other family members.
If you're unsure of a number, get the Social Security cards out and copy it from that. Otherwise you risk getting your return kicked back to you by the IRS.

Wrong Name

Apparently many taxpayers can't spell their names correctly. The IRS says putting the wrong name on a tax form is one of the most common tax errors.
This mistake also comes up a lot after a person has changed their name -- after getting married or for other reasons -- and the name they write down on a return doesn't match the name in the IRS's system.
To avoid this, make sure you've changed your name with all the relevant authorities, like the Social Security Administration, before filing your taxes.

Wrong Filing Status

You should be pretty certain about whether you're married or single. But what often confuses people is whether to choose head of household or single as their filing status, according to the IRS.
"Primarily, this is happening with divorced parents of minor children," said Dominique Molina, CPA and president of the American Institute of Certified Tax Coaches. "Either confusion as to who legally is entitled to claim the kids sets in, or one parent is illegally attempting to claim the children and the lucrative filing status that accompanies them."

Wrong Bank Account Number

When requesting a refund via direct deposit, you must enter your bank account number on the tax return.
But if even one number is off, the IRS won't be able to transfer your refund into your account and will send you back your return to fix the mistake.

By Blake Ellis for @CNNMoney

Published: June 12, 2014

Treasury to Distribute $3.5 Billion in New Markets Tax Credits

The Treasury Department’s Community Development Financial Institutions Fund plans to distribute $3.5 billion in New Markets Tax Credit awards to revitalize low-income communities.

A total of 87 organizations across the country will receive tax credit allocation authority under the calendar year 2013 round of the New Markets Tax Credit Program.

“The New Markets Tax Credit Program creates jobs and critical investments in low-income neighborhoods and rural communities across the nation,” said acting assistant secretary for financial institutions Amias Gerety in a statement. “Often the New Markets Tax Credit is the most critical piece of the puzzle when trying to finance important economic development projects across the country. Its ability to attract private-sector capital into some of the most economically distressed and underserved communities is a hallmark of this important economic development program.”

The New Markets Tax Credit Program was established by Congress in December 2000. The program allows individual and corporate taxpayers to receive a credit against federal income taxes for making equity investments in vehicles known as Community Development Entities. The credit provided to the investor totals 39 percent of the cost of the investment and is claimed over a seven-year period. The Community Development Entities in turn use the capital raised to make investments in low-income communities.

Over $31.1 billion of New Markets Tax Credit transactions have been reported from the program’s inception through the end of fiscal year 2012, and over 74 percent of these were made in severely distressed communities, according to Dennis Nolan, acting director of the Community Development Financial Institutions Fund. “The New Markets Tax Credit Program is clearly targeting economic development in communities that critically need financing to help create new businesses, affordable housing and jobs,” he said in a statement.

Community Development Entities must apply annually to the CDFI Fund to compete for New Markets Tax Credit Program allocation authority. The 87 organizations receiving awards were selected from a pool of 310 applicants that requested over $25.9 billion in allocation authority. They are headquartered in 32 different states and the District of Columbia, and they have identified principal service areas that will cover nearly every state in the country and the District of Columbia.

By Michael Kohn for Accounting Today

Published: June 11, 2014

IRS Adopts "Taxpayer Bill of Rights"

The Internal Revenue Service today announced the adoption of a "Taxpayer Bill of Rights" that will become a cornerstone document to provide the nation's taxpayers with a better understanding of their rights.

The Taxpayer Bill of Rights takes the multiple existing rights embedded in the tax code and groups them into 10 broad categories, making them more visible and easier for taxpayers to find on IRS.gov.

Publication 1, "Your Rights as a Taxpayer," has been updated with the 10 rights and will be sent to millions of taxpayers this year when they receive IRS notices on issues ranging from audits to collection. The rights will also be publicly visible in all IRS facilities for taxpayers and employees to see.

"The Taxpayer Bill of Rights contains fundamental information to help taxpayers," said IRS Commissioner John A. Koskinen. "These are core concepts about which taxpayers should be aware. Respecting taxpayer rights continues to be a top priority for IRS employees, and the new Taxpayer Bill of Rights summarizes these important protections in a clearer, more understandable format than ever before."

The IRS released the Taxpayer Bill of Rights following extensive discussions with the Taxpayer Advocate Service, an independent office inside the IRS that represents the interests of U.S. taxpayers. Since 2007, adopting a Taxpayer Bill of Rights has been a goal of National Taxpayer Advocate Nina E. Olson, and it was listed as the Advocate’s top priority in her most recent Annual Report to Congress.

"Congress has passed multiple pieces of legislation with the title of 'Taxpayer Bill of Rights,'" Olson said. "However, taxpayer surveys conducted by my office have found that most taxpayers do not believe they have rights before the IRS and even fewer can name their rights. I believe the list of core taxpayer rights the IRS is announcing today will help taxpayers better understand their rights in dealing with the tax system."

The tax code includes numerous taxpayer rights, but they are scattered throughout the code, making it difficult for people to track and understand. Similar to the U.S. Constitution’s Bill of Rights, the Taxpayer Bill of Rights contains 10 provisions. They are:

  1. The Right to Be Informed
  2. The Right to Quality Service
  3. The Right to Pay No More than the Correct Amount of Tax
  4. The Right to Challenge the IRS’s Position and Be Heard
  5. The Right to Appeal an IRS Decision in an Independent Forum
  6. The Right to Finality
  7. The Right to Privacy
  8. The Right to Confidentiality
  9. The Right to Retain Representation
  10. The Right to a Fair and Just Tax System

The rights have been incorporated into a redesigned version of Publication 1, a document that is routinely included in IRS correspondence with taxpayers. Millions of these mailings go out each year. The new version has been added to IRS.gov, and print copies will start being included in IRS correspondence in the near future.

The timing of the updated Publication 1 with the Taxpayer Bill of Rights is critical because the IRS is in the peak of its correspondence mailing season as taxpayers start to receive follow-up correspondence from the 2014 filing season. 

The IRS has also created a special section of IRS.gov to highlight the 10 rights. The web site will continue to be updated with information as it becomes available, and taxpayers will be able to easily find the Bill of Rights from the front page. The IRS internal web site for employees is adding a special section so people inside the IRS have easy access as well.

As part of this effort, the IRS will add posters and signs in coming months to its public offices so taxpayers visiting the IRS can easily see and read the information.

"This information is critically important for taxpayers to read and understand," Koskinen said. "We encourage people to take a moment to read the Taxpayer Bill of Rights, especially when they are interacting with the IRS. While these rights have always been there for taxpayers, we think the time is right to highlight and showcase these rights for people to plainly see."

"I also want to emphasize that the concept of taxpayer rights is not a new one for IRS employees; they embrace it in their work every day," Koskinen added. "But our establishment of the Taxpayer Bill of Rights is also a clear reminder that all of the IRS takes seriously our responsibility to treat taxpayers fairly.

Koskinen added, "The Taxpayer Bill of Rights will serve as an important education tool, and we plan to highlight it in many different forums and venues."

Published: June 10, 2014

Penalty Relief Pilot for Small Retirement Plans Begins in June

The Internal Revenue Service will begin a one-year pilot program this month to help small businesses with retirement plans that owe penalties for not filing reporting documents. By filing current and prior year forms during this pilot program, they can avoid penalties.

The IRS is reaching out to certain small businesses that maintain retirement plans and may have been unaware that they had a filing requirement. The IRS projects that this program will bring a significant number of small business owners into compliance with the reporting requirements.

Plan administrators and sponsors who do not file an annual Form 5500 series return can face stiff penalties — up to $15,000 per return. Those who have already been assessed a penalty for late filings are not eligible for this program. This program is open only to retirement plans generally maintained by certain small businesses, such as those in an owner-spouse arrangement or eligible partnership.

Multiple late retirement plan returns may be included in a single submission. If a retirement plan has delinquent returns for more than one plan year, penalty relief may be available for all of these returns. Similarly, delinquent returns for more than one plan may be included in a single penalty relief request. No filing fee will be charged during the pilot program.

Published: June 6, 2014

More than 150,000 Individuals Pay Their Taxes with IRS Direct Pay

The Internal Revenue Service announced the successful start of its new web-based system — IRS Direct Pay — on IRS.gov, which lets taxpayers pay their tax bills or make estimated tax payments directly from checking or savings accounts without any fees or pre-registration.

“IRS Direct Pay reflects our latest effort to add more online tools to provide additional service options to help taxpayers,” said IRS Commissioner John Koskinen. “IRS Direct Pay simplifies the payment process, and taxpayers can make a payment from the convenience of a home computer.”

To date, more than 150,000 taxpayers have paid more than $340 million in taxes through the new IRS Direct Pay system. With IRS Direct Pay, taxpayers receive instant confirmation that the payment has been submitted, and the system is available 24 hours a day, 7 days a week. Bank account information is not retained in IRS systems after payments are made.

From the “Pay Your Tax Bill” icon at the top of the IRS home page, taxpayers can access IRS Direct Pay, which walks the taxpayer through five simple steps. The steps include providing your tax information, verifying your identity, entering your payment information, reviewing and electronically signing and recording your online confirmation.

IRS Direct Pay offers 30-day advance payment scheduling, payment rescheduling or cancellations, and a payment status search. Future plans include an option for e-mailed payment confirmation, a Spanish version and one-time registration with a login and password to allow quick access on return visits.

Published: June 5, 2014

Is It Worth Getting a Valuation for Your Small Business?

There are a number of valid reasons to get a professional business valuation. And really, assuming your small business is your family’s biggest asset—perhaps other than your home—isn’t it smart to have a realistic idea of what it’s worth? Recent research shows many small business owners are counting on their companies as nest eggs—they’re less likely to have diversified investments because they plan to retire on the proceeds of selling the business.

That said, you should probably ignore those solicitations. “Fishing for work by valuation firms when there is no real need is both unprofessional and a waste of client resources, money, time, and efforts,” Jack Bakken, past president of theAmerican Society of Appraisers, writes in an e-mail.

When would a valuation be needed, other than for a sale? “Most commonly they are done for tax purposes, such as estate settlement, income tax or property tax disputes, or litigation, or to satisfy the annual requirements for Employee Stock Ownership Plans,” he writes. Other situations that could require a valuation include mergers and acquisitions, bankruptcy, estate planning, gifting of minority stock interests, qualifying for a loan, or taking on an investor.

Rick Gould, managing partner at New York City mergers-and-acquisitions companySGP Worldwide, specializes in valuations of creative services companies. He says a typical valuation takes about three weeks and requires substantial probing of the company’s financial documents, management, and operational structure.

Valuations in the U.S. cost between $3,000 and $40,000, depending on the accuracy needed and the complexity of the company involved, according to a February report from independent research firm IBISWorld. Preliminary valuations—which turn out at least a rough number—usually cost $3,000 to $10,000, the report says.

That’s a lot of money for many small companies. The process of pulling together the required financial documents can be time-consuming, and the results can be painful if they don’t live up to expectations. It’s no wonder that “many business owners have absolutely no idea—or the wrong idea—about what their company is worth,” according to Julie Gordon White, principal at BlueKey Business Brokerage Mergers & Acquisitions.

She recommends that entrepreneurs get at least a ballpark estimate of their company’s value on an annual basis, though they don’t have to pay for a certified appraisal. Just having a reliable figure in mind “does wonderful things, like make you more realistic about how you’re spending your money and how that’s affecting profitability, and it helps you make plans for the future,” she says. “Having a number also relates to how you value yourself as an entrepreneur. Are you growing something that just makes money along the way but can’t be transferred to someone else eventually? Or can you make changes so it is profitable enough so that you’ll sell it someday and get that pot of gold that could fund your retirement?”

“The conventional wisdom says that most small businesses sell for between two to three times’ discretionary earnings. That fits my experience over the past 10 years,” she says, though there are some exceptions, notably technology companies that hold intellectual-property rights.

In an era where finding a home’s estimated value is as easy as typing in an address, “it’s crazy that we have 28 million small businesses in this country and a majority of them probably don’t know what they’re worth,” Carter says.

By Karen E. Klein for Bloomberg BusinessWeek

Published: June 4, 2014

Risking a Health Insurance Strategy the I.R.S. May Not Approve

When it came time to renew his company’s health plan last fall, Jerry Eledge found himself in a bind that many small-business owners know all too well.

On one hand, “it’s kind of a moral obligation” to offer insurance, said Mr. Eledge, who runs Community Quick Care, a growing chain of primary health care clinics in the Nashville area. And yet, premiums for his existing plan were going up 20 percent, while other group plans promised as much as a 50 percent increase, even as deductibles and co-pays were becoming less generous. “We found no really good alternatives for 2014 at all,” he said. “Before Gary came along, we weren’t sure what we were going to do.”

Gary is Gary Adkins, an insurance agent in Brentwood, Tenn., who introduced Mr. Eledge to Zane Benefits, a company in Park City, Utah, that offers businesses an online claims reimbursement service. With help from Zane’s software, Mr. Eledge created a new health plan for Community Quick Care. The plan, known as a defined contribution plan, has obvious appeal.

It largely frees the company from the headaches of arranging health coverage by reimbursing employees for insurance they buy on their own. At the same time, it allows the company to help its employees find affordable, often cheaper, options on the individual market through Zane. And, importantly, it promises that the contribution the company makes to its employees’ coverage is tax-free for the employees and excluded from payroll taxes for the employer.

That, however, is a promise Zane Benefits may not be able to keep.

In a technical guidance issued last year and reiterated in May, the Internal Revenue Service issued a clear warning about such health reimbursement arrangements, according to eight health and tax lawyers as well a half-dozen lobbyists and analysts who have followed the Affordable Care Act’s adoption. The guidance “makes it very difficult, if not impossible, for an employer to pay for an employee’s individual insurance with tax-free dollars,” said Seth Perretta, a health and tax lawyer with the Groom Law Group in Washington.

The issue, at least on the surface, is language in the health law meant to make sure there are no dollar limits on the coverage for a person’s basic medical needs, which the law calls essential health benefits. The I.R.S. asserts that a plan reimbursing employees for insurance they buy on their own cannot comply with this prohibition on annual limits because the company’s contribution is by definition limited — even though the health insurance the employee ends up buying would have no annual limits.

The president of Zane Benefits, Rick Lindquist, 29, said Zane’s plan did not violate the prohibition on limits because premiums were not an essential health benefit. “We’ve designed an arrangement that takes into account the guidance, and complies with the statutes and regulations as written,” he said.

Before this year, most companies that wanted to make sure their employees had insurance had little choice but to select and manage the plans because they could not be certain their employees would be able to obtain insurance individually. Now, as the Affordable Care Act creates more options on the individual market, the question of whether to continue offering health insurance has intensified, especially for small businesses.

And Zane Benefits is emerging as the leader of a handful of companies hoping to facilitate that transition. According to Mr. Lindquist, about 2,600 small businesses use Zane’s software to create and manage health reimbursement arrangements, as these plans are commonly called — lured at least in part by the tax exclusion. Community Quick Care pays Zane $12 a month for each of its 30 employees to administer the plan. Mr. Adkins estimates that employees can buy their own plan for as much as 40 percent less than the same coverage would cost as part of a group. Should they receive government subsidies to buy that insurance — and Mr. Eledge estimated up to a quarter of his employees qualify — the savings to the employer can double, Mr. Adkins said.

Lawyers following the issue called Zane’s approach risky at best. “It is abundantly clear that the I.R.S. thinks that you cannot use one of these arrangements to use tax-free dollars to pay for individual health insurance,” said Amy B. Monahan, a law professor at the University of Minnesota.

But Mr. Perretta said the Zane plan exploited a weakness in the guidance, which does not specify whether insurance premiums are an essential health benefit. “The Zane arrangement tries to thread a needle,” he said. “It really lives or dies on that ambiguity.” Elsewhere, he added, the I.R.S. and other agencies have implied that a premium is not an essential health benefit, so for now, Mr. Perretta said, the Zane plan could be legal, “but regulators don’t like it.”

Officials from the Treasury Department and the I.R.S. declined to answer questions about the regulations or Zane’s plan, but a Treasury Department official wrote in an emailed statement, “This type of reimbursement plan generally would fail to comply with the A.C.A.’s prohibition on annual dollar limits.”

Several lawyers who had spoken with I.R.S. officials said the Obama administration was concerned that self-insuring companies could use the plans to shift sicker workers to the individual market, which might destabilize it. Nor do regulators want employees with tax-preferred reimbursement accounts to also have access to exchange subsidies, which the lawyers said would constitute “double-dipping.” Because the tax-free benefit would not appear on an employee’s tax return, an exchange could not consider it when determining whether the employee’s income was low enough to qualify for a tax credit. As a result, employees receiving reimbursements could be treated more generously by an exchange than the law intends.

In fact, it is not clear that employees who sign up for Zane’s plan would be eligible for a subsidy. Zane said they would. All of the lawyers interviewed said they would not. Under the law, employers will report to the I.R.S. who has signed up for company health plans, including reimbursement arrangements. Beginning in 2016, the agency will use these employer statements to determine whether an individual who received a subsidy in the previous year was entitled to it — and if not, the employee will have to pay the government back. Said Linda Mendel, a tax lawyer with Vorys, Sater, Seymour and Pease: “There’ll be some nasty surprises when all this stuff comes together in 2016.”

The Treasury official said the government planned to issue further guidance on the matter. But ultimately, it may be up to one of Zane’s clients to persuade a court that the arrangements are legal. The penalty for an employer violating the market reform rules is $100 a day, or $36,500 a year, for each affected employee, though never more $500,000 total.

Mr. Lindquist said his agents walked clients through all of the legal risks, but he was confident the plan would withstand scrutiny. “If we were worried about that, we wouldn’t offer it,” he said. Mr. Adkins, the insurance agent, said he told his small-business clients who had adopted Zane’s software — there are 150 of them — that they had little to fear. “The purpose of the Affordable Care Act is to get people covered in this country,” he said. “Do you really believe the government is going to penalize that small-businessman $36,000 a year per employee because he had the heart to actually help his employees get as much coverage as they could get?”

And Mr. Eledge, of Community Quick Care, said Mr. Adkins satisfied him, and his accountant, that the plan would stand up. “We like it very clear that everything we do as a company is aboveboard and legal,” he said. “I’m not the kind of guy who says, ‘I.R.S., come get me.’ ”

By Robb Mandelbaum for New York Times Small Business

Published: June 3, 2014

June 16 Deadline Nears for Taxpayers Living Abroad

Taxpayers abroad qualifying for an automatic two-month extension must file their 2013 federal income tax returns by Monday, June 16, according to the Internal Revenue Service.

The June 16 deadline applies to U.S. citizens and resident aliens living overseas, or serving in the military outside the U.S. on the regular April 15 due date. Eligible taxpayers get one additional day because the normal June 15 extended due date falls on Sunday this year. To use the two-month extension, taxpayers must attach a statement to their tax return explaining which of these two situations applies. 

Federal law requires U.S. citizens and resident aliens to report any worldwide income, including income from foreign trusts and foreign bank and securities accounts on their federal income tax return. Separately, U.S. persons with foreign accounts whose aggregate value exceeded $10,000 at any time during 2013 must file electronically with the Treasury Department a Financial Crimes Enforcement Network (FinCEN) Form 114, Report of Foreign Bank and Financial Accounts (FBAR).

Form 114 replaces TD F 90-22.1, the FBAR form used in the past. It is due to the Treasury Department by Monday, June 30, must be filed electronically, and is only available online through the BSA E-Filing System website. This due date cannot be extended and tax extensions do not extend the FBAR filing due date. 

Taxpayers who cannot meet the June 16 deadline can get an automatic extension until Oct. 15, 2014. This is an extension of time to file, not an extension of time to pay. Interest, currently at the rate of three percent per year compounded daily, applies to any payment made after April 15, 2014. In some cases, a late payment penalty, usually 0.5 percent per month, applies to payments made after June 16, 2014.

In some cases, an additional extension beyond Oct. 15 may be available. 

Published: June 2, 2014

Supreme Court To Hear Case On Whether States May Tax Income Earned In Other States

The Supreme Court had a busy day on Tuesday. When the dust settled, however, it had only granted one new case – but it was a big one. The nation’s highest court granted certiorari to Comptroller v. Wynne, setting the stage for a fight that could rewrite tax laws in states across the country.

As noted before, lawyers and judges like to use Latin. Granting certiorari (or “granting cert” for the really cool hipster lawyers) means that the Supreme Court will hear the matter.

Some cases have what’s called “original jurisdiction” in the Supreme Court; those cases, which are defined by statute (28 U.S.C. § 1251) go straight to the Supreme Court. The typical case associated with original jurisdiction would be a dispute between the states. Most cases, however, don’t go that route. To be heard at the Supreme Court level without having original jurisdiction requires the losing party at the appellate level to file a petition seeking a review of the case. If the Supreme Court grants the petition and decides to hear the matter, it’s called awrit of certiorari. And that’s what happened here.

The question presented in the Petition for Certiorari in Wynne is:

Does the United States Constitution prohibit a state from taxing all the income of its residents — wherever earned — by mandating a credit for taxes paid on income earned in other states?

Procedurally, the question found its way to the Supreme Court after the Court of Appeals of Maryland “reached the unprecedented conclusion” that a state is in violation of the Commerce Clause in the U.S. Constitution if it collects income taxes from its residents when the income was earned from sources in another state and is subject to tax by the other state.

In this case, a married couple, the Wynnes, reported taxable net income of approximately $2.7 million. More than half of that amount represented a share of earnings in an S corporation with operations in several states. The Wynnes claimed a credit on their Maryland tax returns for taxes paid to 39 other states but not for any county or local government taxes. The State of Maryland denied the credits and issued a notice of deficiency and the Wynnes appealed. At a hearing, the assessment was affirmed.

Eventually, the Wynnes amended their petition to claim that the tax credit statute was in violation of the Commerce Clause of the United State Constitution. That claim was rejected. At appeal, the Wynnes argued that the state of Maryland was constitutionally required to extend the credit for taxes paid to other states to the county as well as the state, raising the question of whether a state had the unconditional right to tax all income based on residency. The Circuit Court agreed with the Wynnes.

On appeal by the state, the Court of Appeals agreed with the Circuit Court. The Court wrote that, based on its belief that the Constitution prohibits “double taxation” of income earned in interstate commerce, a state may not tax all the income of its residents, wherever earned.

That decision, it was argued by the state, conflicted with a number of “fundamental precepts” involving the “well-established principle” that “a jurisdiction… may tax all the income of its residents, even income earned outside the taxing jurisdiction.” However, in Wynne, the Court of Appeals concluded that the Commerce Clause imposes restrictions on a state’s power to tax its own residents: in other words, Maryland was not allowed to tax all of its residents’ income if the resident paid taxes on that income to another State.

The state argued that this finding was inconsistent with prior law and was, in a word, wrong. The consequences, according to the state’s petition, could be the “significant loss of revenue that will amount to tens of millions of dollars annually.”

And that’s why you should care. Not only does this decision have consequences for Maryland but it “has potential repercussions beyond Maryland,” according to the petitioner. The reply brief for the petitioner specifically notes that “while most states provide full credits for income taxes paid to other states, many local jurisdictions do not.” The result, if the Wynne decision holds, according to the state is that “any jurisdiction taxing its residents’ entire income will face needless uncertainty about the viability of its tax system and its potential exposure to onerous refund claims.”

In other words, an affirmation could cost local and state governments millions of dollars.

The loss shouldn’t matter, according to Dominic Perella, a lawyer with Hogan Lovells who is representing the Wynnes. He said, about the case: “Maryland’s approach is unfair to people who make money in more than one state.”

The question is big enough for the feds to weigh in. The Obama administration issued an amicus curiae brief in April of this year, supporting the petitioner’s position. Amicus curiae is Latin (yes, more Latin) for “friend of the court” and describes an argument made by someone who is not a specific party to the proceedings but believes that the court’s decision may affect its interest. Under the Rules of the Supreme Court of the U.S., “An amicus curiae brief that brings to the attention of the Court relevant matter not already brought to its attention by the parties may be of considerable help to the Court. An amicus curiae brief that does not serve this purpose burdens the Court, and its filing is not favored.”

The feds argued in their brief that “though States often choose to grant tax credits to their residents for income taxes paid in other States, nothing in the Commerce Clause compels a State to offer such credits or otherwise defer to other States in the taxation of its own residents’ income.” Further, “[t]he decision… may lead to challenges to similar tax schemes in other jurisdictions; and is inconsistent with statements made by the highest courts in other States.”

The U.S. Supreme Court clearly agreed that this was a matter that needed to be resolved. Granting cert doesn’t mean that the court believes that the petitioner is correct: the regular court rules apply. There will be arguments and more (!) briefs before the Court reaches a decision.

These matters do not move quickly: you shouldn’t expect oral arguments on this matter until fall of this year. But expect plenty of speculation – and interest – before then.

By Kelly Phillips Erb for Forbes

Published: May 29, 2014

Changes in Circumstances Can Affect Advanced Payments of the Premium Tax Credit

Individuals who purchase health insurance coverage from the Health Insurance Marketplace may be getting advance payments of the premium tax credit to help pay for health insurance coverage in 2014. If they are, it is important to report changes in circumstances, such as changes in income, marital status or family size, to the Health Insurance Marketplace when they happen.

Receiving too much or too little in advance payments of the premium tax credit can affect refunds or balance due when individuals file federal tax returns in 2015. Reporting changes will help avoid getting a smaller refund than expected or even owing money not expected to owe.

Remember: Report changes to the Marketplace as they happen!

Published: May 28, 2014

6 Things to Know About New Revenue Recognition

The release of a long-awaited new revenue recognition standard had financial statement preparers settling in to read hundreds of pages of text, as standard setters celebrated the achievement of producing that text.

Members of FASB and the International Accounting Standards Board (IASB) have a good sense of the most important things to consider as a result of the new standard, beyond the obvious takeaway of greater comparability across industries and jurisdictions.

Here are six things to keep in mind, as communicated by board members during interviews with the media:

1. Disclosures are a big key. Much of the value for investors in the new guidance, according to board members, will come from the additional disclosures that are required.

Disclosures around models used to estimate stand-alone selling prices for various performance obligations—and information on the future pipeline of revenue—will help investors, FASB Chairman Russell Golden said.

Investors also will benefit from the new disclosures on contract assets, contract liabilities, and remaining performance obligations, FASB member Marc Siegel said. “You’ll get a much more multidimensional picture about revenue recognition at a company in the footnotes than you have in the past,” Siegel said.

2. Software, telecom, and real estate will be most affected. Golden and IASB Vice Chairman Ian Mackintosh both listed software, telecommunications, and real estate among the industries that will see the most change among their constituents as a result of the new standard.

Some companies in the asset management industry also will see a significant change in U.S. GAAP, according to Golden. Mackintosh said construction, which currently is subject to certain industry-specific rules, also will see major changes in IFRS.

From a U.S. perspective, companies in the real estate, software, and telecommunications industries are likely to recognize revenue earlier under the new model, Golden said, while some asset managers will recognize revenue later.

3. IFRS will become more rigorous. Much has been made of how the replacement of more than 200 pieces of revenue recognition literature with one comprehensive standard will result in substantial improvement in U.S. GAAP.

But Mackintosh said there will be significant improvements in IFRS, too, beyond simply creating more worldwide comparability.

“We actually felt that our guidance was a bit insufficient,” Mackintosh said. “… We’ve had some practices that have grown that perhaps we wouldn’t regard as ideal. We hope that this new standard, with its focus on performance obligations and when you deliver performance to your customer, will clear up some of the practices that have built up over the years.”

4. The transition resource group will provide some direction. A transition resource group, being created by FASB and the IASB, will provide some answers for preparers in interpreting the standard. But don’t look for the group to lay down prescriptive accounting guidance.

The group will field questions from preparers with the intent of directing them to answers that already can be found within the standard, Mackintosh said. Questions that are not covered by the standard will be referred by the transition resource group back to FASB and the IASB.

Meetings will be held in public and available on the web to maximize the boards’ ability to educate the public. The boards expect the meetings to begin in July, and the members of the resource group are expected to be announced next week, according to Golden.

5. Sales of nonfinancial assets may be represented better. Information provided on the sales of nonfinancial assets to noncustomers will better reflect the economics of transactions under the new guidance in U.S. GAAP, Siegel said.

Take, for example, the sale by a manufacturer of its headquarters building and the land associated with it. Siegel said today’s guidance for that transaction, under FAS 66, requires a very prescriptive, constraining FAS 66 analysis that may not reflect the economics of a transaction.

“Under the new standard, everybody would look at that the same way, and you would recognize and measure the gain on the sale of that real estate in the same way, as this standard would require,” Siegel said. “I think that’s a significant enhancement to a very industry-specific FAS 66 that we have in place today.”

6. The transition date is firm—for now. Some preparers who plan to use the full retrospective transition method are concerned that the effective date won’t give them enough time to install systems needed to capture the information they need.

The standard will take effect for U.S. public companies for annual reporting periods beginning after Dec. 15, 2016, including interim reporting periods. Companies using IFRS will be required to apply the standard for reporting periods beginning on or after Jan. 1, 2017.

That means preparers who are performing full retrospective transition rather than the alternate method may want to have systems in place to capture data for dual reporting by Jan. 1, 2015. Some are concerned that this won’t be enough time, but for now, board members seem intent on keeping the current effective date.

Golden said the boards look forward to understanding preparers’ questions, “but right now, this is the effective date that the boards have put out.”

Mackintosh agreed. “There’s always a balance between giving people plenty of time and getting something done,” Mackintosh said. “I think January 1 of 2017, I think that’s the right balance, and I don’t think we’d be looking to change the date unless something really, really major comes up.”

By Ken Tysiac for teh Journal of Accountancy

Published: May 27, 2014

Jacksonville is Hot for Startups

Jacksonville, Fla., is attempting an image change. It's hoping to swap its reputation as a stodgy old Southern city with that of an emerging hub for startups.

"Jacksonville's a hidden jewel for entrepreneurs," said Theodore Carter, executive director of the city's Office of Economic Development. "We have a young ecosystem here that's very welcoming to innovation and new business."

In the last six years, hundreds of early-stage businesses have sprouted In Jacksonville or have relocated from other states. The city's inexpensive business and labor costs and low taxes -- not to mention warm weather and availability of capital -- are drawing entrepreneurs away from hubs like Silicon Valley and New York.

"VC and angel money is coming back to Jacksonville," said Jeanne Miller, executive director of Jacksonville Civic Council. "And the city also has a growing population of high net worth retirees looking to invest in innovative companies."

She said much of the city's nascent startup activity, largely in tech, health care, and consumer products, is driven by these private-sector efforts.

"The startup culture is just starting to crystallize," said Darren Bounds, who's launched three tech startups in Jacksonville in the last six years. The first lacked traction and shut down; the second received $1.5 million from HR firm Adecco, which took it in house last year.

Bounds' third startup, SportsYapper.com, raised $10 million last spring and launched in September. The app helps sports fans stay connected with friends while watching a game and already has 150,000 users, although it's not yet making money.

"In the Valley, you're constantly competing for talent and money with superstars like Google and Twitter. You can't stand out," Bounds said. "In Jacksonville, you can be a big fish in a small pond."

Carter said the city's relatively young population -- the median age has held steady at 34.5 years for the last decade -- also fuels the startup mentality. "Young people want to control their own destiny. They're increasingly starting their own businesses here."

Elton Rivas is another entrepreneur contributing to Jacksonville's transformation.

Rivas left his corporate job four years ago to start a clean tech company. While it wasn't successful, it inspired him to co-found CoWork Jax (an incubator that housed SportsYapper.com in its early stages) and KYN, an accelerator that mentors more mature startups.

In 2012, he also co-launched One Spark, an annual crowdfunding festival to help match startups with money and resources in the area. In 2013, the five-day event drew 130,000 attendees, 20% who came from outside Florida.

"We already have 700 registered startup projects for this year and about $3.5 million in capital committed from VC firms," he said. Rivas said the success of One Spark is a testament to the changing perception of Jacksonville.

Carter said the city is stepping up its efforts to court entrepreneurs. The city offers training grants, revenue grants and real estate tax abatements.

"We have seven major universities in the area," said Carter. "We're also trying to incentivize these schools to collaborate with business incubators in the downtown area."

But Jacksonville is the largest city by area in the continental United States, which Bounds said poses a unique challenge.

"We have pockets of entrepreneurial activity here that are very disconnected because of distance," he said.

The city is trying to address this by revitalizing the downtown area and developing more incubators where entrepreneurs can collaborate.

By Parija Kavilanz for @CNNMoney

Published: May 23, 2014

Small Business Owners Have a $4.5 Billion Payroll Tax Problem

Every month, employers across the U.S. send money to the IRS to cover payroll taxes—levies drawn from employee pay to cover Social Security, Medicare, and unemployment insurance. Many botch the process. The IRS issued 6.8 million penalties totaling $4.5 billion related to these employment taxes for the year ending last September, according to recently published data from the IRS.

Those numbers are down from 2009, when the IRS issued 7.9 million penalties for $7.1 billion. The government doesn’t say what share of the fines were handed out to small businesses, but large employers are generally better equipped to stay current on ever-changing tax rules.

Why are businesses incurring enough in annual penalties to pay for a new Navy destroyer?

As companies get bigger or smaller and hire different types of employees, the rules they must follow can shift. Tax collectors often change rules on their own accord, meaning a business that paid payroll taxes on a monthly basis one year might be expected to pay every two weeks in the next. “There are so many little rules for a small business owner to stay on top of,” says David McKelvey, a New York-based partner at accounting firm Friedman.

McKelvey advises his clients to outsource payroll services. Payroll companies and accounting firms offering payroll services have the resources to stay current on tax rules and in many cases will guarantee customers against payment of IRS penalties, McKelvey says.

Plenty of small businesses handle payroll taxes on their own. ZenPayroll Chief Executive Officer Joshua Reeves, whose startup provides online payroll software, says 40 percent of U.S. businesses are calculating payroll taxes by hand, according to his company’s research. That’s unsurprising in the context of a recent GoDaddy survey, in which 46 percent of respondents said they don’t use an accountant at all.

Hiring a payroll specialist is a good idea as long as you’re careful about whom you hire, says Barbara Weltman, an independent tax attorney. Payroll companies usually pay tax collectors with money debited from business owners’ accounts. Earlier this year the owner of a California payroll company disappeared with millions of dollars in client funds.

ZenPayroll’s Reeves says small business owners should expect tax rules to change and ought to consult an accountant, the IRS, or other experts on new developments. “Don’t try to do what you did last year,” he says.

By Patrick Clark for Bloomberg BusinessWeek's The New Entrepreneur

Published: May 21, 2014

How States Are Cracking Down on Small Business Tax Cheats

Small businesses and the self-employed stiff the federal government on billions of dollars in unpaid taxes each year, according to IRS estimates of the tax gap. That’s the difference between taxes owed and the amount actually collected. States also have tax gaps: California’s is about $10 billion annually, and the Golden State is investing $670 million over five years in technology to improve its collections, expected to raise an additional $1 billion a year in tax revenue.

California isn’t alone. According to interviews with revenue officers from 30 states published last week by Bloomberg BNA, states are betting on new compliance tools aimed at collecting billions of dollars in unpaid taxes. While those efforts aren’t focused solely on Main Street, there are plenty of developments small business owners would do well to keep up on. Here are four takeaways from the BNA report:

Big data is for tax collectors, too. We hear plenty about how big data can help companies, large or small. Tax collectors are finding new ways to use data, according to BNA. Florida is working on a program to use car sales data collected by its Department of Highway Safety to make sure auto dealerships report sales figures accurately. Tennessee and Texas have similar programs to keep beer and tobacco retailers honest by gathering data from wholesalers. Georgia, Indiana, Louisiana, and Massachusetts are among states working with legal information company LexisNexis to cross-reference tax filers’ personal information against historical addresses.

Licensing leverage. State tax collectors are also working with other agencies to put pressure on delinquent taxpayers. Connecticut is withholding permits to retailers that owe state taxes. New York is working on a similar plan, and North Carolina may soon prevent businesses that owe taxes from getting or renewing liquor licenses.

Good neighbors. Kansas and New Mexico are sharing data with other states to keep tabs on fraudsters, according to BNA. California and New York have entered into a formal partnership: If a taxpayer is due a refund in one state, but owes a tax debt in the other, the refund will be automatically used to pay the state holding the tax debt. Nevada, meanwhile, is watching for residents and businesses that buy expensive items such as cars and aircraft in states that don’t charge sales tax.

Jail time. In Illinois, judges are increasingly willing to lock up tax cheats. A series of investigations targeting gas station owners helped the state collect $90 million in tax revenue and resulted in jail time for unscrupulous business owners.

By Patrick Clark for Bloomberg BusinessWeek's The New Entrepreneur 

Published: May 20, 2014

IRS Said To Make $13B In Improper Refunds

The U.S. government doled out more than $13 billion last year in improper payments of a tax credit meant to help the working poor, according to a government watchdog.

One of the country's largest cash assistance programs, the so-called Earned Income Tax Credit (EITC) allows low-income workers to lower their tax bill by as much as $6,000, which in many cases prompts a significant refund check.

But the Internal Revenue Service estimates that around a quarter of all payments made for the tax credit in the 2013 fiscal year were issued improperly -- resulting in anywhere from $13.3 billion to $15.6 billion in faulty payments, according to a report released by the Treasury Inspector General for Tax Administration (TIGTA).

While the IRS has long acknowledged that the tax credit is a major source of fraud, the TIGTA report found that the agency has made "little progress" in reducing the mistaken payments.

"The IRS can and must do more to protect taxpayer dollars from waste, fraud and abuse," Treasury Inspector General for Tax Administration J. Russell George said in a statement.

In some cases, improper payments could be the result of eligibility confusion. In order to correctly claim the credit, a taxpayer must have a job and their income must fall under certain thresholds.

But some preparers fraudulently overstate claims or file claims for taxpayers who don't qualify for the credit at all. Identity thieves have also gotten in on the action, posing as EITC recipients to receive the credit.

The IRS has previously said that taxpayers claiming the credit are typically twice as likely to face a tax audit.

On Tuesday, the IRS said that it continues to improve and expand its strategies to stop improper EITC payments, "an effort that already protects billions of dollars annually" from identity thieves and other fraudsters.

Since 2011, it has stopped nearly 15 million suspicious returns, protecting over $50 billion in fraudulent refunds, it said.

The agency added that Congressional actions could help by providing the agency with new tools to lower the improper payment rate.

"The IRS remains deeply concerned about the level of improper payments, and a major review currently underway is exploring a wide range of options to distinguish valid claims from excessive ones," the IRS said in a statement.

Originally Published by @CNNMoney

Published: May 19, 2014

TIGTA Finds $2.3 Billion Alimony Tax Gap

The discrepancies between alimony income reported by taxpayers and alimony deductions claimed resulted in $2.3 billion in excess deductions in 2010, the Treasury Inspector General for Tax Administration (TIGTA) reported on Thursday (TIGTA Rep’t No. 2014-40-022 (3/31/14)).

Taxpayers who pay alimony to a former spouse under a divorce or separation decree are allowed to deduct the amount paid from their income; the alimony recipient must report the amount received as income.

TIGTA found that 567,887 taxpayers claimed deductions for alimony paid totaling more than $10 billion in 2010, and for 47% of those returns no alimony income was reported on a corresponding recipient’s return. That amounted to a discrepancy of more than $2.3 billion in deductions claimed with no corresponding income reported.

TIGTA also noted that the IRS does not ensure that taxpayers provide a valid taxpayer identification number (TIN) when claiming an alimony deduction.

TIGTA says that, aside from examining the returns, the IRS has no procedures to fix this tax gap. In fact, TIGTA found that the IRS’s filters exclude returns from examination that may actually represent a high risk of alimony deduction or income noncompliance.

TIGTA recommended that the IRS develop a strategy to address the alimony compliance gap. It also recommended that the IRS’s Small Business/Self-Employed (SB/SE) and Wage and Investment (W&I) divisions work together to evaluate the current examination filters to make sure that potentially high-risk tax returns are not being excluded from examinations. The IRS agreed with this recommendation.

TIGTA also recommended that the IRS revise its procedures to verify that all tax returns claiming an alimony deduction include a valid TIN for the recipient. The IRS disagreed with this recommendation, saying that because it does not have the authority to deny an alimony deduction outside of its deficiency procedures, any validation should be performed in its compliance function.

Finally, TIGTA recommended that the IRS revise its processing instructions to ensure penalties are assessed on returns where an alimony deduction is claimed but no valid recipient TIN is provided. The IRS agreed with this recommendation.

By Alistair M. Nevius, J.D. for the Journal of Accountancy

Published: May 16, 2014

AICPA Opposes IRS Voluntary Tax Preparer Certification

The American Institute of CPAs is pushing back against a proposal by Internal Revenue Service commissioner John Koskinen to offer a form of voluntary tax preparer certification after a series of court rulings invalidated the IRS’s efforts to require mandatory testing and continuing education of preparers.

Last week, the IRS missed a deadline to file a petition with the Supreme Court to overturn district and appeals court rulings that the agency had overstepped its statutory authority in imposing its Registered Tax Return Preparer program. Koskinen has said that the chances of getting the Supreme Court to review the case, known as Loving v. IRS, were unlikely. He now favors offering a voluntary form of certification if Congress fails to give the IRS the authority to regulate tax preparers, which seems unlikely given the current mood on Capitol Hill toward the IRS.

At the AICPA’s Spring Meeting of Council in Scottsdale, Ariz., AICPA president and CEO Barry Melancon said Monday he plans to talk with Koskinen on Tuesday to explain the AICPA’s opposition to a voluntary form of tax preparer regulation.

“It was our hope, based on a meeting that we had at the IRS, that they would not go forward with a proposal in this area,” he said. “Congress is not going to give them authority, which it would take to make it a mandatory system. It now looks like the IRS is absolutely set on going forward with a voluntary tax return preparer registration system, which we believe fails just about all of the objectives that were stated. It’s not going to root out bad preparers because if you’re a fraudulent preparer, [taxpayers are] not going to find out from a voluntary system. It’s not cost effective. It actually takes resources away from some of the service issues that the IRS is facing right now with taxpayers and tax preparers. And frankly, it’s contrary to what the court decision basically said.”

While the court rulings left in place the IRS’s Preparer Tax Identification Number registration system, the AICPA believes it has a better approach to regulating unlicensed tax preparers.

“The fifth point is that we believe that an enhanced or modified PTIN system can actually meet the objectives that they’re trying to create, without creating a new bureaucracy associated with a whole new system that, in the end, we believe will cause confusion in the marketplace because it really won’t mean what the IRS believes a registration process and a certificate from the IRS would mean,” said Melancon. “We are very concerned about the mess that would come out of that being used as a legislative impetus to try to get legislation going forward. Our Tax Executive Committee and our tax staff have been very active on this issue. We’ve had some meetings with the IRS. Frankly, we’re concerned about process as much as anything else.”

Melancon said he is concerned that the IRS is moving too quickly without listening to much feedback, which he noted is different than the approach the IRS has previously taken on such issues. He plans to bring that up in his conversation Tuesday with Koskinen.

“I actually have a conference call with the commissioner tomorrow afternoon to discuss this issue and to make very plain our concerns not only with substance but also with the process on this particular issue,” he said.

Melancon added that the AICPA’s proposals on the federal PTIN system could also function at the state level.

“We believe that our PTIN solution that we have proposed actually would work for a state answer as well, where they could just hook into the PTIN issue and not have to have a replicated environment in the states,” he said.

Melancon said the AICPA has also been asking the IRS to provide more resources for practitioners when they need help. “We know the practitioners have said it’s been a pretty bad tax season because of the inability to interact with the Service,” he said. “From that standpoint, it’s a resource issue, so on the one hand we have concerns about the registration system, but on the other hand we’re actually advocates for the IRS to getting a different resource answer to be able to enhance these issues.”

By Michael Cohn for AccountingToday.com

Published: May 15, 2014

Owed a Refund? There's No Penalty for Filing Late!

Some good news for procrastinators: If you're owed a refund and you don't file your taxes by the 15th, you won't get hit with a penalty.

This has always been the case, but many people don't realize it. The IRS is chomping at the bit to get its tax revenue. It's less concerned about doling out refunds to people who haven't claimed them yet.

So if you are absolutely sure you're owed a refund, you won't get in trouble if you miss the filing deadline.

But if you're wrong and you actually owe money, you'll need to fork over a fine. By both failing to file and failing to pay on time, you will incur a maximum penalty of 5% for each month after the deadline. If you're more than 60 days late, you'll be fined $135, or 100% of the unpaid tax -- whichever amount is smaller.

To avoid even the chance of being hit with these penalties, it's always safer to file on time. Or you can file for a six-month extension if you're feeling pressed for time -- which simply requires filling out Form 4868. But remember, even if you get an extension, you still have to pay 90% of the tax owed by the filing deadline.

"Filing by the April deadline can save you from an unexpected surprise," says Lynn Ebel, tax attorney at the Tax Institute at H&R Block. "If you wait to file ... because you 'know' you are getting a refund and then find that you miscalculated and actually owe money, interest and penalties will have accrued on your debt [by the time you do file]."

And if you wait too long, your refund will become the property of the government. After three years, you can no longer claim a refund. This year, the IRS announced that more than 900,000 people still haven't claimed refunds worth a total of $760 million from 2011. After April 15, they can no longer retrieve the funds.

Originially published by @CNNMoney.

Published: May 14, 2014

Foreign Housing Expense Limitations Issued for 2014

According to the IRS, Hong Kong, Moscow, and Geneva are the three most expensive foreign cities to live in, for purposes of the Sec. 911 foreign housing exclusion. On Monday, the IRS provided its annual list of inflation-adjusted limitations on foreign housing expenses for 2014 (Notice 2014-29).

Sec. 911(a) allows a qualified individual to elect to exclude his or her foreign earned income and certain housing costs from gross income. Sec. 911(c)(1) provides a formula for determining the excludable amount of the individual’s foreign housing costs. Generally, under Sec. 911(c)(2)(A), a qualified individual will be limited to maximum housing expenses of $29,760 in 2014.

However, the IRS can adjust the maximum limitation based on geographic differences in housing costs relative to housing costs in the United States, and since 2006 it has issued annual notices adjusting the limitation for qualified individuals who live in countries with high housing costs compared to U.S. housing costs.

Notice 2014-29 includes a table listing hundreds of foreign locations for which the IRS is allowing an increased limitation on housing expenses. In locations where the amount has increased from the amount in 2013 (listed inNotice 2013-31), the notice also allows taxpayers who incurred housing expenses in 2013 to elect to apply the 2014 limitation amount to the 2013 year.

Published: April 30, 2014

Make Plans Now for Next Year’s Tax Return

Most people stop thinking about taxes after they file their tax return. But there’s no better time to start tax planning than right now. And it’s never too early to set up a smart recordkeeping system. Here are six IRS tips to help you start to plan for this year’s taxes:

1. Take action when life changes occur.  Some life events, like a change in marital status, the birth of a child or buying a home, can change the amount of taxes you owe. When such events occur during the year, you may need to change the amount of tax taken out of your pay. To do that, you must file a new Form W-4, Employee's Withholding Allowance Certificate, with your employer.

2. Keep records safe.  Put your 2013 tax return and supporting records in a safe place. That way if you ever need to refer to your return, you’ll know where to find it. For example, you may need a copy of your return if you apply for a home loan or financial aid. You can also use it as a guide when you do next year's tax return.

3. Stay organized.  Make sure your family puts tax records in the same place during the year. This will avoid a search for misplaced records come tax time next year.

4. Think about itemizing.  If you usually claim a standard deduction on your tax return, you may be able to lower your taxes if you itemize deductions instead. A donation to charity could mean some tax savings. See the instructions for Schedule A, Itemized Deductions, for a list of deductions.

Published: April 29, 2014

With 131 Million Returns Filed, Millions of Amended Returns Expected

As of April 18, almost 46 million returns were e-filed from home computers, more than the total from home computers for all of 2013. The IRS has received more than 131 million returns, of which 88 percent were e-filed.

The IRS also projects that almost five million taxpayers will amend their returns by filing Form 1040X during 2014. Taxpayers who need to amend their returns should file this form only after filing the original return. Generally, for a credit or refund, taxpayers must file Form 1040X within three years, including extensions, after the date they filed their original return or within two years after the date they paid the tax, whichever is later. For most people, this means that returns for tax year 2011 or later can still be amended. 

This year, many same-sex couples may want to consider filing amended returns. A same sex couple, legally married in a state or foreign country that recognizes their marriage, is now considered married for tax purposes. This is true regardless of whether or not the couple lives in a jurisdiction that recognizes same-sex marriage.

For returns originally filed before Sept. 16, 2013, legally married same sex couples have the option of filing amended returns to change their filing status to married filing separately or married filing jointly. But they are not required to change their filing status on a prior return, even if they amend that return for another reason. In either case, their amended return must be consistent with the filing status they have chosen. 

As all amended returns must be filed on paper, allow up to 12 weeks for Form 1040X to be processed. Starting 3 weeks after filing their amended returns, taxpayers can use the “Where’s My Amended Tax Return?” tool on IRS.gov to check the status.

Published: April 28, 2014

Ten Tax Stats for Procrastinating Small Business Owners

Most small business owners pay taxes to the federal government all year round, but April 15 was still a big deadline for millions of business owners. For procrastinators still preparing your filings, here are some numbers that may or may not make you feel better:

• 26 million: Unique visitors to IRS.gov last month, more traffic than to any other government site. (Take that, healthcare.gov.)

• 80 hours: Forty percent of small business owners spent at least that much time dealing with federal taxes last year, according to the National Small Business Association.

• 106,776: The number of very small businesses that were audited last year. (To be precise, these are nonfarm businesses that reported less than $25,000 in gross receipts and didn’t claim the earned income tax credit.)

• $5,500: What auditors demanded, on average, from those businesses in additional taxes.

• $4.5 billion. The amount of IRS penalties handed down last year that related to payroll taxes. 

• $4.1 million: Colorado’s estimated take from taxes on medical and recreational pot sales in February.

• $257.6 million: License fees that the Washington state Liquor Control Board collected in the year ended June 2013 after privatizing its liquor store system.

• $670 million: How much California is spending over five years on technology to boost revenue by collecting unpaid taxes.

• $10 billion. California’s estimated “tax gap,” the difference between what people and businesses owe and what the state collects.

From Bloomberg Small Business News

Published: April 22, 2014

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, you should have a qualified CPA prepare and file Form 8379, Injured Spouse Allocation.

Published: April 21, 2014

The Real Story Behind the $3 Tax Checkoff Box

For decades, taxpayers have had the option of checking off a box on their tax returns to earmark money for the Presidential Election Campaign Fund.

The amount you can allocate for the fund started out at $1 and was hiked to $3 in 1994. And while the option was quite popular at the start, the number of people designating money for the fund has been dropping ever since.

In 1977, nearly 29% of taxpayers had opted to contribute to the fund. By 1992, that percentage dropped to 19%. And in 2013, a mere 6% of taxpayers had checked off the box designating $3 toward presidential campaign funding.

As a result, funding received via the checkoff box has dropped from a peak of $71 million in 1994 to $39 million in 2012, the most recent year for which the annual total is available.

Why the decline? A number of factors are likely at play, says Roberton Williams, a fellow at the Tax Policy Center.

For one, there's a common misconception that this money is coming out of the taxpayer's own pocket, so people struggling financially are much less likely to give more money to the government than they have to. But really, the box simply provides taxpayers with a choice to steer $3 of overall tax revenue collected by the IRS for this specific fund -- it doesn't add to someone's tax liability or reduce their refund.

"There's always been the fear, 'is this going to raise my taxes?' Even though the box explicitly says it won't," said Williams.

Another possible reason for dwindling contributions: growing frustration with Washington politics. "People are sick of politics and saying, 'Why should I throw $3 in the pot?," said Williams.

Plus, the most recent presidential candidates -- Barack Obama and Mitt Romney -- refused to draw on money from public funding during their campaigns anyway.

Making matters more confusing: Last week, Obama signed a bill eliminating taxpayer funding for presidential nominating conventions altogether, which is one of three places that money from the Presidential Election Campaign Fund is allocated.

Instead, money that had been previously set aside for these conventions will now be used for pediatric medical research at the National Institutes of Health.

The checkoff box on tax returns isn't going away, however. Taxpayers can still elect to contribute $3 to the overall Presidential Election Campaign Fund.

While that money will no longer be used specifically for nominating conventions, it will be used to match funds for presidential primary candidates during their campaigns and to provide grants for general election nominees, according to the Federal Election Commission.

By Blake Ellis for @CNNMoney

Published: April 16, 2014

Psst…Tax Day is Here and the IRS Won't Forget!

The calendar shows April 15, and you haven't even started on your federal tax return? Chances are, you don't need to fret. If you're due a refund — and about three-fourths of filers get refunds — April 15 isn't much of a deadline at all. The Internal Revenue Service doesn't like to talk about it, but penalties for filing late federal tax returns apply only to people who owe money. The penalty is a percentage of what you owe. If you owe nothing, 5 percent of nothing is…nothing! So, take note! Those in need of our services still have time to contact us! 

If you need more time...

File Form 4868 to get a six-month extension, no explanation necessary. You won't be alone. The IRS expects 12 million extension requests.

Penalties For Not Filing

The failure-to-file penalty is generally 5 percent of your unpaid tax bill for every month, or part of a month, you are late. It kicks in on April 16. In general, the maximum penalty is 25 percent of your original tax bill. There also is a penalty for failing to pay your tax bill, separate from the penalty for failing to file at all, but it's much smaller.

Fast Facts

  • The IRS expected to receive about 35 million returns in the last week before the deadline.
  • Through April 4, 99.9 million returns had been filed, with 78.8 million receiving refunds totaling $220 billion.
  • 90 percent of returns have been filed electronically.
  • Last year, the feds collected $2.8 trillion in taxes and fees.

Who Pays Federal Taxes

  • Individual income tax: 47 percent.
  • Payroll taxes: 32 percent.
  • Corporate income tax: 10 percent.
  • Excise taxes: 3 percent.
  • Unemployment insurance: 2 percent
  • Estate and gift taxes: 1 percent.
  • Customs duties: 1 percent.
  • Miscellaneous: 4 percent.
Sources: Tampa Bay Times, Associated Press, IRS, AP-GfK Poll conducted March 20-24, Treasury report on budget year 2013

Published: April 15, 2014

Tips for Paying Your Taxes

If you owe taxes with your tax return this year, you should know a few things before you file. Here are 10 helpful tips from the IRS about how to pay your federal taxes.

1. Never send cash.

2. If you e-file, you can file and pay in a single step with an electronic funds withdrawal. Your tax preparer will make your tax payment electronically.

3. You can pay taxes electronically 24/7 on IRS.gov. Just click on the ‘Payments’ tab near the top left of the home page for details.

4. You can also pay by check or money order. Make your check or money order payable to the “United States Treasury.”

5. Whether you e-file your tax return or file on paper, you can also pay with a credit or debit card. The company that processes your payment will charge a processing fee.

6. You may be able to deduct the credit or debit card processing fee on next year’s return. It’s claimed on Schedule A, Itemized Deductions. The fee is a miscellaneous itemized deduction subject to the 2 percent limit.

7. Be sure to write your name, address and daytime phone number on the front of your payment. Also, write the tax year, form number you are filing and your Social Security number.

8. Complete Form 1040-V, Payment Voucher, and mail it with your tax return and payment to the IRS. Make sure you send it to the address listed on the back of Form 1040-V. This will help the IRS process your payment and post it to your account. 

9. Remember to enclose your payment with your tax return but do not staple it to any tax form.

Published: April 14, 2014

"My Girlfriend Is A Tax Break"

If you're in a relationship with someone who is dependent on you financially, you might be able to claim them as a tax break.

Wes Fusco, a 35-year-old from Manitowoc, Wisc., had been financially supporting his girlfriend, Danielle Wissbroeker, for more than 10 years. While she took care of their three children and earned no income, Fusco paid the bills and covered her expenses.

But Fusco had no idea that this situation would translate into a tax break until his tax preparer told him that claiming Wissbroeker as a dependent could cut his tax bill by thousands of dollars.

His tax preparer, enrolled agent Don Wollersheim, was right. Girlfriends -- and boyfriends -- can qualify as dependents as long as certain requirements are met.

First, your significant other must earn less than $3,900 per year and live with you throughout the year. You must also pay for more than half of their expenses and they can't be claimed as a dependent by someone else.

If they meet those criteria, then claiming them as a dependent will result in an exemption of up to $3,900. Fusco said he qualified for the full exemption and that this tax break, along with being able to claim his children as dependents, allowed him to receive a refund of more than $8,000 each year for the 10 years he supported his girlfriend.

Fusco and Wissbroeker broke up last May, so this will be the first time in a decade that he can't claim her as a dependent.

One Orlando, Fla., woman used this same strategy, claiming her unemployed boyfriend as a dependent after supporting him for years while he hunted for a job. She also received the full $3,900 exemption.

But these situations are rare. It's typically difficult for a couple to qualify for this deduction because of all the requirements that need to be met -- especially the low-income threshold.

"There aren't a lot of people who really don't make [under $3,900]," said Harlan Levinson, a CPA in Los Angeles.

It's not meant to be claimed by the ultra-rich either: the exemption begins phasing out if you earn more than $250,000 per year.

Lisa Skidmore Sexton, an enrolled agent at Accu-Rite Tax & Accounting in Carlsbad, N.M., said she prepares around 300 tax returns per year and that only one or two of those are for couples where one person can be claimed as a dependent -- typically because they stay at home with the children or are out of work.

This year, she prepared taxes for someone claiming his girlfriend as a dependent. The client works at an oil company and his girlfriend stays home with their three kids and only works small temporary jobs -- earning about $3,800 last year.

Same-sex couples have been employing this strategy for years. Before the Defense of Marriage Act was overturned last year, same-sex couples weren't able to file jointly at the federal level because they weren't recognized as married. So one person would claim the other as a dependent if he or she stayed home with the children and earned no income, said Nanette Lee Miller, head of the LGBT practice at accounting firm Marcum LLP.

Now that married same-sex couples are recognized by the federal government, however, they no longer qualify for the deduction. But if they're not married, the same exemption can be taken -- unless the relationship violates state law.

Enrolled agent Bill Nemeth said he claimed this exemption for an unmarried same-sex couple in Georgia, where one of the men was earning under the $3,900 threshold. Prior to 2004, however, he wasn't able to claim the boyfriend as a dependent because it was against state law for unmarried people in a sexual relationship to live together.

By Blake Ellis for @CNNMoney

Published: April 10, 2014

4 Ways Scammers Can Steal Your Tax Refund

Identity thieves love tax season.

"A thief who has your personal information can file a tax return before you do, collect a fraudulent refund and leave you waiting for many months to get your own refund and clear up the problem," said Neil Chase, vice president of education at LifeLock.

And it's only getting worse. Last year, the IRS launched 1,492 investigations into tax-related identity theft, where criminals used stolen personal information like Social Security numbers to claim fraudulent refunds. That's up 66% from 2012 and more than 400% from 2011.

Here are some of the ways scammers use to steal your identity and how to avoid becoming a victim.

Fake Calls From the IRS

Last month, the IRS said a nationwide phone scam had swindled $1 million from consumers in what the agency called "the largest scam of its kind."

As part of the scheme, callers impersonating IRS agents told victims that they owed taxes and needed to pay by wire transfer or a prepaid card.

Other scams are carried out through email, and ask for personal information like a Social Security number or birthdate -- which can later be used to claim tax refunds.

To protect yourself, be wary of any correspondence from someone claiming to be from the IRS. The agency says it usually reaches out by mail, and it will never ask for personal information via email or phone. If you receive something questionable, reach out to the agency yourself and verify that it's legit.

Rogue Employees

Be careful about giving out your personal information. One bad employee at your doctor's or dentist's office, at a police department, or even a school, could potentially steal your identity.

And don't ever give away more personal information than you need to, says Chase. "Any time anyone asks you for something, ask them why they need it," he said.

Some tax preparers are also scam artists. To avoid being duped, be wary of any preparers who charge fees based on the size of your refund and never let a preparer ask for the refund to be deposited into an account in their control rather than sent straight to you.

To help you detect if you've been scammed, be sure to regularly monitor your bank accounts and credit card statements for any suspicious charges.

Data Breaches

Data breaches -- when hackers break through a company's privacy walls and access private customer information -- are becoming increasingly common.

And once that information is in a fraudster's hands, it's easy for them to file a tax return in your name.

If you know -- or suspect -- that your information was compromised during a data breach, consider signing up for identity theft protection or start vigilantly monitoring your accounts on your own. And be sure to investigate any charges you don't recognize, no matter how small they are.

"If someone has a stolen card, they will often test it with a small transaction to make sure the card is active before making bigger transactions," said Chase.

And because there's a good chance you will be more susceptible to identity theft after a data breach, make sure to strengthen your passwords -- using at least 8 characters, including upper- and lower-case letters and numbers, said Eva Casey Velasquez, president of the Identity Theft Resource Center.

Snail Mail

It's not as common as online identity theft these days, but many fraudsters still use the old-school strategy of stealing mail from mailboxes to piece together the information they need to file a tax return in someone else's name.

Others will even resort to dumpster diving. "It's low-tech, but it's still an easy way for [identity thieves] to get your information, so shred all of those personal documents," said Velasquez.

Another easy way to protect yourself: file early. Many scammers are able to get fraudulent refunds because they file before the victim does. If you file first, the IRS will be forced to investigate when a second return from the same person arrives.

"File first, beat the crooks," said Velasquez.

By Blake Ellis for @CNNMoney

Published: April 9, 2014

Protect Yourself From Shady Tax Shops

Eery year unregulated tax preparers pop up in abandoned storefronts like weeds in a cracked sidewalk. Sprouting in low-income neighborhoods, they promise fat refund checks fast. But even without upfront charges, they can have hidden costs for the unwary.

In Congressional hearings Tuesday, consumer advocates said their investigations found significant levels of fraud and incompetence by paid tax preparers, from about 25 percent to more than 80 percent.

According to the IRS, 81.2 million of nearly 145 million individual tax returns filed for tax year 2011 were completed by a paid preparer. Should one of those preparers make a mistake, or commit outright fraud, the taxpayer is on the hook in the event of an audit. By that time the "For Rent" sign may have reappeared in the tax preparer's former storefront, with no way to find him or her.

In some cases, tax preparers incorrectly boosted the number of deductions the taxpayer would take, the investigations showed. In other instances, preparers listed taxpayers claiming the earned income tax credit as having children they didn't have, fraudulently increasing the credit. Investigators found some preparers then skimmed off the inflated credit for themselves with high, undisclosed fees, before distributing the rest to the taxpayer as a refund.

To avoid one of these scenarios, there are several steps consumers can take to protect themselves.

Sarah-Louise Smith, executive director of Impact Alabama, a campus-based volunteer tax preparation service, also recommends the following:

  • Ask for the preparer's credentials and for how long he's been a tax preparer.
  • Ask to see an estimate of service fees up front.
  • Avoid preparers who charge a percentage based on how big a refund you get.
  • Steer clear of those who say they can get you a bigger refund than others. They could be setting you up for tax fraud.
  • Check that the preparer writes her Preparer Tax Identification Number on the return and signs it.
  • Make sure you have a way to contact the preparer after April 15.

Part of the reason consumers need to beware is a lack of any guidelines or regulations over tax preparers, advocates say.

"Ironically, apart from CPAs and those who are credentialed as 'enrolled agents' by the IRS, the only other preparers in 46 states who are tested for competency are VITA volunteers," said Chi Chi Wu with the National Consumer Law Center, making tax preparers (not CPAs) less regulated in most states than hairdressers.

By Ben Popken for ABC News

Published: April 8, 2014

What to Know about Net Investment Income Tax

Starting in 2013, some taxpayers may be subject to the Net Investment Income Tax. You may owe this tax if you have income from investments and your income for the year is more than certain limits. Here are a few things from the IRS that you should know about this tax:

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

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

  • interest
  • dividends
  • capital gains
  • rental and royalty income
  • non-qualified annuities

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

3. Income threshold amounts.  You may owe the tax if you have net investment income and your modified adjusted gross income is more than the following amount for your filing status:

 Filing Status                            Threshold Amount
 Single or Head of household            $200,000
 Married filing jointly                        $250,000
 Married filing separately                  $125,000
 Qualifying widow(er) with a child       $250,000

Published: April 7, 2014

IRS: e-File Wins Over Paper Tax Forms

More people are e-filing their taxes this year, accounting for about 91% of the returns filed so far with the Internal Revenue Service, the tax body said this week.

The IRS has received 82 million tax returns through e-file, up 1.8% from last year. It projects to end the year with more e-filings than ever at a little more than 125 million. The IRS expects paper filings to be down 7% this year.

In a release, the IRS calls e-filing the "safest, fastest, and easiest way" to submit individual tax returns. Consumers are likely opting to e-file as they continue to gain more access to computers and smartphones, and become more comfortable with the security of online platforms, says Daniel Eubanks, assistant director of online tax filing platform TaxSlayer.

While he won't give specific numbers, he says TaxSlayer has seen more customers e-file this year than last year.

More filers are also doing their own taxes this year, up 5.9%, while tax returns filed by professionals are down nearly 1%.

The IRS has received a little more than 90 million returns so far, and expects to receive 148 million for all of 2014. The average refund is up 1.5% to $2,831 from $2,790 at this point in 2013.

Those who have their refund direct deposited to their account tend to get more back. Direct deposit refunds are at an average of $2,951 so far, though that's down slightly from last year's $2,959 at this same point in time.

By Hadley Malcolm for USA Today

Published: April 4, 2014

3 Methods for Budgeting Your Tax Refund

According to the IRS, the average tax refund is up 3 percent so far this year, to $3,034. That’s a significant amount of money to receive with no plan in place. Some will receive their tax return and know exactly where they intend to spend that money, whereas others might want to be more strategic with their refund check.

1. Elizabeth Warren’s 50-30-20 Rule

The 50-30-20 budget is a commonly used method to divide up a salary — and it can be used to divvy up your tax return as well.

The 50-30-20 rule divides your net pay into three categories:

  • 50 percent for needs: Think food, water and shelter. Half of your budget should go to expenses like rent, transportation and groceries, as well as mortgage, auto loan and minimum credit card payments.
  • 30 percent for wants: This covers the fun stuff, like going to concerts, dining out and indulging yourself.
  • 20 percent for savings and debt: The smallest portion goes to paying down debt, building an emergency fund and contributing to a retirement nest egg.

The average return of $3,034 would amount to an increase of $1,517 toward needs, $910 toward wants, and $607 toward savings and debt.

2. The 33 Percent Rule

This one is based off the 25 percent rule, which divides your pretax income into four equal parts.

  • 25 percent for taxes: This is normally income that is being withheld. In the case of a refund check, this portion can be absorbed by the three other categories.
  • 25 percent for housing: To cover mortgage or rent payments.
  • 25 percent for debts: A larger portion than allotted by the 50-30-20 rule, but exclusively for paying down debt.
  • 25 percent for living expenses: This covers everything else, including savings.

If we remove non-applicable quarter lost to taxes and allot an even third to the remaining categories, $1,011 of the average $3,034 refund would go toward housing, debt and living expenses, respectively. (And buy yourself something nice with that extra dollar.)

3. Budget for the Necessities 

If you want to splurge a bit with your return, this budget dictates how 75 percent of your tax refund is allocated, allowing for some freedom to spend the other 25 percent.

  • 35 percent to housing: Covers mortgage or rent payments, utilities and insurance.
  • 15 percent to transportation: Includes auto loan payments, insurance, gasoline and maintenance costs.
  • 15 percent to debt: To pay down credit cards, student loans and any other personal loans.
  • 10 percent to savings and investments: Includes contributions to an emergency fund, 401 (k) or Roth IRA.
  • 25 percent to spend: Spend however you want.

With this budget, 75 percent of your tax return would be divided as follows: $1,062 to housing, $455 to transportation and debt, respectively, and $303 to savings. $759 would remain for discretionary spending.

Depending on your particular financial situation, devoting your tax return fully to one financial goal might be more advantageous. Potential uses for your return include: rebuilding your emergency fund, paying off credit card debt, investing in a retirement account, building college savings or filling gaps in your insurance coverage.

Adapted from GoBankingRates.com

 

Published: April 3, 2014

Wacky Deductions for Your Tax Return!

These wacky tax deductions aren't an April Fool's joke!

Deduction: pet moving

The most-tax savvy are probably already aware that you can often deduct moving expenses, but did you know that includes shipping your pet?
Yes, Fido and Whiskers can each deduct a sum from your taxes if you choose to move your animals across the country, as they are considered personal effects. Just be sure to throw your pets an extra bone as a thanks for saving you a couple of bucks on your taxes.

Deduction: clarinet lessons

Famed English clarinet player Acker Bilk once said, “I look at my clarinet sometimes and I think, I wonder what's going to come out of there tonight? You never know.” Though this may be true for the sound of this reedy instrument, you can now know for sure that a clarinet can yield surprising financial and dental benefits. 
A clarinet and lessons can be considered tax deductible if a doctor has recommended playing the instrument as a method of correcting an overbite. 
This isn’t the only strange medical write-off however: others include support stockings, wigs for those who have lost hair due to a disease, and many more. 
Not tax deductible: earplugs for parents of children taking clarinet lessons.

Deduction: bingo

Yes, bingo can be deducted from your tax bill: Bingo-playing taxpayers can deduct the amount lost in a given year, up to the amount that was won. This deduction requires a detailed diary of winnings and losses.
The Internal Revenue Service allows taxpayers to deduct losses for other types of wagering, too. They must keep a detailed diary of the kind of wager, where they placed it, who they were with, and how much they won or lost.

Deduction: Business gifts (under $25)

The IRS is fine with giving gifts, as long as they aren't too lavish.
You’re allowed to deduct up to $25 in costs spent on business gifts for any individual person. You can also widely distribute gifts under $4 that have your name on them – examples listed by the IRS include pens, desk sets, and bags – the sum total can be deducted, even if it's over the $25 limit. 

Deduction: weight-loss programs

Some people who enrolled in weight-loss programs last year can deduct the money they paid in fees, according to the IRS. But not everyone qualifies: to be eligible, taxpayers must have enrolled to treat specific conditions diagnosed by doctors. Even when recommended by a health care professional, the cost of dance lessons, swim lessons, and health-club dues are not deductible, according to the IRS.
Except in very limited cases, diet foods are also non-deductible.

Published: April 1, 2014

An Upside to the Alternative Minimum Tax

If you paid the alternative minimum tax (AMT) with your 2012 return, or your return for an earlier year, you may have earned an AMT credit that you can now use to reduce your 2013 federal income tax bill.

Surprised to hear this? Joint the club. Many folks who have paid the AMT never remember to claim their rightful AMT credits because they don’t know they earned them. 

Here are the ground rules for the AMT credit.

AMT credit basics

The first thing to know is that you earned an AMT credit in a prior tax year only if your AMT bill for that year was partially or entirely caused by: (1) exercising an in-the-money incentive stock option (ISO) or (2) claiming accelerated depreciate write-offs. The first cause is quite common, especially with employees of high-tech outfits. The second cause is not very likely unless you are an owner of a proprietorship, partnership, LLC, or S corporation with fairly heavy investments in depreciable assets. (There are plenty of other things that can cause an AMT bill, but those other things won’t generate a AMT credit for you.)

Bottom line: if you exercised an ISO in a prior year and paid the AMT, the odds are pretty good that you earned an AMT credit. To calculate your credit, print out Form 8801 (Credit for Prior Year Minimum Tax—Individuals) from the IRS website at www.irs.gov and fill the form out.

The second thing to know is that you can only claim the AMT credit on your 2013 return if your regular federal income tax amount for the year exceeds your AMT number. That is because you’re only allowed to use the AMT credit to reduce your regular tax bill (not your AMT bill). Put another way, you can’t claim the AMT credit on your 2013 return if you owe the AMT again. But if you’re in the regular tax mode for 2013, you’re eligible and you should keep reading.

The third thing to know is that your AMT credit cannot exceed the difference between your regular tax bill and your AMT amount for the year you claim the credit. So even though you don’t owe the AMT for 2013, you must still fill out IRS Form 6251 (Alternative Minimum Tax—Individuals, Estates, and Trusts) to calculate your AMT amount. The difference between that number and your regular tax number is the maximum amount of AMT credit you can claim on your 2013 return. Put another way, you can use the AMT credit to equalize your regular tax and AMT numbers for 2013, but that’s it. After taking this limitation into account, any leftover AMT credit is carried forward to 2014. Then you’ll go through the same process all over again when preparing your 2014 federal return.

Example

Say you had to cough up an extra $5,000 for the AMT in 2012. In other words, there was a $5,000 difference between your 2012 regular tax number and the AMT number you calculated on Form 6251. You ran afoul of the AMT mainly because you exercised an in-the-money ISO in 2012. When preparing your 2013 return, you fill out Form 8801 and discover that you earned a $4,500 AMT credit in 2012. Good! Now let’s assume that your 2013 regular tax bill (before considering the AMT credit) is $25,000, and your 2013 AMT number (from Form 6251) is $21,000. You can use $4,000 of your AMT credit to reduce your regular tax bill to $21,000. That amount is what you owe for the 2013 tax year. The unused $500 AMT credit ($4,500 — $4,000 used on your 2013 return) is carried over to your 2014 tax year.

Published: March 31, 2014

Tips for U.S. Taxpayers with Foreign Income

Did you live or work abroad or receive income from foreign sources in 2013? If you are a U.S. citizen or resident, you must report income from all sources within and outside of the U.S. The rules for filing income tax returns are generally the same whether you’re living in the U.S. or abroad. Here are seven tips from the IRS that U.S. taxpayers with foreign income should know:

1. Report Worldwide Income.  By law, U.S. citizens and resident aliens must report their worldwide income. This includes income from foreign trusts, and foreign bank and securities accounts.

2. File Required Tax Forms.  You may need to file Schedule B, Interest and Ordinary Dividends, with your U.S. tax return. You may also need to file Form 8938, Statement of Specified Foreign Financial Assets. In some cases, you may need to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts. 

3. Consider the Automatic Extension.  If you’re living abroad and can’t file your return by the April 15 deadline, you may qualify for an automatic two-month filing extension. You’ll then have until June 16, 2014 to file your U.S. income tax return. This extension also applies to those serving in the military outside the U.S. You’ll need to attach a statement to your return to explain why you qualify for the extension.

4. Review the Foreign Earned Income Exclusion.  If you live and work abroad, you may be able to claim the foreign earned income exclusion. If you qualify, you won’t pay tax on up to $97,600 of your wages and other foreign earned income in 2013. 

5. Don’t Overlook Credits and Deductions.  You may be able to take a tax credit or a deduction for income taxes you paid to a foreign country. These benefits can reduce the amount of taxes you have to pay if both countries tax the same income.

Published: March 28, 2014

Two Tax Credits Help Pay Higher Education Costs

Did you, your spouse or your dependent take higher education classes last year? If so, you may be able to claim the American Opportunity Credit or the Lifetime Learning Credit to help cover the costs. Here are some facts from the IRS about these important credits.

The American Opportunity Credit is:

  • Worth up to $2,500 per eligible student.
  • Only available for the first four years at an eligible college or vocational school.
  • Subtracted from your taxes but can also give you a refund of up to $1,000 if it’s more than your taxes.
  • For students earning a degree or other recognized credential.
  • For students going to school at least half-time for at least one academic period that started during the tax year.
  • For the cost of tuition, books and required fees and supplies.

The Lifetime Learning Credit is:

  • Limited to $2,000 per tax return, per year, no matter how many students qualify.
  • For all years of higher education, including classes for learning or improving job skills.
  • Limited to the amount of your taxes.
  • For the cost of tuition and required fees, plus books, supplies and equipment you must buy from the school.

For both credits:

  • Your school should give you a Form 1098-T, Tuition Statement, showing expenses for the year. Make sure it’s correct.
  • You must file Form 8863, Education Credits, to claim these credits on your tax return.
  • You can’t claim either credit if someone else claims you as a dependent.
  • You can’t claim both credits for the same student or for the same expense, in the same year.
  • The credits are subject to income limits that could reduce the amount you can claim on your return.
Published: March 26, 2014

Time Expiring to Claim $760 Million in Refunds for 2010 Tax Returns

If you did not file a tax return for 2010, you may be one of over 900,000 taxpayers who may be due a refund from that year. If you are, you must claim your share of almost $760 million by the April 15 tax deadline. To claim your refund, you must file a 2010 federal income tax return. Here are the facts you need to know about unclaimed refunds:

  • The unclaimed refunds apply to people who did not file a federal income tax return for 2010. The IRS estimates that half the potential refunds are more than $571.
  • Some people, such as students and part-time workers, may not have filed because they had too little income to require filing a tax return. They may have a refund waiting if they had taxes withheld from their wages or made quarterly estimated payments. A refund could also apply if they qualify for certain tax credits, such as the Earned Income Tax Credit.
  • If you didn’t file a 2010 return, the law generally provides a three-year window to claim a refund from that year. For 2010 returns, the window closes on April 15, 2014.
  • The law requires that you properly address, mail and postmark your tax return by that date to claim your refund.
  • If you don’t file a claim for a refund within three years, the money becomes property of the U.S. Treasury. There is no penalty for filing a late return if you are due a refund.
  • The IRS may hold your 2010 refund if you have not filed tax returns for 2011 and 2012. The U.S. Treasury will apply the refund to any federal or state tax you owe. It also may use your refund to offset unpaid child support or past due federal debts such as student loans.
  • If you’re missing Forms W-2, 1098, 1099 or 5498 for prior years, you should ask for copies from your employer, bank or other payer.
  • The three-year window also usually applies to a refund from an amended return. In general, you must file Form 1040X, Amended U.S. Individual Income Tax Return, within three years from the date you filed your original tax return. You can also file it within two years from the date you paid the tax, if that date is later than the three-year rule. That means the deadline for most people to amend their 2010 tax return and claim a refund will expire on April 15, 2014.
Published: March 24, 2014

IRS Warns of Biggest Tax Scam Ever

As if taxpayers don't have enough to worry about. Thousands of Americans have been conned out of more than $1 million by crooks posing as IRS agents demanding tax payments, according to the U.S. Treasury.

"This is the largest scam of its kind that we have ever seen," said J. Russell George, the Treasury inspector general for tax administration, who says the agency has received more than 20,000 complaints about the fraud.

The sophisticated phone scam has hit victims in every state, tax officials say. Callers claiming to be from the IRS tell intended victims they owe taxes and must pay using a prepaid debit card or wire transfer. The scammers threaten those who refuse to pay with arrest, deportation or loss of a business or driver's license.

To lend the scam credibility, the crooks often know the last four digits of the taxpayer's Social Security number, and the calls are made with spoofed caller identification software that makes it appear the call is originating from the IRS.

In many cases, taxpayers will get follow-up calls that appear to be from their state motor vehicle agency (if a driver's license was threatened) or the police. The scammers also send follow-up emails that mimic the IRS insignia and even appear to be signed by real IRS officials.

"The increasing number of people receiving these unsolicited calls from individuals who fraudulently claim to represent the IRS is alarming," George said. "Particularly during the tax filing season, we want to make sure that innocent taxpayers are alert to this scam so they are not harmed by these criminals. Do not become a victim."

In reality, if you owe taxes, the IRS will contact you by U.S. mail -- not email. The agency never asks for payment via debit card or wire transfer. It never asks you to provide a credit card number over the phone. And it never requests personal or financial information by e-mail, text or social media.

"If someone unexpectedly calls claiming to be from the IRS and uses threatening language if you don't pay immediately, that is a sign that it is not the IRS calling," George said.

If you get a call from someone claiming to be with the IRS asking for a payment, here's what to do:

  • If you owe federal taxes, or think you may owe taxes, hang up and call the IRS directly at 1-800-829-1040.
  • If you don't owe taxes, call and report the incident to the Treasury inspector general of tax administration at 1-800-366-4484.
  • You can also file a complaint with the Federal Trade Commission at www.FTC.gov. Please add "IRS Telephone Scam" to the comments in your complaint.
  • If you get an email that's purportedly from the IRS, do not open any attachments or click on any links in the email. Send it to phishing@irs.gov.
  • Taxpayers should also be aware of other unrelated scams (such as a lottery sweepstakes winner) and solicitations (such as debt relief) that fraudulently claim to be from the IRS. You can read more about identified tax scams at the IRS website, www.irs.gov.
From CBS MoneyWatch

Published: March 21, 2014

Key 2014 Tax Changes To Know

What is different for your taxes this year? Here are a few items you need to know about in this tax season.

First, we'll look at the things that could pull a little bit more money from your wallet.

If you are at the top of the income bracket, you are going to pay more. While the Bush-era tax cuts were extended for most, the top tax brackets returned to 39.6 percent. So if you made more than $400,000 as an individual, or $450,000 as a couple, your tax bill will be higher this year. Additionally, if you are making over $200,000, you will be subject to a Medicare surcharge of 0.9 percent.

Secondly, deductions for medical expenses incurred in 2013 will be harder to get. Previously, you could deduct medical expenses if they exceeded 7.5 percent of your adjusted gross income. That number rose to 10 percent for 2013. So, if you or a family member were in the hospital last year, you will have a harder time writing those costs off.

Now for the good news: Education expenses once again provide an opportunity for a little relief. If you are a parent or student paying for school, the American Opportunity Credit could help you take up to $2,500 off of your tax bill if you paid tuition or fees last year, plus additional deductions for loan interest and other education-related expenses.

If you're a teacher, you can write off up to $250 in out-of-pocket expenses for books and other school supplies. A recent survey showed that on average, teachers spend nearly $500 of their own money on school supplies. If you are a teacher, the extension of this deduction is welcome news.

Finally, if you made energy efficient improvements to your home -- whether it was installing an energy-saving heater or upgrading to more efficient windows, you can qualify for an energy credit of 10 percent of the cost of those changes -- though the lifetime maximum is $500. The deductions vary by improvement, so be careful, but it's definitely something to keep in mind.

From CBS MoneyWatch

Published: March 20, 2014

Tax Q&A: What To Do If You Forgot a Tax Payment

Q. I forgot the January 15th estimated tax payment. It appears that we will owe about $5,000 in tax. What should I do?

A: At this point, you have two options. It is not too late to make your fourth estimated tax payment by filing Form 1040-ES and submitting payment now. Because the penalty for any underpayment of taxes accrues daily, it is better to make a late payment than no payment at all.

However, if you are prepared to file your Form 1040 and pay your entire tax liability now prior to the April 15 deadline, it is not necessary to make the fourth quarter estimated payment.

I emphasize that this requires paying the entire amount of tax owed now, roughly a month early, rather than just the fourth quarter payment.

For further information, consult your certified tax professional. We're always available to assist with your questions and concerns! 

Ellen D. Cook, MS, CPA, assistant vice president for Academic Affairs at the University of Louisiana at Lafayette answered this question, via the American Institute of Certified Public Accountants.

Published: March 19, 2014

Don't Forfeit Past Tax Refunds

Does this sound familiar? A few years back your yearly earnings were pretty low so you figured you wouldn't owe any income tax. Thus, when April 15 rolled around the following year you didn't bother filing a tax return, knowing you wouldn't be penalized.

Big mistake.

Even if your income fell below the threshold at which you'd owe anything, chances are taxes were deducted from your paycheck throughout the year. (Check your year-end W-2 form). If so, you probably left a sizeable tax refund on the table.

And you wouldn't be alone. The IRS estimates that each year close to a million people don't bother filing federal tax returns, thereby forfeiting around $1 billion in refunds they were due -- refunds that average several hundred dollars apiece.

Here's the good news: The IRS generally gives you a three-year window to go back and file a past year's tax return if you want to claim an unpaid refund. For example, to collect a refund for 2010 you have until April 15, 2014, to file a 2010 return. After that, the money becomes the property of the U.S. Treasury.

If you're missing any supplementary paperwork (e.g., W-2 or 1099 forms), you'll need to request copies from your employer, bank or other payer. If that doesn't work, file IRS Form 4506-T to request a free transcript showing information from these year-end documents.

Keep in mind that if you file to collect a refund on your 2010 taxes but have not also filed tax returns for 2011 and 2012, the IRS may hold onto the refund until you file those subsequent returns. Also, past refunds will be applied to any amounts you still owe to the IRS or your state tax agency, and may be used to offset unpaid child support or past-due federal debts, such as student loans.

(Important note: The same three-year time period generally also applies when you need to file an amended tax return because you discovered an error on a previous year's return.)

Another good reason to consider going back and filing a previous year's tax return: the Earned Income Tax Credit (EITC). Chances are, if the reason you didn't file a return was because you didn't earn enough to owe taxes, you may have been eligible for the EITC, a "refundable" tax credit for low- to moderate-income working taxpayers. ("Refundable" means that if you owe less in tax than your eligible credit, you not only pay no tax but also get a refund for the difference.)

As an example, for tax year 2010, a married couple filing jointly with three or more qualifying children whose adjusted gross income was less than $48,263 were eligible for an EITC of up to $5,666. 

By Jason Alderman for the Huffington Post

Published: March 18, 2014

Tax Audit Red Flags

You're very charitable. 
Be careful not to overstate your good deeds. The IRS has calculated the average donation level for each income range, so anything that far exceeds those amounts could cause the agency to take a second look at your return.

You're required to keep receipts for any donations exceeding $250, and to fill out Form 8283 for any non-cash donations exceeding $500.

And be realistic: non-cash donations are where a lot of people often exaggerate, so remember that the items you're giving to Goodwill should be valued at the price someone would actually pay for it -- not the amount you bought it for years ago.

You deduct your home office. 

The home office deduction is one of the most complicated and abused deductions in the tax code, which is one of the reasons the IRS is introducing a new, simplified option for claiming it this year.

In the past, taxpayers who claimed the home office deduction were required to fill out a separate form calculating the percentage of their home's space used solely for the business and the percentage of expenses that apply to the office, which can be very complicated to figure out.

But starting this year, you can simply claim $5 per square foot of workspace, up to 300 square feet. The deduction will be capped at $1,500 per year and the form for claiming it will be simplified.

That doesn't mean there isn't still room for error, however. The IRS's definition of a home office remains unchanged, and this is where a lot of people get confused or try to stretch the rules. So remember, just because you work from home a couple days a week or check work emails from your kitchen doesn't mean you can claim the home office deduction. Your home office must be your primary place of business and used exclusively for work.

You claim bizarre deductions. 

Air conditioning for an excessive sweating disorder, a nose job for a wine taster -- bizarre deductions like these are likely to spark suspicion from the IRS. But don't let that stop you from claiming them if they are legitimate. Both the nose job and the air conditioning unit were allowed, for example.

But others, like used underwear donated to charity or medical bills for pets, were not. So don't stretch the limit too far, and when in doubt, ask a tax professional before turning yourself into a target for the IRS.

You claim the same child someone else does. 

If your ex files their taxes before you and claims your child as a dependent, the IRS is going to be very suspicious when your return comes in claiming that same child as your dependent.

This often happens when a couple gets divorced and one parent has primary custody, but the other still tries to claim the child as their dependent. Or when a grandparent is the sole caregiver, but the parent still claims the child as their own.

Even if you're in the right, the IRS may force you to provide extensive proof that the child you are claiming does indeed qualify as your dependent.

You have money abroad. 

The IRS has been on a crusade to retrieve money that's been illegally stashed in overseas accounts. So even if you have money in a perfectly legal account abroad, you need to report it or you could be in big trouble.

Failing to disclose assets exceeding $10,000 that are held in offshore accounts could result in penalties, including a fine of up to $100,000 or 50% of the account balance, whichever amount is greater.

Your "business" is really a hobby. 

Who wouldn't like to turn their favorite hobby into a business? Year after year, taxpayers continue to report losses on their taxes from businesses that are really just activities they like to do for fun.

But the IRS won't be fooled. The general rule of thumb is that if the venture hasn't earned a profit in three out of the last five years, it's usually not a legitimate business.

Dave Du Pal, vice president of customer advocacy at TaxAudit.com, represented a client in an audit who had set up a side videography business where he filmed weddings and special events. It was his first year in business and he reported a loss. The IRS came after him, saying it was just a hobby and not a business. But after providing documentation of expenses like advertising costs and showing records of meetings with business strategy experts, it was approved and the client was let off the hook.

You fail to report income. 
For many people, reporting income is pretty straightforward. But for those who earn money a variety of different sources, it can be easy to forget a stray account.

Some clients forget about small brokerage accounts they have, and since the IRS receives information from brokerage firms directly as well, there's a good chance you'll be contacted if your records don't match what the IRS receives. Because investment firms aren't required to submit documentation for their clients until the end of the February, it's often a good idea to wait until the beginning of March to file your return to make sure the reporting lines up.

If you worked side jobs and earned more than $600 at any one of them in a year, those employers should send you a Form 1099 so you can report that income on your taxes as well.

Adapted from @CNNMoney

Published: March 13, 2014

Special Exclusion for Cancelled Home Mortgage Debt

If a lender cancels or forgives money you owe, you usually have to pay tax on that amount. But when it comes to your home, an important exception to this rule may apply in 2013. Here are several key facts from the IRS about the special exclusion for cancelled home mortgage debt:

  • If the cancelled debt was a mortgage loan on your main home, you may be able to exclude the cancelled amount from your income. To qualify you must have used the loan to buy, build or substantially improve your main home. The loan must also be secured by your main home.
  • If your lender cancelled part of your mortgage through a loan modification, or ‘workout,’ you may be able to exclude that amount from your income. You may also be able to exclude debt discharged as part of the Home Affordable Modification Program. Visit IRS.gov for more details about HAMP. The exclusion may also apply to the amount of debt cancelled in a foreclosure.
  • The exclusion may apply to amounts cancelled on a refinanced mortgage. This applies only if you used proceeds from the refinancing to buy, build or greatly improve your main home. Proceeds used for other purposes don’t qualify. For example, a loan that you used to pay your credit card debt doesn’t qualify.
  • Other types of cancelled debt do not qualify for this special exclusion. This includes debt cancelled on second homes, rental and business property, credit card debt or car loans.
  • If your lender reduced or cancelled at least $600 of your mortgage debt, you should receive Form 1099-C, Cancellation of Debt, in January of the following year. This form shows the amount of cancelled debt and other information. Notify your lender if any information on the form is wrong.
  • Report the excluded debt on Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness. File the completed form with your federal tax return.

Published: March 12, 2014

Check Out Small Business Health Care Tax Credit

With business tax-filing deadlines fast approaching, the Internal Revenue Service today encouraged small employers that provide health insurance coverage to their employees to check out the small business health care tax credit and then claim it if they qualify.

Additionally, the IRS has Health Care Tax Tips, designed to provide useful information to employers, families and individuals. These tips include a new Small Business Health Care Tax Credit tip as well as tips covering other Affordable Care Act topics.

The small business health care tax credit was included in the Affordable Care Act enacted in 2010. Under the ACA, eligible small employers can claim the credit for 2010 through 2013 and for two additional years beginning in 2014. For 2010 through 2013, the maximum credit is 35 percent of premiums paid by eligible small businesses and 25 percent of premiums paid by eligible tax-exempt organizations. In 2014, the maximum credit rate rises to 50 percent for small businesses and 35 percent for tax-exempt organizations.

Small employers that pay at least half of the premiums for employee health insurance coverage under a qualifying arrangement may be eligible for this credit. The credit is specifically targeted to help small businesses and tax-exempt organizations provide health insurance for their employees.

Depending upon how they are structured, eligible small employers are likely subject to one of the following three tax-filing deadlines, which fall in coming weeks:

  • March 17: Corporations and S Corporations that file on a calendar year basis can figure the credit on Form 8941 attached to the income tax return.
  • April 15: Partnerships and individuals have until April 15 to complete and file their income tax returns (partnerships on Form 1065 and individuals on Form 1040). Sole proprietors can figure the credit on Form 8941 attached to the individual income tax return. Individuals who have business income and credits reported to them on Schedules K-1—partners in partnerships, S corporation shareholders and beneficiaries of estates and trusts—will report the credit amount directly on Form 3800– no Form 8941 required. The resulting credit is entered on Form 1040, Line 53.
  • May 15: Tax-exempt organizations that file on a calendar year basis can use Form 8941 and then claim the credit on Form 990-T, Line 44f.

Taxpayers needing more time to determine eligibility should consider obtaining an automatic tax-filing extension, usually for six months. 

Businesses that have already filed and later find that they qualified in 2013 or an earlier year can still claim the credit by filing an amended return for the affected years.  A three-year statute of limitations normally applies to these refund claims. 

Some businesses and tax-exempt organizations that already locked into health insurance plan structures and contributions may not have had the opportunity to make any needed adjustments to qualify for the credit for 2013 or earlier years. These employers can still make changes so they qualify to claim the credit on future returns.

Published: March 11, 2014

Itemizing vs. Standard Deduction

When you file your tax return, you usually have a choice whether to itemize deductions or take the standard deduction. Before you choose, it’s a good idea to figure your deductions using both methods. Then choose the one that allows you to pay the lower amount of tax. The one that results in the higher deduction amount often gives you the most benefit.

Here are some tips to help you choose, and the some items and information that you'll need to furnish in order to determine how much your itemized deductions will amount to. 

To figure your itemized deductions:

Deductible expenses you paid during the year may include expenses such as:

  • Home mortgage interest
  • State and local income taxes or sales taxes (but not both)
  • Real estate and personal property taxes
  • Gifts to charities
  • Casualty or theft losses
  • Unreimbursed medical expenses
  • Unreimbursed employee business expenses

Determine your standard deduction:

If you don’t itemize, your basic standard deduction for 2013 depends on your filing status:

  • Single $6,100
  • Married Filing Jointly $12,200
  • Head of Household $8,950
  • Married Filing Separately $6,100
  • Qualifying Widow(er) $12,200

Your standard deduction is higher if you’re 65 or older or blind. If someone can claim you as a dependent, that can limit the amount of your deduction.

Check the exceptions:

Some people don’t qualify for the standard deduction and therefore should itemize. This includes married couples who file separate returns and one spouse itemizes.

Published: March 10, 2014

Facts about Capital Gains and Losses

When you sell a ’capital asset,’ the sale usually results in a capital gain or loss. A ‘capital asset’ includes most property you own and use for personal or investment purposes. Here are 10 facts from the IRS on capital gains and losses:

1. Capital assets include property such as your home or car. They also include investment property such as stocks and bonds.

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

3. You must include all capital gains in your income. Beginning in 2013, you may be subject to the Net Investment Income Tax. The NIIT applies at a rate of 3.8% to certain net investment income of individuals, estates, and trusts that have income above statutory threshold amounts.

4. You can deduct capital losses on the sale of investment property. You can’t deduct losses on the sale of personal-use property.

5. Capital gains and losses are either long-term or short-term, depending on how long you held the property. If you held the property for more than one year, your gain or loss is long-term. If you held it one year or less, the gain or loss is short-term.

6. If your long-term gains are more than your long-term losses, the difference between the two is a net long-term capital gain. If your net long-term capital gain is more than your net short-term capital loss, you have a 'net capital gain.’ 

7. The tax rates that apply to net capital gains will usually depend on your income. For lower-income individuals, the rate may be zero percent on some or all of their net capital gains. In 2013, the maximum net capital gain tax rate increased from 15 to 20 percent. A 25 or 28 percent tax rate can also apply to special types of net capital gains.  

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

9. If your total net capital loss is more than the limit you can deduct, you can carry over the losses you are not able to deduct to next year’s tax return. You will treat those losses as if they happened that year.

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

Published: March 6, 2014

Most Americans Plan to Save Their Tax Refunds

Instead of spending the big tax refunds they're expecting this year, the vast majority of Americans plan to sock the money away.

A high 61% of Americans say they will save or invest their refunds, while 21% plan to pay off debt and another 18% will spend the money on necessities, according to a new TD Ameritrade survey of 1,000 investors. Only 19% of respondents said they expect to make non-essential purchases with their refunds.

For all the grief millennials get, they're actually the ones most likely to save their refund checks -- with more than two-thirds, or 67%, of Generation Y taxpayers ages 25 to 37 saying they plan to save or invest the money.

Almost half, or 45%, of people surveyed by TD Ameritrade said they are expecting to receive a refund. Last year, the average tax refund was $2,744, according to the IRS.

Millennials are more likely to expect refunds partly because they are more likely to have more taxes withheld from their paychecks throughout the year.

Even though a big refund check can be a nice infusion of cash, it often makes more sense to withhold less and boost the amount you're receiving in your weekly paycheck.

"Rather than giving Uncle Sam extra money throughout the year, they may want to consider adjusting their withholdings so they have that money to invest throughout the year," Lule Demmissie, managing director of investment products at TD Ameritrade said in a statement. "A small increase in the amount you invest monthly can add up over time."

The expectation of such big refunds may be why more millennials rushed to file their taxes right away. About 44% of Gen Y respondents said they file their taxes as soon as they get their W-2s, versus only 26% of the remaining respondents.

In general, Americans are diligent about filing their taxes. The majority, or 62%, said they file their taxes before the deadline, even if they don't rush to file right away.

And when asked where they think the government should spend their money, taxpayers cited public education most often, followed by healthcare and job creation.

Published: March 5, 2014

Five Facts about Unemployment Benefits

If you lose your job or your employer lays you off, you may be able to get unemployment benefits. The payments may be a welcomed relief. But you should know that they’re taxable.

Here are some important facts from the IRS about unemployment compensation:

1. You must include all unemployment compensation in your income for the year. You should receive a Form 1099-G, Certain Government Payments. It will show the amount paid to you and the amount of any federal income taxes withheld.

2. There are several types of unemployment compensation. They generally include any amount received under an unemployment compensation law of the U.S. or a state. 

3. You must include benefits paid to you from regular union dues in your income. Different rules may apply if you contribute to a special union fund and those contributions are not deductible. In that case, only include as income any amount you get that is more than the contributions you made.

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

5. If you are facing financial difficulties, the IRS offers options. For example, if your income decreased, you may be eligible for some tax credits, such as the Earned Income Tax Credit. If you owe federal taxes and can’t pay your bill, the IRS should be notified as soon as possible. In many cases, the IRS can take steps to help ease your financial burden.

Published: March 4, 2014

Are Your Social Security Benefits Taxable?

Some people must pay taxes on part of their Social Security benefits. Others find that their benefits aren’t taxable. If you get Social Security, the IRS can help you determine if some of your benefits are taxable.

Here are seven tips about how Social Security affects your taxes:

1. If you received these benefits in 2013, you should have received a Form SSA-1099, Social Security Benefit Statement, showing the amount.

2. If Social Security was your only source of income in 2013, your benefits may not be taxable. You also may not need to file a federal income tax return.

3. If you get income from other sources, then you may have to pay taxes on some of your benefits.

4. Your income and filing status affect whether you must pay taxes on your Social Security.

5. A quick way to find out if any of your benefits may be taxable is to add one-half of your Social Security benefits to all your other income, including any tax-exempt interest. Next, compare this total to the base amounts below. 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 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
Published: March 3, 2014

Seven Facts about Dependents and Exemptions

There are a few tax rules that affect everyone who files a federal income tax return. This includes the rules for dependents and exemptions. The IRS has seven facts on these rules to help you file your taxes.

1. Exemptions cut income.  There are two types of exemptions: personal exemptions and exemptions for dependents. You can usually deduct $3,900 for each exemption you claim on your 2013 tax return.

2. Personal exemptions.  You can usually claim an exemption for yourself. If you’re married and file a joint return you can also claim one for your spouse. If you file a separate return, you can claim an exemption for your spouse only if your spouse had no gross income, is not filing a return, and was not the dependent of another taxpayer.

3. Exemptions for dependents.  You can usually claim an exemption for each of your dependents. A dependent is either your child or a relative that meets certain tests. You can’t claim your spouse as a dependent. You must list the Social Security number of each dependent you claim. See IRS Publication 501, Exemptions, Standard Deduction, and Filing Information, for rules that apply to people who don’t have an SSN.

4. Some people don’t qualify.  You generally may not claim married persons as dependents if they file a joint return with their spouse. There are some exceptions to this rule.

5. Dependents may have to file.  People that you can claim as your dependent may have to file their own federal tax return. This depends on many things, including the amount of their income, their marital status and if they owe certain taxes.

6. No exemption on dependent’s return.  If you can claim a person as a dependent, that person can’t claim a personal exemption on his or her own tax return. This is true even if you don’t actually claim that person as a dependent on your tax return. The rule applies because you have to right to claim that person.

7. Exemption phase-out.  The $3,900 per exemption is subject to income limits. This rule may reduce or eliminate the amount depending on your income. 

Published: February 27, 2014

Deducting Medical and Dental Expenses

If you plan to claim a deduction for your medical expenses, there are some new rules this year that may affect your tax return. Here are eight things you should know about the medical and dental expense deduction:

1. AGI threshold increase.  Starting in 2013, the amount of allowable medical expenses you must exceed before you can claim a deduction is 10 percent of your adjusted gross income. The threshold was 7.5 percent of AGI in prior years.

2. Temporary exception for age 65.  The AGI threshold is still 7.5 percent of your AGI if you or your spouse is age 65 or older. This exception will apply through Dec. 31, 2016.

3. You must itemize.  You can only claim your medical and dental expenses if you itemize deductions on your federal tax return. You can’t claim these expenses if you take the standard deduction.

4. Paid in 2013. You can include only the expenses you paid in 2013. If you paid by check, the day you mailed or delivered the check is usually considered the date of payment.

5. Costs to include.  You can include most medical or dental costs that you paid for yourself, your spouse and your dependents. Some exceptions and special rules apply. Any costs reimbursed by insurance or other sources don’t qualify for a deduction.

6. Expenses that qualify.  You can include the costs of diagnosing, treating, easing or preventing disease. The cost of insurance premiums that you pay for policies that cover medical care qualifies, as does the cost of some long-term care insurance. The cost of prescription drugs and insulin also qualify. 

7. Travel costs count.  You may be able to claim the cost of travel for medical care. This includes costs such as public transportation, ambulance service, tolls and parking fees. If you use your car, you can deduct either the actual costs or the standard mileage rate for medical travel. The rate is 24 cents per mile for 2013.

8. No double benefit.  You can’t claim a tax deduction for medical and dental expenses you paid with funds from your Health Savings Accounts or Flexible Spending Arrangements. Amounts paid with funds from those plans are usually tax-free.

Published: February 26, 2014

The Premium Tax Credit

The premium tax credit can help make purchasing health insurance coverage more affordable for people with moderate incomes.  To be eligible for the credit, you generally need to satisfy three rules. 

First, you need to get your health insurance coverage through the Health Insurance Marketplace. The open enrollment period to purchase health insurance coverage for 2014 through the Health Insurance Marketplace runs from October 1, 2013 through March 31, 2014.

Second, you need to have household income between one and four times the federal poverty line. For a family of four for tax year 2014, that means income from $23,550 to $94,200.

Third, you can’t be eligible for other coverage, such as Medicare, Medicaid, or sufficiently generous employer-sponsored coverage.

If a  Marketplace determines that you’re likely to qualify for the tax credit at the time you enroll, you have two choices:  You can choose to have some or all of the estimated credit paid in advance directly to your insurance company to lower what you pay out-of-pocket for your monthly premiums during 2014.  Or, you can wait to get all of the credit when you file your 2014 tax return in 2015.

If you wait to get the credit, it will either increase your refund or lower your balance due.

If you choose to receive the credit in advance, changes in your income or family size will affect the credit that you are eligible to receive.  If the credit on your tax return you file in 2015 does not match the amount you have received in advance, you will have to repay any excess advance payment, or you may get a larger refund if you are entitled to more. It is important to tell your Marketplace about changes in your income or family size as they happen during 2014 because these changes will affect the amount of your credit.

Published: February 25, 2014

Beware of Fake IRS Emails and Phone Calls

Tax scams that use email and phone calls that appear to come from the IRS are common these days. These scams often use the IRS name and logo or fake websites that look real.

Scammers often send an email or call to lure victims to give up their personal and financial information. The crooks then use this information to commit identity theft or steal your money. Some call their victims to demand payment on a pre-paid debit card or by wire transfer. But the IRS will not initiate contact with you to ask for this information by phone or email.

If you get this type of ‘phishing’ email, the IRS offers this advice:

  • Don’t reply to the message.
  • Don’t open any attachments or click on any links. They may have malicious code that will infect your computer.
  • Don’t give out your personal or financial information.
  • Forward the email to phishing@irs.gov. Then delete it.

If you get an unexpected phone call from someone claiming to be from the IRS:

  • Ask for a call back number and an employee badge number.
  • If you think you may owe taxes, call the IRS at 800-829-1040. IRS employees can help you.
  • If you don’t owe taxes or have no reason to think that you do, call the Treasury Inspector General for Tax Administration at 800-366-4484 to report the incident.
  • You should also report it to the Federal Trade Commission by using their “FTC Complaint Assistant” on FTC.gov. Please add "IRS Telephone Scam" to the comments of your complaint.

Be alert to scams that use the IRS as a lure. The IRS will not initiate contact with you through social media or text to ask for your personal or financial information.

Published: February 24, 2014

Don’t Fall for the Dirty Dozen Tax Scams

Every year, people fall prey to tax scams. That’s why the IRS sends a list of its annual “Dirty Dozen”. We want you to be safe and informed – and not become a victim.

Taxpayers who get involved in illegal tax scams can lose their money, or face stiff penalties, interest and even criminal prosecution. Remember, if it sounds too good to be true, it probably is. Be on the lookout for these scams. 

Identity theft. Tax fraud using identity theft tops this year’s Dirty Dozen list. In many cases, an identity thief uses a taxpayer’s identity to illegally file a tax return and claim a refund. For the 2014 filing season, the IRS has expanded efforts to better protect taxpayers and help victims. 

Pervasive telephone scams.  The IRS has seen an increase in local phone scams across the country. Callers pretend to be from the IRS in hopes of stealing money or identities from victims. If you get a call from someone claiming to be from the IRS – and you know you owe taxes or think you might owe taxes, call the IRS at 1-800-829-1040. If you get a call from someone claiming to be from the IRS and know you don’t owe taxes or have no reason to think that you owe taxes, then call and report the incident to the Treasury Inspector General for Tax Administration at 1-800-366-4484.

Phishing.  Phishing scams typically use unsolicited emails or fake websites that appear legitimate. Scammers lure in victims and prompt them to provide their personal and financial information. The fact is that the IRS does not initiate contact with taxpayers by email to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels.

False promises of “free money” from inflated refunds.  The bottom line is that you are legally responsible for what’s on your tax return, even if someone else prepares it. Scam artists often pose as tax preparers during tax time, luring victims in by promising large tax refunds. Taxpayers who buy into such schemes can end up penalized for filing false claims or receiving fraudulent refunds. Take care when choosing someone to do your taxes.

Return preparer fraud.  About 60 percent of taxpayers will use tax professionals this year to prepare their tax returns. Most return preparers provide honest service to their clients. But some dishonest preparers prey on unsuspecting taxpayers, and the result can be refund fraud or identity theft.  Choose carefully when hiring an individual or a company to do your return. Only use a tax preparer that will sign your return and enter their IRS Preparer Tax Identification Number (PTIN).

Hiding income offshore.  While there are valid reasons for maintaining financial accounts abroad, there are reporting requirements. U.S. taxpayers who maintain such accounts and do not comply with these requirements are breaking the law. They risk large penalties and fines, as well as the possibility of criminal prosecution.      The IRS has collected billions of dollars in back taxes, interest and penalties from people who participated in offshore voluntary disclosure programs since 2009. It is in the best interest of taxpayers to come forward and pay their fair share of taxes.

Impersonation of charitable organizations. Taxpayers need to be sure they donate to recognized charities. Following major disasters, it’s common for scam artists to impersonate charities to get money or personal information from well-intentioned people. They may even directly contact disaster victims and claim to be working with the IRS to help the victims file casualty loss claims and get tax refunds.

False income, expenses or exemptions.  Falsely claiming income you did not earn or expenses you did not pay in order to get larger refundable tax credits is tax fraud. This includes false claims for the Earned Income Tax Credit. These taxpayes often end up repaying the refund, including penalties and interest or faces criminal prosecution.

Frivolous arguments.  Frivolous schemes encourage taxpayers to make unreasonable and outlandish claims to avoid paying the taxes they owe. The IRS has a list of frivolous tax arguments that taxpayers should avoid. While taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the law or ignore their responsibility to pay taxes.

Falsely claiming zero wages or using false Form 1099.  Filing false information with the IRS is an illegal way to try to lower the amount of taxes owed. Typically, fraudsters use a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 as a way to improperly reduce taxable income to zero. The fraudster may also submit a false statement denying wages and taxes reported by a payer to the IRS.

Abusive tax structures. These abusive tax schemes often involve sham business entities and dishonest financial arrangements for the purpose of evading taxes. The schemes are usually complex and involve multi-layer transactions to conceal the true nature and ownership of the taxable income and assets. The schemes often use Limited Liability Companies, Limited Liability Partnerships, International Business Companies, foreign financial accounts and offshore credit/debit cards.

Misuse of trusts.  There are reasonable uses of trusts in tax and estate planning. However, questionable transactions also exist. They may promise reduced taxable income, inflated deductions for personal expenses, the reduction or elimination of self-employment taxes and reduced estate or gift transfer taxes.  These trusts rarely deliver promised tax benefits. They primarily avoid taxes and hide assets from creditors, including the IRS.

Tax scams can take many forms beyond the “Dirty Dozen”. The best defense is to remain vigilant. Get more information on tax scams at IRS.gov.

Published: February 21, 2014

Form W-2 Missing? IRS Can Help

If you worked as an employee last year, your employer must give you a Form W-2, Wage and Tax Statement. This form shows the amount of wages you received for the year and the taxes withheld from those wages. It’s important that you use this form to help make sure you file a complete and accurate tax return.

Most employers give Forms W-2 to their workers by Jan. 31. If you haven’t received yours by mid-February, here’s what you should do:

1. Contact your employer.  You should first ask your employer to give you a copy of your W-2. You’ll also need this form from any former employer you worked for during the year. If employers send the form to you, be sure they have your correct address.

2. Contact the IRS.  If you exhaust your options with your employer and you have not received your W-2, call the IRS at 800-829-1040. You’ll need the following when you call:

  • Your name, address, Social Security number and phone number;
  • Your employer’s name, address and phone number;
  • The dates you worked for the employer; and
  • An estimate of the amount of wages you were paid and federal income tax withheld in 2013. If possible, you can use your final pay stub to figure these amounts.

3. File on time.  Your tax return is due by April 15, 2014. If you don’t get your W-2 in time to file, a Substitute for Form W-2, Wage and Tax Statement can be used in its place. Estimate your wages and withheld taxes as accurately as you can. The IRS may delay processing your return while it verifies your information.

Published: February 20, 2014

Important Reminders about Tip Income

If you get tips on the job from customers, here are a few important reminders:

  • Tips are taxable.  You must pay federal income tax on any tips you receive. The value of non-cash tips, such as tickets, passes or other items of value are also subject to income tax.
  • Include all tips on your return.  You must include the total of all tips you received during the year on your income tax return. 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.
  • Report tips to your employer.  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, debit and credit card tips you receive. Your employer is required to withhold federal income, Social Security and Medicare taxes on the reported tips. Do not report the value of any noncash tips to your employer. 
  • Keep a daily log of tips.  Use Publication 1244, Employee's Daily Record of Tips and Report to Employer, to record your tips.

Published: February 19, 2014

Four Good Reasons to Direct Deposit Your Refund

Would you choose direct deposit this year if you knew it’s the most popular way to get a federal tax refund? What if you learned it’s safe and easy, and combined with e-file, the fastest way to get a tax refund? The fact is almost 84 million taxpayers chose direct deposit in 2013.

Still not sure it’s for you? Here are four good reasons to choose direct deposit:

1. Convenience.  With direct deposit, your refund goes directly into your bank account. There’s no need to make a trip to the bank to deposit a check.

2. Security.  Since your refund goes directly into your account, there’s no risk of your refund check being stolen or lost in the mail.

3. Ease.  Choosing direct deposit is easy. When you do your taxes, just follow the instructions in the tax software or with your tax forms. Be sure to enter the correct bank account and routing number.

4. Options.  You can split your refund among up to three financial accounts. Checking, savings and certain retirement, health and education accounts may qualify.

You should deposit your refund directly into accounts that are in your own name, your spouse’s name or both. Don’t deposit it in accounts owned by others. Some banks require both spouses’ names on the account to deposit a tax refund from a joint return. Check with your bank for their direct deposit requirements.

Published: February 17, 2014

Filing Season 2014 Begins with More Returns Filed

The IRS today announced that tax filings in 2014 have outpaced filings for the same time last year. As of Feb. 7, the IRS received 27.3 million returns, up 2.5 percent compared to the same time last year. Electronically filed returns account for almost 96 percent of those filed so far this year.

Taxpayers, either through tax preparers or from their home computers, have e-filed more than 26 million returns so far this year, up almost 4 percent compared to the same time last year. As of Feb. 7, taxpayers have filed more than 13 million returns from home computers, an increase of 14.7 percent compared to the same period last year.

Refunds are up for 2014, with almost 19.5 million issued this year, an increase of more than 18 percent compared to the same time last year. The average refund as of Feb. 7 is $3,317, up 4.6 percent compared to the same time last year. (Refund averages generally have higher dollar values early in the filing season than later in the year.)

Most refunds are directly deposited into taxpayer accounts; just over 87 percent of all refunds issued were directly deposited as of Feb. 7. 2014.

Published: February 14, 2014

Choosing the Right Filing Status

Using the correct filing status is very important when you file your tax return. You need to use the right status because it affects how much you pay in taxes. It may even affect whether you must file a tax return.

When choosing a filing status, keep in mind that your marital status on Dec. 31 is your status for the whole year. If more than one filing status applies to you, choose the one that will result in the lowest tax.

Note for same-sex married couples. New rules apply to you if you were legally married in a state or foreign country that recognizes same-sex marriage. You and your spouse generally must use a married filing status on your 2013 federal tax return. This is true even if you and your spouse now live in a state or foreign country that does not recognize same-sex marriage. 

Here is a list of the five filing statuses to help you choose:

1. Single.  This status normally applies if you aren’t married or are divorced or legally separated under state law.

2. Married Filing Jointly.  A married couple can file one tax return together. If your spouse died in 2013, you usually can still file a joint return for that year.

3. Married Filing Separately.  A married couple can choose to file two separate tax returns instead of one joint return. This status may be to your benefit if it results in less tax. You can also use it if you want to be responsible only for your own tax.

4. Head of Household.  This status normally applies if you are not married. You also must have paid more than half the cost of keeping up a home for yourself and a qualifying person. Some people choose this status by mistake. Be sure to check all the rules before you file.

5. Qualifying Widow(er) with Dependent Child.  If your spouse died during 2011 or 2012 and you have a dependent child, this status may apply. Certain other conditions also apply.

Published: February 13, 2014

Quick Tips about Taxable and Nontaxable Income

Are you looking for a hard and fast rule about what income is taxable and what income is not taxable? The fact is that all income is taxable unless the law specifically excludes it.

Taxable income includes money you receive, such as wages and tips. It can also include noncash income from property or services. For example, both parties in a barter exchange must include the fair market value of goods or services received as income on their tax return.

Some types of income are not taxable except under certain conditions, including:

  • Life insurance proceeds paid to you are usually not taxable. But if you redeem a life insurance policy for cash, any amount that is more than the cost of the policy is taxable.
  • Income from a qualified scholarship is normally not taxable. This means that amounts you use for certain costs, such as tuition and required books, are not taxable. However, amounts you use for room and board are taxable.
  • If you got a state or local income tax refund, the amount may be taxable. You should have received a 2013 Form 1099-G from the agency that made the payment to you. If you didn’t get it by mail, the agency may have provided the form electronically. Contact them to find out how to get the form. Report any taxable refund you got even if you did not receive Form 1099-G.

Here are some types of income that are usually not taxable:

  • Gifts and inheritances
  • Child support payments
  • Welfare benefits
  • Damage awards for physical injury or sickness
  • Cash rebates from a dealer or manufacturer for an item you buy
  • Reimbursements for qualified adoption expenses
Published: February 12, 2014

Four Common Myths About Taxes

It's not that surprising that there's a lot of misinformation out there about taxes. The U.S. tax code is over 4 million words long and not one of us has the time to go through it all. Most of us treat the tax code like the monster it is, interfacing with it only from a distance and once a year paying homage to it in the form of a tax return.

Since there's so much to know about taxes and so little willingness to learn about them, people sometimes make assumptions about how the system works that turn out to be false. These bits of false information sometimes take on a life of their own and, unfortunately, become common knowledge. This is problematic because a misunderstanding of how the tax system works can have consequences — most personal financial planning requires a basic, and reality-based, understanding of how taxes work. Otherwise, you could find yourself owing a lot more money than you expected — or, at least, worrying about irrelevant details when you should be relaxing.

For Americans already spending nearly 24 hours each year filing taxes, there's no need to add another minute. Here are a couple of common myths and misunderstandings about taxes, and what's really going on:

1. You can audit-proof your return

The Treasury Inspector General for Tax Administration, America's tax czar, estimates that taxpayers will owe $345 billion more than what they claim they owe on their income tax returns for 2013. Unfortunately for the Internal Revenue Service, they won't be able to reclaim all of that money. All told, only about 1% of all tax returns filed are audited.

Unfortunately for tax filers, there's no way to ensure that you won't fall into that 1%. The IRS can, and does, audit people from every income bracket, including those who report no income. In fact, tax professionals are obligated to prepare returns as if they were going to be audited by the IRS, and they are not permitted to make decisions regarding a filing position based on the likelihood that it will be examined. What this means is that tax professionals are bound by sacred oath to not game the audit lottery. They are (technically) not allowed to advise you on the likelihood that your return will be audited based on how you choose to file.

It stands to reason that if the more glaring errors there are with your return, the more likely you are to be audited (or, as the IRS puts it, be subject to "examination.") However, even if you file a perfect return, there is a chance that you'll be selected for additional screening. The good news is that most Americans have a very low likelihood of being selected — less than 1% if you earn anywhere between $1 and $200,000 per year. If you earn more than that, the odds of getting a call from the IRS increase.

2. An audit means scary men in dark glasses at your door

Just mentioning the word "audit" is enough to give some people a headache. Even those who haven't had to endure one flinch when they hear the word, many of them imagining a litany of phone calls from stern government workers and men in dark glasses rifling through their receipts.

But, believe it or not, the IRS would like to go about its business as unobtrusively as possible. Of the approximately 1.48 million individual income tax returns examined (audited) in fiscal 2012, only 24% were examined in the "field," as the IRS puts it. The rest were conducted through correspondence.

"Enforcement of the tax laws is an integral component of the IRS's mission," wrote the IRS in its 2012 data book. "Field examinations are generally performed in person by revenue agents, tax compliance officers, tax examiners, and revenue officer examiners. However, some field examinations may ultimately be conducted through correspondence in order to better serve the taxpayer."

Something that is worth noting is that when businesses are audited, they are way more likely to get a visit from a man in dark glasses than not. Of the 32,701 corporation income tax returns examined in fiscal 2012 (1.6% of total corporation tax returns filed), an incredible 97% were examined in the field. Another fun, but perhaps self-explanatory, fact: 100% of estate tax returns that are audited are audited in the field.

3. Once you retire, you're tax-free

There are a lot of benefits to retirement, but leaving the workforce and entering your golden years doesn't necessarily free you from all the bonds of labor. Odds are (unless you buried your life savings in the backyard) you will still have income in retirement, and if the government is good at anything, it's collecting taxes on income.

The good (bad?) news is that you may fall into a lower tax bracket in retirement, particularly given the sore state of retirement savings in the United States right now (estimates vary, but Americans are running an estimated retirement savings deficit of approximately $6.6 trillion.) This, though, depends on two things: one, how much of your pre-retirement annual income you expect to live on in retirement — and two, your ability to actually save enough money to make that goal a reality. Many experts suggest that you'll want at least 70% of your pre-retirement income in retirement to live comfortably.

You can reduce your tax liability in retirement by establishing a Roth IRA instead of a traditional IRA, and paying your taxes upfront rather than when you withdraw. Whatever you do, keep in mind that if you take the miserly route and withdraw as little money as possible from your retirement accounts, you may be subject to required minimum distributions laws come the age of 70.5. You can face tax penalties up to 50% of the amount you withdraw if you fail to take the minimum amount required from your retirement account each year.

4. Corporations write the majority of Uncle Sam's paycheck

Whether or not individual politicians are bought and paid for by the private sector is a fair question to ask, but Uncle Sam still works for the American people. At least, individual income taxes account for the vast majority of total government receipts.

This fiscal year to date, the government has collected (or withheld) $324.9 billion from the individual income tax and just $79.7 billion from corporation income taxes. As a share of the $694.6 billion receipts collected by the government this fiscal year to date (the government's fiscal year begins in October), personal income taxes account for 46.7%, while corporation income taxes account for 11.5%.

For the full year, the Treasury Department estimates that it will collect $1.4 trillion in individual income taxes and $333.4 billion in corporation income taxes. If the estimate is accurate, individual income taxes will account for about 46.7% of total receipts, while corporation income taxes will account for about 11%.

At its peak, in the 1940s and early 1950s when the government imposed war-time taxes on corporate profits, corporation income taxes accounted for about 23% of total government revenue. Corporation income taxes have fallen dramatically over the past 40 years or so from an all time high of 52.9%, even though the Tax Reform Act of 1986 was designed to increase the share of government receipts collected from corporations and decrease the share collected from individuals.

By Dan Ritter for USA Today

Published: February 10, 2014

The Earned Income Tax Credit Gives Workers a Boost

For nearly 40 years, the Earned Income Tax Credit has been helping low- to moderate-income workers by giving them a boost to their income. Four out of five eligible workers claim EITC, but the IRS wants every eligible worker to claim and get this credit.  

Here are some things the IRS wants you to know about this important credit: 

Review your eligibility. If you worked and earned under $51,567, you may be eligible for EITC. If your financial or family situation has changed, you should review the EITC eligibility rules. You might qualify for EITC this year even if you didn’t in the past. Workers who qualify for EITC must file a federal income tax return and specifically claim the credit to get it, even if they do not have a requirement to file a return.

Know the rules. Before claiming EITC, you need to understand the rules to be sure you qualify. It’s important to get it and get it right.

There are several factors to consider: 

  • Your filing status can’t be Married Filing Separately.
  • You must have a valid Social Security number for yourself, your spouse if married, and any qualifying child listed on your tax return.
  • You must have earned income. Earned income includes earnings such as wages, self-employment and farm income.
  • You may be married or single, with or without children to qualify. If you don’t have children, you must also meet age, residency and dependency rules.
  • If you are a member of the U.S. Armed Forces serving in a combat zone, special rules apply.

Lower your tax or get a refund. The EITC reduces your federal tax and could result in a refund. If you qualify, the credit could be worth up to $6,044. The average credit was $2,355 last year. 

Published: February 4, 2014

Should You Take The New 2013 Simplified Home Office Deduction?

The Internal Revenue Service is touting the new “no-doc” $1,500 home office deduction that’s available for the first time this tax filing season, but don’t fall for it without doing your homework. “Remember, the IRS doesn’t necessarily do anything good for taxpayers unless it also benefits them,” says Cynthia Jeanguenat, an enrolled agent in Virginia Beach, Va. She didn’t alert her clients to the simplified deduction ahead of tax filing season “lest they stop keeping track of their expenses as we train them to do,” she says. “Is it easier? Sure. Is the deduction better? Not that I’ve found,” she adds.

Basically, the simplified method is an alternative to calculating and substantiating your actual expenses. It’s like using the standard mileage rate for deducting business auto expenses instead of the more cumbersome actual expenses (maintenance, gas, insurance). It may not be the best deduction but if you don’t keep records, it’s all you can claim.

To snag the home office deduction using the simplified method, all you have to do is multiply the square footage of your home office space (that’s space used exclusively and regularly for your home-based business) by $5, and that’s what’s deductible. The biggest catch: there’s a $1,500 maximum limit to the deduction you can claim this way.

By contrast, under the actual expenses method, you add up your rent or mortgage interest, renters’ or homeowners’ insurance, real estate taxes and utilities, and multiply that times the percentage of your house allocable to your home office. You can also deduct an allocable portion of general house repairs (say a new hot water heater) but that’s trickier. With either method, you can only reduce your business income to zero; you can’t take a loss.

Note: if you use the simplified method with the $1,500 cap, you separately get to deduct your mortgage interest and real estate taxes on Schedule A–assuming you itemize. Also with the home office deduction, you can switch from using one method one year to the other method another year.

The bigger your home office, the more likely the actual expense method will yield a bigger tax break. For example, Jeanguenat has three clients, a hair stylist, a contractor and a Shaklee rep who all have large areas of their homes devoted towards their home businesses and have been taking deductions for well over the $1,500 max under the simplified method. The hairstylist who converted her garage to a salon took a home office deduction of $4,881 last year.

By contrast, for a consultant client who claims just 5% of his total house square footage as home office space, his actual expenses for his home office come in close to the $1,500 max. But even if it’s over just a bit, why not claim it? “Clients are paying us to make sure they’re paying the lowest amount of taxes required,” Jeanguenat says. Most people who are in business are so used to having to keep receipts and all this information anyway, and with the ability to track expenses online it’s less burdensome than in the past. (Jeanguenat’s one-room home office came in at $1,701 last year so she expects to take the actual expense method again this year.)

Might you use the simplified method even if it results in a lower deduction? “If someone said, ‘I don’t have time to get my expenses together,’ at least now we have an alternative,” she says.

Who else might go for the simplified method? Folks with tiny home offices. Richard Rhodes, an enrolled agent who works out of a 127-square-foot office converted from a spare bedroom in his Hinckley, Ohio home made the calculations for himself and said he’ll be using the new simplified method. “I’m more than doubling what I would have gotten,” he says. He figures he’ll get a $635 ($5 x 127) deduction versus $302.

“You have to figure it out both ways and choose the one that save the taxpayer the most money on their taxes,” he says. So much for simplification.

By Ashlea Ebeling for Forbes

Published: February 3, 2014

IRS Officially Kicks Off Tax Season, Now Accepting Returns

Tax season, that time of year that spurs Americans to gnash their teeth and root out reams of old documents, officially kicked off Friday.

The Internal Revenue Service started accepting and processing paper and online returns, as well as preparing refunds. Individuals have until April 15 to file their tax returns.The tax agency is actually getting a late start this year after the government shutdown delayed the opening of tax season by 10 days to Jan. 31.

More than 148 million individual tax returns will be filed this year, the IRS estimated. About three out of four filers will get refunds, with the average refund last year clocking in at $2,755.

The IRS is encouraging people to file electronically instead of mailing in paper forms. More than four our of five returns are now filed electronically, and those who are due refunds that file electronically and choose direct deposit will get their refunds more quickly, the agency said.

Published: January 31, 2014

Yacht Owners Seek to Salvage Tax Deduction for Second Homes

Kent Webb plans to write off part of the interest he pays to finance what he considers his second home, a luxury fishing boat named the Moonlighter.

Calling such tax breaks loopholes for the wealthy, congressional Democrats have other ideas.

They want to eliminate the 73-year-old North Carolina physician’s deduction as part of proposed tax-code revisions this year, potentially the biggest revamp since 1986 and one in which lawmakers have pledged to scrutinize every tax break.

The second-home mortgage deduction, which also benefits owners of cabins and recreational vehicles, is the boating industry’s biggest tax break and applies to vessels ranging from tiny sailboats to multimillion-dollar yachts.

Besides having at least a temporary toilet and camp stove, the only other Internal Revenue Service qualifying requirement is that taxpayers spend at least 14 nights a year in their second home if they also sometimes rent it out to others.

“It has been a significant factor in my decision-making,” said Webb, whose 60-foot (18.3-meter) yacht was listed for $2.6 million when it was for sale in 2013. “It is so unfair to target people who want to use their boat as a second home.”

Boat manufacturers are gearing up to protect the break, leveraging campaign contributions and drafting form letters for boaters to send to lawmakers. The industry has more than $35 billion in annual U.S. sales of products and services, according to the Chicago-based National Marine Manufacturers Association.

Elimination Advocates
The Ending Subsidies for Yachts Act, barring the deduction for new mortgages on boats, is pushed by two Democrats in the Republican-led House, Representatives Mike Quigley of Illinois and Tim Walz of Minnesota. They highlight estimates from the bipartisan Joint Committee on Taxation that suggest savings of more than $150 million over 10 years, a number that would grow as the deduction is phased out.

The interest deduction for second homes, with an estimated cost of $8 billion a year, is part of the broader mortgage interest deduction, the future of which is up for debate. The break for boats is a tiny proportion of the second-home total.

Taxpayers can deduct interest on up to $1.1 million in mortgages on two homes: a “main home” where they live most of the time and a second home. The IRS doesn’t require them to say how much interest is for the first or second home, and the agency doesn’t have data on the cost of the boating break.

Not Sympathetic
“I’m not sympathetic for a second-home deduction used largely as leisure,” Quigley said. “If we need revenue and we need to make cuts, I have a hard time putting second homes as a priority.”

Quigley said it “verges on the absurd” that boats have to be “subsidized” at the expense of other things such as food stamps and funding for more police and the military. He’d also like to see the deduction eliminated for RVs, although that isn’t written into his legislation.

Representative Candice Miller, a Michigan Republican with longstanding ties to the boating industry and co-chairman of the 114-member Congressional Boating Caucus, declined an interview request about the merits of the tax break.

“It’s been spun as a deduction that’s taken by wealthy people,” said Nicole Vasilaros, director of regulatory and legal affairs for the National Marine Manufacturers Association. “That’s a political tactic.”

Industry Letter
An industry letter drafted for boat owners to send to lawmakers says the proposal is “wrong-headed and would accomplish nothing except putting American boat builders out of work at a time when the industry is still on its knees and not recovered from the worst downturn since the Great Depression.”

After bottoming out in 2010, the boating industry is recovering. Purchases of powerboats— which include yachts, pontoons and fishing vessels—rose 13.8 percent during the third quarter of 2013 compared with the same period a year earlier, according to figures from Statistical Surveys Inc., a research company based in Grand Rapids, Michigan.

Lake Forest, Illinois-based Brunswick Corp., the leading U.S. boat manufacturer, saw its share price increase 58.3 percent in 2013, compared with a gain of 29.6 percent for the Standard & Poor’s 500 Index.

Boating industry advocates say an elimination of the deduction would hurt sales. They point to the industry’s downturn that followed a 10 percent excise tax on boats priced above $100,000 that was started in 1991 and repealed in 1993.

‘Extremely Damaging’
“It could be extremely damaging,” said Chris Berkeley, a loan officer with Intercoastal Financial Group in Fort Pierce, Florida.

The deduction is mostly used by “middle-class” boaters because the wealthy already tend to have multiple homes on land, Vasilaros said. The average boat loan is for $49,000 and more than three-quarters of owners have annual household incomes of less than $100,000, she said, adding that the industry estimates about 5 percent of the 12 million boats registered in the U.S. qualify for the deduction.

The boat manufacturers don’t have data on how many boat owners use the deduction, or their income level, Vasilaros said.

In Webb’s case, the physician said that although he’s used the deduction on previous vessels, he doesn’t on his current one because his primary home mortgage already exceeds the $1.1 million limit. He plans to get a smaller home, then use the tax break for his boat.

Senator Chafee
An effort to do away with the boat provision in 1987 was pushed back in part by then-U.S. Senator John Chafee of Rhode Island, a top shipmaking state.

“If this whole deduction is going to be eliminated for all players, we would not be happy about it,” Vasilaros said. “But it would at least be fair.”

Since 2001, the boat manufacturers association has contributed roughly $850,000 to federal candidates, according to the Center for Responsive Politics in Washington. Brunswick’s political action committee gave about $330,000 to federal candidates during that period.

Last week, at an annual five-day boat show in Chicago, dozens of vessels filled the sprawling McCormick Place convention center. David and Tracy Lindke of Holland, Michigan, were among the shoppers.

The couple already has a 40-foot (12.2 meter) boat named “Stella.” They don’t currently take the deduction, although they said they will if they purchase a bigger boat.

Standing next to a $1.2 million vessel on display at the show, David Lindke predicted the proposal would hurt boat sales and ultimately the government. “You will lose more tax revenue than you would gain,” he said.

Originally published by Accounting Today

Published: January 30, 2014

6 Tips on Filing Taxes for the First Time

Filing a tax return can be daunting for even the most experienced taxpayer. So how is a new taxpayer expected to cope?

First, don't panic. While taxes can be overwhelming, there are some steps a novice taxpayer can take to successfully make it through the first filing season. Here are six tax-filing tips to get you going.

1. Get organized

The Internal Revenue Service is all about documentation. By late January or early February, you should receive a W-2 from each workplace where you received a salary. This form details how much you made, along with how much federal and state income tax and Social Security and Medicare payroll taxes were withheld.
If you worked as an independent contractor, you'll get a 1099-MISC from each job. This statement lists only your earnings. No taxes were withheld, meaning you'll need to figure your income taxes that are due, as well as any possible self-employment tax.
Jillian Johnson, a tax preparer with Jackson Hewitt Tax Service in Orlando, Fla., says it's not uncommon for new taxpayers to show up at her office unsure about what to do with their W-2s or 1099s. Others arrive wanting to file without the proper documents. "Many are kids, working their first jobs," says Johnson.
Melinda Kibler, a Certified Financial Planner with Palisades Hudson Financial Group in Fort Lauderdale, Fla., recommends that taxpayers, new and veteran, create a folder where tax documents can be safely kept for filing.
In addition to the earnings statements, your tax folder should be home to other types of tax forms you receive. These include statements of additional income, such as interest or other investment earnings, as well as documents useful in claiming tax breaks, such as deductible student loan interest listed on Form 1098-E or records of contributions to an IRA.
"In case it would be more beneficial for you to itemize instead of claiming the standard deduction, you should also save records of deductible expenses," says Kibler.
And don't even think about ignoring the tax statements. In most instances, the IRS also gets copies of these tax-related earnings and payments. These amounts are the first things the IRS checks when it begins processing your return.

2. Talk with your parents

If you are a student looking to file your first tax return, stop. Talk with your parents first.
Mom and Dad may be planning to list you as a dependent or claim some of your college costs on their return. Such claim conflicts are common in families where college kids work enough to be required to file a Form 1040.
Tax rules say, however, that when a taxpayer is a dependent of another filer or simply could be claimed as a dependent, that taxpayer isn't allowed to claim a personal exemption on his or her own return. A personal exemption is a dollar amount that every taxpayer can deduct from his or her income, plus any dependents. The bottom line is that an exemption can show up on only one tax return.
There also are issues regarding whether it would be better for parents or the student to claim some education tax breaks.
To avoid creating filing problems for your folks or yourself, look at each of your tax situations and determine the tax-smart way for each of you to file. Chances are your parents could benefit most for these education tax breaks, and if they're helping you pay for college, it would be nice if you let them get first dibs.

3. Decide how to file

You're ready to file. Now you must decide how. More taxpayers each year turn to tax software to complete and file their returns. Inexperienced filers, however, might be more comfortable getting personal help, either from an accountant or a franchise tax operation.
But just because your tax return might be relatively uncomplicated, that doesn't absolve you of due diligence in finding a preparer. Take the time to check out potential tax preparers thoroughly.
Inexperienced filers often are easy targets for tax con artists. To protect yourself from such scams, avoid tax preparers who base their fees on how large of a refund they can get for you.
If cost is a concern, you might be able to file for free through the Free File program. This partnership between the IRS and around 20 tax software companies is open to taxpayers who make less than a certain amount. The earnings limit for the 2014 filing season that begins on Jan. 31 has been bumped up a bit for inflation to $58,000.

4. Don't leave money on the table

New taxpayers should make sure they do not leave money on the table, says Art Agulnek, a senior lecturer who teaches taxation courses in the Naveen Jindal School of Management at the University of Texas at Dallas.
Deductions that are often overlooked, says Agulnek, include:

  • State and local sales taxes. The IRS allows you to deduct these by using figures based on your income and geographic location, or you can use your own receipts if you have the records.
  • Charitable contributions paid through payroll deductions. Employees may retain pay stubs as proof.
  • Child and dependent care credit. You may be able to claim this credit if you paid a provider to care for a dependent while you worked or hunted for a job.
  • Job search expenses. The IRS allows deductions for costs such as travel and resume printing.
  • Earned income tax credit. Families with lower incomes that qualify can claim this credit.
  • Workplace benefits also can help save on taxes, says Wendy Weaver, a Certified Financial Planner at FBB Capital Partners in Bethesda, Md. She recommends workers contribute to their company 401(k) or other retirement plan where employee contributions are made on a pre-tax basis and the money grows tax-deferred. Similar tax-saving employer-provided benefits include Health Savings Accounts or flexible spending accounts.

5. Don't procrastinate

New taxpayers are sometimes intimidated by the process. But don't let that slow your filing process, says Kibler. "You want to leave ample time before the April 15 deadline in case you run into issues, have questions or have trouble getting an appointment with a tax preparer," she says.

6. Don't be in such a hurry

There is, however, a tax timing flip side. Don't be in such a hurry to file, especially if you're getting a refund, that you make a costly mistake. Make sure you have all the information and supporting documentation to complete your tax return correctly. If you're still awaiting data as the filing deadline nears, ask the IRS for more time.
All you have to do is complete Form 4868. The IRS will give you six more months, until Oct. 15, to finish your filing paperwork.
You must, however, pay any tax amount that you think you will owe when you submit Form 4868 by April 15. But at least you'll avoid additional penalties and have ample time to finish up your first IRS tax return properly.

By Kay Bell for BankRate.com

Published: January 23, 2014

10 New Tax Traps to Watch Out for in 2014

Taxpayers in 2014 don't have to worry about a lot of tax surprises. The American Taxpayer Relief Act of 2012 enacted on Jan. 2, 2013, made many existing tax laws permanent and extended other provisions through 2013. But even in the most stable tax and political environments, there's always something to worry about when it comes to taxes. Here are 10 tax traps you need to watch out for in 2014.

1. Get ready to wait early in the year.
The federal government shut down for 16 days last October, but taxpayers are still paying for it. The IRS says Jan. 31, 2014, is the earliest it will be ready to process individual tax returns. You can go ahead and submit your return electronically as soon as you're ready; your e-filer will hold it until the IRS is ready to accept returns. If you're eligible for Free File, that IRS-software manufacturer partnership opens for filers on Jan. 17. If, however, you file a paper return, the IRS encourages you to wait until Jan. 31 to mail it.

2. Get ready to wait later in the year.
Every year or so, some temporary tax provisions are renewed by Congress. In recent years, however, lawmakers have let the laws expire and then renewed them retroactively, most recently in the American Taxpayer Relief Act of 2012, also known as the "fiscal cliff" tax bill. Expect a replay in 2014. Fifty-five tax provisions expired on Dec. 31, 2013. This doesn't affect your 2013 tax return, but tax planning for 2014 will be a different story.

Consideration of these so-called extenders has been complicated by possible overall tax reform and budget considerations, as well as the political intentions of key Capitol Hill players. Leaders of both parties on the House Ways and Means and Senate Finance tax-writing committees want to, among other approaches, extend the expired tax laws as a package ASAP, look at each now-dead tax provision separately, focus on tax reform first or roll the extenders into a larger tax overhaul bill.

Uncle Sam could bring in billions by letting some or all of the extenders fade away. That would mean, however, that individual taxpayers would lose such popular tax breaks as the itemized deduction for state and local sales taxes, the above-the-line deductions for tuition and fees and educators' out-of-pocket classroom expenses. The longer lawmakers wait to make any decision on extenders, the harder it will be to plan and implement your 2014 tax strategy.

3. Watch for added taxes if you're wealthy.
The American Taxpayer Relief Act of 2012 was not kind to wealthier taxpayers, and they will find out the extent of the damage when they file their 2013 returns.

In addition to paying a top ordinary tax rate of 39.6 percent if, as a single filer, your taxable income is more than $400,000 ($450,000 for married couples filing jointly), you could face added taxes. The most dreaded is the new net investment income tax of 3.8 percent, also known as the Medicare surtax because the money goes toward that health coverage program for older Americans. The tax applies to either your modified adjusted gross income or net investment income, whichever is lower, if you earn more than $200,000 as a single taxpayer or $250,000 as a married joint return filer. The net investment income tax will not only take a bite out of taxpayers' bank accounts, but also cause headaches for high-income earners and their tax professionals working through the tax regulations. Topping it off, single taxpayers who make more than $250,000 and jointly filing couples making more than $300,000 will see their personal exemptions and itemized deduction total reduced.

4. Sign up for medical insurance.
The Affordable Care Act will continue to roll out in 2014, meaning that uninsured individuals have some choices to make that could have tax implications. Enrollment for health insurance under Obamacare, as the health reform act is popularly known, goes through March 31, 2014. If you don't buy an insurance plan, you could face a penalty.

The charge for 2014 is either 1 percent of your yearly household income or $95 per uninsured adult and $47.50 per child, up to $285 for a family. You pay whichever amount is higher. If you get insurance for part of the year, your penalty will be prorated. You'll pay the penalty when you file your 2014 tax return in 2015. If you're getting a refund, the IRS will subtract your ACA penalty from the amount you were to get back. If your refund isn't large enough to cover the penalty, the IRS will send you a bill. Ignore that and the tax agency will take the amount out of future tax refunds.

5. File jointly if you're a same-sex married couple.
Married same-sex couples now have the same federal tax filing responsibilities as heterosexual couples. Following the Supreme Court invalidation of the Defense of Marriage Act, the IRS instructed same-sex married couples to file jointly or as a married couple filing separately even if the state where they live does not recognize their marriage. This will simplify same-sex couples' federal filings, but if they must pay state income taxes, depending on their state's law, they could still face filing two state returns as single taxpayers.

6. Claim the simplified home office deduction.
The recession has prompted many workers to start their own businesses, many of which are run from their homes. There's good filing news for these entrepreneurs. For 2013 returns filed in 2014, the IRS is now offering a simplified home office deduction. The new optional deduction is $5 for each square foot of home office space, up to a maximum of 300 square feet. That comes to a maximum $1,500 annual home office deduction. The IRS estimates that this option will save home-office filers who claim it's an estimated 1.6 million hours of paperwork and record keepings collectively. Instead of filling out Form 8829, you'll use a worksheet in the Schedule C instruction book and enter your simplified home-office deduction amount on Schedule C. While the new deduction option will be welcomed by many, note that the requirements to qualify as a home office still apply. For instance, the office space must be used regularly and exclusively for business.

7. Keep an eye on IRS troubles.
The IRS is proposing new regulations for groups seeking 501(c)(4) nonprofit status. This designation was the focus of a Treasury Inspector General for Tax Administration investigation of IRS handling of Tea Party-affiliated organizations seeking the preferable tax status. During subsequent congressional hearings, it was learned that more liberal, progressive groups also were targeted by IRS reviewers. The IRS is proposing limits on these so-called social welfare groups' spending on political campaign-related activities. Expect continued debate on the groups' activities and IRS oversight before any final regulations are issued. Also look for Congress to restart hearings into IRS activity in the tax-exempt organization area as the 2014 election campaigns heat up. And stay tuned for any changes John Koskinen, a retired corporate restructuring expert who was confirmed Dec. 20, by the Senate as IRS commissioner, might make in his new job.

8. Pay attention to tax preparer regulation.
The IRS effort to regulate professional tax preparers will continue in 2014, both in the court system and on Capitol Hill. The agency wants to register all tax preparers who aren't already subject to certain standards (that is, attorneys, Enrolled Agents or CPAs) and require they pass competency exams and take continuing education classes. The IRS believes this will help reduce incorrectly and fraudulently filed returns. Three tax pros filed a federal lawsuit against the IRS, winning the first court round. An appellate court decision is pending. Meanwhile, legislation has been filed in the House to give the IRS statutory authority to regulate tax preparers. Senate Finance Committee Chairman Max Baucus also has suggested such preparer oversight in his tax reform working drafts. A final decision on tax preparer standards could come in 2014, affecting taxpayers who seek professional help in fulfilling their tax responsibilities.

9. Watch out for tax reform.
The last overhaul of the federal tax code was in 1986. Will we finally see major changes in the Internal Revenue Code in 2014? Probably not. Will we hear a lot of talk about tax reform? Yes. It is an election year and talk of taxes makes for good campaign ads. Rep. Dave Camp, R-Mich., and Sen. Max Baucus, D-Mont., are insistent that there will be some tax reform before they leave the chairmanships of, respectively, the House Ways and Means and Senate Finance committees. Both have led a cross-country tour to solicit public input on tax reform, as well as set up a website on the topic. Camp has focused on 11 specific tax reform working groups. Baucus also has coordinated tax reform option papers and recently released some of his ideas in discussion drafts.

10. Take advantage of inflation tax adjustments.
One thing we do know for sure for 2014, inflation had a nominal effect on around 40 tax provisions. Most notable is that income brackets were widened a tad, meaning you can earn a bit more next year without being bumped into a higher tax bracket. Most people claim the standard deduction, and those amounts for each filing status in 2014 were increased slightly, as was the personal exemption amount, going from $3,900 to $3,950. However, the amounts you can contribute to your workplace pension plan and individual retirement account in 2014 have stayed the same as in 2013.

By Kay Bell for BankRate.com

Published: January 22, 2014

Do You Need To File A Tax Return In 2014?

The Internal Revenue Service will process somewhere around 140 million individual tax returns by the time tax season wraps up. Will you be filing one of those returns? And more important, do you need to?

Not every person who received income in 2013 has to file a federal income tax return. There are a number of factors that affect whether you have to file including how much you earned – and the source of that income – as well as your filing status and your age. For most folks, this is pretty straightforward.

If you can be claimed as a dependent on someone else’s return, the rules are a little bit different. Here are some basic guidelines:

  • For single dependents who are under the age of 65 and not blind, you generally must file a federal income tax return if your unearned income (such as from dividends or interest) was more than $1,000; if your earned income (such as from wages or salary) was more than $6,100.
  • For single dependents who are over 65 or blind, you generally must file a federal income tax return if your unearned income was more than $2,500 or if your earned income was over $7,600.
  • For single dependents who are over 65 and blind, you generally must file a federal income tax return if your unearned income was more than $4,000 or if your earned income was over $9,100.
  • For married dependents when either of you are under the age of 65 and not blind, you generally must file a federal income tax return if your unearned income was more than $1,000; if your earned income was over $6,100; or if your gross income was at least $5 and your spouse files a separate return and itemizes deductions.
  • For married dependents when either of you are over 65 or blind, you generally must file a federal income tax return if your unearned income was more than $2,200; your earned income was over $7,300; and your gross income was at least $5 and your spouse files a separate return and itemizes deductions.
  • For married dependents when either of you are over 65 and blind, you generally must file a federal income tax return if your unearned income was more than $3,400; your earned income was over $8,500; and your gross income was at least $5 and your spouse files a separate return and itemizes deductions.

Keep in mind that these rules apply to dependents who are also married, not just simply married taxpayers. For tax purposes, your spouse is never considered your dependent.

You may also have to file for other reasons. The most frequent reason for filing a federal income tax return even when you don’t meet the basic income criteria is for self-employed persons: those who are self-employed must file a federal income tax return if net earnings are at least $400. Other reasons to file include owing special taxes like a recapture tax (such as the homebuyer’s credit), alternative minimum tax (AMT), household employment taxes, taxes on tips you did not report to your employer or on wages from an employer who did not withhold those taxes. You also need to file if you had wages of $108.28 or more from a church or qualified church-controlled organization exempt from payroll taxes.

Don’t forget tax-favored accounts. You need to file if you received HSA, Archer MSA, or Medicare Advantage MSA distributions during 2013. If you took an early distribution from a qualified plan or one in excess of $160,000 from a qualified retirement plan, or if you made excess contributions to your IRA or MSA, you’ll need to file. If you didn’t take your minimum required distribution – and you were supposed to – you’ll also need to file.

Even if you don’t need to file a federal income tax return this year, you may still want to take advantage of tax breaks and credits which might be available: popular credits include the additional child credit and the American Opportunity credit. You might also be entitled to a refund for excess withholdings or a refundable credit such as the earned income tax credit (EITC). And don’t forget the newest credit: the health coverage tax credit (HCTC) – it’s also refundable.

It’s also important to consider that these are the federal rules. The rules for your state might be very different. In my own state of Pennsylvania, for example, we have no personal exemption and thus, taxpayers are subject to tax at the first dollar. It is possible that you might have to file a state (or local) income tax return even if you are exempt from federal income tax so don’t assume otherwise.

If, after all of this, you’re still confused, ask your tax professional at Hershkowitz & Kunitzer, P.A. We're happy to help! 

Originally appeared on Forbes.com

Published: January 21, 2014

Top 5 Tax Mistakes

The time is fast approaching for all of us to check in with Uncle Sam. You know the saying, "Nothing is certain but death and taxes," and the time of certainty is here for taxes. I have compiled a list of the top five ways to make your tax season bleak. Do these things and you are certain to wish you had not.

Don't file a tax return because you don't have the money to pay your taxes.

Always file, even if you do not have the money to pay the taxes you owe. The IRS considers not paying on time and not filing as two separate issues, and a penalty is involved for each. When you file your tax return, you have several options. You can apply for an "offer in compromise," make monthly payments through an IRS installment agreement, or temporarily delay paying. Whichever is best for you, contact the IRS right away to let them know you cannot pay. You should pay as much as you can when you file because the IRS assesses penalties and interest on the amount not paid.

Ignore those letters from the IRS.

Do not ignore mail from the IRS. If you owe taxes, the IRS will collect. Persons who do not communicate with the IRS about inability to pay can expect a "Notice of Federal Tax Lien" to be filed against their property. In lien terms, this is a lien about the size of Alaska. Few carry more weight. The lien attaches all your property, including your house, car and any future property you might obtain. A levy, which is a legal seizure of property to satisfy a tax debt, is another legal means the IRS can use to collect taxes. This means the IRS can seize your car, boat or home and sell it to satisfy your tax debt or it can place a levy on your wages. More good news is that these liens often stay on your records long after the issue has been resolved or until the IRS gets around to removing it. So it's also the gift that keeps on giving!

Pay your tax bill with a high interest credit card.

Although this is a better approach than not paying your taxes at all, you should investigate the best way to borrow the money. Compare the interest rate of your credit card with that of a personal loan from your bank or credit union. The idea is to incur the least amount of money in interest. Try to pay off the loan as soon as possible and do what you can to avoid the same situation next year. To pay your taxes on time, you may need to adjust your withholding on your W-4 with your employer or put aside money each pay period in a savings account.

Get a refund-related loan.

Your impatience could cost you more than you realize. Tax refund products are advertised heavily at this time of year. What the advertising does not tell you about are the fees and steep interest rate associated with that short-term loan. Depending on fees and the amount of the refund, a finance charge can be the equivalent of a 100 percent annual percentage rate. Also, don't forget this is a loan; if the IRS turns down any deductions or credits on your return, you will still be responsible for the full amount of the loan. You do have other options, such as filing electronically if you have a checking account. You can expect your tax refund to be deposited in your account in 10 to 14 days. Another option is to wait approximately four to six weeks to have your refund check mailed.

When you get your refund, spend it as fast as possible.

Spending your refund may not be such a good idea, no matter how tempting. If you have large credit card debt, inadequate savings or limited retirement fund, a better use of your refund may be to pay down debt, open a savings account or establish an IRA. Obviously, I hope that you do not do the above bad practices. However, if you have already misstepped, make sure you know your rights as a taxpayer.

From ABC News

Published: January 16, 2014

Time To Gather All-Important Tax Documents

Now that the holidays are over, it’s time to prepare for the first major financial event of the new year: filing your income taxes.

Tax-filing season begins Jan. 31, a bit later this year than usual. The Internal Revenue Service typically starts accepting returns in mid-January, but last year’s 16-day government shutdown gummed up the preparations and delayed the date on which taxpayers can first file returns and claim tax refunds.

But despite the shutdown, the April 15 deadline is not affected, so now’s the time to start gathering those all-important documents.

“In most cases, the IRS doesn’t require you to keep records in any special manner, but you should keep any and all documents that may have an impact on your federal tax return,” said Clay Sanford, IRS spokesman in Dallas. “It’s important to get into this routine, because you may forget expenses that qualify as deductions unless you record them when they occur.”

Sanford recommends you “retain a record for every line item on a tax return. For businesses, records for purchases, payroll, sales and other transactions come into play, but even if you just file an individual return as basic as a 1040EZ, keep the forms that you used to fill it out.”

Here are the documents you need to prepare for the filing season:

W-2 Wage and Tax statement — This shows how much you earned in 2013, how much of your income was taxable and how much tax was withheld.

You should get your W-2 from your employer by the end of January.

If you’re an independent contractor, you will get a Form 1099-MISC showing your earnings from the company you worked for.

Documents that show other income — These include Form 1099-INT for interest income, Form 1099- DIV for dividends you received. If you used a stockbroker for transactions, you will receive Form 1099-B.

Records for charitable contributions — To ensure the deductibility of your contribution, you must have the right documents to back up how much you’ve donated.

For donations of less than $250, you need a canceled check or credit card receipt showing the amount of your contribution, or written communication from the charity showing its name and the amount and date of the contribution or other records containing this information.

For donations of $250 or more, you also must obtain written proof for every separate transaction. The written acknowledgment must include the amount of the contribution or a description of donated property, along with a description and good-faith estimate of the value of any goods or services you received.

Records supporting other itemized deductions — These include invoices, receipts, canceled checks or other proof of payment for property taxes, mortgage interest, mileage traveled for work and medical expenses, among other things.

“One overriding thing is to know that any deduction you take must be supported and all income must be reported,” said Ken Sibley, certified public accountant at CliftonLarsonAllen in Dallas.

After you’ve gotten all your documents together, don’t delay in filing your return because it can reduce the risk of identity theft, experts said.

“File early,” said Trey Loughran, president of the Personal Solutions unit at credit bureau Equifax. “If you file your tax return first, an identity thief will be denied when trying to use your Social Security number for a fake return.”

The other advantage: The earlier you file, the earlier you’ll receive any refund due you.

According to the IRS, most taxpayers who file electronically and choose direct deposit will get their refund in 21 calendar days or less.

Taxpayers who file a paper return and opt to get their refund as a check will receive theirs in four to six weeks.

But don’t rush to file your return if you don’t have everything together. And before you file, make sure your Social Security number is correct on the documents.

“Even though identity thieves may use a stolen Social Security number to file a forged tax return and attempt to get a fraudulent refund early in the filing season, a taxpayer should file when they have all their necessary documents and are ready to file,” Sanford said.

Originally Published by the Dallas News

Published: January 15, 2014

2013 Tax Changes Affecting Higher-Income Taxpayers

ATRA introduced, or reintroduced, several basic provisions starting in 2013, mostly affecting higher-income taxpayers.

New top ordinary income tax rate. A top rate of 39.6% applies to taxable income over $400,000 for single filers, $425,000 for head-of-household filers, and $450,000 for married taxpayers filing jointly ($225,000 for each married spouse filing separately). The last time the income tax brackets had a 39.6% marginal rate on individuals was in 2000.

Itemized deductions limitation and personal exemptions phaseout. The itemized deductions limitation and personal exemptions phaseout (PEP) have been reinstated. If a taxpayer’s adjusted gross income (AGI) exceeds an applicable amount based on his or her filing status, the taxpayer’s allowed itemized deductions will be limited. The applicable amounts for 2013 are $250,000 for single taxpayers, $275,000 for heads of household, $300,000 for married taxpayers filing jointly, and $150,000 for married taxpayers filing separately. The itemized deductions limitation, also known as the Pease limitation, is a 3%/80% formula, under which itemized deductions are reduced by the lesser of 3% of the excess of AGI over the applicable amount above or 80% of the amount of the itemized deductions otherwise allowable for the tax year. (The limitation had been eliminated for 2010 through 2012.)

Under PEP, a taxpayer’s personal exemptions are reduced by 2% for every $2,500 (or fractional amount) (or $1,250 for married taxpayers filing separately) by which AGI exceeds the applicable amounts above (Sec. 151(d)(3), as amended by ATRA). Like the Pease limitation, the PEP didn’t apply for tax years 2010 through 2012.

Alternative minimum tax. Beginning in 2013, ATRA permanently indexed for inflation the alternative minimum tax (AMT) exemption amount and the thresholds for the 28% AMT rate for individuals and made the AMT offset for nonrefundable credits permanent. The increase for inflation of the AMT exemption amounts for individuals had often been late-enacted relief in years past. For 2013, the exemption amounts are $80,800 for married taxpayers filing jointly, $40,400 for married taxpayers filing separately, and $51,900 for single filers. The inflation-adjusted threshold for the 28% AMT rate is $179,500 for married taxpayers filing jointly and unmarried individuals (other than surviving spouses) and $89,750 for married taxpayers filing separately.

Published: January 14, 2014

What the New Mortgage Rules Mean for You

New mortgage lending rules are going into effect Friday that aim to put an end to the worst mortgage lending abuses of the past.

The new rules are designed to take a "back to basics" approach to mortgage lending and lower the risk of defaults and foreclosures among borrowers, according to the Consumer Financial Protection Bureau, which issued the new rules.

"No debt traps. No surprises. No runarounds. These are bedrock concepts backed by our new common-sense rules, which take effect today," said CFPB director Richard Cordray in remarks prepared for a hearing Friday.

Mortgage lenders are being asked to comply with two new requirements: The Ability to Repay rule and Qualified Mortgages. Here's how they will impact borrowers:

Ability to Repay

  • Lenders must determine that a borrower has the income and assets to afford to make payments throughout the life of the loan. To do so, the lender may look at your debt-to-income ratio, which is how much you owe divided by how much you earn per month, including the highest mortgage payments you would be required to make under the terms of the loan. To calculate your debt-to-income ratio, add up all your monthly obligations -- including student loan, credit card and car payments, housing costs, utilities and other recurring expenses -- and divide it by your monthly gross income.
  • In an effort to put an end to no- or low-doc loans, where lenders issue risky mortgages without the necessary financial information, lenders will be required to document and verify an applicant's income, assets, credit history and debt. For borrowers, that means more paperwork and longer processing times.
  • Underwriters must also approve mortgages based on the maximum monthly charges you face, not just low "teaser rates" that last only a matter of months, or a year or two, before resetting higher.

Qualified Mortgages

  • To make sure you aren't taking on more house than you can afford, your debt-to-income ratio generally must be below 43%. This rule is not absolute. Banks can still make loans to people with debt-to-income ratios that are greater than that if other factors, such as a high level of assets, justify the risk.
  • Qualified mortgages cannot include risky features, such as terms longer than 30 years, interest-only payments or minimum payments that don't keep up with interest so your mortgage balance grows.
  • Upfront fees and charges cannot add up to more than 3% of the mortgage balance. That includes title insurance, origination fees and points paid to lower mortgage interest rates.

The rules also restrict "steering," or practices that give financial incentives to loan officers or mortgage brokers for pushing people into higher-interest loans that they can't afford -- a practice that was all too common leading up to the housing bust, Cordray said.

Lenders don't seem to be too worried about the new rules, according to Keith Gumbinger of HSH.com, a mortgage information provider. "It's no surprise; everybody has been preparing for the change for months," he said. "Because there will be additional underwriting scrutiny, it could gum up the works initially and slow loan processing, but it's really just the codification of things that are already in place."

A significant factor is what's not in the rules. There's no minimum down payment or credit score requirement.

"The qualifed mortgage is not taking a one-size-fits-all approach. It ensures that first time homebuyers can still come to the table," said Kalman.

If the rules required a minimum down payment of, say 10% or 20%, it would eliminate many first time buyers who would have a difficult time raising that much cash.

The lack of a credit score requirement will enable lenders to loosen currently tight underwriting standards in the future should conditions warrant, according to Gumbinger. For the moment, most loans will still have to be backed by Fannie Mae and Freddie Mac, and, with a few exceptions, they won't approve applicants with scores below 620. 

"We think the new rules are balanced and well-drawn. They will offer consumers protection without limiting credit to qualified borrowers," said Gary Kalman, the policy director for the Center for Responsible Lending.

By Les Christie for CNN Money

Published: January 9, 2014

8 Disappearing Tax Breaks

Here are eight of the tax breaks that will be missed the most, and how you can take advantage of them before it's too late.

1. Tuition and fees: A deduction for tuition and fees of up to $4,000 is currently available to parents and students paying for college. More than 2 million taxpayers claimed this break in 2010, saving more than $4 billion, according to the most recent data available from H&R Block.

If you want to take advantage of this tax break before it expires, you'll need to pay your spring 2014 tuition and fees before Dec. 31. That way you can still claim those costs on your 2013 tax return.

2. Teachers' expenses: The Educator Expense Deduction aims to help teachers cover the cost of classroom supplies like notebooks, pens and paper that their school doesn't reimburse them for. Elementary and secondary school teachers can qualify for deductions of up to $250 per year, even if they don't itemize.

Nearly 4 million teachers deducted $915 million in school expenses in 2010.

"If you haven't bought all the supplies you need for your classroom, it might be worth doing that before the end of the year and taking advantage of this credit," said Greg Rosica, Ernst & Young partner and contributing author to the EY Tax Guide 2014.

3. Mortgage insurance premiums: Currently, homeowners are able to deduct their mortgage insurance premiums as residence interest. About 4.2 million taxpayers claimed the tax break in 2010, deducting a total of $5.6 billion in mortgage insurance premiums.

4. State and local sales tax: In states without an income tax, like Florida and Alaska, taxpayers have been able to deduct state and local general sales taxes instead of taking the income tax deduction -- but that won't be an option next year unless Congress intervenes.

In 2010, 57 million taxpayers claimed more than $16.4 billion in deductions this way.

If you live in a state without an income tax and are planning to make a big purchase next year, you may want to do it before the end of 2013 instead, said Rosica. That way, you can claim this deduction before it expires.

5. Donations through your IRA: Retirees older than 70-and-a-half have traditionally been able to make non-taxable charitable donations of up to $100,000 directly from their IRA disbursements. But once this tax break expires, they will need to take the disbursement first, meaning it will be considered part of their taxable income.

6. Energy-efficiency: It's your last chance to get a credit of up to $500 if you made energy-efficient home improvements this year -- including new windows and doors. To see if you qualify, visit EnergyStar.com or ask the company where you bought the items.

The break is only available for people who haven't already claimed received credits totaling $500 in past years (The credit has ranged in value since taking effect in 2006.).

7. Commuter costs: Currently, commuters who take mass transit like trains or buses to work are able to receive $245 a month (or $2,940 per year) in tax-free money toward those expenses. But this perk is scheduled to expire January 1, at which point commuters will only be able to write off just $130 per month - $1,560 a year.

8. Mortgage debt forgiveness: A tax break that has been in effect since 2007 allows struggling homeowners to exclude any debt forgiveness they were granted from a bank when calculating their taxable income.

For the more than 6 million Americans who still owe more on their loans than their homes are worth, the expiration of this tax credit Jan. 1 is bad news. If they get a mortgage modification from their bank or do a short sale of their home after year-end, their tax bill could be thousands of dollars higher than if the modification were completed before year-end.

By Brett Ellis for CNN Money

Published: January 8, 2014

5 Reasons to File Your Taxes Early

If you like to file your taxes early and then chuckle at all the procrastinators who wait until April 15 nears, your day of reckoning is getting close. The earliest day the IRS will begin processing 2013 individual tax returns is Jan. 31, 2014, a date slightly later than usual due to the government shutdown last fall.

What are the advantages of filing early? Here's a list of good arguments from tax preparers.

Get your money now. This is the most obvious reason a taxpayer might want to file as early as possible. But try not to fall into the trap of thinking you need the refund before the IRS can get it to you. Some tax preparation services offer refund anticipation loans, which have steep fees that eat into that refund.

You'll also likely get your money in a shorter amount of time if you file earlier than the person who files a month or two after you, according to Elaine Phelan, a professor of accounting at Siena College in Loudonville, N.Y. Early filers may only have to wait for their refund for 21 days – the average time taxpayers have had to wait in recent years, and sometimes less, according to the Internal Revenue Service – whereas a later filer may have to wait longer, say, 31 days.

"If you work with a paid preparer, they are excited to jump into the new year and will enthusiastically get your taxes done quickly," Phelan says. "If you are expecting refunds, the IRS processing centers are less busy and will process your claim faster, so you might even get that refund sooner."

And, of course, if you file electronically versus putting your form in a mailbox, you should get your money even faster.

It may help with financial aid. "Taxpayers with college-age children need to get their tax information early to get the maximum amount of financial aid," says Lawrence Pon, a tax specialist who owns an accounting firm, Pon & Associates, in San Francisco. He says there is a direct link between the Free Application for Federal Student Aid form and the IRS, so your tax information is sent directly to the financial aid form without you having to provide it yourself.

It may help if you and your ex-spouse are feuding. Hopefully you don't fall into this category, and it's better for each party if you can keep the IRS out of your marital strife, but Pon says that "sometimes divorced people do not agree on who claims the children as a dependent, even though there may be a court order and an agreement. Whoever files first will claim the child, and the other ex-spouse may be out of luck."

You'll lessen your odds of becoming a victim of identity theft. "The sooner you file your return, the less opportunity someone else has to file a return in your name," says Joe Reynolds, identity fraud product manager at Travelers, headquartered in New York.

He points out that some criminals have been known to break into a home or car, steal identification and then file taxes in that person's name, scoring a refund that doesn't belong to them. The odds are slim that that will happen to you, of course, but it is another reason to file earlier rather than later.

Reynolds also advises getting your refund via direct deposit "so criminals can't have it redirected to their address or steal it from your mailbox."

There's more time to catch potential mistakes. If you wade into your taxes now and discover there's paperwork you need that you don't have, or it's simply going to be a more complicated tax year than you anticipated, you may not end up filing early, but now you have more time to spend on your taxes.

Not that there aren't smart reasons to file close to or on April 15, of course. If you owe the IRS money, there's really no financial advantage for you to give it to them any earlier than April 15.

Still, by preparing your taxes early, you'll know earlier how much you owe and will have more time to drum up the money to pay.

If you have a really complicated tax form – in which case you probably have a tax consultant or accountant advising you every step of the way – "many filing issues are resolved as the [tax] season goes on for the IRS," says Tim Gagnon, an assistant academic specialist of accounting at the D'Amore-McKim School of Business at Northeastern University in Boston.

It's possible that if you file too early, Gagnon says, you "may need to amend filing if the IRS changes forms, instructions or interpretations."

Still, for most taxpayers who have refunds coming, filing early rather than later is the smarter decision. It is also psychologically better for many people, Pon says.

"Get the darn task out of the way" is the reason most of his clients opt for early filing, he says. He adds that it's always "nice to get something checked off your to-do list early instead of letting it fester."

Published by US News

Published: January 6, 2014

Commuters Pinched on Tax Break as Congress Deadlock Lasts

Heidi Przybyla and Richard Rubin of Bloomberg wrote on January 6 about another of the fifty-five tax breaks that expired at the end of 2013, this one a commuter tax break worth as much as $115 a month for mass-transit users.

“Both [Republican and Democratic] parties usually come together each year at some point to approve the commuter tax break and others – tax provisions valued at $50 billion a year,” the article stated. “Most of the items, such as the tax credit for research and development, can easily be restored retroactively and handled on tax returns filed in 2015.

“Mass-transit users, who receive their tax break monthly, are harder to make whole,” Przybyla and Rubin continued. “In other words, commuters lose the cash until Congress acts.”

According to the article, commuters can set aside money in tax-free accounts for transit and parking costs each month. The amount was capped at $245 a month last year. While the parking benefit increased to $250 for 2014, the transit benefit dropped to $130, pinching commuters in New York, Washington, and other cities.

Published: January 3, 2014

What The Proposed Ad Tax Could Mean For You

Congress recently proposed a measure that would limit the immediate deductibility of advertising costs as part of a broader tax-reform effort. In a January 6 article for Advertising Age, Andrew Osterland breaks down how the proposed ad tax could affect small businesses and startups.

The proposal, introduced by House Ways and Means Committee Chairman Dave Camp (R-MI) in November 2013, would enable companies to deduct 50 percent of their advertising costs in the year they are incurred, with the remaining 50 percent amortized over the following ten years, Osterland reported. Senate Finance Committee Chairman Max Baucus (D-MT) proposed a five-year amortization period.

“For large companies with big advertising budgets, the policy change would be a nuisance in the short-term but ultimately it would only delay – not limit – the deductibility of advertising expenses,” he wrote.

“The proposal would likely have a more significant effect on startups and small businesses for which cash management is crucial,” Osterland added.

Published: January 2, 2014

5 Year-End Tax Tips to Get You Ready for 2014

The holidays are a busy season for small business owners—and that’s a good thing—but they still need to take the time to do some tax planning so they are ready to meet the tax man in the spring.

Here are five tips to help you close out your small business for the year:

1. Review subcontractor data.
If you paid anyone for services (including incorporated attorneys) more than $600 during the year, you will be required to send a Form 1099 to the recipient by Jan. 31, 2014. Make sure you have your subcontractor’s complete address and either their Social Security number or federal ID number. To prevent problems in obtaining this information in the future, be sure to send each new independent contractor Form W9 upon hiring.

If you use QuickBooks for bookkeeping, set up automatic 1099 creation by going to the top ruler bar and selecting ‘Edit’ then ‘Preferences’ then ‘Tax: 1099.’ Follow the instruction in the pop up box to map the accounts that you must track for 1099 purposes.

Then in the ‘Vendor section’ you can fill in the federal ID numbers or Social Security numbers for the appropriate vendors that are required to receive Form 1099. Double click on the vendor in question and then click on the ‘Additional Information’ tab. In the bottom left corner is a box to check to indicate the vendor is a 1099 recipient. Another box contains a field to complete the vendor’s federal ID number or social security number.

From ‘Reports’ on the top ruler bar, select ‘Vendors’ and run a 1099 detail report to check which vendors have incomplete data. Then contact the vendor to obtain his/her address and ID number

2. Submit expense account data.
If your legal form is corporate, you and your employees should submit expense account data and accept a reimbursement check prior to Dec. 31 to ensure that the corporation will receive a tax deduction for the business expenses being claimed. It’s easy to create an expense account form on a spreadsheet program. The form can be completed monthly or quarterly and make sure receipts are attached in the event of audit.

3. Evaluate your financial standing. 
Review your profit and loss, balance sheet, and general ledger for accuracy and to ensure that all transactions have been recorded. Make sure the bank and credit card accounts have been reconciled and that loan interest has been separated from the principal and is accurately logged onto your books. Check the accuracy of accounts receivable and accounts payable. Write off bad debt for customers who are uncollectable.

4. Review personal expenses.
If your business entity is a sole proprietorship or partnership, then review your personal expenses. Are any business expenses co-mingled? If so, find the receipts or cancelled checks and log in those expenses to your company’s books. More taxpayers pay extra taxes needlessly because they overlook business expenses paid from personal funds.

5. Schedule a professional tax planning session. 
This is especially needed if your profit increased substantially during 2013. We may be able to help you reduce your taxable income by implementing some last minute strategies.

By Bonnie Lee for Entrepreneur.com

Published: December 31, 2013

Pay Less Tax on Capital Gains in 2014: 3 Simple Tips

The explosive move higher for stocks in the past several years has been great for stock investors, who've seen their portfolios largely recover from the 2008 bear market. But the IRS wants its share of your hard-earned investing profits, which means more taxpayers will have to pay tax on capital gains in 2014.

However, by  following a few simple strategies, you can make sure that you pay as little tax on your capital gains in 2014 as you absolutely have to. Let's look at three of those strategies and find out how you can pay less to Uncle Sam in the years to come.

1. In taxable accounts, hold on to your investments for more than a year
The easiest way to reduce your tax on capital gains is to hold on to your investments for more than a year. That qualifies you for long-term capital gain treatment, which includes favorable rates that are lower than what you'll pay for capital gains on investments you hold for a year or less. Short-term capital gains tax rates are the same as your ordinary income tax rate, ranging up to 39.6%. But for long-term capital gains on most qualifying investments, the maximum tax is 20% for those in the highest tax bracket, 15% for those in the four tax brackets from 25% to 35%, and 0% for those in the 10% and 15% brackets.

Not all assets qualify for these particular preferential rates. Gold and silver bullion, as well as exchange-traded funds SPDR GoldiShares Silver, and iShares Gold, are treated as collectibles, for which ordinary income tax rates apply subject to a higher maximum of 28%. Nevertheless, structuring your investments to hold them for longer than a year is the most obvious way to reduce your tax bill on capital gains in 2014 and beyond.

2. For quick trades, use tax-deferred accounts
Capital gains taxes make it expensive to be a short-term trader in a taxable account, but that doesn't mean you have to give up on all your opportunistic trading options. The key to avoiding capital gains with short-term trades is to use IRAs or other tax-deferred vehicles to hold those stocks.

The reason is simple: Even when you sell a winning stock in an IRA, you don't have to pay capital gains tax at that time. What happens instead is that the proceeds from the sale stay in the IRA and are available for reinvestment, and you'll only get taxed when you start making withdrawals from your retirement account. So if you're looking to take advantage of a short-term opportunity, such as a spinoff, special dividend, or buyout offer, buying it in an IRA will avoid a painful tax on eventual gains.

3. Look for capital losses to offset your gains
As in any other year, capital gains in 2014 will be netted against any capital losses you might have for the year. As a result, if you foresee selling some of your winning stocks next year, you should consider selling some of your losing stocks as well to offset those gains.

Tax considerations should only be part of your decision to sell a stock, though. If you sell a stock you like just to reap the loss, you won't be able to claim that loss if you buy the stock back within 30 days. That can lead to missing out on a rebound in that stock, forcing you to repurchase shares at a higher price after the 30-day period ends. Tactics like buying SPDR S&P 500 or other index ETFs to substitute for an individual stock can reduce that risk, but nothing can eliminate it entirely. On the other hand, if you want to get rid of a losing stock for good, it only makes sense to use the tax loss to your best advantage.

It's easy to be tax-smart about your capital gains in 2014. By following these three simple strategies, you can make sure you pay as little tax on your 2014 capital gains as possible.

By Dan Caplinger for The Motley Fool

Published: December 30, 2013

3 Tax Tips You Need to Know Heading Into 2014

The budget deal that Congress and President Obama struck at the beginning of the year to avoid the fiscal cliff resulted in seven tax increases. If you throw in the six tax hikes that are part of Obamacare,  that means there are 13 new taxes that may have hit you in 2013.

1.) The biggest potential taxes for wage earners include:

  • The payroll tax went back to 6.2% (as I’m sure you noticed in your take home wages)
  • The top marginal tax rate increased to 39.6% to from 35% for taxable incomes over $450,000 ($400,000 for single filers)
  • There’s a "phase out" of personal exemptions for adjusted gross incomes (AGI) over $300,000 ($250,000 for single filers). Now you no longer need to have kids to save tax money
  • They increased the tax rate on dividends and capital gains to 20% from 15% for taxable incomes over $450,000 ($400,000 for single filers)
  • People making over $250,000…you get an additional 3.8% surtax on investment income and another payroll tax hike of 0.9%
  • The "Death Tax" rate increased on estates larger than $5 million to 40% from 35%

Is your stomach sick yet? Please don’t shoot the messenger, but it's important to know that your tax return may be exceptionally ugly this year. 

2. Charity

Contributing to charity not only makes you feel good, but is a great way to lower your tax bill--especially if you itemize your deductions. So hurry up and write a check, charge it, give cash.  Do something.Just make sure you do it by Dec. 31 and have a receipt to back up any contribution, regardless of the amount. 

The old rule that you only had to have a receipt to back up contributions of $250 or more is long gone.

And if you have appreciated stock (that includes mutual funds) or property, you can give that away too.  As long as you've owned the asset for more than one year, you get a double tax benefit from the donation: You can deduct the property’s market value on the date of the gift and you avoid paying capital gains tax on the built-up appreciation.

And remember for gift tax purposes, you can transfer up to $14,000 per person in 2013 without incurring any federal gift tax. Spouses together may gift up to $28,000 per recipient.

So start your giving!

3. Investments and retirement

With all the extra taxes on investment income this year, it’s really important to get your net investment income number – which is just your gains less your losses – down. Go through your portfolio and consider selling more losers.  The pros call this “loss harvesting.” You can then use those losses to offset any taxable gains you have realized during the year, and then your net investment income comes down as does your tax bill.

Also make sure to contribute to your IRA. You have until April 15, 2014 to make IRA contributions for 2013, but the sooner you get your money into the account, the sooner it has the potential to start to grow tax-deferred. And remember, that contribution can lower your 2013 tax bill.

If you are self-employed, and have a Keogh plan, you have until the tax filing deadline (including extensions) to make contributions toward your 2013 return.

By Tracy Byrnes for FOX Business

Published: December 27, 2013

Florida and 12 Others To Raise Minimum Wage in 2014

The retail-worker strikes that swept the nation in 2013 did not move Congress to raise the minimum wage, but a growing number of states are taking action.

The minimum wage will rise in 13 states this week, and as many as 11 states and Washington, D.C., are expected to consider increases in 2014, according to the National Employment Law Project. Approval is likely in more than half of the 11, says NELP policy analyst Jack Temple.

The trend reflects growing concerns about the disproportionate spread of low-wage jobs in the U.S. economy, creating millions of financially strained workers and putting too little money in consumers' pockets to spur faster economic growth.

On Jan. 1, state minimum wages will be higher than the federal requirement of $7.25 an hour in 21 states, up from 18 two years ago. Temple expects another nine states to drift above the federal minimum by the end of 2014, marking the first time minimum pay in most states will be above the federal level.

"2014 is poised to be a turning point," Temple says. "States are seeing the unemployment rate is going down but job growth is disproportionately concentrated in low-wage industries. (They're) frustrated that Congress is dragging its feet."

Connecticut, New York, New Jersey and Rhode Island legislatures voted to raise the minimum hourly wage by as much as $1, to $8 to $8.70, by Wednesday. In California, a $1 increase to $9 is scheduled July 1. Smaller automatic increases tied to inflation will take effect in nine other states: Arizona, Colorado, Florida, Missouri, Montana, Ohio, Oregon, Vermont and Washington.

Meanwhile, states such as Massachusetts, New Hampshire, Maryland, Minnesota and South Dakota plan to weigh minimum-wage hikes next year through legislation or ballot initiatives.

In Minnesota, the state House and Senate have each passed bills to raise the minimum wage and plan to iron out their differences early next year after failing to approve similar measures the past two decades.

"You're coming out of a deep recession, and people are landing jobs, but they're low-paid," says state Rep. Ryan Winkler, sponsor of the House bill.

The legislative movement has been partly fueled by walkouts this year in at least 100 cities by fast-food workers who are calling for $15-an-hour pay and the right to form unions. Wal-Mart workers have staged similar protests.

While the demonstrations were not explicitly intended to prompt minimum pay increases, they've made the issue "more urgent," Temple says.

The Bureau of Labor Statistics estimates that 3.6 million hourly paid workers received wages at or below the federal minimum in 2012 — almost 5% of all employees on hourly pay schedules.

President Obama recently said he supports legislation in Congress that would lift the federal minimum wage to $10.10 an hour in three steps over two years and then index it to inflation. But the measure faces an uphill climb in Congress.

Proponents of minimum-wage hikes note that low-wage jobs have dominated payroll growth in the 4-year-old recovery, and increases over the past four decades have not kept pace with inflation.

Opponents say the increases raise employer expenses and will lead to layoffs. "If your costs are going up and you can't raise prices, you have to find a way to produce the same product at a lower cost," says Michael Saltsman, a research fellow at the Employment Policies Institute.

On Jan. 1, the minimum wage in 13 states, including Florida, will increase. Florida will raise the minimum wage to $7.93.

Originally published by USA Today

Published: December 26, 2013

Grant Reform Increases Single-Audit Threshold, Changes Audit Rules

New guidelines unveiled Thursday by the Office of Management and Budget (OMB) raise a key threshold for compliance audits of entities that receive federal award money from $500,000 per fiscal year to $750,000 per fiscal year.

Among other things, the new rules raise the federal awards threshold that triggers compliance audits currently performed under OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations, which are also referred to as single audits or Circular A-133 audits.

As a result of the new rules, states, local governments, and not-for-profit entities will be required to undergo a single audit if they spend $750,000 or more in federal awards in a fiscal year.

Nonfederal entities that spend less than $750,000 in a fiscal year will be required to make records available for review or audit by appropriate officials of the federal agency, passthrough entity, and the U.S. Government Accountability Office.

Approximately 5,000 nonfederal entities will be relieved of the single-audit requirement as a result of the higher threshold, according to a preliminary online inspection version of the rules. The guidelines are scheduled to be published in the Federal Register on Thursday, Dec. 26.

The comprehensive new rules also contain numerous other changes to the requirements for entities spending federal awards and their auditors.

Raising the threshold is part of a larger federal effort to reduce administrative burden, waste, fraud, and abuse. The new rules combine eight previously separate sets of OMB guidance into one for entities that receive a portion of the $600 billion in federal grants that are awarded annually.

According to a blog on the OMB’s webpage, the new guidance is designed to eliminate duplicative and conflicting guidance, encourage efficient use of information technology and shared services, strengthen oversight, and provide for consistency and transparency.

The OMB and its partners also are continuing work to improve outcomes through effective use of grant-making models, performance metrics, and evaluation, according to the OMB blog.

The new rules are expected to take effect for single audits of fiscal years beginning on or after Jan. 1, 2015, according to an alert from the AICPA Governmental Audit Quality Center to its members.

By Ken Tysiac for the Journal of Accountancy

Published: December 23, 2013

Starting Jan. 13, Business Tax Filers Can File

The IRS will begin accepting 2013 business tax returns on Monday, Jan. 13, 2014. This start date applies to both electronically-filed and paper-filed returns.

Business returns include any return that posts on the IRS Business Master File (BMF). BMF returns include a variety of income tax and information returns such as Form 1120 filed by corporations, Form 1120S filed by S corporations, Form 1065 filed by partnerships and Form 1041, the return filed by estates and trusts. It also includes various excise and payroll tax returns, such as Form 720, Form 940, Form 941 and Form 2290. The IRS expects to be able to begin processing any of these business returns on Jan. 13.

The Jan. 13 start date does not apply to unincorporated small businesses that report their income on Form 1040. The start date for all 1040 filers is Jan. 31, 2014. Although the IRS encourages these small businesses to begin preparing their returns now, it will not be able to accept these or any other individual returns or begin processing them until Jan. 31. This includes sole proprietors who file a Schedule C, landlords who file a Schedule E and farmers who file a Schedule F. 

Published: December 20, 2013

Illegal But Taxable

When state and federal laws collide, something's got to give. Under federal law, income from growing medical marijuana is ill-gotten gain. It is, however, taxable, as is all income. In some states, growing cannabis is legal for medical purposes and in Colorado, it's legal – period. That means it can be a source of income and therefore taxable. But that doesn't mean cannabis farmers can claim production costs on their federal return, without admitting to criminal activity. 

Somehow, claiming expenses of growing an illegal substance is worse than reporting the income, said Forbes magazine. Of course, there are some expenses that are always going to be illegal, added Forbes, like the cost of hiring a hit man to bump off the competition. But medical marijuana is subject to an addition to the Tax Code known as Section 280E, which goes back to the 1980s. Under that section, there simply are no legitimate expenses that are claimable.  

Here's a snippet: 

No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted. 

One way medical marijuana growers get around the restriction on claiming expenses is to have another business on the same property, says Forbes, and push the expenses to that business. The example they cite is a care-giving business which occupies most of the premises. That way the property rent – or most of it – is claimed for that business rather than the cannabis production.  

Forbes also says these growers need to keep immaculate records, even more so than other businesses. They need to be clear and transparent, because if there's any appearance of evading taxes, the proprietors may be found guilty of tax evasion. And that carries a possible five years in prison.  

The federal and state laws regarding medical marijuana just don't line up, but this could be easily fixed if there was a motivation. Instead, the industry, which is legal, gets pushed underground, according to Marijuana Business Daily

By Teresa Ambord for AccountingWEB

Published: December 19, 2013

IRS Issues Guidance on Roth 401(k) Rollovers

The Roth 401(k), a hybrid of a Roth IRA and a traditional 401(k), has failed to gain much traction in the workplace. But a provision in the American Taxpayer Relief Act of 2012 (ATRA) was designed to grease the skids. Now the IRS has provided valuable guidance on in-plan Roth 401(k) rollovers. 

Here's the basic lay of the land. With a Roth IRA, qualified distributions made at least five years after the Roth was established are 100 percent exempt from federal income tax. For this purpose, qualified distributions include those made after attaining age 59½; upon death or disability; or use for a first-time home purchase (up to a lifetime limit of $10,000). A Roth 401(k) is essentially a Roth IRA account set up to hold funds in an employee's 401(k) plan. 

Under ATRA, an employee participating in a 401(k) can elect to have the plan transfer any amount "not otherwise distributable" under the plan to a designated Roth account maintained for his or her benefit. In other words, the employee can roll over funds without paying the 10 percent tax penalty for pre-age 59½ distributions, although the transfer is still subject to regular income tax. 

The new IRS Notice clarifies the rules for in-plan rollovers. Some of the main points of interest to practitioners are as follows:

  • Rollovers to a designated Roth account in the same plan are available for elective deferrals in 401(k) and 403(b) plans; matching contributions and nonelective contributions, including qualified matching contributions and qualified nonelective contributions; and annual deferrals made to governmental 457 plans.
  • Amounts rolled over to an employee's designated Roth account are subject to distribution restrictions applicable to the amount before the in-plan Roth rollover. For example, distributions may not be allowed prior to age 59½.
  • There's no income tax withholding requirement for a rollover of an otherwise non-distributable amount. However, an employee making an in-plan Roth rollover may have to increase withholding or make estimated tax payments to avoid an underpayment penalty.
  • A plan amendment providing for in-plan Roth rollovers of otherwise nondistributable amounts is a discretionary amendment that can't be adopted after the last day of the first plan year in which the amendment is effective. However, to give employers more time to implement this for the 2013 plan year, the IRS is extending the deadline to the later of the last day of the first plan year in which the amendment is effective or December 31, 2014, as long as the amendment is effective as of the date the plan first operates in accordance with the amendment. 
  • The Notice also provides a temporary period during which sponsors of safe harbor plans are permitted to make a midyear change to provide for in-plan Roth rollovers of otherwise nondistributable amounts. The period ends December 31, 2014.
  • Subject to the nondiscrimination requirements normally applicable to plan benefits, rights, and features (e.g., the right to make a rollover), a plan may restrict the type of contributions eligible for an in-plan Roth rollover and the frequency of in-plan Roth rollovers. 
  • If an in-plan Roth rollover is the first contribution made to an employee's designated Roth account, the five-year period of participation required for qualified distributions begins on the first day of the first tax year in which the employee makes the in-plan Roth rollover.

Remember that these are just the highlights, contact our office if you have any further questions! 

Originally published on AccountingWEB. 

Published: December 18, 2013

Three Year-End Tax Tips to Help You Save

Although the year is almost over, you still have time to take steps that can lower your 2013 taxes. Now is a good time to prepare for the upcoming tax filing season. Taking these steps can help you save time and tax dollars. They can also help you save for retirement. Here are three year-end tips from the IRS for you to consider:

1. Start a filing system.  If you don’t have a filing system for your tax records, you should start one. It can be as simple as saving receipts in a shoebox, or more complex like creating folders or spreadsheets. It’s always a good idea to save tax-related receipts and records. Keeping good records now will save time and help you file a complete and accurate tax return next year.

2. Make Charitable Contributions.  If you plan to give to charity, consider donating before the year ends. That way you can claim your contribution as an itemized deduction for 2013. This includes donations you charge to a credit card by Dec. 31, even if you don’t pay the bill until 2014. A gift by check also counts for 2013 as long as you mail it in December. Remember that you must give to a qualified charity to claim a tax deduction. 

Make sure to save your receipts. You must have a written record for all donations of money in order to claim a deduction. Special rules apply to several types of property, including clothing or household items, cars and boats. 

If you are age 70½ or over, the qualified charitable distribution allows you to make tax-free transfers from your IRAs to charity. You can give up to $100,000 per year from your IRA to an eligible charity, and exclude the amount from gross income. You can use the excluded amount to satisfy any required minimum distributions that you must otherwise receive from your IRAs in 2013. This benefit is available even if you do not itemize deductions. This special provision is set to expire at the end of 2013. 

3. Contribute to Retirement Accounts.  You need to contribute to your 401(k) or similar retirement plan by Dec. 31 to count for 2013. On the other hand, you have until April 15, 2014, to set up a new IRA or add money to an existing IRA and still have it count for 2013.

The Saver’s Credit, also known as the Retirement Savings Contribution Credit, helps low- and moderate-income workers in two ways. It helps people save for retirement and earn a special tax credit. Eligible workers who contribute to IRAs, 401(k)s or similar workplace retirement plans can get a tax credit on their federal tax return. The maximum credit is up to $1,000, $2,000 for married couples. Other deductions and credits may reduce or eliminate the amount you can claim.

Published: December 17, 2013

12 Key Business Tax Issues For 2014

As business executives outline key programs and initiatives for the coming year, several important international, federal and state tax issues could have a significant impact on their business operations and potentially their corporate reputations and, therefore, should be on their radar screens, according to KPMG LLP, the U.S. audit, tax and advisory firm.

"Almost every business decision has tax – and potentially – reputational implications," said Jeff LeSage, vice chair of tax services for KPMG LLP.  "With up to 40 cents of every dollar at stake, keeping an eye on key tax issues is a competitive necessity for CFOs, board members and tax departments, especially as companies put new plans in motion at the start of the new year."

Among the issues worth watching, according to KPMG: taxation of cloud-related activities, challenges transforming the operational effectiveness of tax departments, the prospect for U.S. and international business tax reform, concerns over base erosion and profit shifting (BEPS), and far-reaching consequences of the implementation of the Foreign Account Tax Compliance Act (FATCA).

"As companies assess these and other developments, leaders should weigh the potential impact on their bottom lines and plan how to best respond to the challenges and opportunities they may present," added LeSage.

The Top 12

Looking ahead, here are a dozen "to dos" identified by KPMG for business leaders in 2014:

  • Manage Efforts Related to the Foreign Account Tax Compliance Act (FATCA) – Implementation has evolved since the enactment of FATCA, but it is clear that implications surrounding this new regime are wide-ranging for foreign institutions, U.S. financial institutions, and non-financial entities that make withholdable payments to non-U.S. entities. Companies will need to continue assessing their FATCA status and their resulting compliance obligations.
  • Monitor U.S. Business Tax Reform Developments – There continues to be a strong desire among some members of Congress, the Obama Administration and the business community for a tax system that is simpler, more competitive and conducive to economic growth. The current debate on government funding and the debt limit has temporarily moved tax reform to the sidelines.  Nonetheless, companies will need to keep a close watch on the issue as it will continue to remain "on the table."
  • Understand Base Erosion and Profit Shifting – Increased concern about base erosion and profit shifting (BEPS) has triggered a public debate about the tax affairs of multinational companies and a call to action at the highest levels of government. Companies need to be aware of public perceptions, guard against reputational risks, and prepare for the reality of potential changes in tax rules and standards.
  • Understand Opportunities Connected with the New Repair Regulations – Beginning January 2014, every business with at least some fixed assets – that is, virtually every business – must comply with the final so-called "Repair Regulations," issued by Treasury and the Internal Revenue Service (IRS) in September 2013, which established the federal tax standards for costs incurred to acquire, maintain or approve, and dispose of tangible property. Certain industries, such as retail, manufacturing, hospitality and utilities, may be particularly affected. Some taxpayers would be wise to review their capitalization policies before 2014 in order to comply with new elections and to enhance potential benefits; others should also consider filing accounting-method changes early for 2012 or 2013 to take advantage of certain provisions in the final regulations.
  • Check Progress of Marketplace Fairness Act – Other major issues in front of Congress, as well as political and business opposition, may have currently moved the Marketplace Fairness Act off the fast-track, but companies need to continue to stay alert to potential tax compliance requirements under the proposed law if the situation changes. The bill, which would allow states to require online and other out-of-state merchants to collect and remit sales and use taxes on products and services they sell, is now in the hands of the House Judiciary Committee, after Senate passage earlier in 2013. The Committee is considering possible changes to the Senate bill.
  • Add Tax in the Cloud to Your Business Conversations – The movement of computing services and resources to "the cloud" is expected to continue to drive both back- and front-office business transformations during 2014. It's critical that tax executives take a more active role in getting a "seat-at-the-table" early for their company's cloud discussions. Not doing so may lead to missed incentives and planning opportunities as well as increased potential for risk and unforeseen liabilities down the road.
  • Navigate a Shifting Landscape for Transfer Pricing – Tax authorities worldwide are continuing to sharpen their focus on transfer pricing arrangements, especially higher-risk/higher-value transactions. Taxpayers should expect heightened enforcement – including increased documentation requirements, examination of uncertain tax positions, expanded tax return disclosures – to continue during 2014 and should consider how they can address these challenges.
  • Include Your Tax Department in Business Operation Transformation – Leaders would be wise to include their tax departments in any business improvement and operational transformation programs they consider to mitigate risk and enhance value opportunities. Moving people, assets or revenue streams can have an impact on direct and indirect taxes and the underlying processes to comply with various tax regulations. Ensuring tax is a part of any business transformation process will help determine that compliance and financial reporting processes are captured and tax management opportunities are spotlighted.
  • Expect Enhanced IRS Scrutiny – Recent announcements from the Internal Revenue Service (IRS) on its plans to change examination procedures for large corporate taxpayers are making enhanced engagement between the IRS and these taxpayers a priority for 2014. Taxpayer-friendly changes to the IRS' Information Document Request (IDR) process that now require IDRs to be more narrowly issue-focused and a call for more taxpayer involvement in the determination of information due dates are balanced by a new set of nearly automatic enforcement triggers – if due dates are breeched – which start a series of delinquency notices, pre-summons letters and summonses.
  • Focus on Unclaimed Property Liabilities – Potentially significant and costly audit assessments for corporate unclaimed property, coupled with an expanded definition of property reportable as unclaimed, make this an issue to watch in 2014. Companies in all industries – especially retailers, financial institutions, insurance companies and even energy suppliers – need to closely evaluate their reporting requirements as unclaimed property remains an important source of revenue for state jurisdictions throughout the country.
  • Use FTZs to Meet International Trade Challenges – As continued economic pressure on international trade leads many companies to look for new ways to strengthen their global competitiveness, the benefits of U.S. Foreign Trade Zones (FTZs) may be an answer for some. These areas, secure within the United States but outside U.S. customs territory, can help companies improve cash flow, manage inventory costs, reduce or eliminate U.S. Customs duties, and generate distribution savings.
  • Better Align Tax-Exempt Activities with Corporate Strategies – The coming year may be a good time for companies to review their corporate responsibility and philanthropy activities, not only to foster compliance with their tax-exempt status, but also to enhance their alignment with business strategy. A strategic review of employee volunteer programs, partnerships with not-for-profit organizations, philanthropy and grant making, and overall financial support through the lens of corporate identity and goals can help determine whether the programs are benefiting the organizations they serve and aligning with corporate strategy.
Originally published at KPMG Highlights
Published: December 16, 2013

What Kind of Research is Worthy of the R&D Tax Credit?

Question: Would an independent real estate sales person, doing their own research and comparative market analysis for new property listings, stand a chance at qualifying for an R&D tax credit?

Answer: While the market research you do is vital to your business, your activities fall outside the scope of the R&D tax credit. When Congress enacted the R&D credit, its intent was to reward research activities it considered to be technological in nature. Generally speaking, this includes research on topics related to the physical sciences, engineering disciplines or software development fields.


The law explicitly excludes research like yours, which is related to marketing, business management or routine data collection and testing. The kind of research that qualifies for the tax credit must be done in the course of developing a new or improved product or business process.

When it was enacted in 1981 as part of an economic stimulus package, the tax credit was intended to encourage investment in the U.S. Ever since then, large corporations have made up the bulk of those claiming the credit. Many small businesses, particularly engineering and technology companies, could claim the credit but don’t, either because they don’t know about it or they’re concerned that it might trigger an IRS audit. Even startups with no income may claim the credit for qualified research and experimentation costs incurred in their early years and carry them forward to offset taxes on future profits.

Hard science and experimentation are keys to qualifying for the credit. The product or service must be technological in nature and based upon a hard science. And there must be a process of experimentation, where there is uncertainty and more than one alternative available by which the individual must test to determine the best alternative.

The R&D credit lapses at the end of this calendar year and is no longer available to taxpayers as of Jan. 1, 2014. However, it draws bipartisan support and has been continuously renewed since its original expiration date in 1985. President Obama has proposed making the credit more effective by establishing it as a permanent part of the tax code, but his proposal has not gained traction in Congress.

It's expected for the credit to be retroactively reinstated sometime after the beginning of 2014. Both parties agree it should be extended but it is buried in the quagmire of Washington at this time. As it was in late 2012, when the credit was retroactively reinstated to the beginning of the year, we currently anticipate the same treatment for 2014. Unfortunately, it will be held hostage until mid- or late-2014 before it is extended.

Originally appeared on Bloomberg BusinessWeek. 

Published: December 13, 2013

IRS Releases Rules for In-Plan Rollovers of Roth Accounts

The IRS released rules in question and answer format for in-plan rollovers to designated Roth accounts in retirement plans. The most significant part of the guidance concerns the mechanics of making an in-plan rollover of funds from Sec. 401(k), 403(b), or 457(b) governmental plans, which is now permitted for rollovers of “otherwise nondistributable amounts” (i.e., the plan participant has not reached age 59½ or left the company) made after Dec. 31, 2012.

These new rules for in-plan Roth rollovers under Sec. 402A(c)(4)(E) were added by Section 902 of the American Taxpayer Relief Act of 2012 (ATRA), P.L. 112-240, as a revenue raiser, because the rules permit rollovers of funds from the tax-deferred accounts noted above without being subject to the 10% penalty for early withdrawals in Sec. 72(t), but also result in the plan participants’ paying income tax on the amount of the rollover. Before the amendment, these rollovers could be made without the penalty only for “otherwise distributable amounts,” which meant the participant had to reach age 59½ or have a severance from employment.

The first question addressed is the effect of the new law on Notice 2010-84, which provided guidance on in-plan rollovers under pre-ATRA rules, including the provision permitting the inclusion of the amount taxable under the rollover over a two-year period in 2011 and 2012 (which is not available for the new rollovers). Notice 2013-74 explains that the rules under Notice 2010-84 (such as the vesting requirements) continue to apply to distributions of otherwise nondistributable amounts, but that the other rules do not, including the rule for a 60-day rollover and the rule under Sec. 402(f) requiring a written notice to recipients explaining the distributions eligible for rollover.

Any of the following amounts (including earnings on those amounts) in a Sec. 401(k), 403(b), or 457(b) governmental plan can be rolled over: Secs. 401(k) and 403(b) elective deferrals, matching contributions, and qualified nonelective contributions, and annual deferrals made to Sec. 457(b) governmental plans. Once these amounts are rolled over, they, and the amounts earned afterward, are subject to the rules restricting distributions before a participant reaches age 59½ or leaves employment at that company.

Because these rollovers are eligible rollovers under Sec. 3405(c)(1), no withholding can be made from these amounts to pay the taxes that will be due on the amounts rolled over. The notice advises employees making these rollovers to adjust their withholding or make estimated tax payments to avoid a penalty for underpayment of tax. 

Notice 2013-74 also contains the rules for making plan amendments to permit these types of rollovers. For Sec. 401(k) plans generally, these plan amendments usually must be made by the last day of the first plan year for which the amendment is to be effective. To give plan sponsors and plan participants more time (and probably also because this notice was released less than three weeks before the end of the year), the IRS is extending the deadline to the later of the last day of the plan year or Dec. 31, 2014, provided the amendment is effective as of the date the plan first operates in accordance with the amendment. For a calendar-year plan that wants to permit rollovers in 2013, the deadline is Dec. 31, 2014. The same deadlines apply to calendar-year Sec. 401(k) safe-harbor plans (those that use matching or qualified nonelective contributions to meet the nondiscrimination safe harbor) and to Sec. 457(b) governmental plans.

Sec. 403(b) plans, are permitted under the notice to make these amendments by the last day of the remedial amendment period that applies under Rev. Proc.  2013-22, or, if later, the last day of the first plan year in which the amendment is effective.  

The notice also contains a number of other questions and answers, including how a rollover will be treated for purposes of determining whether a plan is top-heavy under Sec. 416, and whether discontinuing in-plan Roth rollovers would violate the Sec. 411(d)(6) prohibition on decreasing accrued benefits.      

By Sally P. Schrieber and appearing originally in the Journal of Accountancy.

Published: December 12, 2013

IRS Loses Billions Due to Stolen ID Numbers

Tax cheats armed with stolen identification numbers are costing the Treasury billions of dollars a year, according to a new audit.

Treasury’s inspector general for tax administration says that, in 2011 alone, tax cheats were able to steal or falsely obtain some 285,000 employee identification numbers, which the IRS uses to identify a taxpayer’s business account.

In all, the IRS could be issuing around $2.3 billion a year in these sorts of false payments — or around $11.4 billion over a five-year span.The IRS does have procedures in place that prevent it from handing out fraudulent refunds, and keeps track of data that could give it even more tools on that front, the inspector general said.

But the agency does not have access to third-party W-2 information that would allow it to verify income and withholding at the time a return is processed.

“With an estimated Tax Gap in excess of $450 billion, it is imperative that the IRS use all available data to increase its ability to detect tax returns with false income and withholding associated with stolen or falsely obtained EINs,” Russell George, the tax administration inspector general, said in a statement. 

By Bernie Becker for The Hill

Published: December 6, 2013

5 Ways to Reduce Your Business's Year-End Tax Bill

For many business owners, December means employee gifts, holiday promotions and planning for the new year. It also means it's time to review business tax plans, which can often be an expensive process. When federal, state and investment income taxes are taken into account, tax attorneys estimate that small business owners will be facing an effective tax rate of 40 percent or higher.

"This is the first time in many years that tax professionals and their clients are having to face such tax rates," said Jim McCarten, partner at Burr & Forman LLP.

What can business owners do to reduce their year-end tax bill? McCarten offered these five tips for reviewing your 2013 tax plans:

Maximize the use of qualified plans, including 401(k)s and/or IRAs. One of the maxims of tax planning is to defer tax for as long as possible to get yourself to a situation in which you are in a lower tax bracket when you begin to pull the funds out of the plan.

Align your investment and tax strategies. Make sure you, your CPA and your investment adviser have reviewed your portfolio and aligned your investment strategy with your tax strategy and needs, especially if your income is approaching the threshold for application of the net investment income tax. This new tax, which went into effect on Jan. 1, 2013, applies a 3.8 percent tax to certain net investment income if your income is above a statutory threshold amount, depending on your filing status.

Pull cash out for capital gains or qualified dividends. The rates imposed on long-term capital gains and qualified dividends are still significantly more favorable when compared to regular income-tax rates. If business owners can pull cash out of the business in a manner that allows it to be taxed as a qualified dividend — which usually requires that the company be a regular corporation for tax purposes and not a flow-through entity — or capital gain, the maximum tax assessed against that income will be 15 or 20 percent. Depending on the taxpayer's modified adjusted gross income (MAGI), you may also avoid the net investment income tax.

Spread out your gains. Selling a business or real estate asset, and spreading the gain out over several years can keep your MAGI below the applicable threshold for imposition of the net investment income tax. If this is the case for your business, consider structuring the transaction as an installment sale in which at least one payment is received after the tax year of the sale.

Be proactive. Tax planning must be complete before year-end. You must be proactive and inquire about changes you can make to reduce you tax burden.

Originally published on BusinessNewsDaily.

Published: December 5, 2013

8 Tax Breaks You Might Miss Out On

The year is fast approaching and the time to get your financial ducks in a row is getting shorter.  Make sure you are getting all the tax breaks you can qualify for in order to lower your tax liability.  There are eight tax breaks expiring at the end of 2013 - take advantage of them while you still can.

1. Qualified educators can deduct up to $250 worth of unreimbursed classroom expenses.  These deductions are taken before the adjusted gross income and regardless of whether the teacher itemizes other deductions or just takes a standard deduction.

2. Exclusion of cancellation of indebtedness or principal residence.  This tax break allows those individuals who have had a home foreclosed or short sale completed to not claim the debt forgiveness as taxable income.

3. Transit benefits deduction.

4. Mortgage Insurance Premiums can still be deducted through 2013.  This provision is scheduled to expire after this year.

5. IRA distributions to charity.

6. State and local sales tax deduction allows you to deduct state sales tax if your state does not have sales tax or if the amount you paid in sales tax was higher than income tax.

7. Electric vehicle credit.

8. Home energy efficiency credit.

These tax breaks are all set to expire this year.  It is not too late to get qualified for these credits and deductions. 

Via US News

Published: December 3, 2013

Hurry, These Four Tax Breaks Expire at the End of the Year

Fifty-five federal tax breaks are scheduled to expire at the end of the year. Usually, many of these expiring tax provisions are extended at the last minute, but this year is shaping up to be different.

The pressure for additional revenue, combined with political gridlock, has greatly increased the likelihood that many of the most advantageous provisions will not be extended or will be reduced significantly. This challenges business owners to make difficult decisions before the year ends without knowing what rules will be in effect in 2014.

We’ve sifted through all the expiring tax provisions and narrowed the list down to the four most important expiring breaks that every small business should consider taking advantage of before the end of the year.

Use Sec. 179 Expensing/Bonus Depreciation Opportunities

Current law enables firms to deduct the cost of purchasing assets like equipment, furniture, and computer software now instead of over a set period of years. The 2013 expensing limit is $500,000, and it is scheduled to drop significantly to $25,000 in 2014. The deduction begins to phase out when total qualified purchases for the year exceeds $2 million. If you have equipment needs, consider purchasing them in 2013.

This provision applies to new and used property. Keep in mind that the assets need to be placed in service by the end of the year, and you must have taxable income to take advantage of this benefit. Also, traditionally, only tangible personal property was eligible for the Section 179 deduction; however, for 2013 taxpayers are allowed an immediate deduction of up to $250,000 of qualified leasehold, restaurant and retail improvement property.

For businesses without taxable income, they can still take advantage of the bonus depreciation provision that allows taxpayers to immediately write off 50 percent of qualified asset purchases. The original use of the property must begin with the taxpayer claiming the deduction, i.e., it must be new property. This too expires at the end of the year.

Explore R&D Credit Opportunities

The R&D tax incentive, which is set to expire completely, enables business to claim a credit for developing or improving manufacturing processes. These improvements can be related to new products or experimentation efforts to improve the quality and efficiency of an existing process.

The incentive can benefit a myriad of industries and business types, including job/machine shops, food manufacturers, and government contractors. A large number of small and mid-sized companies are able to take advantage of the credit.

The benefits of taking advantage of this credit can have a significant impact on a company’s bottom line. Proper documentation is vital as the IRS continues to consider the R&D tax credit a significant issue.

Claim Energy Tax Incentives

Businesses that build or renovate their real estate holdings may qualify for special tax benefits if they “go green” by taking advantage of the 179D tax deduction. Even if a building only added green features such as lighting, a deduction could be claimed. Excellent candidates for this incentive include warehouses, distribution centers, hotels and motels and large office buildings.

If you installed what you believe may be qualifying property in previous years and did not claim the 179D deduction on your tax return, it is not too late. However, the 179D deduction will not be available on property placed in service after 2013.

Establish a Formal Capitalization Policy

New regulations that go into effect in 2014 allow businesses to write off small asset purchases without the fear that the IRS could come in and disallow the immediate deduction. While this provision won’t benefit you in 2013, you need to take action by the end of the year if you want to apply this provision in 2014.

The amount that can be written off is up to $5,000 per item or invoice if you have an audited financial statement, or $500 per item or invoice if you don’t. This de minimis safe harbor also applies to materials and supplies.

To take advantage of this provision in 2014, you must have a formal capitalization policy in place as of the first day of the year and you must follow that policy for financial statement purposes. So act now to establish your written policy for writing off small asset purchases.

Bonus Tip: Review Your Business Structure

One of the most significant tax changes from the American Taxpayer Relief Act of 2012 (ATRA) increased the highest income tax bracket for individuals from 35 percent in 2012 to 39.6 percent in 2013. And the effective rate can be as high as 43.4 percent for taxpayers subject to the new 3.8 percent Medicare surtax.

Most businesses are pass-through entities — LLCs, partnerships and S corporations — and thus their owners are taxed at their individual marginal tax rates. This makes business and personal tax planning imperative.

Remember, it’s not too late to make tax moves that can significantly reduce your company’s tax obligations for 2013. The sooner you act, the more opportunities you will likely uncover.

By Bill Smith at The Washington Post

Published: November 25, 2013

Why Small Business Is Divided Over Hiking the Minimum Wage

Raising the federal minimum wage to $9.50 would be bad for small businesses, yet almost half of small business owners support a hike, according to a new survey of about 600 owners published today by Wells Fargo (WFC) and Gallup.

Among the findings: Forty-seven percent of respondents, most of whom generate less than $2 million in annual revenue, said they would approve of a law setting the minimum wage at $9.50, even though 60 percent said the policy shift would hurt most small businesses. Support for higher wages was also at odds with findings that roughly 30 percent of respondents would cut staff and reduce worker benefits to offset higher wages.

What’s behind the discordant sentiments? After President Obama proposed raising the minimum wage to $9 from its current $7.25 by 2015, we reported on the increasing support for a wage hike among small business advocacy groups. Backers of a wage hike pointed to growing unease with the gap between the rich and poor, and a way to reduce worker turnover. Another practical-minded argument: Higher salaries for the lowest-paid workers could help boost consumer spending.

It’s worth noting that increasing the minimum wage would mostly affect companies in industries accustomed to paying low wages, such as fast-food restaurants. That helps explain why the International Franchise Association has opposed efforts to raise the minimum wage. It also means that many small business owners won’t be directly affected by the issue—a point worth remembering when supporters and opponents of a wage hike say they speak for small business owners.

By Patrick Clark for The New Entreprenuer

Published: November 22, 2013

IRS Urged to Fix Lingering Security Weaknesses

The Internal Revenue Service needs to do a better job of tracking its efforts to eliminate identified flaws in the security of systems involving taxpayer data, according to a new government report released to the public on Thursday.

The report, from the Treasury Inspector General for Tax Administration, reviewed whether some of the corrective actions to security weaknesses and findings previously reported by TIGTA have been fully implemented, validated and documented. TIGTA identified weakened management controls over the IRS’s closed planned corrective actions for the security of systems involving taxpayer data.

It turned out that eight of the 19 planned corrective actions, or 42 percent of the PCAs, that had already been approved and closed and were supposedly fully implemented to address the reported security weaknesses from prior TIGTA audits were only partially implemented. These involved systems with taxpayer data.

In addition, documents did not support the closure of the planned corrective actions, and supporting documents were not always uploaded to a Treasury Department database and were not readily available.

“When the right degree of security diligence is not applied to systems, disgruntled insiders or malicious outsiders may exploit security weaknesses to gain unauthorized access,” said TIGTA Inspector General J. Russell George in a statement.

TIGTA made six recommendations, including advising the IRS to strengthen its management controls to adhere to internal control requirements, provide refresher training to employees involved in uploading data to the Treasury database, audit the corrective actions for closed PCAs, and change the status of closed PCAs to open for those that were partially implemented.

IRS management agreed with five of TIGTA’s six recommendations and plans to issue guidance on internal control requirements, provide training, and revise the procedures to improve the IRS’s management controls over the PCAs. IRS management partially agreed with the sixth recommendation to upload documentation for previously closed PCAs, pending the completion of a cost-benefit analysis and risk-based approach. TIGTA believes the IRS should complete the sixth recommendation as stated, to ensure the implementation of all PCAs over security weaknesses.

“We will continue to work with the IRS business units to ensure that the closures of corrective actions are properly documented,” wrote IRS CFO Pamela LaRue in response to the report. “In addition, the [Office of Internal Control] will develop a program to audit completed actions to provide assurance that audit agencies' recommendations have been fully addressed.”

By Michael Cohn for TaxProTODAY

Published: November 21, 2013

'Green' Commuter Tax Break May Be Slashed

A popular tax break for commuters who use mass transit may be cut nearly in half if Congress doesn't step in by the end of the year.

Right now, millions of people who take mass transit to work, as well as those who drive and pay to park, can reduce their pre-tax income by up to $245 a month in commuting and parking expenses.

But starting January 1, mass transit and van pool riders will only be able to take $130 off their pre-tax income for commuting costs, while drivers will be able to write off $250 for parking.

A mass transit commuter in the 25% tax bracket could lose about $470 next year if the transit benefit drops to $130, said Mike O'Toole, senior director of government relations at the American Payroll Association.

More than 2.7 million families use the transit break to defray the cost of getting to work, according to one coalition advocating for parity between the two breaks. The break only applies to workers whose employers offer it among other benefits.

Practically, the transit portion of the benefit is likely to be used most heavily in places where buses, ferries, light rail systems and subways are commonly used, said Dan Neuburger, president of WageWorks Commuter Services.

"This would certainly include large markets such as New York City, San Francisco, Chicago, Boston, Philadelphia and Washington, D.C. The benefit is also popular in smaller markets where vanpooling helps to defray the cost of commuting and reduces road congestion," Neuburger said.

Roughly 15,000 companies in New York alone offer the transit benefit, covering about 700,000 employees, WageWorks estimates.

As tax breaks go, the commuter benefit is not hugely expensive to federal coffers -- the Congressional Budget Office in 2012 estimated the 10-year cost at less than $3 billion.

There is a push by some on Capitol Hill to make sure that parity between the tax break for mass transit and parking is maintained and made permanent.

The only problem: Congress is nowhere near dispensing with any of its legislative business this year. It's still mired in basic questions about the federal budget for fiscal year 2014, which started last month. Plus, it has a host of other expiring provisions it has yet to deal with.

That's why O'Toole wouldn't be surprised to see a repeat of the headache Congress created over the commuter benefit for 2012.

Back then, lawmakers failed to prevent the transit portion from being slashed that year. Then in January 2013 they restored it to the same level as the parking benefit and made the change retroactive for all of 2012. That meant payroll departments had to scramble to reissue W2 forms and refund employees for payroll taxes they shouldn't have had to pay in 2012, O'Toole said.

By Jeanne Sahadi for @CNNMoney

Published: November 20, 2013

Three Pressing Tax Issues

American Institute of CPAs (AICPA) held a briefing which was monitored by AICPA Vice President of Taxation Ed Karl, AICPA Chair of the Tax Executive and focused on three critical areas: (1) expiring tax provisions, (2) the 2014 tax filing season, and (3) the IRS budget.

Expiring Tax Provisions

Karl began the briefing by explaining the problems facing tax practitioners, as dozens of key tax provisions reach their expiration date on January 1, 2014. He noted that this is becoming a near-annual ritual because Congress typically fails to address extenders in a timely fashion. The current provisions at risk range from tax breaks for businesses to individual deductions to special elections for taxpayers.  

"The timing of transactions is especially difficult, with fifty-seven tax provisions expiring at the end of the year," said Karl. He referenced the Section 179 deduction for businesses as a prime example. Using a rough illustration, Karl pointed out that a business acquiring $1 million of property in 2014 would qualify for a Section 179 deduction of about $600,000 if the current rules are extended, but would otherwise be entitled to a deduction of only $200,000 – a $400,000 swing. The uncertain fate of this provision makes it difficult for business owners to decide what to do. 

Karl acknowledged that such complications aren't limited to business-related provisions. He mentioned several tax breaks for individual taxpayers that are also set to expire after 2013, including the optional deduction for state sales taxes, the tuition deduction for higher education expenses, and the election for retirees to contribute to charity directly from an IRA. "The on-again, off-again nature creates uncertainty," said Karl. 

In response to a question, Karl said that this year differs from last year when the "fiscal cliff" was approaching. Because certain two-year extenders were eventually reinstated retroactively, the emphasis was on tax filing complications. This time around, the uncertainty revolves around decision-making, which Karl believes is even more difficult to address.

2014 Tax Filing Season

The AICPA representatives were united in their disappointment in the decision to push back the start of the tax filing season due to the federal government shutdown in October. On October 22, the IRS announced that the delay would last for one or two weeks. Traditionally, the IRS kicks off the tax filing season on January 21 for tax returns due for the prior calendar year, although the critical tax filing deadlines remain April 15 for most taxpayers, or October 15 for those requesting an automatic six-month extension. 

This means the IRS would start accepting and processing 2013 individual tax returns no earlier than January 28 and no later than February 4. The IRS says the additional time is needed for programming, testing, and deployment of the more than fifty IRS systems used to handle processing of nearly 150 million tax returns. 

Labant strongly urged the IRS to start the tax filing season as soon as possible to alleviate a crunch for practitioners and taxpayers alike. She also noted that another shutdown by the government in 2014 could cause further damage. Labant stressed the need for the IRS to come up with a contingency plan in a worst-case scenario. "We don't want any surprises in January, especially as it comes to tax filing season," she said. 

In addition, Labant hoped that the IRS would make any contingency plans public, so it would be possible for tax return preparers to plan ahead. She stated the AICPA will be holding meetings with other stakeholders in the near future to address these issues.

The IRS Budget

The briefing ended with a discussion about how projected budget cuts will affect the IRS' ability to effectively handle its responsibilities. Karl complained that current budgetary restraints, some of which were mandated by the federal sequester, were already having an adverse effect. He cited the following problems:

  • Fewer resources for taxpayers.
  • Increase in wait time on calls to IRS.
  • Delay in issuing notices.
  • Delays in receiving forms from IRS.
  • Reduction in walk-in taxpayer assistance services. 
  • Less administrative guidance.

"Training budgets have been cut and that potentially could have a long-term impact," said Karl. He remains concerned that the IRS hasn't provided sufficient guidance with respect to the tax consequences resulting from the invalidation of the Defense of Marriage Act (DOMA) and the imposition of the new 3.8 percent Medicare surtax, among other issues. Karl doesn't paint a positive picture for the future. What's more, he referred to IRS efforts to thwart identity theft as yet another sore spot, noting it has already spent half a billion dollars on defensive measures. 

The AICPA is promising to do its part to rally the troops. Karl noted that the organization previously sent a letter to Congress relating to the IRS' budget. If anything, he believes the nation's lawmakers should allocate more money, not less, to the IRS. "Indiscriminate cuts to the IRS budget are not necessarily the answer," he concluded.

By Ken Berry for AccountingWEB

Published: November 18, 2013

Small-Business Partnerships to Be Priority of IRS Exams: Taxes

The Internal Revenue Service is shifting its small-business audit focus from corporations to various types of partnerships as those entities have grown more prevalent and complex, according to an agency official.

Examining the returns from partnerships and other so-called pass-throughs will be the “top priority” of the IRS’s Small Business/Self-Employed Division over the next year and beyond, said Faris Fink, the head of the office. As part of that shift, more and better training of IRS agents is needed, Fink said at the American Institute of CPAs National Tax Conference last week in Washington, Bloomberg BNA reported.

“The Service has for a long time focused its energy on corporations,” he said. “Frankly, we’re a little bit behind the curve in getting around to developing a partnership strategy.”

Pass-throughs, which include S corporations and sole proprietorships, are businesses that don’t pay income taxes directly. Instead, their income is passed through to their owners who pay taxes on it on their individual returns. Pass-throughs comprise almost 95 percent of all U.S. business entities, according to IRS statistics.

Between 2007 and 2011, the number of partnerships grew by 15.3 percent and now constitute a significant percentage of returns for both IRS’s small business division and the Large Business & International Division, Fink said.

Training Issue

For IRS employees, challenges they face due to a lack of experience and training in auditing these entities are accentuated by the complexity of modern partnership structures, he said. The IRS now sees partnerships with 82,000 partners and structures ranging from 125 to 182 tiers, Fink said.

“Frankly, our training was not geared for dealing with those types of large, complex partnerships,” he said. “Historically, we would think of a partnership of having, say, 10 partners” with a limited number of tiers.

The IRS also is aware that the way some large partnerships are organized is partly designed to make it tough for the agency to identify substantive transactions by the businesses, Fink said.

“We as an organization have recognized that this is something that we’ve got to be paying attention to, not just this year, but going forward,” he said.

The IRS increased training on partnership issues for field examiners and revenue agents during the last year, Fink said. Addressing tax preparers, he also said, “It’s going to be challenging for you, because you’re going to be interacting with some of those folks.”

Research Program

In other comments at the conference, Fink said taxpayers and tax practitioners should be able to more easily access information from the IRS’s multiyear National Research Program. The program randomly selects a certain number of returns over several years to track new areas of taxpayer noncompliance and to develop better strategies for audits.

“We’re going to try to be a little more transparent as far as sharing information from the NRP,” he said. “For a while, organizationally, we’ve treated it pretty much as ‘top secret’ information and that we wouldn’t share it with anybody, as if we’d be giving away our trade secrets and we could always go out and say ‘we got you.’”

The new goal will be to make the information available so tax preparers “can be educated on the issues that we’re seeing and so that you can better educate your clients,” he said.

The availability of the information will depend on the progress of each individual research project, Fink said. The IRS is running simultaneous programs to examine returns with individual taxpayer, employment, fuel tax and corporate tax issues, he said.

By Lydia Beyoud for BNA

Published: November 14, 2013

Don't Forget the Tax Breaks for SUVs, Trucks and Vans

As you know, skimpy federal income tax depreciation allowances generally apply to passenger autos used for business (IRC Sec. 280F). These are the so-called luxury auto depreciation limitations. Specifically, for passenger autos placed in service in 2013, the maximum depreciation deductions (including the Section 179 deduction) are as follows:

Of course, when a passenger auto is used less than 100% for business, these figures are cut back even further. In fact, the average client may not live long enough to fully depreciate a really expensive car.

Better Depreciation Rules or Vehicles Falling outside Passenger Auto Definition

Fortunately, the luxury auto depreciation limitations only apply to passenger autos [IRC Sec. 280F(a)(1)(A)]. When the vehicle in question is used over 50% for business and is not classified as a passenger auto, it can be depreciated without limit under the MACRS rules for transportation equipment, which is considered to be five-year property. In addition, new vehicles that are outside the passenger auto definition also qualify without limits for 50% first-year bonus depreciation if acquired and placed in service during calendar-year 2013 [IRC Sec. 168(k)].

Finally, new and used vehicles that fall outside the passenger auto definition also qualify for the Section 179 deduction (generally a total of $500,000 for all eligible property placed in service in tax years beginning in 2013). As explained later, however, heavy SUVs are subject to a reduced Section 179 limit of $25,000 per vehicle.

Unless Congress takes action, bonus depreciation won't be available after 2013. Furthermore, the Section 179 deduction limit will drop to a $25,000 combined total for all eligible property acquired and placed in service during tax years beginning after 2013-not just for heavy SUVs. So, a business that is on the fence about buying a vehicle that isn't a passenger auto this year or next may want to get it done sooner rather than later. Of course, it is possible that Congress will extend the increased Section 179 deduction and bonus depreciation beyond 2013, but why take the chance?

Clearly, the tax-saving trick is buying something outside the passenger auto definition. Because a car is a passenger auto unless its unloaded weight exceeds 6,000 pounds, few cars, if any, escape passenger auto status. However, a truck, van, or SUV escapes passenger auto status if its Gross Vehicle Weight Rating (GVWR-the manufacturer's maximum weight rating when loaded to capacity) exceeds 6,000 pounds. [See IRC Sec. 280F(d)(5)(A).] In making this determination, the weight rating and the manufacturer's classification as a car, truck, or van are the controlling factors, not the type of chassis. (See CCA 201138046 .)

These "heavy" vehicles are eligible for the favorable depreciation rules outlined earlier (as opposed to the stingy luxury auto rules that apply to passenger autos). As you'll see, quite a few SUVs, pickups, and vans qualify as heavy.

Reduced Section 179 Deduction for Heavy SUVs

There is a $25,000 per vehicle limit on Section 179 deductions for any heavy SUV with a GVWR over 6,000 pounds and less than 14,001 pounds [IRC Sec. 179(b)(5) ]. For this purpose, the term heavy SUV includes trucks and vans, as well as what is normally thought of as an SUV. Exception: the reduced deduction rule doesn't apply to:

(1.) Vehicles designed to seat more than nine passengers behind the driver's seat. For example, many hotel shuttle vans will qualify for this exception.

(2.) Vehicles equipped with a cargo area that is not readily accessible directly from the passenger compartment and that is at least six feet in interior length. The cargo area can be open or designed to be open, but enclosed by a cap. For example, many pickups with full-size cargo beds will qualify for this exception. Some "quad cabs" and "extended cabs" with shorter cargo beds may not.

(3.) Vehicles with: (a) an integral enclosure that fully encloses the driver's compartment and load carrying device, (b) no seating behind the driver's seat, and (c) no body section protruding more than 30 inches ahead of the leading edge of the windshield. For example, many delivery vans will qualify for this exception.

Vehicles with GVWRs above 6,000 pounds that fall under these exceptions remain eligible for the full Section 179 deduction ($500,000 all eligible property placed in service in tax years beginning in 2013). This means the business portion of the cost of these vehicles (both new and used) can often be completely deducted in Year One under Section 179.

Depreciation Rules for Heavy SUVs Are Still Quite Good

The idea of buying a heavy SUV is still a smart year-end tax planning strategy for 2013. Why? Because a heavy SUV used over 50% for business can qualify for the following depreciation benefits:

(1.) The $25,000 heavy SUV Section 179 deduction (available for both new and used vehicles). This is a per vehicle limit. Thus, a client could feasibly place 20 heavy SUVs costing more than $25,000 in service during 2013 and qualify for a total Section 179 deduction of $500,000 ($25,000 per vehicle, limited to $500,000).

(2.) The 50% first-year bonus depreciation break (available for new vehicles acquired and placed in service in calendar-year 2013).

(3.) Accelerated MACRS depreciation over five years for the balance of the vehicle's depreciable basis (available for both new and used vehicles).

In contrast, passenger autos fall under the less-favorable luxury auto depreciation limitations discussed earlier.

By Thomson Reuters Tax Analyst, Robin Christian, CPA for CPA Practice Advisor

Published: November 12, 2013

Who Gets the Most Federal Spending for Their Tax Dollars?

Figuring out how much you get for the taxes you pay is a tricky business.

In a report this week, the Tax Foundation attempts to answer the question. It compares how different income groups benefit from federal spending -- directly and indirectly -- for every tax dollar they pay.

The broad takeaway: The bottom 60% of Americans receive more from government spending than they pay in taxes, and the top 40% get less from government spending than they pay.

The issue comes down to a question of how federal spending is allocated to each group. There is no widespread agreement on the right way to do that.

Spending represents everything from direct federal payments such as those for food stamps, Social Security and farm subsidies to spending on public goods intended to benefit everyone such as national defense, education and highways.

Those in the bottom 20% of the income scale (who make no more than $17,000 and are at or near poverty level) get back the equivalent of $8.13 in federal spending for every federal tax dollar they pay, according to the report. That's in part because of anti-poverty programs and refundable tax credits.

By contrast, those in the top 20% (who make more than $120,000) get back 25 cents for every tax dollar they pay.

Those in the middle ($37,000 to $67,000) receive $1.57.

In coming up with these numbers, the Tax Foundation, a conservative-leaning tax research group, decided to allocate the benefits of spending on public goods like defense evenly across the population.

But it also notes that there are alternative ways to allocate spending.

One common scenario assumes that high-income households benefit more from public goods spending than lower income households.

In that case, the gap would narrow as the amount of spending per tax dollar would go up for high-income taxpayers, and go down for the lowest- and middle-income groups.

The fact that there is a gap at all, however, is not surprising because many spending programs and the tax code are designed to be progressive -- meaning they are meant to redistribute some income from the wealthiest to the poorest.

So what's the point of the exercise?

After all, there's no way to objectively assess whether the gaps are too wide, too narrow or just right. Indeed, that's a political decision, and there is ample divide over that question in Washington.

"It's a point to start the conversation," said Scott Hodge, executive director of the Tax Foundation, which has advocated for lower tax rates and a simpler tax system.

Of course, that assumes lawmakers are ready to have a meaningful debate and craft substantive policy about taxes and spending - something they currently are nowhere near.

Nevertheless, the idea of looking holistically at both sides of the federal ledger and trying to paint a more accurate picture of who benefits would be helpful, said Matthew Gardner, executive director of the liberal-leaning Institute on Taxation and Economic Policy.

But Gardner would have preferred a different method entirely, one that might drastically alter the results: measuring spending against taxes paid by Americans according to their wealth instead of income.

"It's about what you have to lose," he said. "Income is not going to be a great measure of that."

By Jeanne Sahadi for @CNNMoney

Published: November 11, 2013

IRS Extends Fast-Track Settlement to Smaller Businesses Nationwide

Formerly available only to large and midsize businesses and in a geographically limited pilot program for smaller entities, the IRS’s Fast Track Settlement program is now available to smaller businesses nationwide, the IRS announced Wednesday.

Fast-track settlement allows the IRS and business or self-employed taxpayers under examination to use alternative dispute resolution procedures to resolve tax controversies more quickly, without a formal administrative appeal or litigation. The program began on a pilot basis in 2001 for businesses over which the IRS’s Large and Mid-Size Business Division (LMSB, now the Large Business and International Division) had jurisdiction—those with more than $10 million in assets.

It was extended to LMSB taxpayers nationally in 2003. Three years later, the IRS launched a pilot program for taxpayers under the Small Business/Self-Employed Division (SB/SE) in Chicago, Houston, and St. Paul, Minn. (see Announcement 2006-61). The pilot program was expanded in 2007 to include Philadelphia, central New Jersey, and three California cities (News Release IR-2007-200).

Under SB/SE fast-track settlement, taxpayers with one or more unagreed issues in an open year or years under examination can work to resolve the issues with SB/SE and the IRS Office of Appeals, generally before the IRS issues a first notice of proposed deficiency (30-day letter).

The parties aim to settle cases within 60 days of acceptance of an application to the program.

Generally, for a case to be eligible for fast-track settlement, issues must be fully developed, the taxpayer must state a position in writing, and there must be a limited number of unagreed issues. Fast-track settlement is not available for Collection Appeals Program cases, Collection Due Process cases, offers-in-compromise, trust-fund recovery cases, certain correspondence examination cases, and others identified in Announcement 2011-5.

If the application is accepted, an IRS Appeals official trained in mediation serves as a neutral party to propose and facilitate a settlement agreement between the taxpayer and SB/SE representatives through one or more conferences. If the parties are unable to resolve the issue or issues, the taxpayer may still request a traditional appeal.

By Paul Bonner for the Journal of Accountancy

Published: November 8, 2013

43% Pay No Federal Income Taxes

A little more than 43% of U.S. households -- or 70 million homes - will end up owing no federal income taxes.

That's down from recent years because of an improving economy and the expiration of various tax cuts that were passed after the 2008 financial crisis, according to the nonpartisan Tax Policy Center, which published its latest estimates on Thursday.

The households with zero income tax liability are not evenly distributed across income groups. The majority this year - nearly 67% - have incomes below $30,000.

"Many people who pay no income tax simply have too little income to owe tax. The rest benefit from the tax code's many preferences -- exclusions, deductions, exemptions, and credits - that zero out the tax they would otherwise pay," said Roberton Williams of the Tax Policy Center.

But that doesn't mean there aren't any nonpayers among high-income folks. The Tax Policy Center estimates that a little more than 1% of nonpayers have six-figure incomes or more.

Specifically, an estimated 798,000 households in the nonpayer group make between $100,000 and $200,000 a year; 48,000 have incomes between $200,000 and $500,000; 3,000 make between $500,000 and $1 million; and 1,000 households bring in more than $1 million. (Here are some reasons why million-dollar households make the list.)

A misconception about those who end up owing no federal income taxes -- especially those with low incomes -- is that they pay no taxes at all. In fact, most pay payroll taxes to support Medicare and Social Security as well as sales taxes and state and local taxes.

However, there is a subset of households that still end up with no liability when income and payroll taxes are combined. The Tax Policy Center estimates 14.4% of all households - or 23 million - fall into this group. "And two-thirds of them are elderly," Williams noted.

The issue of Americans with zero tax liability is a politically charged one. Mitt Romney created an uproar on the presidential campaign trail last year after he incorrectly characterized this group as people who are "dependent on government" and "believe they are victims."

Lawmakers, too, often complain about the issue, even though Congress itself boosts the ranks of the nonpayers by passing new tax breaks and failing to review whether the old ones still make sense.

But there may be less fodder for heated rhetoric in the years ahead. The Tax Policy Center estimates the percentage of households without federal income tax liability will continue to drop, falling as low as 34% of households by 2024.

By Jeanne Sahadi for @CNNMoney

Published: November 7, 2013

Historic Revenue Recognition Standard Takes Big Step Forward

A financial reporting standard designed to increase global comparability of one of the most important items in financial statements is nearing completion after an important vote Wednesday.

FASB directed the board’s staff to draft a final revenue recognition standard to be submitted to the board in December for final approval. FASB members indicated by a 5–1 margin that they will vote in favor of the standard.

The International Accounting Standards Board (IASB) is scheduled to vote later this month on whether to proceed with a ballot for the standard, which is expected to be issued during the first quarter of 2014.

The revenue project has been followed closely by companies throughout the world.

“This is a major accomplishment that will greatly change how people think about perhaps the most important item in financial statements,” FASB member Tom Linsmeier said during the board meeting.

Objectives for the project include:

  • Creating a comprehensive framework for revenue recognition, which
  • currently is governed in U.S. GAAP by more than 200 different pieces of guidance.
  • Simplifying financial statements and disclosures.
  • Comparability across the world and across industries.

FASB’s staff reported that the proposed standard would significantly change U.S. GAAP or increase the level of judgment for application in some areas, increasing costs for a broad population of entities.

The staff said stakeholders in particular have identified specific, anticipated cost increases in accounting for construction- and production-type contracts, adjusting transaction prices for the time value of money, accounting for bundled telecommunications contracts, the constraint on revenue, the implementation guidance for licenses of intellectual property, and transition requirements.

Board members expressed regret that implementation costs will be high in some cases and that companies in some industries will bear a disproportionate amount of costs. But board members said the benefits outweigh the costs.

“The FASB will issue a standard that both improves and substantially converges guidance on how revenue is recognized in financial statements,” FASB Chairman Russell Golden said in a news release. “Today’s vote represents a major milestone in our 11-year effort to create greater comparability in an area of financial reporting that affects all industries.”

Hal Schroeder was the lone FASB member who indicated he would not support the proposal. He said the core principle of the project was to have the core performance of an entity aligned with revenue recognition. He said late votes on constraint and collectibility led to his dissent and that the constraint in the proposed standard disconnected performance from revenue recognition.

Board members also said that while the proposed standard would improve global comparability among companies in the same industry, comparability across industries will remain elusive.

The final standard submitted to the boards for ballot will include a five-step process for revenue recognition:

Step 1: Identify the contract with a customer.
Step 2: Identify the separate performance obligations in the contract.
Step 3: Determine the transaction price.
Step 4: Allocate the transaction price to the separate performance obligations in the contract.
Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.


Although the standard has taken longer to develop than expected, Golden said the proposed effective date still should give companies enough time to prepare for the change. The standard would take effect for reporting periods beginning after Dec. 15, 2016 (FASB), or reporting periods beginning on or after Jan. 1, 2017 (IASB).

By Ken Tysiac for the Journal of Accountancy

Published: November 6, 2013

IRS Warns of New Phone Scam

Taxpayers, beware: Fraudsters impersonating IRS agents are calling people across the country demanding they pay taxes that they don't even owe.

The IRS warned of this "pervasive" scam on Thursday, saying it has been identified in nearly every state.

Innocent taxpayers - often immigrants - are answering their phones only to be informed they owe money to the IRS and need to pay it immediately by either loading money on a prepaid card or sending it via a wire transfer. If they argue or refuse to pay, scammers will threaten to arrest or deport them, or suspend their business or driver's license.

"In many cases, the caller becomes hostile and insulting," the IRS said in a statement.

These calls may be convincing, because the scammers use caller ID spoofing to make sure the IRS's toll-free phone number shows up on the caller ID, they make up bogus badge numbers and may know the last four digits of a victim's Social Security number. Sometimes victims will even hear background noise that sounds like a call center.

And if the victim hangs up, they may get another call seconds later from the same scammer -- or another one -- saying they are with the police or an agent at the DMV.

To avoid getting duped, don't believe anyone claiming to be the IRS who calls to ask for your credit card number or requests a prepaid debit card or wire transfer. The IRS said it will never ask for payments to be made by prepaid debit card or wire transfer, and it typically makes its first contact with taxpayers by mail.

You should also be immediately suspicious of any caller claiming to be from the IRS and demanding money, especially if you aren't aware that you owe anything. Nasty language and threats should also be a red flag.

"If someone unexpectedly calls claiming to be from the IRS and threatens police arrest, deportation or license revocation if you don't pay immediately, that is a sign that it really isn't the IRS calling," IRS Acting Commissioner Danny Werfel said in a statement.

To report any calls like this, contact the Treasury Inspector General for Tax Administration at 800-366-4484.

By Blake Ellis for @CNNMoney

Published: November 5, 2013

Health FSA "Use-It-or-Lose-It" Rule Modified to Allow a $500 Carryover

On Thursday, the IRS issued Notice 2013-71, which permits companies to amend their Sec. 125 cafeteria plans to allow participants in health flexible spending arrangements (FSAs) who do not use all of the money in a plan year to use up to $500 in the next plan year, in addition to the regular $2,500 limit during the succeeding year. Employers may amend their cafeteria plans to adopt the carryover provision for the current cafeteria plan year or any subsequent plan year.

The new carryover rule offers an alternative to the current grace period rule, and companies that adopt this new carryover rule are not permitted to also offer the grace period. Under the grace period rule, introduced in 2005, a cafeteria plan can allow participants to spend unused amounts in the first two months and fifteen days after the beginning of the next plan year.

Health FSAs in cafeteria plans permit employees to pay for qualified medical expenses such as co-pays and deductibles, eyeglasses, and hearing aids on a pretax basis. Usually, once the plan year ends, employees lose any money left in the accounts under the use-it-or-lose-it rule (unless the employer offers the grace period). This new carryover rule helps employees by allowing them to make the election without worrying they will forfeit some of their money and to lessen the incentive to make wasteful purchases (such as for a third pair of eyeglasses) at the end of a year to exhaust the funds.

Employers are not required to allow the $500 carryover (and can also set a lower limit) or the grace period, but to participate, employers must amend their plans on or before the last day of the plan year for which amounts may be carried over, and may be effective retroactively, provided certain requirements are met.

The notice also clarifies how the transition rules for non-calendar-year cafeteria plans will work for changing cafeteria plan elections after the first day of the 2013 plan year. Normally, cafeteria plan elections must be made before the start of a plan year and cannot be changed after the start of that year unless a change-in-status event occurs. The preamble to the proposed Sec. 4980H regulations issued in January (REG-138006-12) provided a transition rule for non-calendar-year plans so participants could take advantage of the benefits under the health care act, such as the ability to purchase insurance in a health care exchange, that take effect at the start of 2014.

Specifically, the transition relief allows an employer, at its election, to amend one or more of its written Sec. 125 cafeteria plans to allow employees to either make a prospective salary reduction election for accident and health coverage on or after the first day of the 2013 plan year or to prospectively revoke or change his or her election with respect to the accident and health plan once during that the 2013 plan year, whether or not the employee experienced a change in status event.

Based on the language in the preamble to the regulations, this transition rule for plans that were on non-calendar years seemed to apply only to applicable large employers subject to the Sec. 4980H employer mandate. In this notice, the IRS clarified that the relief is available to an employer with a Sec. 125 cafeteria plan non-calendar plan year beginning in 2013 whether or not the employer is an applicable large employer or applicable large employer member under  Sec. 4980H.

By Sally P. Schreiber, J.D.

Published: November 4, 2013

IRS Releases Inflation Adjustments for 2014

On Thursday, the IRS issued the annual inflation adjustments for 2014 for more than 40 tax provisions and the tax tables for 2014 (Rev. Proc. 2013-35).

Among the inflation-adjusted amounts that have increased are the personal exemption, which increased from $3,900 in 2013 to $3,950 for 2014, and the standard deduction, which for married filing jointly status increased from $12,200 in 2013 to $12,400 in 2014. In addition, the adoption credit under Sec. 23 is inflation-adjusted from $12,970 in 2013 to $13,190 in 2014.

The revenue procedure also contains the inflation-adjusted unified credit against the estate tax, which is $5.34 million for 2014. The annual gift tax exclusion remains at $14,000.

The AMT exemption amount for 2014 is $82,100 for married taxpayers filing joint returns and $52,800 for single taxpayers. The Sec. 911 foreign earned income exclusion increases to $99,200 for 2014 from $97,600 for 2013.

The revenue procedure also includes the inflation adjustments for the Sec. 24 child tax credit, the Sec. 25A Hope scholarship and lifetime learning credits, the Sec. 32 earned income tax credit, the Sec. 179 election, and the Sec. 221 interest on education loans.

The IRS also announced the 2014 contribution limits and other figures for pension plans and other retirement-related items (IR-2013-86). The elective deferral (contribution) limit for employees who participate in Sec. 401(k), 403(b), or 457(b) plans and the federal government’s Thrift Savings Plan remains unchanged at $17,500, as does the catch-up contribution limit under those plans for those age 50 and over, which stays at $5,500.

On Wednesday, the Social Security Administration announced that the Social Security wage base for 2014 will be $117,000 (up from $113,700 in 2013).

By Sally P. Schreiber, J.D. for the Journal of Accountancy

Published: November 1, 2013

What Business Owners Should Discuss With Their Tax Planners

With the government shutdown and debt-ceiling issues resolved—at least temporarily—it’s time for small business owners and the self-employed to take stock of their finances and do year-end tax planning. Things are much more clear-cut now than they were in the fourth quarter of 2012, when the country faced massive uncertainty around tax cuts and the so-called fiscal cliff.

Patrick Cox, an attorney specializing in taxation and small business in the New York office of law firm Withers Bergman, says he sometimes feels as if he’s crying wolf when he warns clients about looming tax changes at year’s end. “All you want, as a business owner or a tax planner, is the ability to forecast what’s coming next. But for the past five or six years, I’ve been telling people to hurry up because everything is going to change—and then Congress eventually reaches an agreement to extend tax rates, sometimes even retroactively,” he says.

Then came 2012, when the tax cuts put in place by President George W. Bush expired for high earners and new taxes tied to Obamacare went into effect on the wealthy, including many clients whose small businesses are organized as flow-through entities such as S-corps and LLCs. “I felt bad for them because I could not convince some of them to dispose of assets to take advantage of the lower rates and then they got caught,” he says.

This year, things aren’t so dire. Still, it’s a good time to meet with your accountant or financial adviser to see what you can do to minimize the taxes you and your business will owe for 2013. Typically, that means deciding whether to accelerate or defer income before the end of the calendar year, plus taking stock of expiring tax provisions to see whether you should take advantage of any before they disappear.

Here’s some guidance on how to approach your invoicing, purchasing, and giving decisions for the next couple of months.

Take stock of your income. Start by adding up your 2013 business or self-employment income to date and determine if you’re likely to be in the same tax bracket this year as you were in 2012. Then think about 2014 and whether you are likely to have less income then—or additional income that could bump you into a higher tax bracket.

If you expect to be in a lower tax bracket next year, it’s best to defer as much income as possible until after year-end, accelerating any deductions you plan to take, anyway. Similarly, if you have new clients or contracts lined up now that are likely to push you into a higher tax bracket next year, it’s better to bring in more income now and pay taxes on it at the lower rate.

What if you determine that nothing much will change? “If a taxpayer’s overall tax rate is the same in both years, accelerating deductions achieves tax savings this year rather than waiting for those tax savings to materialize next year,” Rick Rodgers, a certified financial planner and president of Rodgers & Associates in Lancaster, Pa., writes in an e-mail.

If you’d like to defer income, ask clients to pay you in January, rather than December. And put off taking distributions from your retirement accounts, unless they are required minimum distributions. In order to accelerate deductions, make your planned charitable contributions now rather than in 2014.

If you can pay medical bills in December, you may become eligible for the medical expense deduction on your tax return. Be aware that the Affordable Care Act raised the income threshold for that deduction to 10 percent of adjusted gross income from the previous threshold of 7.5 percent. (Taxpayers 65 and over are still subject to the 7.5 percent threshold.). “You may need to prepay or defer medical bills to lump expenses into a single year to get the deduction,” Rodgers writes.

Make retirement contributions. Self-employed individuals not covered by a retirement plan can put money into their IRAs or other retirement accounts to reduce their taxable income for 2013. If you want to accelerate income this year so as to avoid paying at a higher rate next year, you can convert a traditional IRA to a Roth IRA. And you don’t have to decide what to do immediately: You can make IRA contributions for 2013 as late as next April, when your federal income tax return is due.

Determine where you are on the self-employment tax. If you make quarterly estimated payments on your self-employment income, take a look to see whether you have overpaid or underpaid, now that the year in nearly gone. If you’ve overpaid and estimate that you’ll be getting a large refund next April, you can reduce your final payment due in January 2014—keeping some money in your pocket now, rather than waiting for that refund check. If you’ve underpaid, talk to your accountant about increasing the January check, so you don’t wind up owing taxes on your 2013 income.

Take advantage of capital expenditures. During the recession, a series of stimulus bills raised the Section 179 deduction threshold for the purchase of new and used equipment, including such things as computers and office furniture. The provision, named after an IRS tax code, allows a business to deduct the full purchase price of new and used equipment in the year it is purchased, financed, or leased and put into service, rather than having to depreciate it over time.

“We always hear about increased Section 179 limits expiring, but so far, Congress has extended them every year,” says Barbara Bel, a CPA and tax partner in the New York office of O’Connor Davies, an accounting and consulting firm. Rather than recover the cost of the expenditure with tax deductions over its useful lifetime, Section 179 provides an opportunity to expense the entire amount in the year of purchase. “If your business will be profitable in 2013, and you’re thinking about making a large purchase anyway, you might look at this as an option. Generally, you cannot take this deduction if it puts your business into a loss situation.”

For 2013, the deduction cannot exceed $500,000, with a maximum purchase amount of qualifying property of $2 million before the deduction to your company begins to be reduced. The deduction is set to revert to $25,000 in 2014 unless the more generous deduction threshold is extended. “This might apply to someone like a restaurant owner who is looking to buy a second restaurant and will need to outfit it with a lot of expensive equipment,” Cox says.

And take advantage of bonus depreciation. This is another tax provision that is perennially on the chopping block. Also tied to the stimulus provisions enacted during the recession, a one-time bonus depreciation of 50 percent is available in 2013. Unlike the Section 179 deduction, the bonus depreciation can only be taken on new equipment and it can be taken by businesses that have net operating losses in 2013. Certain states, including New York, do not allow for this bonus depreciation, Bel says. “That’s another reason to consider the Section 179 deduction.”

Every year, multiple tax breaks, including the two I’ve described above, are set to expire on Dec. 31 unless Congress extends them. While it’s difficult to know whether those breaks will be extended retroactively in 2014, being aware of these tax provisions may help you with purchasing decisions, Cox says.

By Karen E. Klein for Bloomberg BusinessWeek

Published: October 31, 2013

NFL Players versus the IRS

Professional athletes get a lot of glory, not to mention salaries that range from healthy to obscene, and all for doing what they love. It's one thing to envy their wealth, but when it comes time to file taxes, be glad you're not one of them.
 
Pro athletes are the guys who put the gleam in the eyes of tax authorities everywhere. Unlike a business person who can slip unnoticed into a state, do a deal, and slip out again, the athlete's work schedule is on the nightly news. You can bet when the NFL comes to town, the local taxmen hear the cha-ching of new tax revenue.
 
Thanks to the jock tax, an NFL player can easily file a bumper crop of tax returns before he's through. The average salary of NFL players this year is close to $2 million. With thirty-two teams and up to fifty-three players (on game day), the taxable income adds up pretty quickly.
 
State Tax, City Tax, and Elsewhere

Twenty-two states and the District of Columbia have NFL teams, eighteen of which charge state income taxes. Then there are nine cities that charge taxes of their own. No player will file the maximum number of returns since none of them will play in every state. Even so, a guy who lives in one state (with a state income tax) and plays for a team in another state, can easily end up filing one federal return, a stack of state returns, plus several city returns.
 
This year, two NFL games were played in London, where the top tax rate is 45 percent. Players will receive a foreign tax credit against the amount paid in the United Kingdom, but only up to the top tax rate in the United States, which is 39.6 percent. One of the teams that traveled to England to play against the Jaguars was California's San Francisco 49ers. California has the dubious distinction of charging the highest personal income tax rate, now 13.3 percent. This means whatever salaries the 49ers earn will be reduced by roughly 60 percent in combined taxes (45 percent to the United Kingdom, 13.3 percent to the state of California, and 1.45 percent federal Medicare tax). Ouch!
 
Jock Tax Explained

The jock tax is calculated by the number of "duty days" a player spends in a game function, such as practice, training, playing, or meeting, beginning with spring training and ending on the last day of the season, including playoffs. Even an injured player who travels with the team has to pay jock tax, whether he practices with the team or not.

Generally jock tax is determined this way. Let's say a quarterback earns the average of $3.84 million in 2013 and is deemed to have worked 200 to 210 duty days over the course of the year, not counting the playoffs. His salary will be attributed to each state by the number of days worked there. At tax time, therefore, each state gets its share of his tax liability. You can see why these states love the jock tax. Not only do the games themselves bring revenue, but the visiting players spend their own money while they're there and, on top of that, they owe taxes for the privilege of playing in those states and also in certain cities. It's a sweet deal . . . unless you're the taxpayer.
 
Tennessee doesn't have state income tax, but it has what's known as a "privilege tax," which is a flat rate of $2,500 per game charged to professional athletes who play in Tennessee (regardless of income, up to three games for a maximum of $7,500 per year). NFL players, however, aren't charged this privilege tax on NFL income, whether they're Tennessee residents or visiting teams.
 
California

In California, which has three NFL teams – the San Diego Chargers, the San Francisco 49ers, and the Oakland Raiders – duty days and taxable income add up fast.
 
In 2010 alone (the last year for which figures are available from the California Franchise Tax Board), NFL players who were California residents paid more than $24 million to their own state tax coffers. And visiting NFL players paid in close to another $16.4 million in jock tax.
 
If you consider all professional sports – and California is a haven for pro sports – in the same year, the state tax authorities collected a total of $171.7 million in tax revenue, more than $70 million of which was attributable to jock tax from visiting athletes. Mind you, that was prior to the recent round of tax hikes in the Golden State. In fall of 2012, California's highest state income tax rate was raised to 13.3 percent, retroactive to the beginning of the year.
 
Of course, not every state followed California's policy of raising personal taxes. Wisconsin, for example, dropped its top tax rate from 7.75 percent to 7.65 percent for 2013. That's a sweet deal for Green Bay Packer quarterback Aaron Rodgers. With total compensation from the Packers of $40 million in 2013, the tax rate reduction will save him a cool $40,000 in state tax, without lifting a finger.
 
Tax Authorities See Stars

With states and municipalities all over the country seeing their budgets go from black to red, you can bet the tax authorities are going to go after easy targets like pro athletes. For most of these sports stars, that means a stack of tax returns that's not for the fainthearted and definitely not for the novice.
 
CPA Robert A. Raiola sees it this way: "Players don't always know which states they have to file in and which they don't. They may not understand the credits they're entitled to, depending on where they reside and what reciprocity laws are in force." Raiola heads the Sports & Entertainment Group for the New Jersey–based accounting firm of Fazio, Mannuzza, Roche, Tankel, LaPilusa, LLC. "Figuring out the jock tax is a puzzle that needs to be assembled by a professional. Otherwise, taxes may be overpaid or overlooked and credits may be lost," he added.
 
Regardless, it's unlikely that anyone is going to shed a tear for the plight of the pro athlete with a multimillion-dollar contract and the potential to make much more in endorsements and other fees. But maybe we can at least have a little sympathy on April 15 for the guy who's up to his ears in tax returns.

By Teresa Ambord for AccountingWEB

Published: October 30, 2013

Are You Paying More Than Your Parents?

It seems like the price of things goes in one direction only: up.

It's true that sticker prices usually rise. But in relative terms, you could actually be paying a lot less than your parents did a generation ago.

For example, the price of milk has increased at a pace that's 9% slower than the overall level of inflation since 1983, according to the Bureau of Labor Statistics.

Meanwhile, some other things will cost you a lot more than the previous generation paid. Since 1983, a gallon of gas has risen 30% relative to everything else.

So what things do you pay relatively more for now than your parents did, and what things cost relatively less?

"Stuff" Is Getting Cheaper

The price of manufactured goods is way down. Televisions are now 98% cheaper than they were in 1983, according to the Consumer Price Index.

The index accounts for advances in technology. That 98% drop means a TV that costs $100 in 1983 -- with its dial controls and antenna -- would be worth about $2 today.

Toys are another example. The price of toys has fallen 78% compared to the overall level of inflation in the last 30 years. And clothing has fallen by 46%.

"We've experienced the 'miracle of manufacturing' over the last 50-60 years," said Mark Perry, an economist at the University of Michigan Flint School of Business. "Anything that is manufactured has become cheaper and cheaper over time."

It's easy to attribute the decline in price for manufactured goods to outsourcing and rise of China's economy, but that's only part of the story.

Other advances in manufacturing include better supply chain management and, especially, automation. The manufacturing sector is currently going through what agriculture went through at the beginning of the last century. At the time, tractors and harvesters replaced human labor on the farms, vastly increasing the amount of food that could be produced and sharply lowering food prices.

The average family now spends less than 20% of their income on food and manufactured goods, according to Perry. That's down from over 40% in the late 1940s.

Perry expects these advances to continue, citing the advent of 3D printing and other technologies, and said the quality of manufactured goods should continue rising while the prices fall even further.

Services Are Getting Pricier

What hasn't experienced a full on revolution is the services economy. As such, prices for services and specialty goods have soared.

The cost of college tuition has surged 227% over the rate of inflation since 1983, according to BLS. A hospital stay is up 197%, while prescription drugs are 89% more expensive. And housing costs are more expensive too -- up 14% from 1983.

What's happened is the demand for these things has grown substantially as people got richer, said Douglas Irwin, an economics professor at Dartmouth College. But advances in productivity -- the ability to churn out ever greater numbers for a cheaper price -- hasn't kept up.

It's possible that as the labor force moves from the factory floor to what Google Chairman Eric Schmidt calls the "creative and caring economy," there could be big gains in productivity, but economists have a hard time seeing it.

"It's hard to shift the supply curve," said Irwin. It's just not that easy to automate a college lecture, or a yoga class, or a visit to the doctor.

By Steve Hargreaves for @CNNMoney

Published: October 28, 2013

AICPA Deals with Hectic Year of Tax Challenges

The American Institute of CPAs has faced a hectic year dealing with problems like the last-minute fiscal cliff deal that delayed tax season, along with the after-effects of Superstorm Sandy and the impact of changes at the Internal Revenue Service that made life difficult for many tax practitioners.

Jina Etienne, director of taxation, member service and tax ethics at the AICPA, addressed a number of the AICPA’s concerns during a wide-ranging keynote speech on the final day of Accounting Today’s Growth & Profitability Summit in Orlando, Fla., on Tuesday. She noted that Superstorm Sandy struck during last year’s Growth & Profitability Summit, and then the country faced the fiscal cliff, deficit and debt ceiling talks, and the recent government shutdown.

The AICPA also had a busy season testifying before Congress this past year, first about the fiscal cliff and its impact on the upcoming tax session. “There was a storm last fall of tax law changes,” said Etienne. “I thought no matter what, they'll get it done by the end of the year. But when did they pass the law? On January 2.”

The certainty about areas such as the alternative minimum tax and the post-Bush tax rates were both good news and bad news. The fiscal cliff deal led to a severely compressed tax season, and Etienne pointed out that seven of the forms needed by many tax practitioners weren't even available from the IRS until March. She encouraged practitioners whose clients’ taxes were affected by the delay to file Notice 2013-24 with the IRS to get late-payment penalty relief.

Etienne noted that the AICPA is developing proposals for the IRS to streamline and harmonize information reporting systems, particularly with a view to the due dates of 1099, W2 and other forms, to avoid similarly compressed tax seasons. With so many businesses filing such information forms relatively late in tax season, it puts more pressure on practitioners and leads to late tax filings.

The AICPA also made progress on developing its own Financial Reporting Framework for Small and Medium-sized Entities, or FRF for SMEs, Etienne pointed out. She emphasized that it is not the same as the work of the Private Company Council established by the Financial Accounting Foundation and the Financial Accounting Standards Board. The main objective is for a business to be able to use FRF for SMEs to report on operational performance, “what you own and what you owe,” Etienne noted. It functions as a non-GAAP Other Comprehensive Basis of Accounting, or OCBOA. The framework was vetted using CPAs and AICPA staff before rolling it out, Etienne added. In addition, the AICPA has recently developed an online toolkit for FRF for SMEs for CPAs that can be downloaded from the AICPA’s Web site.

The IRS shut down some of its most popular e-services this year, Etienne noted, which led to lots of calls to the AICPA asking what happened. The AICPA is asking CPAs to send in any problems they experience with the IRS such as the missing e-services and expanded waiting times, to a section of its own Web site, and it will report on them to the IRS to see if it can do something about reopening the affected services or addressing other problems.

Etienne cautioned that with the recent government shutdown, the IRS is still dealing with a backlog of problems leading to expanded IRS wait times, so CPAs should be careful to distinguish those types of recent issues from earlier delays and glitches.

The AICPA has also been doing some surveys of trends in the accounting profession, including succession planning. The AICPA found that while Baby Boomers are predominantly leading firms right now, Generation X will be taking over from them soon. The Millenials are also looking for positions at firms as more members of Gen Y join the profession. The AICPA found that 46 percent of firms have a formal succession plan, up from 35 percent in 2008.

The AICPA has seen demand for skills from younger people such as helping clients manage data. “We need to be helping our clients with data, harnessing the data and providing intelligence,” said Etienne. “CPAs have a skill set that helps them deal with that, to provide a consulting service from their practices.”

By Michael Cohn for AccountingToday

Published: October 25, 2013

The Best Tax Moves for Fall

Fall is the best time for last-minute tax planning because you still have a few months to meet end-of-the-year deadlines that can minimize your tax bill in the spring. Follow these five tips and you might even get some money back from Uncle Sam.

Bulk up your retirement contributions.

You can contribute up to $17,500 for your 401(k) in 2013. If you're age 50 or over, the limit is $23,000. If you're nowhere close to that amount, you can ramp up your contributions to take advantage of tax-advantaged individual retirement accounts. The same goes for Roth IRAs and traditional IRAs. If you want to max out your retirement savings, now is the time to start putting more money away. (You can contribute up to the 2013 limit until April 15, 2014.)

Investments in certain energy-efficient products, water heaters, central air conditions, new windows and doors, and insulation could make you eligible for tax credits this year. A new water heater or air conditioner with an Energy Star label, for example, may result in a $300 credit, while window credits are available up to $200. If you install a solar energy system (or other type of renewable energy system), you could be eligible for a tax credit of up to 30 percent of the cost. Details about these types of tax credits are available at www.energysavers.gov.

Delay deductions.

Because tax experts say tax increases are likely in the future, they recommend saving big deductions until next year, if possible. So if you're planning to make a sizable charitable contribution, for example, you might want to hold off for the sake of your tax bill. Similarly, if you have flexibility over when you receive income, you might want to put as much in the bank before Dec. 31 so it counts as income in 2013 - before any potential tax increases.

Check that you've been paying enough taxes.

If you received income beyond your usual paycheck because of freelance work or income from a side business, then you might end up owing a lot of money in April. You're also at greater risk if you got married this year and earn a relatively high salary similar to your spouse. That's because of the so-called marriage penalty, which often means dual, high-earning couples owe more when they file taxes jointly than they did when they were single.

As a result of the Internal Revenue Services' recent announcement that it will now recognize same-sex marriages, even if couples live in a state that does not recognize their marriage, gay couples that include two high-earning spouses might also face the marriage tax. Likewise, they can start preparing for it by paying more to Uncle Sam throughout the year by lowering their tax deductions on their W-4 form. Other financial moves, such as buying a home, donating to charity or putting more money into retirement accounts can also help reduce your tax burden.

People who earn significant chunks of their salary in cash also need to make sure they're saving enough of that cash to pay the appropriate amount of taxes in the spring. The IRS keeps a close eye on people in professions that pay in cash, like waiters, by using formulas that estimate expected income. If you report less, you could be flagged for an audit - not something you want.

A big tax bill can not only shock your budget - you might owe the government additional fines, too. Check to see if you've been paying the correct amount of taxes by reviewing your payroll stubs or other documentation. If you're going to owe money, prepare by starting to save now.

Keep track of important receipts.

If you run your own business, are self-employed or spend money on education to boost your career, then many of your expenses may be tax deductible. Make sure you put your receipts in an easy-to-find filing system so you can claim them when you file your taxes next year. If your employer offers flexible spending accounts for health care costs, you also want to make sure to keep eligible receipts for doctor visits, pharmaceuticals and other health-related expenses. You often have until April 15 to file those claims.

Talking taxes might not be as fun as picking out your Halloween costume, but it can get you a much bigger treat in the spring.

By Kimberly Palmer for U.S. News and World Report

Published: October 24, 2013

2014 Tax Season to Start Later Following Government Closure

The Internal Revenue Service today announced a delay of approximately one to two weeks to the start of the 2014 filing season to allow adequate time to program and test tax processing systems following the 16-day federal government closure.

The IRS is exploring options to shorten the expected delay and will announce a final decision on the start of the 2014 filing season in December, Acting IRS Commissioner Danny Werfel said. The original start date of the 2014 filing season was Jan. 21, and with a one- to two-week delay, the IRS would start accepting and processing 2013 individual tax returns no earlier than Jan. 28 and no later than Feb. 4.

The government closure came during the peak period for preparing IRS systems for the 2014 filing season. Programming, testing and deployment of more than 50 IRS systems is needed to handle processing of nearly 150 million tax returns. Updating these core systems is a complex, year-round process with the majority of the work beginning in the fall of each year.

About 90 percent of IRS operations were closed during the shutdown, with some major workstreams closed entirely during this period, putting the IRS nearly three weeks behind its tight timetable for being ready to start the 2014 filing season. There are additional training, programming and testing demands on IRS systems this year in order to provide additional refund fraud and identity theft detection and prevention.

“Readying our systems to handle the tax season is an intricate, detailed process, and we must take the time to get it right,” Werfel said. “The adjustment to the start of the filing season provides us the necessary time to program, test and validate our systems so that we can provide a smooth filing and refund process for the nation’s taxpayers. We want the public and tax professionals to know about the delay well in advance so they can prepare for a later start of the filing season.”

The IRS will not process paper tax returns before the start date, which will be announced in December. There is no advantage to filing on paper before the opening date, and taxpayers will receive their tax refunds much faster by using e-file with direct deposit. The April 15 tax deadline is set by statute and will remain in place. However, the IRS reminds taxpayers that anyone can request an automatic six-month extension to file their tax return. The request is easily done with Form 4868, which can be filed electronically or on paper.

IRS processes, applications and databases must be updated annually to reflect tax law updates, business process changes, and programming updates in time for the start of the filing season.

The IRS continues resuming and assessing operations following the 16-day closure. The IRS is seeing heavy demand on its toll-free telephone lines, walk-in sites and other services from taxpayers and tax practitioners.

During the closure, the IRS received 400,000 pieces of correspondence, on top of the 1 million items already being processed before the shutdown.

The IRS encourages taxpayers to wait to call or visit if their issue is not urgent, and to continue to use automated applications on IRS.gov whenever possible.

“In the days ahead, we will continue assessing the impact of the shutdown on IRS operations, and we will do everything we can to work through the backlog and pent-up demand,” Werfel said. “We greatly appreciate the patience of taxpayers and the tax professional community during this period.”

Published: October 23, 2013

IRS and Tax Court Reopen After Government Shutdown

After President Barack Obama signed the bill reopening the federal government and raising the debt limit, the IRS posted a notice on its website Thursday morning notifying workers to report to work no later than four hours after “the start of their tour of duty that begins at 6 a.m. or later local time on Oct. 17.” Employees with approved telecommuting schedules can work at home; all others must take leave if they cannot return to work.

The IRS also announced on Thursday that 2014 renewals of preparer tax identification numbers (PTINs) are being delayed because of the government shutdown. The IRS will notify current PTIN holders when the renewal season will start.

Approximately 90% of IRS employees were furloughed during the 16-day government shutdown. As a result, many IRS functions were not operating, including the issuing of refunds and liens and levies. All taxpayer services, including telephone assistance and local IRS offices, were closed, and the Taxpayer Advocate Service shut down. Also, no IRS guidance was issued during the shutdown.

The Tax Court, which was the only federal court that closed during the government shutdown, reopened for business on Thursday for its regular business hours: 8 a.m. to 4:30 p.m. Unlike the IRS, the court did not give its employees a four-hour reprieve. The court began accepting hand and electronically filed documents again on Thursday and began sending out documents itself.

Cases that had been scheduled to be heard during the shutdown will be rescheduled. The court will notify the parties of the new dates and times. For cases that were scheduled to begin Oct. 21 or later, the schedules are unchanged unless the parties are notified otherwise. For other court-scheduled due dates, the court will publish a follow-up notice describing grace periods for filings that have been affected by the shutdown.

The court reiterated its inability to defer filing deadlines that are set by statute, such as the Sec. 6213(a) deadline to file a tax court petition to redetermine a deficiency within 90 days of receiving the deficiency notice and the 30-day deadline for filing a petition challenging a lien or levy under Sec. 6330(d)(1). During the shutdown, petitions and other documents could be filed only via U.S. mail or private delivery services. Taxpayers could rely on the Sec. 7502(a) rule that a timely mailed petition is treated as timely filed, as of the date of the U.S. postal service postmark on the envelope in which the petition was mailed. Under Sec. 7502(f), petitions sent using designated private delivery services get the benefit of this rule. Now that the Tax Court has reopened, taxpayers whose filing deadlines fall on Oct. 17 or later may resume electronic filing or hand-delivery, as well as continue to mail the petitions.

By Sally P. Schreiber, J.D. for the Journal of Accountancy

Published: October 21, 2013

Child Benefit if Your Child is 16 or Over

If you have a child aged 16, check whether you are still receiving all the child benefit and child tax credits you expect to.

Child benefit and child tax credit both stop automatically on 31st August on or after the child’s 16th birthday, but where the child is in approved education or training, the parent who claims the child benefit is entitled to extend that claim until the child reaches their 20th birthday. ‘Approved education’ means at least 12 hours of supervised study per week, and the training can include an apprenticeship.

From September 2013 children who live in England (the rules are different in Wales, Northern Ireland and Scotland) are required by law to remain in education or training until the end of the academic year in which they turn 17. So there are a lot of families out there with 16 years olds who are in approved education, but who have lost their child benefit.

If you are one of those parents, and you want to continue to receive the child benefit, you need to contact the Child Benefit office at HMRC, to inform them that your child is still in approved education or training.

Similar rules apply for child tax credit. In that case the claimant must contact the Tax Credit office.

Although child benefit and child tax credit are both administered by HMRC, you need to inform them twice, as one section of HMRC cannot pass the relevant information to another part!

You may prefer not to receive the child benefit if you or your partner/spouse earns £50,000 or more, because in that case all or part of the child benefit paid to your family is clawed-back through the operation of the high income child benefit charge (HICBC). HMRC has written to some of the parents who may be due to pay the HICBC, but not all, as they cannot correctly identify every person who may be liable to pay the charge.

If you are the highest earner in a family that has claimed child benefit since 7 January 2013, and your total income is £50,000 or more, you need to declare that child benefit on your tax return form. If you don’t normally complete a self-assessment tax return form, you need to ask HMRC to set you up on the self-assessment tax return system. We can help you with that, but don’t delay, as if you fail to complete the tax return form on time there will be automatic penalties to pay.

By Chris Thomas for One Accounting Blog

Published: October 15, 2013

Shutdown Or No, IRS Filing Deadline Remains October 15

Yes, the Internal Revenue Service is (mostly) shut down right now. But that doesn’t mean that you get a break: the 12 million taxpayers who filed for extension during tax season must still file and pay any balance due on Tuesday, October 15, 2013.

That deadline applies for all taxpayers who timely requested a six month extension of the time to file in April.

There are a few exceptions to the October 15 deadline: members of the military and others serving in Afghanistan or other combat zone localities typically have until at least 180 days after they leave the combat zone to both file returns and pay any taxes due.

Additionally, as reported earlier by Forbes, taxpayers with extensions in parts of Colorado affected by severe storms, flooding, landslides and mudslides have until December 2, 2013, to file and pay.

For faster processing, the IRS encourages taxpayers to file electronically. The Free File system using fillable forms is available to all taxpayers and some electronic filing options are available free of charge for taxpayers with incomes of $57,000 or less.

If you are expecting a refund, you’re out of luck for the short term: due to the shutdown, IRS is processing payments but not issuing refunds. The “Where’s My Refund?” tool will not give you a firm date for your refund until after the shutdown: the IRS advises you to check “Where’s My Refund?” TWO days after the government reopens for updated information.

By Kelly Phillips Erb for Forbes

Published: October 14, 2013

Got Severance Pay? Supreme Court Will Decide How It's Taxed

If your employer pays you severance when you terminate employment or later because you sue, is it for “rendering services?” Clearly it is pay and is subject to  income tax and withholding. But as you aren’t actually rendering services for it, the question is whether it is also subject to payroll tax.

Predictably, the IRS says it is, but not everyone agrees. Tax rates are high, so significant money can turn on this issue. FICA consists of Social Security tax and Medicare tax.

Employers pay Social Security tax of 6.2% and employees also pay 6.2%, or 12.4% total. Add to that the 1.45% employers pay for Medicare and another 1.45% for the employee. With over 15% of pay at stake, employers and employees both care whether severance pay is subject to FICA.

There are two conflicting cases, United States v. Quality Stores, Inc. and CSX Corp. v. United States. Fortunately, the Supreme Court has granted certiorari and will decide once and for all. See United States v. Quality Stores, Inc.

Severance pay is sometimes defined as gap pay to cover a period after the employee finishes rendering services. The definition is important, and significant tax dollars hang in the balance. The law is strangely muddled and the IRS is pushing its agenda hard.

Severance can be paid for a variety of reasons. It may be company policy, required by state or federal law, or paid pursuant to an agreement between the company and the former employee. It could be paid willingly or only after a lawsuit.

And the courts have reached differing decisions. In 2002, the Court of Federal Claims considered severance pay made in downsizing programs implemented by CSX. The court ruled it was not wages under the Social Security (FICA) tax. See CSX Corp. v. United States, 52 Fed. Cl. 208 (Apr. 1, 2002).

In 2008, the Court of Appeals for the Federal Circuit reversed and held that the severance pay was subject to FICA after all. See CSX Corp. v. United States, 518 F.3d 1328 (Mar. 6, 2008). Then in 2012, the Court of Appeals for the Sixth Circuit reached the opposite result. Quality Stores was in a Chapter 11 bankruptcy and made severance payments to terminated employees. In United States v. Quality Stores, the Sixth Circuit said severance pay was not wages.

Quality Stores treated the payments as wages, withholding federal income and employment tax and paying it to the IRS. Later, the company claimed a refund. The Bankruptcy Court ruled the severance payments were not wages for FICA purposes. The district court affirmed and then the Sixth Circuit affirmed too. Now, the Supreme Court will decide.

Who will win, the IRS or companies and employees? The IRS thinks the Federal Circuit was correct in CSX Corp. Taxpayers, on the other hand, are generally more persuaded by the Sixth Circuit’s ruling in Quality Stores. But even before the Supreme Court decided to weigh in, the IRS has pushed its agenda.

Reports say that the IRS has suspended action on administrative refund claims totaling $127 million from approximately 800 taxpayers within the Sixth Circuit. The Sixth Circuit includes Kentucky, Michigan, Ohio, and Tennessee. More troubling still, the IRS has been disallowing refund claims filed by employers elsewhere.

The IRS hopes the Supreme Court will reverse Quality Stores, making CSX Corp. the law of the land. Meanwhile, there can be important statutes of limitation running. If you are impacted by this and the dollars are significant, get some advice to protect your rights.

By Robert W. Wood for Forbes

Published: October 11, 2013

How Poor Financial Planning Can Doom Your Small Business

There’s an old adage is that good news doesn’t sell newspapers. And whether or not it’s true, it’s a depressing premise either way. So with that in mind, we like to occasionally highlight good news – after all, we don’t have newspapers to sell – because despite what the media may tell you, the country is full of small business success stories.

Take this article in the New York Times, for example. It looks at the “Berkeley of the East,” otherwise known as Ithaca, NY. The small college town is experiencing tremendous growth thanks to its innovative and reciprocal relationship with local colleges, specifically Cornell University. The premise is pretty simple. The universities crank out thousands of young, energetic, and brilliant graduates while the town breaks down barriers for entry for small businesses. The net result: dozens upon dozens of boutique firms, ranging from retailers to dot.coms, that can enjoy a steady stream of local talent as well as an embedded customer base.

Again, this is all good news. But let’s put ourselves in the shoes of these small businesses. Let’s imagine a dot.com or app designer who launched a three-person firm right out of college. They’re renting a building a few miles from campus. They’re all in their early 20′s with computer programming degrees, a fiery work ethic, and a passion for designing applications. There’s just one problem: no one has extensive financial management experience. No one took accounting courses. No one knows the basics of economic modeling or financial planning. And as a result, these weaknesses can have a tangible and costly effect on business growth. Let’s look at some examples as to how this plays out.

At the most basic level, these businesses – again, due to poor financial planning – may simply lack the cash to maintain daily operations. And low levels of liquidity will impede growth. After all, people need to be paid, whether it’s the utility company, the landlord, or partners. As a result, start-ups may want to consider outsourcing financial management to help maximize cash reserves.

Of course, the main reason why small business lack cash on hand is that they spend too much. This problem is particularly acute with start-ups who embrace the renegade culture of Silicon Valley. Think of the famous scene in the movie “The Social Network” where coders are working through the night in an enormous mansion while college kids are swimming in the in-ground pool. Those guys clearly didn’t spend too much time worrying about the bottom line.

An outsourced financial planner can help small businesses control spending by implementing purchasing policies that allow them to get the “most bang” for their vendor-buck. Planners can also build greater transparency into the procurement process, outlining strict budgets, and creating uniform policies so everyone is playing by the same rules.

Of course, these are just a few of the roadblocks small businesses can run into from a financial management perspective (we’ll look at more in future posts.) Until then, we’ll continue to embrace pieces of good news across the small business economy. Just make sure poor financial management doesn’t ruin your small business’s happy ending.

by Reckenen Accountants & Consultants

Published: October 10, 2013

IRS Clarifies Status of Liens and Levies During Shutdown

The IRS updated its website to notify taxpayers that, during the current government shutdown, the IRS is not sending out liens or levies either generated automatically or sent by personnel. Taxpayers may still receive notices of liens or levies with October mailing dates, the IRS says, but these notices were printed before the shutdown. The IRS often prints these notices with future dates to allow them sufficient time to reach taxpayers.

In addition, IRS systems are still automatically sending out notices warning taxpayers they could be subject to a lien or levy in the future; however, the IRS notes that these are not actual liens or levies.

The IRS also announced that criminal enforcement continues as usual during the shutdown, similar to other areas of the federal government. Civil enforcement, such as seizures, is extremely limited, and will occur only when necessary to protect the government’s interest. This could happen, for example, if the expiration of the statute of limitation on collection actions is imminent.     

The IRS also used its website to remind taxpayers that the October 15 due date for 2012 individual tax returns on extension has not been extended, despite the shutdown. The IRS says more than 12 million taxpayers filed for extensions this year.

Although the IRS shutdown contingency plan was supposed to cover only the first five days of the shutdown and was due to be updated on Monday, Oct. 7, as of Wednesday the IRS had not issued any further guidance.

By Sally P. Schreiber, J.D. for the Journal of Accountancy

Published: October 8, 2013

New $100 Bill to Debut Tuesday

The new $100 bill will make its debut Tuesday, several years later than originally planned.

The bill was originally due to reach banks in 2011. But three years ago the Federal Reserve announced that a problem with the currency's new security measures was causing the bills to crease during printing, which left blank spaces on the bills.

The bill's belated debut has nothing to do with the government shutdown, since the Fed's budget is not included in the current congressional appropriations stalemate.

The new bill has several features designed to make it easier for the public to authenticate but more difficult for counterfeiters to replicate. Those measures include a blue, 3-D security ribbon, as well as color-shifting ink that changes from copper to green when the note is tilted. That ink can be found on a large "100" on the back of the bill, on one of the "100's" on the front, and on a new image of an ink well that's also on the front.

The image of Benjamin Franklin will be the same as on the current bill, but like all the other newly designed currencies, it will no longer be surrounded by an dark oval. Except for the $1 and $2 bill, all U.S. paper currency has been redesigned in the last 10 years to combat counterfeiting.

The $100 bill is actually the second most common bill in circulation, behind only the $1 bill. It's actually slightly more common than the $20 bill.

The most recent statistics from the Fed show that as of Dec. 31, there were 10.3 billion $1 bills, in circulation, 8.6 billion $100 bills and 7.4 billion $20 bills, followed by $5's, $10's, $50's and $2's. A little more than 75% of the more than $1 trillion of currency in circulation is in $100 bills. Much of it is held outside the United States.

The current design for the $100, in circulation since 1996, as well as all previous designs, will still be legal tender, and will likely still be given out to customers by banks for some time to come. But the when banks request $100 bills from the Federal Reserve, they'll only receive the new design starting Tuesday.

By Chris Isidore for @CNNMoney

Published: October 7, 2013

The Shutdown, The IRS and Your Taxes

If you were thinking that the government shutdown meant you would get out of paying your taxes, think again.

While only 9% of Internal Revenue Service employees - roughly 8,750 out of nearly 95,000 workers - are currently working, the underlying tax law remains in effect.

That means "all taxpayers should continue to meet their tax obligations," according to the IRS's website.

Need an IRS employee to answer a question, though? "That's where there will be challenges," said Edward Karl, a certified public accountant and vice president of taxation for the American Institute of CPAs. Not only are customer service agents unavailable, but the Taxpayer Advocate Service, which fields consumer complaints, is also closed.

Here are some other things you need to know about your taxes and the IRS during the shutdown:

Will I still have to meet the October 15 deadline?

Yes. Regular filing deadlines will remain in effect during the shutdown. So anyone who requested an extension on their taxes last spring should still file their returns by October 15.

Around 6 million individual returns are expected. "A lot of them are finished up in these last couple of weeks," Karl said.

The IRS is urging individuals and businesses to file their tax returns electronically because those returns are usually processed automatically. Paper returns will not be processed until full government operations resume. Yet, they still must be postmarked by October 15 to be considered filed on time.

That means I'll get the tax refund I've been waiting for, right?


Wrong. While tax returns and payments are still expected to be filed during the shutdown, refunds won't be issued until operations return to normal, the IRS said.

What if I need help with my taxes?

Sorry. Live telephone customer service agents are among the tens of thousands of IRS workers that have been furloughed. The IRS's walk-in taxpayer assistance centers are also closed, as well as the Taxpayer Advocate Service, which fields consumers complaints and offers free tax help.

You're not entirely out of luck, though. The IRS's automated assistance line is still open at (800) 829-1040, and private tax preparers should be able to help you navigate the shutdown. You can also try the AARP Foundation's Tax-Aide program or one of the low-income taxpayer clinics.

Will my tax audit be postponed?

Those who were about to get audited, can breathe a sigh of relief (for now). Tax audits weren't considered "essential" services so they will be suspended until full operations return, according to the IRS contingency plan.

By Melanie Hicken for @CNNMoney

Published: October 4, 2013

Don’t Know Which Entity to Select for Your New Corporation?

Need Guidance on Selecting an Entity Type that Will Work Both Short and Long Term?

Want to Be Sure Your New Corporation Pays Its Lowest Possible Tax?

Understanding the nuances of being a C Corporation versus being an S Corporation is a key component of making wise and informed decisions about which entity type is best for your business. Whether you are incorporating in Georgia or elsewhere, working with someone who is well informed about local and state laws is your best defense to getting started off on the right foot. While there are many differences between entity types including set-up and rules of operation, there are perhaps no greater concern than what your overall tax bill will ultimately be. And this will vary predominantly based upon the entity type that you chose.

S Corporations are “flow through entities” and as such pay no income taxes upon preparation of the corporate income tax return. Rather these profits “flow down to” the respective owners returns where each owner pays their portion of income taxes due on their respective pro rata profits and other “tax preference” items. Each owner, as a part of the Corporate Return/Form 1120S, are issued a Form K-1 whereby each owners pro rata share of income is reflected and communicated for inclusion with each respective owners personal income tax return.

The Rules of Qualification to be an S Corporation are:
-One class of stock.
-A calendar year-end.
-Shareholders to be resident aliens or U.S. citizens.
-No more than 100 shareholders.

For the most part the basic rules of being an S Corporation have remain unchanged for approximately sixty years.

By law both C Corporations and S Corporations are required to have a Board of Director’s, and their attendant meetings and to elect elected Officers. In many small companies these different capacities are held by the same individual, the owner.

An S Corporations overall tax bill will most always over time be less than an C Corporation because by tax law all of the net earnings out of an C Corporation are subject to being taxed first at the corporate level and then later again at the personal level, when profits are paid out to Corporation’s owners as either salary or dividends. Though a C Corporation typically might pay less taxes the first year, as a result of lower corporate income tax versus personal income tax rates, this advantage quickly disappears as owners take out the profits in subsequent years resulting in the “double taxation” effect of C Corporations. Accordingly a C Corporation is exposed to double taxation that S Corporations and other “flow through” entities are not.

C Corporations are often options when:
-Different classes of stock are needed.
-There are more than 100 shareholders.
-Shareholders are not U.S. citizens or resident aliens.
-A publicly traded company.

There are other entity types such as an LLC, LLP, Partnership or even a proprietorship that should be carefully evaluated in starting your new business and its attendant tax structure. Choosing the right entity type will have many other significant tax, legal, retirement and financial issues as well. Consulting with your trusted CPA and adviser is your best first step to making a wise and informed decision.

Via Alltop Accounting

Published: October 3, 2013

Federal Government Shutdown

There’s an old adage that “there’s nothing new under the sun” and so it is inside the Beltway.  As you are well aware, the federal government suspended most of its operations on Oct. 1 after Congress failed to pass a bill to extend funding to mid-November, the first such shutdown in 17 years. Strong political discourse is alive and well in America and it is part of the price we pay for democracy.  It was that way in 1996 when a shutdown lasted three weeks. Hopefully a compromise can be reached quicker this time around.

On the tax front, with more than 85,000 Internal Revenue Service workers now furloughed until Congress reauthorizes spending, many non-essential IRS functions have shut down, including all taxpayer services, as well as examinations. The closure of taxpayer and practitioner hotlines is particularly challenging for those individuals who must file a Form 1040 by Oct. 15 and need to contact the IRS. Nevertheless, no filing deadlines are postponed and returns must be filed. We have urged the IRS to consider the substantial burden imposed on taxpayers (and practitioners) by the inability to communicate with and obtain information from the IRS.
The AICPA Tax Section created a Questions and Answers page to help practitioners with related challenges in filing returns and representing clients (e.g., collections, notices, ongoing examinations, etc.). According to the IRS’s contingency plan, the following activities will cease during the shutdown:

  • Refunds and the “Where’s My Refund?” service
  • Examinations
  • Operation of taxpayer services (including those related to identity theft) and Taxpayer Assistance Centers
  • Operation of the Practitioner Priority Service
  • Processing of paper returns that do not require remittance

Also, the Tax Court announced that, unlike other federal courts, it is stopping its operations during the federal government shutdown. The plan does authorize several IRS functions to continue, including electronic returns processing, e-Services, criminal law enforcement, and the protection of bankruptcy, lien and seizure cases.

By Edward Karl, CPA for AICPA Insights

Published: October 2, 2013

IRS Releases Government Shutdown Contingency Plan

The IRS on Friday released its contingency plan for what it will do if the federal government shuts down Oct. 1. The 61-page plan covers preparation for a shutdown, implementation, and reactivation of functions, but it anticipates a government shutdown of no more than five days. A longer shutdown would require a reassessment by the IRS deputy commissioner for operations support. With the Oct. 15 deadline for individual returns on extension quickly approaching, most tax return processing would continue during the shutdown.

Certain IRS activities would continue during a government shutdown, as allowed by the Antideficiency Act, P.L. 97-258. These include activities funded with appropriations that do not expire at the end of the government’s fiscal year, functions that are authorized by statute to occur in advance of appropriations, and certain other activities that are required by duties imposed on the IRS. The IRS gives as an example of the latter category the design and printing of next year’s tax forms and the completing and testing of next filing season’s programs.

Activities necessary for protection of life and property are also excepted from the shutdown, and the IRS estimates that of its 8,752 excepted employees, 8,273 fall in the category of being engaged in protection of life or property (this includes law enforcement activities). The IRS includes in this category processing of tax returns, protection of lien and seizure cases, maintaining building security and facilities personnel, and criminal law enforcement operations.

Nonexcepted functions, which would shut down, include IRS headquarters and administrative functions, audits and examinations, processing of paper returns that do not include remittances, legal counsel, and taxpayer services. The IRS expects 90% of its employees (almost 86,000) to be furloughed during a government shutdown.

When the government restarts, the furloughed IRS employees will be expected to return to work—no later than four hours after the IRS notifies them to return, if the notification comes during a workday.

By Alistair M. Nevius, J.D. for the Journal of Accountancy

Published: September 30, 2013

Feds Bust Up Massive Refund Fraud Ring

A massive case of organized tax and bank fraud culminated today with the unsealing of four federal grand jury indictments accusing 55 people of participating in one or more illicit schemes, including the theft of more than 2,000 identities that were used to claim more than 420 million in bogus IRS tax refunds. As a result the IRS paid out more than $7 million, even issuing payments in the names of dead people.

The charges are the result of a two-year-long investigation by federal and local authorities in San Diego and Los Angeles. Twenty-two defendants were arrested this morning during sweeps in Los Angeles, San Diego, Las Vegas and Maryland. Hundreds of federal, state, and local law enforcement officers participated in the takedown. Thirty-three defendants remain at large, including 21 who are believed to be out of the country.

"This case is staggering in terms of the number of victims, its level of sophistication, its audacious methods and the callous disregard for victims," said U.S. Attorney Laura Duffy. "These arrests are the first strike back on behalf of taxpayers and more than 2,000 victims who now have to reclaim their good names -- a frustrating task that can take years. We will continue to make these cases a priority."

The various schemes are described in four separate indictments. The largest indictment charges 29 people and involved the alleged filing of about 2,000 fraudulent tax returns. The scheme involved the participation of scores of San Diego-based foreign nationals from former Soviet bloc countries, including Russia, Kazakhstan, and Turkmenistan, who were visiting San Diego using J-1 and F-1 visas. All of the defendants arrested in Thursday's operation are expected to make their initial appearances in federal court either today or tomorrow in the district where they were arrested.

Tax refund fraud involving the use of stolen identities has emerged as such a fast-growing crime category that it has earned an acronym, SIRF, for Stolen Identity Refund Fraud. The Department of Justice has issued a new directive to coordinate, expedite and streamline the prosecutorial efforts of the Tax Division and U.S. Attorneys' Offices nationwide.

By Roger Russell for AccountingToday

Published: September 27, 2013

How the IRS Thinks About Small Business Tax Scofflaws

There’s a story from Bloomberg BNA this week that does a good job describing the conventional wisdom on how the Internal Revenue Service thinks about policing small business owners.

The story is about an increase in criminal cases against small businesses believed to be shirking employment tax obligations. That generally means companies that fail to remit federal income, Social Security, and unemployment taxes, according to an IRS report on criminal investigations. The IRS doesn’t say how many employment tax prosecutions the agency initiated recently, but it’s a pretty tiny area: The agency’s criminal investigations unit recommended a total of 3,700 prosecutions for misdeeds of all stripes for the year ending September 2012.

Small business owners are more likely to be targeted for employment tax prosecutions because they’re more likely to trample the law, according to lawyers quoted by Bloomberg BNA. Here’s the money quote:

“We are seeing these cases in some of the smaller dollar amounts lately, and I think part of the reason why is that that’s where you sometimes have some of the more egregious conduct with these small business owners, as opposed to larger entities who for the most part are maybe going to make more of an effort to do things right,” said Sarah Wirskye of Meadows Collier Reed Cousins Crouch & Ungerman.

It’s also the prevailing view that the self-employed are more likely to be audited because they have more room to cheat on their taxes. And research from the National Taxpayer Advocate has also shown that certain types of small businesses—including construction contractors and real estate rental agents—are more likely to attract auditors’ attention.

By Patrick Clark for Bloomberg Businessweek

Published: September 26, 2013

Higher Limits for Estate Tax Credits in 2014

Starting next year, people who have done some estate planning and made the maximum tax-free transfers to their families (and those thinking about doing it) can take another crack at it. Beginning January 1st 2014, the amount folks can pass on during life (and at their death) completely free from federal estate tax will increase by an additional $90,000.

Using the Consumer Price Index data for the most recent month and the preceding 11 months, the tax experts at Research Institute of America calculated and reported increases for 2014 to a number of tax limits including the income where the various marginal tax brackets apply, the standard deduction amounts, the personal exemption amount, and a number of other items. They also calculated adjusted amounts for the various estate tax and gift tax limits that will apply in 2014.

  • Gift tax limits rise in 2013
  • 2013 tax rules than can save you money
  • Reducing taxes on IRA payouts

Here are a few of the new limits that affect tax free gifts made in 2014:

Unified estate and gift tax exclusion amount. For gifts made and estates of decedents dying in 2014, the exclusion amount will be $5,340,000 (up from $5,250,000 for gifts made and estates of decedents dying in 2013).

This means that in 2014, each person has a credit that can be used to offset the estate tax on a taxable estate of up to $5.34 million of assets. The practical application of this is that individuals can make gifts during life or transfers at death of up to this new higher limit and pay no federal estate tax. Also, new last year is that spouses may combine their unused individual credit amounts and pass on assets free of estate tax on a taxable estate of up to $10.68 million at the death of the second spouse, assuming none of these credits were used during their lifetimes.

Other estate limits that change in 2014 include:

Generation-skipping transfer (GST) tax exemption. The exemption from GST tax will be $5,340,000 for transfers in 2014 (up from $5,250,000 for transfers in 2013).

Increased annual exclusion for gifts to non-citizen spouses. For gifts made in 2014, the annual exclusion for gifts to non-citizen spouses will be $145,000 (up from $143,000 for 2013).

Foreign earned income exclusion. The foreign earned income exclusion amount increases to $99,200 in 2014 (up from $97,600 in 2013).

Gift tax annual exclusion. For gifts made in 2014, the gift tax annual exclusion will be $14,000 (same as for gifts made in 2013). Generally the amount that can be given to any individual each year that is excluded from the gift tax is $14,000 per person per year. In 2014, this amount is projected to remain at $14,000 per person as the amount that may be gifted annually free from the gift tax. Parents may also use the technique of "gift splitting" or combining gifts to a child, whereby they can each make a gift of $14,000, for a total amount of tax free gifts made of $28,000 to a single person or child each year.

In addition to the annual gifts, there are two specific types of gifts which are completely exempt and free from the gift tax. Check back in a few days when I'll write about those special tax-free gifts where no dollar limits apply.

By Ray Martin for CBS MoneyWatch

Published: September 24, 2013

The Business Traveler Tax Threat

Ever travel to New York for work, even for a day? How about to any other state?

Whenever you do, you're entering into another universe that may require you to pay tax on the income you earn while you're there.

But many business travelers and their employers aren't abiding by the rules, whether they realize it or not.

And it's easy to understand why.

Fifty states mean 50 different sets of rules.

In some states, you may be obligated to file a tax return even if you just spent a few hours there all year. Other states set minimum thresholds, based on the days you're there or how much you make during your trip.

And nine states don't impose any income tax at all. So no fear they'll hassle you.

Meanwhile, the rules for when your employer must start withholding tax from your paycheck on behalf of the state you travel to are also all over the map.

Indeed, in some states withholding rules don't square with the filing rules for the business traveler.

New York, for instance, requires that anyone who comes for business must file a nonresident return for income earned from day one. But those travelers' employers are only required to start withholding New York tax if they work in the state for at least 14 days.

Who follows the rules? Several sources told CNNMoney that there is "rampant noncompliance."

Still, the rules are "not universally ignored," said Verenda Smith, deputy director of the Federation of Tax Administrators.

Those most likely to comply are professional athletes, entertainers and big-firm lawyers and accountants.

Take Jamie Yesnowitz, a principal at tax advisory firm Grant Thornton. He gives speeches around the country about state and local taxation. In 2011, he found himself filing 11 state tax returns.

"My wife looked at me like I had two heads," Yesnowitz said.

But other types of road warriors can find themselves in a similar situation if their employer is audited or simply withholds taxes where required -- a process that, by the way, can be very costly for the company.

Vincent Cervone, a CPA in Brooklyn, said one client -- a salesman for a large company -- had to file 10 different state tax returns in addition to his home state return.

If you do end up owing tax to another state, you're allowed to take a credit for that money on your own state's return. But that still might not make you whole because of differences between state tax systems. Not to mention the extra you have to pay your tax preparer.

Companies, payroll associations and tax professionals have been calling for greater uniformity among states when it comes to business travel.

Without it, "it's a compliance nightmare," said Cara Griffith, editor-in-chief of state tax publications for Tax Analysts.

There's a bill in Congress called the Mobile Workforce Simplification Act, which would exempt most business travelers from income tax in any state not their own unless they work there at least 30 days a year. And employers wouldn't have to withhold taxes before that threshold is met.

The bill has been revised several times, primarily to accommodate New York's concerns, said Maureen Riehl, a spokesperson for the Council on State Taxation, a trade association for companies that do business across states.

But the accommodations so far still haven't brought New York on board, she said.

New York is among the most aggressive states in terms of tax collection and stands to lose the most revenue if the Mobile Workforce bill became law, multiple sources noted.

The New York State Department of Taxation and Finance did not comment for this story.

Figures on how often people get in trouble are hard to come by. States that have gone after companies, to date, have likely focused on travel by high-paid executives, Griffith said.

But going forward, states may get more active, particularly after the hit their coffers took during the recession.

"This is one area they weren't heavily auditing in the past," Griffith said. "So there's potential for revenue."

By Jeanne Sahadi for @CNNMoney

Published: September 23, 2013

Recent Tax Developments Affecting Individuals

Sec. 23: Adoption Expenses

In Field, an adoption expense credit was denied to a taxpayer who filed her return using married-filing-separate status. The taxpayer claimed that the denial of the credit was unconstitutional. The Tax Court upheld the joint filing requirement for purposes of the adoption credit as valid under the Equal Protection Clause of the Constitution. It did not matter that the taxpayer had adopted the children before she married and her husband did not adopt them. Generally, if a taxpayer is married at the end of a tax year, the credit can only be claimed if the taxpayer and his or her spouse file a joint tax return.

Sec. 68: Overall Limitation on Itemized Deductions

The American Taxpayer Relief Act of 2012 restored a limitation on itemized deductions, but with new thresholds for when the limitation applies. For 2013, the adjusted gross income (AGI) thresholds are $250,000 for single filers, $300,000 for married couples filing jointly, and $275,000 for filers using the head-of-household status. These amounts will be adjusted for inflation in subsequent years.

President Barack Obama’s fiscal year 2014 budget proposal includes an expansion of the limitation on itemized deductions for higher-income individuals. This proposal would cap the tax benefit of itemized deductions to 28% of their amount. This cap would also apply to other specified deductions (such as moving expenses), as well as certain exclusions (such as tax-exempt bond interest and employer-provided health insurance).

Sec. 104: Compensation for Injuries or Sickness

Scott involved the question of how much of a firefighter’s pension was taxable when his retirement was due to a service disability. The taxpayer was injured on the job when he had more than 36 years of service and was entitled to pension payments. His monthly retirement pension amount was $9,913, and his disability pension was $5,148. He was entitled to collect only the higher amount. In 2006, the payor of the pension reported to the taxpayer and IRS that the difference between these two amounts, $4,765 per month, was taxable (for the year, the reported taxable amount was $61,430). The taxpayer originally reported that amount on his return but then filed an amended return seeking a refund on the position that, because he retired due to a permanent service-connected disability, none of the pension income was taxable under Sec. 104 and Regs. Sec. 1.104-1(b).

The government relied on Rev. Rul. 80-44, which holds that if a person is entitled to receive the greater of a service pension or a service-connected disability pension and the service pension is greater, the difference between the two amounts is taxable. The district court agreed with this interpretation.

The court found that the taxpayer’s reliance on the Ninth Circuit’s decision in Picard was misplaced. In that case, a police officer’s disability pay was reduced when he later qualified for retirement pay. In this case, the taxpayer’s retirement pay was greater than his disability pay. Thus, the court held, there was no “conversion” of the disability pay into regular retirement pay. The court noted that the taxpayer “receives a portion of both pensions—at least for federal income tax purposes.”

In Smallwood, the taxpayer received $995,000 to settle her legal complaint alleging workplace race and gender discrimination and related claims. She paid tax on the award less the contingent fee paid to her attorney (almost 50%), but then sought a refund, claiming that the award was excludable under Sec. 104. At issue was whether the award was received for personal injuries.

The court noted that under Sec. 104(a)(2), damages received for emotional distress are excludable only if the distress is due to physical injury or physical sickness or to the extent the damages do not exceed medical costs attributable to the emotional distress. The court had to determine whether the payments to the taxpayer were intended to compensate her for physical injuries, noting that a settlement agreement is important in making this determination. If the agreement is not specific, a court next looks to the payor’s intent.

In case pleadings, the taxpayer stated that she developed “Hashimoto’s autoimmune disease” due to the stress, as well as a number of other ailments, including vertigo, vomiting, and low blood pressure, that required hospitalization and medication. Based on the evidence presented, the court found that whether any portion of the settlement payment was intended to be for physical injuries or physical sickness was a genuine issue of material fact. However, it held that she could not prevail, as a matter of law, because her complaint did not extensively concern physical injuries or sickness.

Sec. 108: Income From Discharge of Indebtedness

Under Secs. 108(a)(1)(E) and (h), discharge-of-indebtedness income from qualified principal residence debt of up to $2 million ($1 million for married taxpayers filing separately) is excluded from gross income. The American Taxpayer Relief Act of 2012 extended this exclusion to qualified principal residence debt discharged before Jan. 1, 2014.

In Rev. Proc. 2013-16, the IRS provided guidance for homeowners participating in the Home Affordable Modification Program’s Principal Reduction Alternative (HAMP PRA). To the extent that a borrower under HAMP PRA uses a property as his or her principal residence or the property is occupied by the borrower’s legal dependent, parent, or grandparent without rent being charged or collected, the borrower can exclude from gross income under the general welfare exclusion the PRA payments HAMP makes to the investor in a mortgage loan. But the borrower must include these payments in gross income to the extent the property is used as a rental property or is vacant and available to rent.

Sec. 117: Qualified Scholarships

A series of IRS letter rulings examined exempt private foundations’ grant-making procedures for providing scholarships to dependent children of employees of a specified company or other eligible student recipients. The IRS found that the awards constituted qualified scholarships within the meaning of Sec. 117 and were excludable from the gross income of the recipients, subject to the limitations in Sec. 117(b).

Sec. 121: Exclusion of Gain From Sale of Principal Residence

The IRS issued proposed regulations (along with FAQs) that include guidance on the interplay of the new 3.8% surtax on net investment income and gains imposed by Sec. 1411 and the exclusion of gain from the sale of a principal residence under Sec. 121 (up to $250,000 for a single taxpayer and $500,000 for married taxpayers filing jointly). Gain on a post-2012 sale of a principal residence in excess of the excluded amount increases net investment income for purposes of the 3.8% surtax and net capital gain under the general tax rules. This excess gain thus could be subject to the net investment income tax imposed by Sec. 1411. The entire gain on the sale of a home not covered by this exclusion (e.g., a second home) could be entirely includible in net investment income.

Originally Published in The Tax Adviser

Published: September 19, 2013

IRS to Get Stricter on Preparer Penalties

In response to a recent government report, the IRS will be improving its procedure for determining and enforcing penalties on paid tax preparers.

The report from the Treasury Inspector General for Tax Administration was requested by the IRS Oversight Board to determine how effective the IRS is in using the existing requirements and penalty regime that applies to unenrolled paid tax return preparers. The overall objective was to determine whether controls are in place to ensure that the IRS effectively enforces and applies penalties to paid preparers as required by Internal Revenue Code Section 6694, which provides penalty standards for paid preparers who take unreasonable positions or intentionally prepare inaccurate tax returns.

TIGTA reviewed a statistical sample of 98 closed Section 6694 preparer penalty cases from a population of 2,345 cases with penalties totaling $9.35 million that were closed during fiscal years 2009 through 2011. In eight cases, the immediate managers did not properly approve $19,000 in preparer penalty assessments as required.

Section 6751(b) requires that no penalty shall be assessed unless the initial determination of such assessment is personally approved in writing by the immediate supervisor. The lack of proper approval could hinder the IRS’s ability to successfully litigate these penalty assessments in court if necessary. When this issue was brought to their attention, IRS officials took immediate corrective actions by emphasizing the importance of properly approving, in writing, preparer penalty assessments.

TIGTA also analyzed the IRS’s quality reviews for civil penalty determinations to evaluate whether preparer penalties were properly considered and documented. IRS quality reviewers found that examiners did not always adequately document the examination case files with the facts that supported whether or not they considered paid preparer penalties. This appeared to be attributable to management’s interpretation of procedures regarding proper documentation in the examined cases.

In addition, TIGTA analyzed the Master File to determine whether the IRS is effectively enforcing paid preparer penalties, and found that current enforcement practices do not treat paid preparers with unpaid penalties as a priority, which could impact whether penalties achieve their intent of changing preparer behavior and increasing voluntary compliance.

TIGTA recommended that the IRS update the Internal Revenue Manual and implement improvements to ensure that managers and employees adhere to internal procedures for documenting actions and results in the preparer penalty case files. TIGTA also recommended that the IRS develop procedures to expedite assigning Section 6694 preparer penalty tax accounts to a revenue officer, as well as to give more consideration before suspending collection actions on these types of accounts.

IRS officials agreed with all of the recommendations and said that they plan to take corrective actions.

By Daniel Hood for AccountingToday

Published: September 18, 2013

Tax Court Holds Accounts Receivable Are Debt

In a new ruling, the Tax Court has held that accounts receivable constituted related party debt under Code section 965(b)(3), and therefore part of the deduction claimed by the taxpayer, BMC Software, Inc., was disallowed.

The section 965(b)(3) related party debt rule reduces the dividends otherwise eligible for the 85 percent dividends received deduction by any increase in the indebtedness of a controlled foreign corporation to any related person. The one-time dividend received deduction was created in 2004 to encourage U.S. corporations to repatriate their foreign earnings and increase investment in the U.S.

BMC Software, Inc., is a U.S. corporation that develops and licenses computer software, and is the common parent of a group of subsidiaries that joined in the filing of a consolidated federal income tax return.  BMC has a wholly-owned controlled foreign corporation, BMC Software European Holding (BSEH).

Under cost-sharing agreements BMC and BSEH co-owned software and each held exclusive distribution rights for certain territories. BMC terminated the CSAs in 2002 and took sole ownership of the software, agreeing to pay future royalties to BSEH and licensed to BSEH the software for distribution.

The IRS concluded that the royalty payments from 2002 through 2006 were not arm’s length. BMC entered a transfer pricing closing agreement, under which the IRS increased BMC‘s income by $102 million for the four years, representing net reductions in royalties BMC paid to BSEH.

The primary adjustments required BMC to make secondary adjustments to conform its accounts. These secondary adjustments would have been treated as deemed capital contributions from petitioner to BSEH except that BMC elected to establish accounts receivable under Rev. Proc. 99-32 for repayment. This resulted in a second closing agreement between BMC and the IRS that established interest-bearing accounts receivable from BSEH to BMC. The accounts receivable bore interest at the applicable federal rate, which was deductible from BSEH’s taxable income and includible in BMC’s taxable income.

Before it entered the closing agreements, BMC repatriated from BSEH $721 million. On its 2006 federal corporate return, BMC claimed $709 million in repatriated dividends as qualifying for the one-time dividends received deduction under Code section 965.

Under Code section 965, the amount of the deduction is reduced by increased indebtedness during a testing period running from the close of the taxable year in which the election is in effect and October 3, 2004. The IRS determined that $43 million of the repatriated dividends was ineligible for the dividends received deduction, since they were deemed established during the testing period and constituted increased related party indebtedness.

The Tax Court held that the accounts receivable deemed established during the testing period are increased related party indebtedness for purposed of section 965.

Although BMC contended that the related party debt rule only applies to abusive transactions, the court disagreed. It found that the accounts receivable constitute indebtedness for purposes of section 965(b)(3).

By Roger Russell for AccountingToday

Published: September 17, 2013

10 Tips for Preventing Online Credit Card Fraud

Merchants and retailers are often on the front lines of managing payment card fraud. Online businesses face a unique challenge because all purchases are made as a “card not present” transaction. But there are red flags to look out for and security measures to put in place that will help minimize losses from online credit card fraud.

Steve Chou, co-founder of Bumblebee Linens, has had years of experience dealing with online credit card transactions in his e-commerce business. We reached out to him to share some of his “insider” tips and expertise, along with additional pointers. Below are 10 tips to prevent online credit card fraud:

1. Be wary of expedited shipping when billing and shipping addresses differ.

When the “bill to” and “ship to” addresses are different and the customer is asking for expedited shipping, there’s a high possibility for fraud, Chou explains. Also, when the “ship to” address is not the same as the billing address for the card, you are at greater risk of it being a fraudulent transaction. Different billing and shipping addresses are not always a sure sign of fraud (for example, honest customers may order items as gifts). But for all large orders that fit this profile, always call to try to match the phone number as well.

2. Make sure IP location and credit card address match up.

Chou recommends watching out for IP addresses from overseas that don’t match the address on the credit card used in a payment. You can manually research an IP address at a site like IP-Lookup.net.

One way to cut down on the number of these kinds of transactions is to restrict all IP addresses that originate from countries where you don’t offer shipping. Simply program your site to prevent such visitors from checking out in the first place. Some e-commerce software platforms provide settings for you to block IP addresses, without requiring custom programming.

3. Watch out for suspicious email accounts.

Some email addresses can be a dead giveaway tipping you off you’ve received a fraudulent order, says Chou. Always check the email address used when placing that order. Does it read something like bgh3423679@yahoo.com? If so, it’s a red flag.

4. Do some research on that suspect address.

One way to detect a possible fraudulent credit card transaction is to research the billing address or shipping address being used for the order. Fortunately, there are tools that can make it easier to do this. Chou suggests using Google maps or Zillow to try to assess whether the address is legitimate. You can use a service such as ZabaSearch to make sure the person actually lives at the address in question or use address verification services offered by payment brands.

5. Keep a log of credit card numbers.

Chou suggests keeping a log of whenever a customer tries to enter in a credit card number. If the number of times is five or higher, it’s likely to be fraud. Most credit card processors will allow you to review the batch transactions for the day. Scammers will attempt many transactions using multiple credit card numbers. Be sure to flag these.

6. Consider using a fraud profiling service.

Though it may not be necessary for every online store, a fraud profiling service such as MaxMind is another option, says Chou. These services cross reference IP addresses, names, previous purchases and more. Studying per-purchase behaviors allows these companies to give you a more informed assessment around each transaction, and to identify high risk transactions. Some e-commerce platforms such as Volusion offer add-on fraud profiling services that work with their software.

7. Restrict the number of declined transactions.

Chou explains when scammers try to make fraudulent transactions, sometimes this is done via a malicious software script where many credit card numbers are tried in succession. Since you may incur a fee for each declined transaction — even if it doesn’t go through — the solution is to restrict the number of times a user can incorrectly enter in credit card numbers. Ban them once they exceed that number of attempted transactions.

8. Always require the Security Code.

This security code is typically a three-digit number printed on the back of the card (in the case of American Express, four digits on the card front). It is not stored in the magnetic strip or embossed on the card, so it can’t be as easily retrieved by thieves unless the card is in hand. This code goes by different names depending on the credit card brand: Visa calls it a CVV2, MasterCard calls it a CVC2, and American Express calls it the CID.

9. Ship your orders using tracking numbers and require signatures.

A tracking number helps prove a package was delivered, of course. While this may not protect your business in the case of outright criminals, it may help if you get into a dispute with a legitimate customer who says they never received the package, but you are sure it arrived. For expensive items, always require a signature upon delivery.

10. Strengthen your website security measures.

Beyond the individual credit card transaction, pay attention to the security of your entire website and e-commerce processes. Cyber attacks on small businesses are increasing, mostly because small business websites are perceived as softer targets than larger corporations.

Make sure your systems and services are PCI-compliant (i.e., meeting the payment card industry’s security standards for e-commerce transactions) at every step of the way. Visa and MasterCard maintain lists of certified PCI-compliant providers: Visa certified PCI-compliant providers; MasterCard certified PCI-compliant providers.  The major e-commerce software platforms or shopping cart providers will have information on their websites about being PCI compliant. In addition, Visa has an animated business guide to data security that I recommend you watch. MasterCard also offers online fraud prevention training for merchants.

Some e-commerce sites use a “trust mark” security service that scans daily to search for malware and vulnerabilities. Examples are Truste, Verisgn or McAfee Secure. These services help you avoid and/or catch problems quickly — in addition to increasing consumer trust.

Your e-commerce software platform — especially a hosted e-commerce service — may integrate advanced security measures and handle it all for you as part of their service. Don’t assume — be sure to check.

No matter what software you use, always update to the latest version as it becomes available. Updates could include security patches vital to avoiding a breach of your site. One vulnerability on your server — even if it’s not in your e-commerce software but in a different software program on the same server — could open a backdoor for cybercriminals to get into all your customer data and steal credit card numbers and other sensitive information. And that could cause you much greater losses and headaches than a fraudulent credit card transaction.

For more information on avoiding fraud at your business and online credit card fraud, you can check out Community Merchants USA’s resources online.

By Anita Campbell for Small Business Trends

Published: September 11, 2013

IRS Proposes Increased User Fees for Installment Agreements, Offers in Compromise

On Thursday, the IRS issued proposed regulations to raise user fees for installment agreements from $105 to $120 and for offers in compromise from $150 to $186. The new fees are scheduled to take effect Jan. 1, 2014 (REG-144990-12). The user fees have not been raised since 2007 for installment agreements and since 2003 for offers in compromise.

The fee for installment agreements that are paid by direct debit from taxpayers’ bank accounts will remain $52, as will the $43 fee for low-income taxpayers (defined in Regs. Sec. 300.1(b)(2)), but the fee for restructuring or reinstating an installment agreement will rise from $45 to $50.

While offers in compromise will now cost $186 instead of $150, there will continue to be exceptions for low-income taxpayers (defined in Regs. Sec. 300.3(b)(1)(ii)) and for taxpayers for whom the offer is based on a doubt as to liability. Both of those groups will continue to pay no fee.

In the preamble to the proposed regulations, the IRS explained that it is required to charge user fees to cover the full cost of government-provided services that confer benefits on taxpayers above what the general public receives. Installment agreements and offers in compromise confer those types of benefits.

The IRS says that it recently reviewed the installment agreement and offers in compromise programs and determined that its full cost to provide an installment agreement is $282. The full cost for a direct debit agreement is $122. The full cost of an offer in compromise is $2,718. While federal agencies are generally required to charge their full cost to provide services that confer benefits on identifiable recipients over and above those benefits received by the general public, the IRS has received a waiver from the Office of Management and Budget from charging fees to cover the full cost of the two programs.

Comments on the proposed rules may be sent to the IRS within the next 30 days, and a public hearing is scheduled for Oct. 1.

Originally Published via The Tax Adviser


Published: September 9, 2013

Are Some Americans Paying Federal Income Tax They Don't Owe?

Headline got your attention? No, it isn’t a come-on for a new tax avoidance scheme. Rather, it reflects an interesting but little known problem with the federal income tax system: People who have tax withheld from their paychecks but, for some reason, don’t file returns. For many, blowing off their 1040 means they are paying tax they don’t owe.

According to one estimate, in 2003 more than 8 million people had almost $16 billion in taxes withheld but did not file 1040s. Not only did many pay tax they didn’t owe but some likely missed out on refundable credits that could have improved their well-being.

To some degree, this is the flip side of another set of numbers that get far more attention—those American who pay no federal income tax.  The other day, the Tax Policy Center estimated that about 43 percent of Americans will be off the federal income tax rolls in 2013, down from 47 percent in 2009.

Nearly three in four non-payers file 1040s. Nearly all pay some tax—sales taxes, payroll taxes, excise taxes and the like. And most have income taxes withheld from their paychecks but get these payments returned from the government in the form of refunds or credits.

There are also people who make money, have no tax withheld, and owe no tax. Think low-income retirees who are living on Social Security or younger adults who work but make very little.

But a surprisingly large number of people do work, do have taxes withheld, but never file 1040s. Because we don’t know much about them, TPC treats them as non-payers of income tax even though some do pay through withholding. As a result, our estimate that 43 percent of Americans don’t pay federal income tax is probably high.

A 2005 paper for the National Tax Association Proceedings by Jacob Mortenson of the University of Nebraska-Lincoln, James Cilke of the congressional Joint Committee on Taxation, Michael Udell of Ernst & Young , and Jonathon Zytnick of Yale explores the phenomenon.

Unfortunately, their paper uses what are now fairly old data (from 2003) but there is no reason to believe matters have changed very much in the past decade.

It isn’t easy to learn about these non-filing taxpayers, mostly because the IRS only publishes data about those who do file tax returns. But the authors used information returns such as W-2s and 1099s to build a broad profile.

Not surprisingly, non-filers who had tax withheld earned a limited amount of income. The NTA paper figures an average of only about $20,500 in 2003. And the vast majority of their income was from wages. Keep in mind, though, that this estimate is based on what was reported on those information returns. Some non-filers surely had unreported income as well.

A more recent paper for the IRS publication Statistics of Income also found a signficant number of non-filers who had tax withheld. That paper, by Udell and Joshua Lawrence of Ernst & Young and Tiffany Young at Yale, used 2005 information return data. It estimated that non-filers missed out on $3.8 billion in potential refunds of withheld income tax and another $5 billion in refundable credits.

Of course, while many non-filers are owed money by the federal government there are also many who owe taxes, including some who had tax withheld.

It is easy to understand the motivations of those who owe Uncle Sam and don’t file (such a course of action isn’t very smart but it is explainable). It is much harder to figure out why someone who has tax withheld and is likely eligible for refunds or refundable tax credits doesn’t bother. We can all speculate about what is happening here, but it would sure be nice to learn more about these taxpaying non-filers.

By Howard Gleckman for Forbes

Published: September 6, 2013

Behind on your taxes? You may lose your driver's license.

New York is known as an aggressive state when it comes to tax collection. And it's about to get tougher still.

The state is creating a driver's license suspension program aimed at those who owe at least $10,000 in back taxes and who have exhausted all appeals.

"16,000 Tax Scofflaws Put on Notice," an announcement from Gov. Andrew Cuomo warned earlier this month.

License suspension could be a very effective way to get laggards to pony up.

People rely on their driver's licenses not only to drive -- say, to work -- but as a form of identification for travel, to prove residency and even to buy a drink.

But is it really fair?

It is if you really owe the money, and the time for disputing the charge is over, said David Brunori, deputy publisher of Tax Analysts. "Holding your feet to the fire is not necessarily crazy."

As a self-described libertarian, Brunori is no fan of government. But he explains his position this way: "Getting a license is a privilege. It's not messing around with a constitutional right."

New York will let tax delinquents work out a payment plan with the state if they're too strapped to pay everything in full. And anyone whose license is suspended may apply for a restricted license that would let them drive to and from work only.

Seizing a driver's license is likely to be a less costly way for the state to raise money. Garnishing wages, imposing tax liens and seizing bank accounts are more difficult, intrusive and mistake-prone, Brunori noted.

New York isn't the first state to suspend driver's licenses as a prod to get people to pay back taxes. But only a few others do, said Kathleen Thies, senior state tax analyst for CCH, a tax publisher.

They include California, Massachusetts and Louisiana. Of them, Louisiana sets the lowest threshold in defining tax delinquency: A mere $1,000 in debt to the state puts not only your driver's license at risk, but a commercial business license and hunting and fishing licenses, too.

And when you finally do pay up, you may also owe a fee to have your license reinstated.

A number of states, including New York, have also resorted to public shaming. They publish the names of the biggest tax delinquents to coax them to pay what they owe.

California, for instance, posts the names of the state's top 500 tax delinquents twice a year.

To make that list, your tax liability has to exceed $100,000. And only if you're on that list are you at risk of losing both your driver's license and occupation or professional license. Plus, state agencies are prohibited from entering into contracts with you until you satisfy your debt.

By Jeanne Sahadi for @CNNMoney

Published: September 4, 2013

2013 Year End Tax Planning

It is that time of year again when we need to take a look at your financials to do some tax planning for the year. I have recapped below a list of the items we will need in order to properly evaluate and plan for your year-end taxes as well as address any yearend tax planning ideas.

As the end of calendar year approaches, it’s time to think about what can be done to minimize the amount of taxes paid to the IRS by your business. Although tax planning should be a year-round process, there are several year-end strategies you can take, particularly if you are an S Corporation.

Here are some things to think about as the end of the year approaches:

  • Try to keep your inventory as low as possible on December 31st. Since you are taxed based on the value of your goods in stock, it makes sense to minimize your inventory.
  • Accrual-based taxpayers may want to consider delaying end of December billing until early January. Since income is recognized when it is billed, you can delay the tax effects from this year to next year.
  • For the same reason, it makes sense to book all tax-deductible expenses and accounts payable before the end of the end of the calendar year, rather than waiting until next year. This includes your personal expense report for December. Cash-based taxpayers must pay these expenses, while accrual-based taxpayers need only to receive and enter the bills.
  • There is still time to set up a qualified retirement plan. A qualified retirement plan (such as a 401K, Owner 401K, Simple, SEP/IRA) can be a good way to reduce taxes while preparing for your retirement.
  • Please be sure to turn in an expense report and obtain reimbursement by years-end for any business expenses you might have incurred personally such as business mileage on your personal vehicle.

Additional Year End Planning Tips

If you have kept track of your business mileage, the rate for this year’s mileage rate. Please keep in mind IRS rules state that you must have kept a log of the miles you have driven to take this deduction.

Although not directly related to current tax deductions, small business owners should take additional steps to ensure the success of their businesses in the future. If you expect a big change in your future income, you should consult with your CPA now to minimize the tax impact. If you are a subchapter S corporation, you should plan to have the annual meeting of your Board of Directors as close to the new year as possible.

While this generic tax advice can be helpful to any small business, there are probably some specific steps your business can take to reduce taxes at the end of the year. We have helped many small businesses in Atlanta and throughout Georgia minimize their tax liabilities and increase their profitability. We would be happy to sit down with you and discuss your situation. Please feel free to call or contact us.  

Via Alltop Accounting News

Published: September 3, 2013

Three Tax Scams to Beware of This Summer

Are you thinking about taxes while you’re enjoying the warm summer months? Not likely! But the IRS wants you to know that scammers ARE thinking about taxes and ways to dupe you out of your money.

Tax scams can happen anytime of the year, not just during tax season. Three common year-round scams are identity theft, phishing and return preparer fraud. These schemes are on the top of the IRS’s “Dirty Dozen” list of scams this year. They’re illegal and can lead to significant penalties and interest, even criminal prosecution.

Here’s more information about these scams that every taxpayer should know.

1. Identity Theft.  Tax fraud by identity theft tops this year’s Dirty Dozen list. Identity thieves use personal information, such as your name, Social Security number or other identifying information without your permission to commit fraud or other crimes. An identity thief may also use another person’s identity to fraudulently file a tax return and claim a refund.

The IRS has a special identity protection page on IRS.gov dedicated to identity theft issues. It has helpful links to information, such as how victims can contact the IRS Identity Theft Protection Specialized Unit, and how you can protect yourself against identity theft.

2. Phishing.  Scam artists use phishing to trick unsuspecting victims into revealing personal or financial information. Phishing scammers may pose as the IRS and send bogus emails, set up phony websites or make phone calls. These contacts usually offer a fictitious refund or threaten an audit or investigation to lure victims into revealing personal information. Phishers then use the information they obtain to steal the victim’s identity, access their bank accounts and credit cards or apply for loans. The IRS does not initiate contact with taxpayers by email to request personal or financial information. Please forward suspicious scams to the IRS at phishing@irs.gov. You can also visit IRS.gov and select the link “Reporting Phishing” at the bottom of the page.

3. Return Preparer Fraud.  Most tax professionals file honest and accurate returns for their clients. However, some dishonest tax return preparers skim a portion of the client’s refund or charge inflated fees for tax preparation. Some try to attract new clients by promising refunds that are too good to be true.

Choose carefully when hiring an individual or firm to prepare your return. All paid tax preparers must sign the return they prepare and enter their IRS Preparer Tax Identification Number (PTIN). The IRS created a webpage to assist taxpayers when choosing a tax preparer. It includes red flags to look for and information on how and when to make a complaint.

Published: August 30, 2013

IRS Announces All Legal Same-Sex Marriages Will Be Recognized For Federal Tax Purposes

The U.S. Department of the Treasury and the Internal Revenue Service (IRS) today ruled that same-sex couples, legally married in jurisdictions that recognize their marriages, will be treated as married for federal tax purposes. The ruling applies regardless of whether the couple lives in a jurisdiction that recognizes same-sex marriage or a jurisdiction that does not recognize same-sex marriage.

The ruling implements federal tax aspects of the June 26 Supreme Court decision invalidating a key provision of the 1996 Defense of Marriage Act.

Under the ruling, same-sex couples will be treated as married for all federal tax purposes, including income and gift and estate taxes. The ruling applies to all federal tax provisions where marriage is a factor, including filing status, claiming personal and dependency exemptions, taking the standard deduction, employee benefits, contributing to an IRA and claiming the earned income tax credit or child tax credit.

Any same-sex marriage legally entered into in one of the 50 states, the District of Columbia, a U.S. territory or a foreign country will be covered by the ruling. However, the ruling does not apply to registered domestic partnerships, civil unions or similar formal relationships recognized under state law.

Legally-married same-sex couples generally must file their 2013 federal income tax return using either the married filing jointly or married filing separately filing status.

Individuals who were in same-sex marriages may, but are not required to, file original or amended returns choosing to be treated as married for federal tax purposes for one or more prior tax years still open under the statute of limitations.

Generally, the statute of limitations for filing a refund claim is three years from the date the return was filed or two years from the date the tax was paid, whichever is later. As a result, refund claims can still be filed for tax years 2010, 2011 and 2012. Some taxpayers may have special circumstances, such as signing an agreement with the IRS to keep the statute of limitations open, that permit them to file refund claims for tax years 2009 and earlier.

Additionally, employees who purchased same-sex spouse health insurance coverage from their employers on an after-tax basis may treat the amounts paid for that coverage as pre-tax and excludable from income.

How to File a Claim for Refund

Taxpayers who wish to file a refund claim for income taxes should use Form 1040X, Amended U.S. Individual Income Tax Return.

Taxpayers who wish to file a refund claim for gift or estate taxes should file Form 843, Claim for Refund and Request for Abatement. For information on filing an amended return, see Tax Topic 308, Amended Returns, available on IRS.gov, or the Instructions to Forms 1040X and 843. Information on where to file your amended returns is available in the instructions to the form.

Future Guidance

Treasury and the IRS intend to issue streamlined procedures for employers who wish to file refund claims for payroll taxes paid on previously-taxed health insurance and fringe benefits provided to same-sex spouses. Treasury and IRS also intend to issue further guidance on cafeteria plans and on how qualified retirement plans and other tax-favored arrangements should treat same-sex spouses for periods before the effective date of this Revenue Ruling.

Other agencies may provide guidance on other federal programs that they administer that are affected by the Code.

Revenue Ruling 2013-17, along with updated Frequently Asked Questions for same-sex couples and updated FAQs for registered domestic partners and individuals in civil unions, are available today on IRS.gov. See also Publication 555, Community Property.

Treasury and the IRS will begin applying the terms of Revenue Ruling 2013-17 on Sept. 16, 2013, but taxpayers who wish to rely on the terms of the Revenue Ruling for earlier periods may choose to do so, as long as the statute of limitations for the earlier period has not expired.

Published: August 29, 2013

Give Withholding and Payments a Check-up to Avoid a Tax Surprise

Some people are surprised to learn they’re due a large federal income tax refund when they file their taxes. Others are surprised that they owe more taxes than they expected. When this happens, it’s a good idea to check your federal tax withholding or payments. Doing so now can help avoid a tax surprise when you file your 2013 tax return next year.

Here are some tips to help you bring the tax you pay during the year closer to what you’ll actually owe.

Wages and Income Tax Withholding

  • New Job.   Your employer will ask you to complete a Form W-4, Employee's Withholding Allowance Certificate. Complete it accurately to figure the amount of federal income tax to withhold from your paychecks.
  • Life Event.  Change your Form W-4 when certain life events take place. A change in marital status, birth of a child, getting or losing a job, or purchasing a home, for example, can all change the amount of taxes you owe. You can typically submit a new Form W–4 anytime.
  • IRS Withholding Calculator.  This handy online tool will help you figure the correct amount of tax to withhold based on your situation. If a change is necessary, the tool will help you complete a new Form W-4.


Self-Employment and Other Income

  • Estimated tax.  This is how you pay tax on income that’s not subject to withholding. Examples include income from self-employment, interest, dividends, alimony, rent and gains from the sale of assets. You also may need to pay estimated tax if the amount of income tax withheld from your wages, pension or other income is not enough. If you expect to owe a thousand dollars or more in taxes and meet other conditions, you may need to make estimated tax payments.
  • Form 1040-ES.  Use the worksheet in Form 1040-ES, Estimated Tax for Individuals, to find out if you need to pay estimated taxes on a quarterly basis.
  • Change in Estimated Tax.  After you make an estimated tax payment, some life events or financial changes may affect your future payments. Changes in your income, adjustments, deductions, credits or exemptions may make it necessary for you to refigure your estimated tax.
  • Additional Medicare Tax.  A new Additional Medicare Tax went into effect on Jan. 1, 2013. The 0.9 percent Additional Medicare Tax applies to an individual’s wages, Railroad Retirement Tax Act compensation and self-employment income that exceeds a threshold amount based on the individual’s filing status. For additional information on the Additional Medicare Tax, see our questions and answers.
  • Net Investment Income Tax.  A new Net Investment Income Tax went into effect on Jan. 1, 2013. The 3.8 percent Net Investment Income Tax applies to individuals, estates and trusts that have certain investment income above certain threshold amounts.

 

Published: August 28, 2013

Ten Tax Tips for Individuals Selling Their Home

If you’re selling your main home this summer or sometime this year, the IRS has some helpful tips for you. Even if you make a profit from the sale of your home, you may not have to report it as income.

Here are 10 tips from the IRS to keep in mind when selling your home.

1. If you sell your home at a gain, you may be able to exclude part or all of the profit from your income. This rule generally applies if you’ve owned and used the property as your main home for at least two out of the five years before the date of sale.

2. You normally can exclude up to $250,000 of the gain from your income ($500,000 on a joint return). This excluded gain is also not subject to the new Net Investment Income Tax, which is effective in 2013.

3. If you can exclude all of the gain, you probably don’t need to report the sale of your home on your tax return.

4. If you can’t exclude all of the gain, or you choose not to exclude it, you’ll need to report the sale of your home on your tax return. You’ll also have to report the sale if you received a Form 1099-S, Proceeds From Real Estate Transactions.

5. Use IRS e-file to prepare and file your 2013 tax return next year. E-file software will do most of the work for you. If you prepare a paper return, use the worksheets in Publication 523, Selling Your Home, to figure the gain (or loss) on the sale. The booklet also will help you determine how much of the gain you can exclude.

6. Generally, you can exclude a gain from the sale of only one main home per two-year period.
 
7. If you have more than one home, you can exclude a gain only from the sale of your main home. You must pay tax on the gain from selling any other home. If you have two homes and live in both of them, your main home is usually the one you live in most of the time.

8. Special rules may apply when you sell a home for which you received the first-time homebuyer credit.

9. You cannot deduct a loss from the sale of your main home.

10. When you sell your home and move, be sure to update your address with the IRS and the U.S. Postal Service. File Form 8822, Change of Address, to notify the IRS.

Published: August 26, 2013

Innovation: Five Key Questions Organisations Should Ask Themselves

CEOs are getting personally involved in innovation and view strong, visionary business leadership as one of the two most important ingredients for successful innovation, according to a new survey.

As companies look to innovation to drive growth, 37% of CEOs surveyed by PwC said their primary role in driving innovation is to be a leader, and 34% described their role as “visionary”, according to the survey report. The survey polled 246 chief executives from North and South America, Europe, Asia Pacific and the Middle East.

More than one-quarter (26%) said strong, visionary business leadership is the most important ingredient for successful innovation at a company. An additional 26% said having the right culture to foster and support innovation is the most important factor for innovation.

The importance of innovation rose compared with a similar survey in 2009, when companies were more concerned about increasing operational effectiveness to stave off losses during the financial crisis, according to the report. Three-fourths of respondents now view innovation to be at least as important as operational effectiveness in the success of their company.

Despite that focus on innovation, CEOs reported significant barriers to innovation at their companies. Just 14% said nothing is stopping them from being innovative. The most frequently cited constraint was financial resources, reported by 43% of respondents.

Existing organisational culture was identified by 41% of respondents as a barrier. That’s significant because having a culture that supports innovation was reported as one of the two most important ingredients for successful innovation.

Other significant barriers included lack of talent (30%), political and regulatory factors (21%) and inadequate technology (18%).

Based on the survey, PwC recommended five key questions for organisations to address to become genuinely innovative:

  • Does the way you innovate (collaboration, employee empowerment, customer engagement, time horizons, etc.) reflect your vision and appetite for innovation?
  • How effectively are you articulating your vision and appetite for innovation to employees, investors and business partners?
  • Do your employees see creating, promoting and executing new ideas as a crucial part of their job description?
  • Are the processes for decision-making and organisational mobilisation quick enough to bring new innovations to market ahead of your competitors?
  • How effectively do you measure and track the return on investment and ability to meet customers’ changing expectations?

By Ken Tysiac for CGMA Magazine

Published: August 9, 2013

How Nonfilers Can Reenter the Tax System Safely

If you haven’t filed an income tax return for several years despite being required to, you may be nervously glancing over your shoulder or trying to get motivated to remedy your debt with Uncle Sam, but it’s hard to know where to start.

The idea of approaching the IRS about overdue tax returns can conjure up images of being clamped into handcuffs and carted away. Well, do not fear: The IRS will welcome you back like the prodigal son you are.

The IRS may have filed tax returns for you, called Substitute Filed Returns (SFRs). The information is based on copies of third-party documents the IRS routinely receives in January every year – Forms W2, 1099, K-1, 1098, to name a few. The IRS will then bill you for the tax it comes up with, and that number tends to be considerably higher than it would be if you had prepared the tax return yourself.

The folks who compile SFRs do this on purpose to get your attention. You see, if the IRS files for you, this does not absolve you from your filing requirement, it’s essentially a place holder. Also, the tax liability stemming from the SFR is enforceable until you submit a proper filing. The tax liability from an SFR cannot be discharged in bankruptcy.

So it’s time to get things right. Perhaps you can prepare the tax returns yourself. You may have the data and it may be just a simple income tax return or two or three. If so, you can prepare it and paper file it. You cannot electronically file prior year income tax returns.

But if you do not have all of your records, you will need some help. The IRS can provide you with transcripts of all third-party documents – Forms W2, 1099, K-1, 1098, etc. You can order a transcript of third-party documents by filing Form 4506 available at www.irs.gov. Just keep in mind that it will take some time for the IRS to process this form and send you the results.

Usually it’s faster and simpler to hire a tax professional to obtain the information. A tax professional will ask you to sign IRS Form 2848 Power of Attorney and Declaration of Representative, which means you don’t ever have to speak to anyone at the IRS. In fact, if an IRS agent or officer contacts you, simply tell him to contact your tax representative.

With a signed Power of Attorney, your representative can obtain all of your confidential income tax information. There is a special phone number available to practitioners only. The request can be made for the missing year data and it will be faxed over within 48 hours. No months of waiting.

If you were self-employed during the tax years in question, you may have to compile your income and expenses in order to complete Schedule C of Form 1040. It may be necessary to hire a bookkeeper to prepare a profit and loss statement for you. If you do not have your records, the IRS will allow reasonable estimates. In fact, one auditor used industry standards from www.bizstats.com to compare to an existing schedule C as the taxpayer’s records had been lost after several moves.

By Bonnie Lee for FOXBusiness

Published: August 8, 2013

IRS Filed a Tax Lien on Your Home - Now What?

If you are past due on your federal income taxes, the Internal Revenue Service can file a tax lien against your house. A lien can complicate selling the home and make it difficult to refinance the mortgage.

You're subject to an IRS lien whenever you're past due on your taxes, says E. Martin Davidoff, a tax attorney and certified public accountant in Dayton, N.J. An IRS tax lien on a home isn't official until you receive a notice of federal tax lien, which means that the IRS has made a legal claim to your property as security for a tax liability.

"You typically need to owe $5,000 or more before an IRS tax lien is triggered," Davidoff says.

Elizabeth Gonsalves, a tax attorney in Encino, Calif., says, "IRS tax liens on homes are generally triggered whenever the IRS perceives it will be difficult to collect the full amount you owe within the statute of limitations for the payment of IRS debt, which is 10 years."

Tax authority must follow procedures

An IRS tax lien can be filed only after a liability is assessed, a notice and demand for payment is served on you, and you fail to pay the debt within 10 days of that notification, Gonsalves says.

Even if you have an IRS tax lien on your property, this doesn't mean the IRS can force you to sell your home or that the government has taken over your property. However, if you want to sell the home, the IRS has a right to take the proceeds from the sale to satisfy your tax bill. If you want to refinance, the federal government may be willing to subordinate the lien, particularly if you use home equity to pay your taxes.

Unfortunately, an IRS tax lien may make it difficult for you to qualify for a refinance.

IRS tax liens and your credit

An IRS tax lien, even if it is paid in rll, will stay on your credit history for seven years after it's paid, says Rod Griffin, director of public education for Experian. "The further in the past the lien was paid, the less impact it will have on credit scores and lending decisions," Griffin says.

Under the IRS Fresh Start program, you can request that the IRS withdraw your lien after it is paid in full. You need to complete a form, and then once the lien has been withdrawn, you need to send that information to all three credit bureaus.

"If the lien is withdrawn and reported as such, Experian deletes it from the file. As a result, it will no longer appear in the credit report," Griffin says.

Eliminating an IRS tax lien

The best plan, if you know you may be getting an IRS tax lien on your home, is to sell it before the lien is triggered, says David L. Mortimer, a certified public accountant in Alexandria, Va.

If that's not possible, here are your options:

Pay your bill in full. "If you pay the tax bill, the IRS will release your lien," says Davidoff.

Once you have paid the bill, you should request that the IRS take the extra step to withdraw your lien.

Start an installment plan. If your tax bill is less than $50,000 and you enter into an installment plan with the IRS, you can get your tax lien withdrawn.

"You have to set up a direct debit from your bank account or your employer and then file a form to request a withdrawal of the lien," Gonsalves says. "You must make three payments before you file the form, and then it could take two or three months to have the lien removed. But once this happens, it's as if the lien never existed, even though you're making monthly payments on the debt."

Gonsalves says you must fully repay your back taxes within six years, so your monthly payments on a $50,000 tax bill would be nearly $700.

Sell the property. If you have enough equity to satisfy your tax bill, Davidoff says you can discharge the lien by selling and using your sales proceeds to pay the IRS. You would need to provide the IRS with complete documentation about the sale. However, if you don't have enough equity, you can request a release of the lien, Davidoff says. The IRS might accept a partial payment or look for other assets you can use to pay your taxes.

Request lien subordination and refinance. "If you want to refinance and can demonstrate to the IRS that you intend to use the savings on your mortgage or cash from your home equity to pay your taxes, the IRS will usually agree to subordinate the lien," Gonsalves says.

While an IRS tax lien on your home is never good, taxpayers have more options than they did in the past to resolve their tax issues and offset the damage to their credit.

By Michele Lerner for Fox Business

Published: August 6, 2013

Reduce Your Taxes with Miscellaneous Deductions

If you itemize deductions on your tax return, you may be able to deduct certain miscellaneous expenses. You may benefit from this because a tax deduction normally reduces your federal income tax.

Here are some things you should know about miscellaneous deductions:

Deductions Subject to the Two Percent Limit.  You can deduct most miscellaneous expenses only if they exceed two percent of your adjusted gross income. These include expenses such as:

  • Unreimbursed employee expenses.
  • Expenses related to searching for a new job in the same profession.
  • Certain work clothes and uniforms.
  • Tools needed for your job.
  • Union dues.
  • Work-related travel and transportation.

Deductions Not Subject to the Two Percent Limit.  Some deductions are not subject to the two percent of AGI limit. Some expenses on this list include:

  • Certain casualty and theft losses. This deduction applies if you held the damaged or stolen property for investment. Property that you hold for investment may include assets such as stocks, bonds and works of art.
  • Gambling losses up to the amount of gambling winnings.
  • Losses from Ponzi-type investment schemes.

Many expenses are not deductible. For example, you can’t deduct personal living or family expenses. Report your miscellaneous deductions on Schedule A, Itemized Deductions. Be sure to keep records of your deductions as a reminder when you file your taxes in 2014.

Published: August 5, 2013

College Tax Strategy: Wipe Out $25,000 Of Capital Gains Per Year

Many families simply earn too much for their child to qualify for need-based college aid, so they need to shift their focus to what I call tax aid; tax savings that help lower the overall cost of college. With the stock market at all-time highs, parents can combine their investment gains with this tax strategy to wipe out $25,000 in capital gains each year while a child is in collegeThat’s a pretty good way to save for college, and it can pay dividends in retirement, too.

In the following hypothetical example you will gift your daughter appreciated stock or other investments like mutual funds or ETFs, and your daughter will use the standard deduction, personal exemption and American Opportunity Tax Credit to offset $25,000 of long-term capital gains in a single year.

Standard Deduction and Personal Exemption

Typically parents will claim the $3,900 personal exemption for their child because the parents are providing greater than half of the child’s support throughout the year. However, during the college years, if your daughter uses her own income and assets to provide more than half of her own support (roughly half the total cost of college), then she would also be able to claim the personal exemption of $3,900 (for 2013) for herself, instead of you (the parent) claiming it.

The standard deduction (for 2013) for a dependent child (i.e. parents claim the personal exemption for the child), is the child’s earned income +$300 up to the maximum of $6,100. However, if you child is claiming the personal exemption for herself (i.e. passed the support test), then she can automatically claim the personal exemption and the full standard deduction of $6,100, regardless of earned income.

American Opportunity Tax Credit

Furthermore, as long as you do not claim the AOTC on your tax return, and do not claim your daughter as a personal exemption, she can claim the AOTC on her tax return.

The AOTC is worth up to $2,500 per student for four academic years. The income phase-out is $160,000 – $180,000 of modified adjusted gross income on joint tax returns. The amount of the credit is calculated as 100% of the first $2,000 in qualified tuition and fees costs paid, plus 25% of the next $2,000 paid for such fees.

Kiddie Tax

The kiddie tax is a tax on unearned income paid to minors. For 2013, the first $1,000 of such income is tax free, the second $1,000 is taxed to the child at his/her tax rate and all unearned income over $2,000 is taxed at the parents’ tax rate. The kiddie tax rule now applies to children under age 19 and full-time college students under the age of 24.

In 2013, the only way that college students under age 24 will be able to avoid the kiddie tax is if they provide over half of their own support from their own earned income (i.e., wages and salaries, not income from selling stocks). Notice that this is different from the support test for the personal exemption mentioned above which allows the student to use their earned income in addition to their unearned income and personal assets to pass the test.

Tax Saving Example

Let’s assume that you have been gifting your daughter appreciated assets ($14,000 per year, per donor permitted in 2013; $28,000 on joint return) over the years and your daughter will sell some of the assets during each year of college, realizing $25,000 in long-term capital gains. She will use the proceeds from the sale of assets to pay to enroll at a flagship state university with a total cost of attendance of $46,000 per year, including out-of-state tuition. View Forbes 2013 List of Top Colleges.

She will be able to take advantage of the standard deduction, personal exemption and the American Opportunity Tax Credit to offset her $25,000 of unearned (long-term capital gains) each year.

The standard deduction and personal exemption will reduce her capital gain income of $25,000 ($25,000 – $3,900 – $6,100 = $15,000), leaving a remaining taxable income of $15,000 that is taxed at the parent’s capital gain tax rate of 15%, for a total tax of $2,250.

Her overall federal tax of $2,250 will be eliminated by the American Opportunity Tax Credit (see the math below).

Long-term capital gains                                  $25,000

Student’s personal exemption                       –$3,900

Student’s standard deduction (single)         –$6,100

Net taxable income                                          $15,000

Capital gains rate (parents’ rate of 15%)          x 0.15

Gross federal tax                                             = $2,250

American Opportunity Tax Credit                ($2,500)

Federal tax due                                                        $0

For clients in the highest tax bracket who are subject to the 3.8% net investment income surtax, the capital gains tax would be 23.8%, or $5,950 per year on $25,000 in gains. The child’s tax would be $500 (20% x $15,000 = $3,000 – $2,500 AOTC = $500; and the 3.8% surtax would not apply to the child), thus saving the family $5,450 per year in taxes; $21,800 over four years of college, even under kiddie tax rules. Even with a modest rate of return, the $21,800 in tax savings should grow to $50,000 by the time most parents reach retirement age. This underscores my longstanding philosophy that college planning is retirement planning.

By Troy Onink for Forbes

Published: August 2, 2013

Worker Classification Conundrum: Employee or Independent Contractor?

Improper classification of workers as independent contractors versus employees causes myriad problems for employers, states, and workers, according to the society's presenter Avery E. Neumark, CPA, JD, partner and director of Employee Benefits and Executive Compensation at Rosen Seymour Shapss Martin & Company LLP.
 
State studies show up to 60 percent of companies misclassify workers as independent contractors, resulting in $9.5 million in back wages being collected by the IRS since 2011. Why? Because the employers have avoided paying not only income taxes deducted from the workers' wages, but also FICA (Social Security and Medicare) deducted from the workers' wages and FUTA (federal unemployment) paid by the employer.
 
Neumark highlighted some estimates to underscore why the government is going after employment taxes:

  • FICA taxes estimated at $14 billion are underreported.
  • Unemployment taxes estimated at $1 billion are underreported.
  • Self-employment taxes estimated at $39 billion are underreported.
  • $5 billion are underpaid in the above three categories.
  • Non-filed amounts in the above three categories are inestimable.

When the IRS expanded its National Research Program in 2009 to include tax compliance related to employment taxes, it started with sixty-one misclassification audits. The best and most experienced auditors were brought in and were provided special training to determine if those sixty-one companies – nonprofits, professional services companies, construction companies, and others – were in compliance. From 2010 through 2013, more than 6,000 audits were conducted because of all the reclassification issues uncovered in 2009, according to Neumark.

Now, if a company receives an IRS audit notification letter, the audit isn't simply going to be a review of forms 941 (reporting income and employment taxes withheld) and forms 940 (FUTA taxes) for the tax year, according to Neumark. "The IRS intends to drill down on the compensation that generated the withholding and then audit those various compensatory components for reporting compliance as well," he said. "They'll be reviewing fringe benefits, like personal use of aircrafts, and nonqualified plans to see if they're being reported properly."
 
And they won't need to ask the company for the files when they knock on the door, because the auditors will have already looked into them in advance. Plus, the IRS and Department of Labor have agreements with roughly thirty states, which allow them to share information and, therefore, collect more money. The red flag that often waves in the air for the government to see is when a so-called independent contractor files for worker's compensation or unemployment and there's no record of that person being an employee.
 
So how do you know who the government considers and employee versus an independent contractor? Focus on one word: Control.
 
Prior to 2007, the IRS used a twenty-factor test to determine the difference. According to the IRS, it now uses the following three factors:

1) Behavioral control: The facts that illustrate whether there's a right to direct or control how the worker performs the specific task for which he or she is engaged (e.g., instructions, training etc.).
2) Financial control: The facts that illustrate whether there's a right to direct or control how the business aspects of the worker's activities are conducted (e.g., significant investment, unreimbursed expenses, method of payment, opportunity for profit or loss, etc.).
3) Relationship of the parties: The facts that illustrate how the parties perceive their relationship (e.g., intent of the parties/written contracts, employee benefits, discharge/termination, regular business activity, etc.).

Ask yourself, "Is this guy under too much control? If yes, he's likely an employee," Neumark said.
 
Whether workers are independent contractors or employees depends on the facts in each case, according to the IRS.
 
"The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done,"  according to the IRS website. "[However], there is no 'magic' or set number of factors that 'makes' the worker an employee or an independent contractor, and no one factor stands alone in making this determination."
 
So what can accountants do to protect themselves and their clients?
 
1. Update processes and procedures to ensure compliance.
 
2. Verify payroll system taxability and tax rates. Make sure proper documents are in place to show workers are really independent contractors.

3. Consider voluntary disclosures. The Voluntary Classification Settlement Program (VCSP) is an optional program that launched in 2012. It provides taxpayers with an opportunity to reclassify their workers as employees for future tax periods and requires them to pay only 10 percent of employment tax liability that would have been owed for the most recent tax year. Several factors must be considered to be eligible for this program, and the employer must fill out Form 8952, Application for Voluntary Classification Settlement Program.
 
Only about 1,000 companies have taken advantage of this program, which Neumark suspects is due to an unwarranted degree of confidence by companies that they won't get caught, or fear that it will expose them to other penalties.
 
4. Review Section 530 of the Revenue Act of 1978. This section protects companies from the IRS reclassifying their workers and collecting back taxes and excessive penalties if employers (1) can prove they had a  reasonable basis to classify the workers as independent contractors; (2) were audited previously when they treated similar workers as independent contractors and the workers weren't reclassified; (3) can prove a significant segment of the industry treats such workers as independent contractors; or (4) relied on some other reasonable basis, such as the advice of an accountant or attorney, to classify the workers as independent contractors. The employers must also have consistently treated the workers as independent contractors and filed Form 1099-MISC for each such worker who earned $600 or more during the year in question.

Workers to evaluate include, but are not limited to, construction and janitorial workers, restaurant staff, nurse temps, cable television installers, home-based telecommuters, and even interns (if they're doing the work of an employee).

By Alexandra DeFelice for AccountingWEB

Published: August 1, 2013

Public, Private Companies Report Rise in Audit Fees in FY 2012

Fees for external audits of financial statements paid by U.S. public and private companies rose in fiscal year 2012 over the previous year, according to a new survey report.

Audit fees paid by 87 public companies averaged $4.5 million in FY 2012, according to a Financial Executives International (FEI) report. That represented a 4% increase over the audit fees those same companies paid in the previous fiscal year.

Private companies paid an average of $147,800 in total audit fees in FY 2012, an increase of 3% over their FY 2011 audit fees. Executives from 118 private companies participated in the survey.

It was the third straight year of fee increases reported by public companies in the annual survey, which previously showed increases of 5% in FY 2011 and 2% in FY 2010 after a fee decrease was reported in FY 2009.

Private companies saw fees rise 7% in FY 2011, and reported that their year-over-year audit fees remained essentially unchanged in FY 2010 and FY 2009.

Public company respondents most commonly said audit fees increased for their companies because of additional audit work required related to corporate acquisitions, and the perception that PCAOB inspections of audit firms have led to rising audit fees. Private company executives cited corporate acquisitions and inflation as reasons for the rise in their audit fees.

Centralized operations correlated with lower audit fees for both public and private companies in the survey. Public companies with centralized operations paid an average of $3.7 million for their audits, compared with $4.6 million for their counterparts with decentralized operations.

Private companies with centralized operations paid an average of $103,500 for their audits, while fees for public companies with decentralized operations averaged $354,600 in audit fees.

“We continue to believe that the audit of the financial statements of a company with centralized operations is more efficient than that of a company with decentralized operations, and this year’s survey results demonstrate that this still holds true,” FEI President and CEO Marie Hollein said in a news release.

The average number of audit hours required for public company audits was 16,737. Private companies reported an average of 1,769 hours required for their audits.

By Ken Tysiac for the Journal of Accountancy

Published: July 30, 2013

Parents, Get Ready for Some Tax-Free Shopping

As children across the country start getting ready to say goodbye to summer, 17 states are preparing to offer shoppers tax breaks on back-to-school items.

The tax savings could amount to anywhere from 4% to 7% on everything from crayons to computers.

That savings could come in handy. Economic uncertainty, unemployment and a recent surge in gas prices are forcing parents to focus on necessities this school year, says Matthew Shay, chief executive of the National Retail Federation. Still, families with school-aged children are expected to spend an average of $635 on apparel, shoes, supplies and electronics during this year's back-to-school shopping season, down from $688 last year, the industry trade group found.

Before heading to the stores, shoppers in the states where these temporary breaks are being offered should research which items are tax exempt and the restrictions that apply, said Carol Kokinis-Graves, senior state tax analyst at CCH, a global provider of accounting and audit information.

 In Florida, for example, clothing that costs less than $75 qualifies. But any item that costs more than that amount does not. Want a personal computer? You can get a tax break in Florida, but only if you opt for something that costs less than $750 -- not that MacBook Air you may have been eying.

If you gotta' have that top-end Mac, try Missouri or North Carolina; those two states are offering breaks on computers worth up to $3,500.

Every single one of the 17 states offering tax breaks include exemptions on clothing, but most of the states limit the exemption to items that cost less than $100. However, in Connecticut, clothes horses can spend up to $300 an item. In Louisiana and South Carolina, there is no limit.

Another big difference: In most states, the tax holiday lasts only for a couple of days, while in others it lasts a full week.

While these tax holidays sound like a shopper's dream, some groups don't think they are very effective.

 In a report released in July, the Tax Foundation found that the price limit imposed on items during sales tax holidays encourages consumers to purchase cheaper goods -- even if they would prefer a better quality item.

"If you raise a poster advertising 5% off, that's not going to get people through the doors," said Joseph Henchman, vice president for state projects at the Tax Foundation. "But if you raise a poster saying 'tax-free' that will get people through the doors."

Florida
August 2 - 4

Clothing worth $75 or less; school supplies of $15 or less per item; computers and accessories worth $750 or less. Exemption does not apply to sales made within theme parks, entertainment complexes or airports.

By Angela Johnson for CNN Money

Published: July 29, 2013

The Perils of Moving to a No-Tax State

You might think that moving to a state with no income tax would greatly simplify your tax life. Not so fast.

If you're not careful, it could greatly complicate things and cost you tons in back taxes and penalties.

For example, if you are still planning to spend significant time in your former state, you better limit it to less than 183 days.

Why? Spending any more time there could mean you'll be treated as a resident of that state and therefore have to pay tax.

And it's not just days spent in-state that tax authorities may scrutinize. They will look at a host of factors to see if you legally owe them taxes despite setting up a new home elsewhere.

"States will often take the most minute shred of evidence to make an assumption of residence and follow that path in pursuit of collecting state taxes," said CPA Jon Blakesberg of Boca Raton, Fla.

This issue, of course, doesn't only apply to people who move to states without income tax. And it isn't exclusive to wealthy people, but they are more likely to be shuttling between properties in different states and end up in the cross hairs of the taxman.

 New York and California are known as particularly aggressive in pursuit of former residents who've moved to places like Florida and Nevada. (Texas, South Dakota, Washington, Wyoming and Alaska also don't impose income taxes, while New Hampshire and Tennessee only tax interest and dividend income.)

But other states may get more aggressive in pursuing former residents, now that technology lets them analyze data better and faster from places like the IRS, said Cara Griffith, editor-in-chief of state tax publications for Tax Analysts.

Quiz: Which state has the highest income tax rate?

To avoid suspicion and prove that you've established legal permanent residence in the new state, you'll have to jump through some hoops.

As soon as you move, you should change your driver's license, car registrations, voter registration and mailing address for all bills and financial statements. You may also need to file a non-resident return to your old state if you earned any income there.

Even a minor oversight could create a headache, Blakesberg noted. One client, for instance, moved from Massachusetts to Florida, but the custodian of his retirement plan kept withholding Massachusetts tax on his annual distribution. The client ended up having some back-and-forth with Massachusetts tax authorities to remedy the situation.

 It's also important to keep proof of how many days you actually spend in your old state. Requirements vary, but typically you must spend less than 183 days in a state to be considered a non-resident.

"If you're straddling the line closely, be prepared for more scrutiny," said Kathleen Thies, senior state tax analyst at CCH.

That's why tax experts advise clients who've moved to keep a meticulous travel log, complete with gas, toll and airline receipts, credit card records and the like.

And be prepared for some weird scheduling problems.

Still sit on the board of a company or other organization in your former home state? Better hope the quarterly meeting won't push you over the 183-day mark.

Will your flight back to your former city get in at 11:55 pm? Those five minutes in-state may count as a day against your total.

 Now, no one's saying you can't maintain ties to your former state -- whether by having a bank account there or owning a property, or coming back to visit friends and family.

But it's a matter of degree. Where is your most active checking account? Where's your main office? Where do you return to most frequently after a trip? If you go to church on Sundays, do you spend more Sundays at your old church or your new one? Same goes for country clubs and gym memberships.

"The courts will look at the entirety of the record. It mostly comes down to 'Where is your life?' " said Verenda Smith, deputy director of the Federation of Tax Administrators.

By Jeanne Sahadi for @CNNMoney

Published: July 26, 2013

Preparing a Family Business for the Next Generation

Baby boomers are reaching retirement age at the rate of 10,000 per day, according to the Pew Research Center. That’s prompting scores of family businesses to be passed down to Gen Xers and millennials. Of course, such transitions are seldom easy, and they can be made more difficult due to generational disconnects. I asked family business experts for their advice on intergenerational family business succession. Their dos and don’ts follow.

Do: Train and coach the successors who will one day lead your family business. “Millennials [born roughly between 1982 and 2004] particularly love mentorship,” says Courtney Templin, chief operating officer at JB Training Solutions in Chicago, and co-author of Manager 3.0: A Millennial’s Guide to Rewriting the Rules of Management (Amacom, 2013). “They have often relied on others to tell them what to do from an early age.”

You also want to get them to buy into your company’s vision and mission, says Aaron McDaniel, a corporate manager, entrepreneur, and author of The Young Professional’s Guide to Managing (Career Press, 2013). “With technology, great customer service looks very different in execution today than 20 years ago, but the principles are the same. If you work to ingrain the mission and vision in the minds of your successor, it will help build the type of legacy you want to leave on the business,” he writes in an e-mail.

Do: Let members of the younger generations working in your business fail, at least occasionally. “Millennials’ parents are overprotective. They swoop in and help out a lot. But failing is one of those really big learning experiences, if people are allowed to make mistakes and cope with them on their own,” Templin says. McDaniel agrees: “Don’t let the failures get catastrophic, but let them mess up on a couple orders. Ask yourself, is it better that they make the mistake now, while you are there to catch it, explain the lesson, and help clean up? Or is it better that they make the mistake after you have gone? As they say, it is better to make a mistake with thousands now than with millions later.”

Do: Really leave the company when you retire. This one sounds easy, but it’s probably the most difficult aspect of family business succession, says Joel Freimuth, president of Blue Pearl Consulting, a Chicago company that works primarily with family-owned manufacturing and distribution businesses. “It’s very difficult to get the older generation out of the company when they need to give up the reins. They don’t know what else to do, and often the children are not helpful in transitioning them,” he says.

One client company reserves an office in its warehouse for its 84-year-old founder. “He sits in there and comes out every once in a while to yell, ‘That isn’t the way I would have done it!’ at someone,” Freimuth says. Sometimes that’s harmless, but other times it’s dangerous when an emeritus CEO won’t get out of the way, says Amy Renkert-Thomas, a joint managing director of family business consultancy Withers Consulting Group in New Haven, Conn., who served as president of her fifth-generation family business for a dozen years. “If everybody in the office feels like they’re used to taking orders from the senior person and they wait until that guy shows up to tell them what to do, that can be very undermining for everyone,” she says.

Do: Call on Gen Xers [born roughly between 1965 and 1982] to help smooth difficult transitions, Freimuth says. “They are the best at making every generation feel there’s still a place for them in the workplace. They can create nice bridges between their fathers and their little brothers, because they are open to using technology and experimenting but they also can understand the traditional ways to do business.”

Don’t: Set unrealistic expectations. “Don’t leave a company expecting your successors to grow it by 50 percent, or expand to X amount of locations by yearend,” Templin says. On the other hand, millennials especially need to learn that it’s not enough just to try hard in business. “Help them recognize that trying isn’t always good enough. They have to accomplish something,” she says.

Don’t: Turn over your company’s technology and social media to your successors without mastering it yourself. “When it comes to using new technologies, I have seen many boomers, my parents included, shut down and avoid using it,” McDaniel writes. “While it is a good idea to let your younger successors manage these parts of the business, it is important for you to understand these things to ensure the business is still being run properly and is not being derailed by these new tools.”

Don’t: Expect your successors to purchase the company from you. “It’s our experience that millennials think they’ve paid into the company by working there for the 10 or 12 years they’ve been there. The idea of paying on an installment plan for the company so they can take ownership is foreign to them. They expect to inherit it,” Freimuth says. “It becomes a challenge to extract value for the outgoing owners.” He often solves the problem by changing the company bylaws and operating agreements before the ownership is transferred, giving the founders a percentage of the profits until they die.

By Karen E. Klein for Bloomberg Businessweek

Published: July 25, 2013

Six Tips on Gambling Income and Losses

Whether you roll the dice, play cards or bet on the ponies, all your winnings are taxable. The IRS offers these six tax tips for the casual gambler.

1. Gambling income includes winnings from lotteries, raffles, horse races and casinos. It also includes cash and the fair market value of prizes you receive, such as cars and trips.

2. If you win, you may receive a Form W-2G, Certain Gambling Winnings, from the payer. The form reports the amount of your winnings to you and the IRS. The payer issues the form depending on the type of gambling, the amount of winnings, and other factors. You’ll also receive a Form W-2G if the payer withholds federal income tax from your winnings.

3. You must report all your gambling winnings as income on your federal income tax return. This is true even if you do not receive a Form W-2G.

4. If you’re a casual gambler, report your winnings on the “Other Income” line of your Form 1040, U. S. Individual Income Tax Return.

5. You may deduct your gambling losses on Schedule A, Itemized Deductions. The deduction is limited to the amount of your winnings. You must report your winnings as income and claim your allowable losses separately. You cannot reduce your winnings by your losses and report the difference.

6. You must keep accurate records of your gambling activity. This includes items such as receipts, tickets or other documentation. You should also keep a diary or similar record of your activity. Your records should show your winnings separately from your losses.

Published: July 23, 2013

Nine Factors That Determine Whether an Activity Is a Hobby

C corporations, S corporations, limited liability companies, limited partnerships, professional corporations, and nonprofit organizations all may be questioned by the IRS regarding profits, losses, and even whether the activity is a business or a hobby. For an activity to be considered a business, it must be engaged in for profit. If the activity is not engaged in for profit, it is subject to the hobby loss rules in Sec. 183. Whether an activity is a business or a hobby is important because under the hobby loss rules, the deductible expenses of a hobby are limited to the amount of income it generates and are further subject to a floor of 2% of adjusted gross income (AGI) as a miscellaneous itemized deduction.

Regs. Sec. 1.183-2(b) lists nine factors for determining whether a taxpayer engages in an activity for profit. However, these factors are not exhaustive, and each must be weighed in the context of the activity.

The first factor is how a taxpayer carries on the activity. A tax preparer would first want to look for how the taxpayer handles the entity, ensuring that he or she is conducting all activity in a businesslike manner. The taxpayer can establish this by maintaining separate personal and business bank accounts, keeping records and books, and acting like similar profitable, operational entities.

The second factor is the expertise of the taxpayer. A business operator should have extensive knowledge of his or her profession or activity, showing that he or she has studied accepted business methods and sought advice from experts.

The third factor is whether the taxpayer expends substantial time and effort in carrying out the activity.

Example: J manages a janitorial service, and his prime contract is with a fast-food chain. J also works three days a week teaching at a local university, and can clean the restaurants only late in the evening after closing or early in the morning before opening. This causes him to devote much of his personal time and effort to the cleaning.

Dedicating personal time to such an activity indicates that a taxpayer entered into the activity, or continued the activity, with the actual and honest objective of making a profit.

The fourth factor is an expectation that assets used in an activity, such as land, may appreciate in value. Regs. Sec. 1.183-2(b)(4) says such appreciation may be considered in lieu of current profits: “[E]ven if no profit from current operations is derived, an overall profit will result when appreciation in the value of land used in the activity is realized since income from the activity together with the appreciation of land will exceed expenses of operation.”

The fifth factor recognizes that even if the taxpayer’s activity is currently unprofitable, it may be for-profit if the taxpayer has been able to convert other activities from unprofitable to profitable in the past, especially ones similar to the current activity.

The sixth factor looks at the taxpayer’s history of income or losses from the activity. The economy plays a big role in how much business J, the hypothetical janitor, can generate and keep. Since J’s main contract is with a fast-food chain whose budget fluctuates with the economy, he sometimes incurs losses. Losses alone are not conclusive, because Sec. 162(a) allows “as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.” However, a long series of losses warrants consideration, and sustained earnings indicate a for-profit activity.

The seventh factor examines the relative amount of the profits and losses. Regs. Sec. 1.183-2(b)(7) states, “The amount of profits in relation to the amount of losses incurred, and in relation to the amount of the taxpayer’s investment and the value of the assets used in the activity, may provide useful criteria in determining the taxpayer’s intent.” However, the presumption of profit motive in Sec. 183(d) says that if an activity has gross income for three or more of the last five years that exceeds the deductions attributable to the activity, the activity generally is presumed to be for-profit.

The eighth factor examines the taxpayer’s financial status, including whether he or she has other sources of income, although their presence does not preclude an activity from being considered for-profit. In the example, J also teaches three days per week at a local university during the academic year. He is not paid when school is not in session. Those months he relies solely on his janitorial business for income. J’s janitorial services can be considered a for-profit activity whether school is in session or not.

The ninth factor is whether the activity provides recreation or involves “personal motives” that may, with other factors, indicate lack of a profit motive. J’s janitorial service entails cleaning grills, mopping floors, and scrubbing public bathrooms. This activity lacks recreational appeal, helping J’s business to be seen as a for-profit activity rather than a hobby.

After reviewing the records and previous tax returns for an activity, a tax preparer can determine whether the activity is a hobby or a for-profit activity based on these nine factors. However, taxpayers must understand that there is no single, defining pattern or factor that is conclusive of whether an activity is for-profit or a hobby, and all the facts and circumstances must be considered. If an activity is deemed a hobby, its income is reported as other income on line 21 of Form 1040, U.S. Individual Income Tax Return, and the related expenses are reported as miscellaneous itemized deductions on Schedule A, Itemized Deductions, subject to the 2%-of-AGI floor.

by Robert Gard, CPA for The Tax Advisor

Published: July 22, 2013

The IRS's Same-Sex Marriage Tax Problem

During the runup to the Supreme Court’s June 26 ruling on the Defense of Marriage Act, one number kept recurring: The government’s refusal to recognize same-sex marriages meant gay couples were denied more than 1,000 federal benefits that straight couples enjoy. Now that the justices have struck down DOMA, gays can look forward to equality under U.S. tax laws. That is, just as soon as the Internal Revenue Service can figure out how to make equality happen. The tax agency has promised to “move swiftly” to recognize gay unions, but for many couples it won’t be as simple as checking the “married” box on their 1040.

Those living in Washington, D.C., or the 13 states that allow same-sex marriages can file a federal tax return next April just like other married couples. Not so for the thousands of gay couples who took their vows in one of those states but who live in one of the 37 others where same-sex marriage isn’t recognized. It’s not yet clear whose definition of marriage the IRS is supposed to follow in evaluating their taxes—the state where the couple got married, or the one in which they reside. And will the federal government recognize gay couples in civil unions who file a joint return?

To avoid confusion, a single nationwide rule makes the most sense, says Patricia Cain, a tax law professor at Santa Clara University in California. “The IRS has the power to construe the Internal Revenue Code,” she says. “So for them it’s, ‘What does the word spouse mean?’ ” President Obama has weighed in, saying it’s his “personal belief” that same-sex couples should get the same federal benefits as married couples regardless of where they live. He’s asked federal agencies to research legal issues that might stand in the way. Such a ruling, though, could cause headaches for the IRS, which until now has typically followed states’ definitions of marriage, says David Herzig, a tax law professor at Valparaiso University. “You may solve this problem,” he says, “but you may open up another.”

Many gay couples might not like what marriage equality looks like on a tax form. Until now, they’ve been able to take advantage of their separate status to maximize tax savings—claiming multiple capital-loss deductions unavailable to opposite-sex married couples or multiple tax credits for adopting children. Straight married spouses with roughly equal incomes typically pay a marriage penalty under the tax code, because more of their income is subject to higher marginal tax rates. Gay couples would get hit with the same penalty. And unless the IRS exempts them from paying back taxes, some same-sex married couples could owe penalties for underwithholding during the time they’ve been married, even though the federal government didn’t recognize their unions until now.

On the other hand, gay couples with unequal incomes would get the same marriage bonus as straight couples and could seek a refund for the extra taxes they paid in recent years. Typically the IRS allows taxpayers three years to redo their tax returns. “One of the biggest issues is what to do retroactively,” says Elda Di Re, a partner at Ernst & Young in New York. “One would think that the IRS will allow there to be filing refunds—but not mandate filing to pay additional tax.”

Another potential mess: what to do about payroll taxes workers paid on employer-provided health insurance for their same-sex spouses, which isn’t taxable for married couples. The IRS could allow refunds, and then businesses would have to figure out how to distribute them to employees and ex-employees. Some companies pay married gay employees extra to cover their health-care tax burdens; they would have to decide whether to seek reimbursements from workers who get income tax refunds. And the IRS has to figure out whether or how to tax alimony payments from gay marriages that end in divorce, and money inherited from the retirement account of a same-sex spouse.

All these decisions will be made with a skeptical—and sometimes hostile—Congress ready to call foul. The IRS is already under scrutiny for its clumsy probes of political groups, and its efforts to formalize gay marriage in the tax code are likely to provoke congressional hearings and lawsuits. “No matter what they do,” says Herzig, “it’s such a volatile issue they’ll end up getting a challenge.”

The bottom line: The IRS, which usually follows states’ definitions of marriage, must find a way to give gay couples nationwide equal treatment.

By Richard Rubin for Bloomberg Businessweek

Published: July 19, 2013

Tips for Employers Who Outsource Payroll Duties

Many employers outsource their payroll and related tax duties to third-party payers such as payroll service providers and reporting agents. Reputable third-party payers can help employers streamline their business operations by collecting and timely depositing payroll taxes on the employer’s behalf and filing required payroll tax returns with state and federal authorities.

Though most of these businesses provide very good service, there are, unfortunately, some who do not have their clients’ best interests at heart. Over the past few months, a number of these individuals and companies around the country have been prosecuted for stealing funds intended for the payment of payroll taxes. Examples of these successful prosecutions can be found on IRS.gov.

Like employers who handle their own payroll duties, employers who outsource this function are still legally responsible for any and all payroll taxes due. This includes any federal income taxes withheld as well as both the employer and employee’s share of social security and Medicare taxes. This is true even if the employer forwards tax amounts to a PSP or RA to make the required deposits or payments. For an overview of how the duties and obligations of agents, reporting agents and payroll service providers differ from one another, see the Third Party Arrangement Chart on IRS.gov.

Here are some steps employers can take to protect themselves from unscrupulous third-party payers:

  • Enroll in the Electronic Federal Tax Payment System  and make sure the PSP or RA uses EFTPS to make tax deposits. Available free from the Treasury Department, EFTPS gives employers safe and easy online access to their payment history when deposits are made under their Employer Identification Number, enabling them to monitor whether their third-party payer is properly carrying out their tax deposit responsibilities. It also gives them the option of making any missed deposits themselves, as well as paying other individual and business taxes electronically, either online or by phone. To enroll or for more information, call toll-free 800-555-4477or visit www.eftps.gov.
  • Refrain from substituting the third-party’s address for the employer’s address. Though employers are allowed to and have the option of making or agreeing to such a change, the IRS recommends that employer’s continue to use their own address as the address on record with the tax agency. Doing so ensures that the employer will continue to receive bills, notices and other account-related correspondence from the IRS. It also gives employers a way to monitor the third-party payer and easily spot any improper diversion of funds.
  • Contact the IRS about any bills or notices and do so as soon as possible. This is especially important if it involves a payment that the employer believes was made or should have been made by a third-party payer. Call the number on the bill, write to the IRS office that sent the bill, contact the IRS business tax hotline at 800-829-4933 or visit a local IRS office. See Receiving a Bill from the IRS on IRS.gov for more information.
  • For employers who choose to use a reporting agent, be aware of the special rules that apply to RAs. Among other things, reporting agents are generally required to use EFTPS and file payroll tax returns electronically. They are also required to provide employers with a written statement detailing the employer’s responsibilities including a reminder that the employer, not the reporting agent, is still legally required to timely file returns and pay any tax due. This statement must be provided upon entering into a contract with the employer and at least quarterly after that. See Reporting Agents File on IRS.gov for more information.
  • Become familiar with the tax due dates that apply to employers, and use the Small Business Tax Calendar to keep track of these key dates.
Published: July 18, 2013

How to Classify Student Workers in Your Small Business

Q: Our business is hiring some college students for the summer. How do we treat them for tax purposes?

A: Different rules apply depending on how you are using the students in your business. For instance, the U.S. Department of Labor has issued guidelines that govern the use of unpaid interns in for-profit companies.

Unless you are bringing on students more for their benefit than your company’s, however, you should be cautious about classifying them as unpaid interns. Some professional organizations discourage companies from using them. And recent litigation in the publishing and entertainment industries has challenged the use of unpaid interns, with some former interns alleging they were improperly classified and should have been paid for their work.

If you plan to pay your summer student workers, you should determine whether they are independent contractors or employees. The IRS has extensive guidelines about how to classify people who work for you.

Basically, if you set the students’ work schedules, assign them tasks, and have them working on-site, they are considered your employees, says Harvey Bookstein, founding partner of accounting firm RBZ in Los Angeles. If they do projects for your company and for other companies, set their own hours, and work completely independently, they may be classified as self-employed.

It’s important to get the details right: If you treat people who should be considered employees as independent contractors, you could be held liable for employment taxes for those workers. “I encourage my clients not to try and avoid the costs of an employee vs. an independent contractor and risk incurring penalties if they get it wrong,” Bookstein says. If you think these students should be classified as independents, it’s not a bad idea to double-check your conclusion with your payroll provider or attorney, just to make sure you don’t run afoul of labor laws.

The major difference from your end is that you must withhold payroll taxes from your employees’ salaries and match their Social Security and Medicare taxes, while you do not withhold taxes or contribute a match on the amount you pay contractors—it’s incumbent on them to pay self-employment taxes. Even if they are classified as employees, because they presumably will work for a few weeks or months, you most likely will not be required to give these students benefits such as health insurance or pension contributions.

CPA Gregg Wind, of Wind & Stern in Los Angeles, says his office has had good experiences with college summer employees. “We’ve found them hard-working and eager to learn. They want to make a positive impression, and they’re just a pleasure to work with,” he says. Bookstein agrees: “We have six to eight students work every year in our office to give them the experience of working in an accounting firm. If we like them, we make them offers for full-time jobs when they graduate.”

Have your summer employees complete IRS Form W-4, so you know how much tax to withhold from their paychecks. If you will be treating them as independent contractors, make sure you have contact information for them in 2014, since you will be required to issue them a 1099-MISC form if you pay them more than $600 in 2013.

Students who will not be required to pay income taxes because they will not earn enough to incur tax liability in 2013 can claim an exemption from income tax withholding on their W-4, so they will not have to file a tax return in 2014. Payroll taxes will still need to be withheld from their pay, however.

By Karen E. Klein for Bloomberg Businessweek

Published: July 17, 2013

IRS Makes Official Postponement of Large-Employer Health Care Penalty

The IRS made official the postponement of the large-employer health care penalty and certain information reporting rules that had been informally announced July 2 on a Treasury Department blog. Notice 2013-45 postpones the information reporting rules under Secs. 6055 and 6056 and the Sec. 4980H shared responsibility penalty to 2015, to give employers, insurers, and other providers more time to adapt their health coverage and reporting systems. (The original effective date for all three Code sections was 2014.)

As the notice explains, the postponement of the Sec. 6056 information reporting rules makes the 2014 relief from the shared responsibility payments necessary. The transition relief from information reporting under Sec. 6056 is expected to make it impractical to determine which employers owe shared responsibility payments for 2014 under the employer shared responsibility provisions. Accordingly, the IRS will not assess any shared employer shared responsibility payments for 2014.

The notice reiterated that the postponement will have no effect on the availability of the premium tax credit under Sec. 36B, which assists certain low- and moderate-income individuals who enroll in a qualified health plan through a health insurance exchange (and who are not eligible for employer coverage that is affordable and provides minimum value) in paying their premiums. It also does not affect the individual mandate under Sec. 5000A, which imposes a penalty on individuals who do not have minimum essential coverage and will apply, as scheduled, beginning in 2014.

Treasury expects to publish proposed regulations implementing the Sec. 6055 information-reporting requirements for insurers, self-insuring employers, and other parties that provide health coverage, and the Sec. 6056 information-reporting requirements for employers that provide health coverage to their full-time employees this summer. The proposed rules will reflect the transition relief for the information reporting rules for 2014.

Although the effective date for these provisions will be 2015, the government will encourage voluntary compliance in 2014 to prepare for full application of the rules in 2015 and allow “[r]eal world testing of reporting systems and plan designs.” In the meantime, the IRS wants to have additional time to discuss the reporting requirements with stakeholders to enable it to simplify the requirements while ensuring that the law is being implemented effectively.

By Sally P. Schreiber, J.D. for Journal of Accountancy

Published: July 16, 2013

Special Tax Benefits for Armed Forces Personnel

If you’re a member of the U.S. Armed Forces, the IRS wants you to know about the many tax benefits that may apply to you. Special tax rules apply to military members on active duty, including those serving in combat zones. These rules can help lower your federal taxes and make it easier to file your tax return.

Here are ten of those benefits:

1. Deadline Extensions.  Qualifying military members, including those who serve in a combat zone, can postpone some tax deadlines. This includes automatic extensions of time to file tax returns and pay taxes.

2. Combat Pay Exclusion.  If you serve in a combat zone, you can exclude certain combat pay from your income. You won’t need to show the exclusion on your tax return because qualified pay isn’t included in the wages reported on your Form W-2, Wage and Tax Statement. Some service outside a combat zone also qualifies for this exclusion.

3. Earned Income Tax Credit.  You can choose to include nontaxable combat pay as earned income to figure your EITC. You would make this choice if it increases your credit. Even if you do, the combat pay remains nontaxable.

4. Moving Expense Deduction.  If you move due to a permanent change of station, you may be able to deduct some of your unreimbursed moving costs.

5. Uniform Deduction.  You can deduct the costs and upkeep of certain uniforms that regulations prohibit you from wearing while off duty. You must reduce your expenses by any reimbursement you receive for these costs.

6. Signing Joint Returns.  Both spouses normally must sign joint income tax returns. However, when one spouse is unavailable due to certain military duty or conditions, the other may, in some cases sign for both spouses, or will need a power of attorney to file a joint return.

7. Reservists’ Travel Deduction.  If you’re a member of the U.S. Armed Forces Reserves, you may deduct certain travel expenses on your tax return. You can deduct unreimbursed expenses for traveling more than 100 miles away from home to perform your reserve duties.

8. Nontaxable ROTC Allowances.   Educational and subsistence allowances paid to ROTC students participating in advanced training are not taxable. However, active duty pay – such as pay received during summer advanced camp – is taxable.

9. Civilian Life.  After leaving the military, you may be able to deduct certain job hunting expenses. Expenses may include travel, resume preparation fees and job placement agency fees. Moving expenses may also be deductible.

10. Tax Help.  Most military bases offer free tax preparation and filing assistance during the tax filing season. Some also offer free tax help after April 15.

Published: July 15, 2013

Tips for Taxpayers Who Travel for Charity Work

Do you plan to travel while doing charity work this summer? Some travel expenses may help lower your taxes if you itemize deductions when you file next year. Here are five tax tips the IRS wants you to know about travel while serving a charity.

1. You must volunteer to work for a qualified organization. Ask the charity about its tax-exempt status. You can also visit IRS.gov and use the Select Check tool to see if the group is qualified.

2. You may be able to deduct unreimbursed travel expenses you pay while serving as a volunteer. You can’t deduct the value of your time or services.

3. The deduction qualifies only if there is no significant element of personal pleasure, recreation or vacation in the travel. However, the deduction will qualify even if you enjoy the trip.

4. You can deduct your travel expenses if your work is real and substantial throughout the trip. You can’t deduct expenses if you only have nominal duties or do not have any duties for significant parts of the trip.

5. Deductible travel expenses may include:

  • Air, rail and bus transportation
  • Car expenses
  • Lodging costs
  • The cost of meals
  • Taxi fares or other transportation costs between the airport or station and your hotel
Published: July 12, 2013

The Questions to Ask Before Adopting an ESOP

Talking to business owners about succession planning, the idea of an employee stock ownership plan, or ESOP, always comes up.

It’s a method of leaving a business that many business owners are fascinated with, and one that could potentially leave a business in the hands of those who have a deep-seated interest in maintaining its prosperity: its hard-working employees. Gar Alperovitz, a professor at the University of Maryland, recently extolled the virtues of ESOP’s in an Op-Ed in The New York Times. As he describes, companies in which employees have a direct ownership stake typically have higher productivity, profits and other benefits.

The bottom line, however, is that the structures of such programs are complicated. The Web site of the National Center for Employee Ownership, which endorses ESOPs, can give an overview of just how complicated they are. That’s not to say that business owners should shy away from such plans. But before settling on starting an ESOP, there are several factors to first consider:

Is you company big enough? An ESOP is expensive to put in place. It will likely cost at least $150,000 and can easily cost $250,000 to establish. For an ESOP to be a cost-effective transaction, you need to have a company that has at least 40 employees and has over $5 million in annual sales.

To establish an ESOP, a company is going to need at least two lawyers, a valuation expert and a trustee for the program. Then, there are continuing compliance and costs for extra tax returns and annual valuations. This is not a strategy for an owner who just wants a simple exit.

Are you ready to share your financials? At the very least, you will have to allow your employees access to the annual valuation of the company. And companies that use best practices go much further than the minimal requirement.

For example, King Arthur Flour, which converted to an ESOP in 1996, spend lots of time and money teaching employees to be financially literate. Steve Voigt, chief executive, says he believes that effort is one of the drivers of the company’s success. He believes that when you combine employee ownership with financial understanding employees take steps to make a better and more sustainable company.

Does your company have growth prospects? Mr. Voigt feels strongly about this point. Employees are beneficiaries of the stock value of the company. If your company isn’t growing and doesn’t increase in value, the ESOP could become a negative in the eyes of your employees.

Do you have a good nonfinancial reason to form an ESOP? ESOPs are strong financial tools, and they have great tax benefits. But companies that undertake them for financial reasons only will often run into trouble.

Will Raap, the former owner of Gardener’s Supply Company, a gardening company that sells products through mail order and the Web, wanted to keep the jobs he had created in Burlington, Vt. He knew that if he sold the company to the suitors that were knocking on this door, there was a good chance the jobs would leave the state.

Mr. Raap started out having the program owning a minority of the shares. He hoped the ESOP would work well enough that he would feel comfortable having the ESOP take control of the company and keep the jobs he created in Vermont. As of December 2009, the company became 100 percent employee-owned.

I believe one of the reasons Gardener’s ESOP is successful is because Mr. Raap had more than a financial reason to start an ESOP at his company.

Do you have good management in place to take over? A successful ESOP should last for more than one generation of managers. The owner needs to establish a method for identifying and training the next generation before starting an ESOP.

Chris Mercer from Mercer Capital had a good reason to find a new shareholder for his company. He had a partner who had reached retirement age and needed to be bought out. Mr. Mercer, an expert in business transition issues, chose an ESOP as a good way to buy out his partner and start moving management of his valuation and advisory firm to the next generation of managers.

Like Gardener’s Supply, the ESOP at Mercer Capital became a minority shareholder. This allowed him to test his new managers to see whether they could run the company. It turns out Mr. Mercer is happy with the next generation of mangers, and he’s now thinking about having the ESOP buy more of his stock so he can start his own transition out of the company he founded.

Do you have managerial training in place? An ESOP is intended to last for several generations. This will only happen if there is an active training program to help create future managers.

Mr. Voigt of King Arthur Flour has instituted several programs to address this. Cross-training across various job functions is the norm. Management seminars are offered to employees who want to advance.

Mr. Voigt points out that a good reason to grow the company is to provide opportunities for younger employees who want to grow into more responsible positions, and thus creating a deep bench for leadership.

Are you in a rush? King Arthur Flour, Gardener’s Supply and Mercer Capital – three very different businesses – all started out by having their ESOP’s take minority positions. This allowed them the opportunity to unwind the structure if the ESOP’s weren’t working out.

An ESOP is not a quick succession strategy for selling shareholders. In all three cases, the owners took years, sometimes more than 20 years, to complete the sale of the company to the ESOP. You must have patience and time to make such a plan work. Many owners I’ve spoken with have decided against ESOP’s simply because of the time necessary for them to separate from their business. If you want a fast exit, an ESOP is probably not for you.

Many business owners who start a business make all of the decisions by themselves and don’t want to share information with anyone. These owners are not going to try an ESOP. But those who like the idea of including employees in the success of the company and are willing to get more people involved in decision-making should explore the strategy.

By Josh Patrick for You're The Boss for the New York Times

Published: July 11, 2013

Job Search Expenses May Lower Your Taxes

Summer is often a time when people make major life decisions. Common events include buying a home, getting married or changing jobs. If you’re looking for a new job in your same line of work, you may be able to claim a tax deduction for some of your job hunting expenses.

Here are seven things the IRS wants you to know about deducting these costs:

1. Your expenses must be for a job search in your current occupation. You may not deduct expenses related to a search for a job in a new occupation. If your employer or another party reimburses you for an expense, you may not deduct it.

2. You can deduct employment and job placement agency fees you pay while looking for a job.

3. You can deduct the cost of preparing and mailing copies of your résumé to prospective employers.

4. If you travel to look for a new job, you may be able to deduct your travel expenses. However, you can only deduct them if the trip is primarily to look for a new job.

5. You can’t deduct job search expenses if there was a substantial break between the end of your last job and the time you began looking for a new one.

6. You can’t deduct job search expenses if you’re looking for a job for the first time.

7. You usually will claim job search expenses as a miscellaneous itemized deduction. You can deduct only the amount of your total miscellaneous deductions that exceed two percent of your adjusted gross income.

For more information, contact our office, we're happy to help!

Published: July 8, 2013

Manage Small Business Debt by Prioritizing Bills

Managing your business while steeped in debt feels overwhelming and can impair your ability to conduct everyday business tasks. When you have more bills than you can afford to pay, it’s difficult to know where to start. Here is a guide to assist you in identifying the top priority bills.

Choosing to pay essential bills first protects you from legal repercussions, enables business transactions to continue uninterrupted, addresses credits and loans based on preserving credit history, and identifies what to pay as a last resort.

Tackle your most crucial bills by making payments, starting in this order:

Taxes - Money owed for federal payroll, state and income taxes must be addressed first, otherwise fines and penalties will increase your debt. The Internal Revenue Service has the authority to garnish wages, seize business property and equipment, and even gain access and take funds from an Individual Retirement Account.

Employee Payroll - State laws require that employees’ wages be paid on time. If you violate these laws, you may lose talented workers who require owed wages to pay personal bills and incur serious penalties.

Overdue Bills - Bills that are overdue by 60 days or more are known as aged payables, and can reduce your business credit, which may bar you from future financing possibilities. Aged payables take precedence because as long as they remain unpaid, they continue to gain interest. Communicating with creditors and even making partial payments is a step toward good standing.

Operating Costs - If you don’t pay utilities and rent, you’ll be left in the dark, unable to conduct the business required to pay your bills. Negotiate with service providers and your landlord to find a temporary solution if possible. Forbearance or partial payment plans are better than being locked out your office.

Major Vendors and Suppliers - Protect relationships with the vendors and supplies that must work in conjunction with you to continue profiting. Request to modify payment plans and be transparent about your situation and recovery plan. This may buy time for you to remain competitive, instead of ceasing production temporarily.

Secured Debt - Businesses that are corporations or limited liability companies are only liable for debts that are personally guaranteed. Rather than handling credit card debt, which is mostly unsecured, repay secured debts like home mortgage and auto loan, as these obligations are tied to collateral. Repossession of equipment for nonpayment can threaten your profitability.

Insurance - As you eliminate essential bills, make compromises by downsizing coverage, increasing deductibles or temporarily functioning without liability insurance.

Large Bills - These take priority over smaller bills because they pose a greater threat to your business credit history. Attempt to make partial payments before leaving these unpaid for an extended period of time.

Credit Cards - Because creditors must file a lawsuit against you and go through court proceedings to get a judgment, paying these bills is a lower priority in terms of keeping your business running. However, interest charges can add up, so make at least minimum payments once funds are available.

Non-essential Debts - The last debts to worry about are professional dues, advertising, entertainment and maintenance.

Don’t let debt paralyze your ability to function when the small profits you are earning can be leveraged to preserve the fundamental costs that will sustain your business. Learning which debts should be your primary concerns will enable you to slowly regain financial control.

Before another past due notice lands in your mail box, start paying your debtors.

By Jon Robinson for Noobpreneur.com

Published: July 5, 2013

Tax Tips if You’re Starting a Business

If you plan to start a new business, or you’ve just opened your doors, it is important for you to know your federal tax responsibilities. Here are five basic tips from the IRS that can help you get started.

1. Type of Business.  
Early on, you will need to decide the type of business you are going to establish. The most common types are sole proprietorship, partnership, corporation, S corporation and Limited Liability Company. Each type reports its business activity on a different federal tax form.

2. Types of Taxes.  
The type of business you run usually determines the type of taxes you pay. The four general types of business taxes are income tax, self-employment tax, employment tax and excise tax.

3. Employer Identification Number.  
A business often needs to get a federal EIN for tax purposes. Check IRS.gov to find out whether you need this number. If you do, you can apply for an EIN online.

4. Recordkeeping.  
Keeping good records will help you when it’s time to file your business tax forms at the end of the year. They help track deductible expenses and support all the items you report on your tax return. Good records will also help you monitor your business’ progress and prepare your financial statements. You may choose any recordkeeping system that clearly shows your income and expenses.

5. Accounting Method.  
Each taxpayer must also use a consistent accounting method, which is a set of rules that determine when to report income and expenses. The most common are the cash method and accrual method. Under the cash method, you normally report income in the year you receive it and deduct expenses in the year you pay them. Under the accrual method, you generally report income in the year you earn it and deduct expenses in the year you incur them. This is true even if you receive the income or pay the expenses in a future year.

Published: July 3, 2013

Tax Tips for Newlyweds

Late spring and early summer are popular times for weddings. Whatever the season, a change in your marital status can affect your taxes. Here are several tips from the IRS for newlyweds.

  • It’s important that the names and Social Security numbers that you put on your tax return match your Social Security Administration records. If you’ve changed your name, report the change to the SSA. To do that, file Form SS-5, Application for a Social Security Card. You can get this form on their website at SSA.gov.
  • If your address has changed, file Form 8822, Change of Address to notify the IRS. You should also notify the U.S. Postal Service if your address has changed. You can ask to have your mail forwarded online at USPS.com or report the change at your local post office.
  • If you work, report your name or address change to your employer. This will help to ensure that you receive your Form W-2, Wage and Tax Statement, after the end of the year.
  • If you and your spouse both work, you should check the amount of federal income tax withheld from your pay. Your combined incomes may move you into a higher tax bracket.
  • If you didn’t qualify to itemize deductions before you were married, that may have changed. You and your spouse may save money by itemizing rather than taking the standard deduction on your tax return. You’ll need to use Form 1040 with Schedule A, Itemized Deductions. You can’t use Form 1040A or 1040EZ when you itemize.
  • If you are married as of Dec. 31, that’s your marital status for the entire year for tax purposes. You and your spouse usually may choose to file your federal income tax return either jointly or separately in any given year. You may want to figure the tax both ways to determine which filing status results in the lowest tax. In most cases, it’s beneficial to file jointly.

 

Published: July 2, 2013

The DOMA Ruling's Implications for Employers Explained

The Supreme Court ruled that federal law must recognize same-sex marriages by states that have legalized them. What does that mean for employers?

Any federal benefits and laws that apply to an employee’s spouse will now extend to same-sex spouses in legally recognized marriages. There are more than 1,000 things that apply. The big ones that employers need to think about are health and retirement benefits, taxes, and family leave.

I’m already offering health insurance to employees’ same-sex spouses. Do I need to do anything?
Yes. “Employers who offered same-sex couples health insurance benefits were required to treat those as income to the employee, because technically they were giving something of value to someone who wasn’t related to them,” says Boston attorney Scott Squillace, who advises same-sex couples. Going forward, federal tax law will treat those benefits the same as an employee’s own health insurance. That means they’re tax-free for the employee. It will also mean employers no longer have to pay payroll taxes on that compensation.

What are the tax implications for employees?
Not having a spouse’s benefits treated as income may change their tax rate, says Mona Smith, a Seattle attorney. “Your tax bracket could be lower,” she says. Employees may want to adjust their withholdings on their W-4 forms.

That sounds good. Any downside for workers?
High-income same-sex spouses may be subject to a higher tax rate when the federal government recognizes their marriages, says Joseph Milizio, a partner at the Long Island law firm Vishnick McGovern Milizio. “If both employees are high-wage earners, the marriage penalty comes into effect,” he says.

What about retirement plans?
Employers and workers may have to review retirement plans to make sure that the federal marriage recognition doesn’t change their beneficiaries. Spouses are the default beneficiaries for pension plans. Employees may have to make changes if they want to designate a child or someone else besides a spouse as a beneficiary. Companies should also make sure that their plans are compliant. “Employers need to look at their plans to make sure that they don’t say this will not be available to same-sex spouses,” Milizio says.

Any other benefits that I need to think about?
COBRA benefits that let former employees continue buying health insurance through the company plan will extend to same-sex couples. Likewise, employees will be entitled to take family and medical leave to care for a spouse who is seriously ill.

I have some employees in states that recognize same-sex marriage and others that don’t. Are their benefits the same?
Things get very tricky when you start crossing state lines. “There are certain federal benefits that derive from being married just based on having a marriage anywhere,” Squillace says. Others “derive from being married based on where you’re domiciled when you apply for the benefit.” For others, there’s no clear answer.

That sounds like a mess. When will things get clearer?

The vast federal bureaucracy will have to overhaul rules for a post-DOMA world. “All of the federal agencies now have to come up with policies to determine, ‘Well, how are we going to treat people who are married but don’t necessarily live in a recognition state?’” Milizio says.

By John Tozzi for Bloomberg Businessweek

Published: July 1, 2013

Groups Propose to Simplify Accounting for Small Firms

Making accounting easier for small companies — and saving them the need to report some losses that big companies can face — has become a new preoccupation of the accounting profession.

The American Institute of Certified Public Accountants, a trade group, will announce on Monday that it is has created a “framework” that would simplify accounting for such companies. It would differ from the “generally accepted accounting principles,” or GAAP, that public companies must follow in a number of ways, large and small.

On the same day, the Financial Accounting Standards Board, which determines just what those accepted principles are, plans to propose its first exceptions for private companies — that is, for companies whose securities are not traded publicly. Those exceptions are expected to deal with some of the same issues as the institute’s proposal.

“The framework is going to deliver tailored financial reporting for the small business community,” said Robert Durak, the institute official who led the effort to compile it. “It provides very meaningful, clear accounting.”

Some private companies have complained that preparing GAAP statements costs too much, with a considerable portion of the cost coming from rules that provided for disclosures that might be irrelevant. The companies say that because owners and lenders generally know one another, it is easy for them to arrange to get only the information they actually need, whether or not the rules require companies to provide it.

In the United States, unlike some European countries, there are no legally required accounting standards for most companies. The Securities and Exchange Commission requires that companies that sell securities in the public markets follow GAAP, but all others can use any form of accounting that the company and its creditors find acceptable. Many smaller companies just use tax accounting, because they must file tax returns like everyone else.

To win widespread acceptance, the institute framework would need support from two groups: accountants and bank lenders. “We think it will be a grass-roots-type of effort,” Mr. Durak said, where local certified public accountant firms “go to their clients and say, ‘This might be the right option for you. Let’s go talk to your banker.’ ”

Any company that chooses to adopt the framework would face new headaches if it ever decided to go public. Then it would have to redo its financial statements for at least two years to conform to accepted accounting principles. “The framework is not intended for companies that are looking to go public,” Mr. Durak said.

The changes being proposed for a new GAAP for private companies might prove less of a problem. Because they are presented as specific changes from the normal rules, it might be easier to reverse them if a company needed to do so to sell securities in public markets.

Efforts to get simpler accounting for smaller companies have been going on for several years. In 2009, several accounting organizations appointed a “blue-ribbon panel on standard-setting for private companies.” In 2011, the panel recommended that “exceptions and modifications” be made to GAAP for private companies, but advised against “a separate, self-contained GAAP for private companies or a wholesale reorganization of GAAP.”

One dissenting member of the group contended that only companies that did not like some standards, not users of financial statements, were demanding changes.

As a result, the Financial Accounting Foundation, the parent of the standards board, set up a council to advise changes for private companies. It has recommended three changes, and the board is expected to propose them formally them on Monday.

One area where change appears to be coming is in accounting for good will, which is created when a company acquires another company for more than the tangible assets are worth. GAAP now requires periodic reviews to see if the good will is “impaired,” and needs to be written down, because the acquired operation has lost value.

The institute framework deals with that by saying such companies never need to review whether good will in impaired. The proposal from the standards board is slightly less permissive, allowing companies to avoid writing down good will unless it is clear the entire company is worth so little that there is no justification for having good will on its balance sheet.

By Floyd Norris for The New York Times

Published: June 28, 2013

Inheritance Tax Loan Change

A change in the way loans are treated for inheritance tax (IHT) purposes could increase the taxable value of your estate on death, and the amount of IHT payable. This change will affect IHT calculated on deaths occurring after the Finance Act 2013 is passed, (expected mid-July 2013) but applies to loans which are already in place.

At present any debts owed by the estate are deducted from the net estate after reliefs, such as business property relief (BPR), have been given. Broadly BPR provides 100% or 50% relief from IHT on the value of your business assets and unquoted shares. After the Finance Act 2013 is passed, the value of a loan must be deducted from the asset it was used to acquire.

Say in the past you increased the loan on your home to invest in your business, and that loan is still outstanding on your death. To calculate the IHT due that business part of the loan must be deducted from the value of your business and not from the value of your home. This reduces the value of your estate exempt from IHT under business property relief, and increases the taxable value of the remaining estate.

Also if the loan owing at death is not actually repaid by the estate to the creditor after death, that loan can’t be deducted from the estate at all, unless there is some commercial reason for not repaying the loan.

Remember IHT is payable at 40% on the taxable value of your estate that exceeds £325,000. A lower rate may be payable if you leave at least 10% of your net estate to charity. There are other ways of mitigating IHT, but we need to discuss your individual circumstances to formulate a plan.

By Chris Thomas for One Accounting Blog


Published: June 27, 2013

How Not-For-Profits Can Combat Fraud

The nature of not-for-profit organizations can make them vulnerable to fraud.

Not-for-profits often have religious affiliations, and their missions often are to do good for less fortunate people. This do-good culture can make not-for-profits susceptible to placing a greater trust in their employees than for-profit businesses.

“Trust is not an internal control,” warned Gregory Capin, CPA, a partner at CapinCrouse LLP in Atlanta.

“As soon as there is unbridled trust, the environment is ripe for illegal activity,” said Nancy Young, CPA, a senior manager with the business assurance services group at Moss Adams in Portland, Ore.

Capin and Young spoke last week at the AICPA Not-for-Profit Industry Conference in Washington, where fraud was a frequent topic of discussion. Problems not-for-profits encounter include:

  • Low pay in the not-for-profit sector can cause employees to rationalize fraudulent behavior because they may think they could make more money at a for-profit company and therefore feel entitled to compensation that is not rightfully theirs.
  • A lack of segregation of duties, which is an important preventive control, because staffs can be small and resources scarce.
  • Accounting systems that don’t have robust abilities to limit access of employees to functions that are related to their own duties.
  • Susceptibility to management override of controls.
  • Reluctance by management to implement appropriately severe corrective controls because of a culture of forgiveness that can exist at not-for-profits.

These factors—as well as the trust factor—mean that not-for-profits need to be especially attentive to the topic of fraud.

“That’s the thing that we would preach, that you need to be more vigilant to protect the people, to protect the organization, to protect the reputation,” Capin said.

The absence of preventive controls such as segregation of duties means detective controls are especially important at not-for-profits, according to Young. Detective controls she recommends include:

  • Exception reports. Review payroll to see who was paid this period who wasn’t paid last period, and check with HR to make sure the person being paid is legitimate. Taking a close look at employees who claim more than 20 federal and state exemptions also may be prudent, Young said.
  • Watching for warning signs. Employees who complain or are disgruntled; are financially needy; have close relationships with vendors or suppliers; excessively resist process changes; or work long hours and never take vacations may be exhibiting warning signs of fraudulent behavior.
  • Creating an anonymous fraud hotline. Tips by fellow employees are recognized as the most frequent identifier of fraud.

Board members with extensive financial experience also can play an important part in preventing and detecting fraud. And Young recommends that CPAs who serve on boards become trained in fraud awareness.

When fraud is detected, the corrective controls are critical to preventing future illegal behavior, Young said. She said organizations that merely accept the employee’s apology and transfer him or her to another department are leaving themselves vulnerable to potential fraud from other employees who see that illegal behavior does not result in serious consequences.

Young applauded a client that discovered on a Friday that an employee was committing fraud. By Saturday, law enforcement officers were ready to go to the employee’s house to make an arrest. But management told the police to wait until 10 a.m. Monday to make the arrest. Officers came into the office and led away the employee in handcuffs in full view of the rest of the staff, making an impression unlikely to be forgotten.

Capin recommends that clients who discover fraud consult with legal counsel immediately so they can comply with laws and regulations in addition to reviewing their governing documents to determine a response.

By Ken Tysiac for the Journal of Accountancy

Published: June 25, 2013

When Employers Want to Avoid Paying for Health Insurance

Question: I cut my employees’ hours to 28 per week to avoid paying Obamacare. If an employee really needs 40 hours to make ends meet, can I hire him part-time at another one of my businesses without paying for his health insurance?

Answer: The short answer is no, although your question raises several issues for small business owners who are subject to Obamacare’s pay-or-play rules, meaning they have more than 50 full-time employees (or the equivalent in full-time and part-time workers) and are thus mandated to offer insurance coverage. (Remember, small employers with fewer than 50 workers are exempt from having to offer insurance under Obamacare.)

Why can’t you give an employee two part-time jobs to help him out financially but still avoid paying for his health insurance? Because of long-standing IRS aggregation rules that govern tax treatment and retirement plans at multiple businesses owned by the same individuals or entities. Those rules are part of the Employee Retirement Income Security Act of 1974 (Erisa) and—unsurprisingly—they are quite complicated. If you want the full rundown on defining ownership percentages for controlled groups (as these companies are called by the IRS).

Basically, what it boils down to is that “if one individual or entity owns or has substantial ownership in several businesses, all of those businesses are essentially considered one entity,” says Brian Uhlig, a vice president at brokerage GCG Financial in Chicago. And if the businesses count as one entity, employee hours at all the businesses are counted together. So if your employee worked 28 hours a week at one of your companies and 10 hours a week at another within the controlled group, he would be considered to be working 38 hours a week, and you would potentially be subject to a penalty for not offering him coverage.

This year, in sectors as diverse as academia, government, and restaurant franchising, there have been reports of companies reducing employees’ hours to no more than 29 per week, so they are classified as part-timers and do not qualify for mandatory health insurance coverage. The law begins imposing annual penalties of $2,000 per employee in 2014 on employers with more than 50 employees that do not offer coverage to their full-time employees.

There is some question, however, about whether reducing employee hours in order to avoid providing them with benefits might be open to legal challenges under Erisa. There is also a look-back provision of the health reform law, which considers employee hours over a 12-month period—depending on when your health insurance contract comes up for renewal—in determining whether they should be eligible for insurance coverage, says Jay Starkman, chief executive officer of Engage PEO, a Fort Lauderdale professional employer organization that handles administration and payroll for 100 small businesses.

“Either way, you probably can’t get around” the pay-or-play provision, Starkman says. “It’s either going to cost you an unhappy employee or about $2,500 a year,” considering that average insurance premiums across the country are $400 a month and the employer is required to pay about half that cost for eligible employees.

Starkman says business owners looking for ways to avoid having to provide insurance should not be vilified as bad people. “It’s not as if they’re not a good person because they’re trying to find loopholes. It’s a time-honored tradition—our entire tax system is based on finding deductions and loopholes.”

Bonita Hatchett, a partner in the Barnes & Thornburg law firm’s Chicago office, says she’s had many inquiries from clients who are looking at hiring part-time employees or reducing full-timers’ hours as an alternative to providing insurance.

Of course, if you want to help your employee, you do have another alternative, she suggests: “Just increase the person’s pay, so instead of working 40 hours a week they may be working 28 hours a week but making more because their hourly rate has gone up.”

By Karen E. Klein for Bloomberg BusinessWeek Smart Answers

Published: June 24, 2013

6 Reasons Why the IRS Is a Hot Mess Right Now

The U.S. Internal Revenue Service has been embroiled in controversy for around a month now, with reports of lavish spending as well as ‘mistreatment’ of conservative groups shaming the agency. All of this has happened quickly, and with hearings commencing on Capitol Hill, here’s a recap of why the IRS is a complete hot mess right now:

1. Livin’ Large
The IRS has been quite loose with the very tax money it collects, with reports surfacing recently that $50 million was spent on employee conferences. That money accounted for 220 conferences between 2010 and 2012; a period of time in which the IRS failed to negotiate for discounted rooms — a standard procedure for the government — purchased baseball tickets for its employees, and spent $135,000 on speakers, including one on the topic of “leadership through art” for the price of $17,000. Many employees were also upgraded to presidential suites at the conferences that ranged from $1,500 to $3,500 per night.

2. FBI Probe
The U.S. Federal Bureau of Investigation has announced it will launch a criminal probe of the IRS following the revelation that the agency had been inappropriately targeting conservative groups during the 2012 election as they sought to obtain tax-exempt status. President Barack Obama has declared this behavior “intolerable and inexcusable” amid an investigative report that found this activity continued uninterrupted for 18 months. Attorney General Eric Holder told the press: “The FBI is coordinating with the Justice Department to see if any laws were broken in connection with those matters related to the IRS.” Groups were targeted based on certain criteria, including containing the phrases “Tea Party” and “Patriot.”

3. Asking for More
Since the passage of the healthcare law, the IRS is finding itself strapped with new responsibilities, as the Patient and Affordable Care Act implements new taxes in a variety of forms. As such, the agency has asked for $1 billion to aid its expanded duties in implementing the law amid findings of excess spending and misbehavior. This funding increase on the rocks now, with Rep. Hal Rogers (R-Ky.) saying: “The power of the purse rests in Congress. We’re prepared to use that purse to get to the truth.”

4. Inspector General’s Report

A report by the Treasury Inspector General for Tax Administration detailed the abundant spending at the IRS from 2010 to 2012, and highlighted a “Star Trek” training video being made, as well as accusing the agency of failing to lower its own costs. The IRS reported that it spent over $50,000 on the production of videos, including the “Star Trek” parody, although the report shows that the IRS did not keep any documentation related to the costs of these productions. Specifically, no documentation was maintained to track the expenditures for, “script development, makeup, lighting, and videotaping,” resulting in the report recommending more stringent procedures on the production of training videos, and the monitoring of their costs.

5. Apologizing for the Past
Danny Werfel, upon assuming the role of acting IRS commissioner, was also placed in the role of chief apologizer, being forced to take responsibility for the wrongs of his predecessors. Werfel admitted the problems from the inspector general’s report, and conceded that public confidence in his agency was damaged. He even went so far as to suggest the agency didn’t need more money at this time. “If you start with more money, it’s the wrong starting point,” he said when discussing how to fix the agencies problems.

6. Change of Stories
The IRS initially reported that the actions against conservatives taken by the Cincinnati office were their own initiative, and that Washington had no part in the behavior. However, Rep. Darrell Issa (R-Calif.) is intent on proving that this is not the case, even accusing the White House Press Secretary Jay Carney of being a “paid liar.” Cincinnati employees have indicated through interviews to House committees that their actions were induced by orders from Washington. Issa has since claimed that Lois Lerner, head of the tax-exempt division which oversaw the scandal, invoked her Fifth Amendment rights, “not because there’s a rogue in Cincinnati, it’s because this is a problem that was coordinated in all likelihood right out of Washington headquarters And we’re getting to proving it.”

By Curtis Tate for Wall St. Cheat Sheet

Published: June 21, 2013

12 Things You Need To Know About Financial Statements

Knowing how to work with the numbers in a company's financial statements is an essential skill for stock investors. The meaningful interpretation and analysis of balance sheets, income statements and cash flow statements to discern a company's investment qualities is the basis for smart investment choices. However, the diversity of financial reporting requires that we first become familiar with certain general financial statement characteristics before focusing on individual corporate financials. In this article, we'll show you what the financial statements have to offer and how to use them to your advantage.

1. Financial Statements Are Scorecards
There are millions of individual investors worldwide, and while a large percentage of these investors have chosen mutual funds as the vehicle of choice for their investing activities, a very large percentage of individual investors are also investing directly in stocks. Prudent investing practices dictate that we seek out quality companies with strong balance sheets, solid earnings and positive cash flows.

Whether you're a do-it-yourself or rely on guidance from an investment professional, learning certain fundamental financial statement analysis skills can be very useful - it's certainly not just for the experts. Over 30 years ago, businessman Robert Follet wrote a book entitled "How To Keep Score In Business" (1987). His principal point was that in business you keep score with dollars, and the scorecard is a financial statement. He recognized that "a lot of people don't understand keeping score in business. They get mixed up about profits, assets, cash flow and return on investment."

The same thing could be said today about a large portion of the investing public, especially when it comes to identifying investment values in financial statements. But don't let this intimidate you; it can be done. As Michael C. Thomsett says in "Mastering Fundamental Analysis" (1998):

"That there is no secret is the biggest secret of Wall Street - and of any specialized industry. Very little in the financial world is so complex that you cannot grasp it. The fundamentals - as their name implies - are basic and relatively uncomplicated. The only factor complicating financial information is jargon, overly complex statistical analysis and complex formulas that don't convey information any better than straight talk." (For more information, see Introduction To Fundamental Analysis and What Are Fundamentals?)

What follows is a brief discussion of 12 common financial statement characteristics to keep in mind before you start your analytical journey.

2. What Financial Statements to Use
For investment analysis purposes, the financial statements that are used are the balance sheet, the income statement and the cash flow statement. The statements of shareholders' equity and retained earnings, which are seldom presented, contain nice-to-know, but not critical, information, and are not used by financial analysts. A word of caution: there are those in the general investing public who tend to focus on just the income statement and the balance sheet, thereby relegating cash flow considerations to somewhat of a secondary status. That's a mistake; for now, simply make a permanent mental note that the cash flow statement contains critically important analytical data.

3. Knowing What's Behind the Numbers
The numbers in a company's financials reflect real world events. These numbers and the financial ratios/indicators that are derived from them for investment analysis are easier to understand if you can visualize the underlying realities of this essentially quantitative information. For example, before you start crunching numbers, have an understanding of what the company does, its products and/or services, and the industry in which it operates.

4. The Diversity of Financial Reporting
Don't expect financial statements to fit into a single mold. Many articles and books on financial statement analysis take a one-size-fits-all approach. The less-experienced investor is going to get lost when he or she encounters a presentation of accounts that falls outside the mainstream or so-called "typical" company. Simply remember that the diverse nature of business activities results in a diversity of financial statement presentations. This is particularly true of the balance sheet; the income and cash flow statements are less susceptible to this phenomenon.

5. The Challenge of Understanding Financial Jargon
The lack of any appreciable standardization of financial reporting terminology complicates the understanding of many financial statement account entries. This circumstance can be confusing for the beginning investor. There's little hope that things will change on this issue in the foreseeable future, but a good financial dictionary can help considerably.

6. Accounting Is an Art, Not a Science
The presentation of a company's financial position, as portrayed in its financial statements, is influenced by management estimates and judgments. In the best of circumstances, management is scrupulously honest and candid, while the outside auditors are demanding, strict and uncompromising. Whatever the case, the imprecision that can be inherently found in the accounting process means that the prudent investor should take an inquiring and skeptical approach toward financial statement analysis. (For related content, see Don't Forget To Read The Prospectus! and How To Read Footnotes - Part 2: Evaluating Accounting Risk.)

7. Two Key Accounting Conventions

Generally accepted accounting principles (GAAP) are used to prepare financial statements. The sum total of these accounting concepts and assumptions is huge. For investors, a basic understanding of at least two of these conventions - historical cost and accrual accounting - is particularly important. According to GAAP, assets are valued at their purchase price (historical cost), which may be significantly different than their current market value. Revenues are recorded when goods or services are delivered and expenses recorded when incurred. Generally, this flow does not coincide with the actual receipt and disbursement of cash, which is why the cash flow becomes so important.

8. Non-Financial Statement Information
Information on the state of the economy, industry and competitive considerations, market forces, technological change, and the quality of management and the workforce are not directly reflected in a company's financial statements. Investors need to recognize that financial statement insights are but one piece, albeit an important one, of the larger investment information puzzle.

9. Financial Ratios and Indicators
The absolute numbers in financial statements are of little value for investment analysis, which must transform these numbers into meaningful relationships to judge a company's financial performance and condition. The resulting ratios and indicators must be viewed over extended periods to reflect trends. Here again, beware of the one-size-fits-all syndrome. Evaluative financial metrics can differ significantly by industry, company size and stage of development.

10. Notes to the Financial Statements

It is difficult for financial statement numbers to provide the disclosure required by regulatory authorities. Professional analysts universally agree that a thorough understanding of the notes to financial statements is essential in order to properly evaluate a company's financial condition and performance. As noted by auditors on financial statements "the accompanying notes are an integral part of these financial statements." Take these noted comments seriously.

11. The Auditor's Report
Prudent investors should only consider investing in companies with audited financial statements, which are a requirement for all publicly traded companies. Before digging into a company's financials, the first thing to do is read the auditor's report. A "clean opinion" provides you with a green light to proceed. Qualifying remarks may be benign or serious; in the case of the latter, you may not want to proceed.

12. Consolidated Financial Statements
Generally, the word "consolidated" appears in the title of a financial statement, as in a consolidated balance sheet. Consolidation of a parent company and its majority-owned (more that 50% ownership or "effective control") subsidiaries means that the combined activities of separate legal entities are expressed as one economic unit. The presumption is that a consolidation as one entity is more meaningful than separate statements for different entities.

By Richard Loth for Investopedia

Published: June 19, 2013

Beware of Pension Liberation

Have you been approached by firms that promise you instant cash from your pension fund? This is known as pension liberation, and involves taking cash from your pension fund before you reach the retirement age set by your pension scheme.

Unscrupulous firms persuade individuals to apply to move their pension funds out of their current scheme, in order to permit an early release of funds, either by a direct transfer out or by a loan. In some case the individual is told there are no tax implications – but there are.

If an individual gains access to their pension savings before their scheme-set retirement age, that individual will be liable to a 55% tax charge on the extracted funds. This tax rate applies to all taxpayers whatever their marginal rate of income tax. It also applies if the monies are repaid back to the pension scheme. It is the individual who must pay this tax charge, not the new or old pension scheme, or the firm that organised the switch of funds.

Pension funds can be safely transferred from one scheme to another, but if you want to do this you should get advice from a qualified financial adviser who is registered on the financial services register.

By Chris Thomas for One Accounting Blog

Published: June 18, 2013

AICPA Reccomends Changes to net Investment Income Tax

Jeffrey Porter, chair of the AICPA’s Tax Executive Committee, submitted comments to the IRS on behalf of the AICPA on Monday, recommending many changes to the proposed regulations on the new net investment income tax.

Starting in 2013, Sec. 1411(a)(1) imposes a tax equal to 3.8% of the lesser of an individual’s net investment income for the tax year or the excess (if any) of the individual’s modified adjusted gross income for the tax year over a threshold amount. The threshold amounts are $250,000 for married taxpayers filing jointly and surviving spouses, $125,000 for married taxpayers filing separately, and $200,000 for other taxpayers. The tax also applies to estates and trusts, with different threshold amounts. The tax was enacted as part of the 2010 health care reform legislation.

In December 2012, the IRS issued detailed proposed regulations governing the application of the tax (REG-130507-11). The proposed regulations provided rules for individuals, trusts, and estates. They defined net investment income and its components, provided definitions and examples regarding the trade or businesses to which the tax applies, and gave details on determining the gain or loss on the disposition of interests in partnerships or S corporations and various other topics. The regulations were proposed to generally be effective for tax years beginning after Dec. 31, 2013, but taxpayers can rely on them until final regulations are issued.

In his letter, Porter notes that the IRS’s guidance on Sec. 1411 "generally provides a reasonable approach to interpreting, implementing, and complying with the new [net investment income] tax rules." However, in response to the proposed regulations, the AICPA is making 16 detailed recommendations.

Specifically, the AICPA recommends that the final regulations should:

•  Provide additional and clear guidance on when income is derived "in the ordinary course of a trade or business";
•  Clarify when a rental real estate activity is considered to have risen to the level of a Sec. 162 trade or business;
•  Clarify that regrouping activities under Sec. 469 only affects whether a specific activity is treated as passive or nonpassive under Sec. 469 and provide other guidance about regrouping;
•  Provide additional rules that allow mark-to-market losses of traders to reduce net investment income;
•  Clearly provide that distributions to retired partners that qualify as not subject to self-employment tax are excluded from gross income subject to the net investment income tax;
•  Provide that dividends received from Alaska Permanent Funds are excluded from gross income subject to the net investment income tax;
•  Provide additional guidance on whether or not the gain or loss from the repayment of reduced basis debt held by an S corporation shareholder is excluded from gross income subject to the net investment income tax;
•  Provide for a simplified method and/or a safe harbor for calculating the tax with respect to distribution in excess of basis;
•  Clearly provide that income received by Indian tribal members is excluded from gross income subject to the net investment income tax;
•  Provide that income from a covenant not to compete is excluded from gross income subject to the net investment income tax;
•  Provide additional guidance on the treatment of state and local tax refunds in the current or a subsequent year;
•  Provide that Sec. 165 losses and deductions recognized in connection with taxable business and investment activities, the income of which is subject to the net investment income tax, should be considered "properly allocable deductions" for the purposes of the tax;
•  Provide clear guidance that suspended passive losses will be considered properly allocable deductions under Sec. 1411(c)(1)(B) in the year allowed under chapter 1 of the Internal Revenue Code;
•  Replace the proposed "property by property deemed sale" method with a methodology more consistent with the statutory language of Sec. 1411;
•  Include an amendment to the adjustment rules under Prop. Regs. Sec. 1.1411-7 to adjust the gain or loss from a deemed sale of all assets of a partnership or S corporation to include the liquidation gain/loss caused by inside/outside basis differentials; and
•  Use either a simplified method or a safe harbor method when the trustee (transferor) computes the gain or loss from the sale or disposition of an S corporation owned by a qualifying subchapter S trust (QSST) and taken into account for purposes of Sec. 1411.

Under the AICPA’s recommended simplified method for calculating the tax, the amount of gain attributable to assets used in a trade or business by the materially participating seller of an interest in a partnership or S corporation would be calculated using the sales price of the disposed ownership interest in the S corporation or the partnership to determine a reasonable estimate of the fair market value of the entity’s assets. Rules similar to those applicable in the context of Sec. 338(h)(10) could be used to determine the gross selling price (i.e., gross up the sales price based on the percentage interest sold and increase that amount for liabilities).

The AICPA also recommends that the entity not be required to provide the net investment income gain or a property-by-property analysis unless requested and that such request be received by the due date of the owner's tax return excluding extensions. The AICPA recommends that the Sec. 1411 gain information should be provided on a newly designed form that may be filed either with the return or as a stand-alone submission.

The AICPA also provided a detailed safe harbor method based on the information available to both taxpayers and the IRS (e.g., Schedule K-1) to help reduce taxpayers’ compliance burdens.

By Alistair M. Nevius, J.D. for the Journal of Accountancy

Published: June 17, 2013

Young American are Ditching Credit Cards

The number of young Americans who are living without credit cards has doubled since the recession, according to new research.

About 16% of consumers ages 18 to 29 didn't have a single credit card by the end of 2012 -- up from 8% in 2007, according to data that credit score provider FICO collected from the credit files of millions of consumers.

As a result, credit card debt has declined by about a third among this age group -- from an average $3,073 to $2,087 per person.

After watching older generations -- like their parents -- get hit hard by the recession, many younger Americans are shying away from credit and opting for debit cards instead, according to FICO.

Prepaid cards have also become attractive alternatives, said John Ulzheimer, president of consumer education at SmartCredit.com.

"[T]here has been very aggressive marketing of prepaid debit cards over the past few years targeting young people and minorities," he said. "So it's not a surprise that more young people are using prepaid debit cards over credit cards."

 In addition, the CARD Act, which took effect in 2010 and requires consumers under age 21 to have a co-signer or to earn enough income to make full payments, has also made it harder for this group to qualify for credit cards, FICO found.

Along with credit card debt, overall debt has fallen among this younger group. Even with the surge in student loan debt, this younger group has seen an even more rapid decline in other debts like mortgages. And this shedding of debt has translated into higher credit scores, with the number of consumers 18 to 29 years old with excellent FICO scores of 760 or higher jumping from 8.6% in 2005 to 11.2% last year.

 Older Americans are another story, however. While they also lowered their credit card debt, they racked up more auto and mortgage debt.

Consumers 40 and over therefore have more overall debt today than they did in 2005. And as a result, FICO scores have fallen 1.7 percentage points among the 40 to 49 age group, 1.8 percentage points for those ages 50 to 59 and 3.8 percentage points for consumers 60 and older.

"[P]arents are having to take on more debt to help their kids make ends meet," said Ulzheimer. "And, thanks again to the CARD Act, more parents are being asked to co-sign for their younger non-working children who want a credit card."

By Blake Ellis for @CNNMoney

Published: June 14, 2013

Can't Pay Your Tax Bill? You Have Options.

At tax time, many Americans are eager to get their returns in so they can receive a nice refund check from the Internal Revenue Service. But it's not a universal truth that tax time means a nice payday.

Like it or not, some have to pay even more to the tax man come April 15.

This is generally not a happy situation to be in. But even worse is being up against a tax bill when you simply can't find the money to cover the tab.

If you don't have the cash, don't panic. There are a few options out there.

Ask a pro for help. Did you arrive at a big tax bill after crunching the numbers yourself? Well, perhaps it's worth visiting a certified public accountant or other knowledgeable professional to look for missing deductions or credits. After all, tax preparation itself is deductible — so that's one more item to reduce your tax burden right there.

Make a payment agreement. If you owe less than $50,000 in tax, penalties and interest then you can strike an installment deal with Uncle Sam instead of making a lump sum payment. You have to be approved for this kind of deal, but applying is very simple on IRS.gov. This service isn't free, however, and still comes with fees and interest charged by the tax man along the way.

Use a credit card or bank loan. This may sound illogical to run up personal debts with double-digit interest rates to pay off the IRS. However, this bit of advice comes from the tax man himself. Topic 202 on IRS.gov regarding payment options reads, "The interest rate and any applicable fees charged by a bank or credit card company are usually lower than the combination of interest and penalties imposed by the Internal Revenue Code." The fact that the government itself recommends you pick this option is a pretty compelling case you can save money this way.

Pay what you can. If you can't get access to credit or worry about your ability to pay the tax bill in installments, it is much better to scrape together as much as you can rather than pay nothing. The IRS will send you a bill in a month or two – including some penalties, of course. As with all creditors, the Internal Revenue Service is ultimately kinder to those who do something instead of nothing. And like all bills that charge interest, the more you can pay up front means the more you'll be charged in fees over time as you try to whittle down the tab.

Of course, those in desperate situations can sometimes do foolish things. So here are a few things you should assuredly NOT do if you're facing a big bill:

Don't lie. If you think the late fees are bad, let's not even talk about the charges – both monetary and criminal – that come with tax fraud. It's simply not worth it.

Don't skip your return. Ignoring the bill won't make it go away or free you from late penalties. Failure to file a tax return is a big red flag with auditors, and they'll find you eventually.

By Jeff Reeves for USA Today Personal Finance

Published: June 12, 2013

IRS Confirms Plans to Retire Two e-Services Products in August

The IRS confirmed June 7 that it plans to retire two major e-services incentive products used by CPAs, attorneys, and enrolled agents to file authorizations and resolve IRS account problems.
 
The IRS announced it will retire the Disclosure Authorization and Electronic Account Resolution e-services products August 11, "due largely to low usage." The IRS stated it increased the number of employees and improved its internal processes in response to this change.
 
The two major e-services products slated for retirement serve several common functions for tax professionals:

  • Disclosure Authorization (DA) allows for real-time input of Form 2848, Power of Attorney and Declaration of Representative, and Form 8821, Tax Information Authorization, eliminating the waiting period resulting from IRS processing delays that occur when mailing or faxing disclosure authorizations to the IRS. According to the IRS announcement, the current average processing time for mailed or faxed authorizations is ten days.
  • Electronic Account Resolution (EAR) gives tax professionals electronic access the IRS Practitioner Priority Service (PPS) to resolve client account problems. There are seven EAR inquiries available, allowing tax professionals to address such client issues as notice research, installment agreement requests, and refund issues. This allows for convenient communication with the IRS about client issues and eliminates time spent waiting to speak with a PPS representative by phone.

IRS Move Draws Sharp Criticism from Practitioners

After learning of the IRS announcement to retire the two e-services products, many practitioners were upset and disappointed to learn they will lose the convenience of interacting with the IRS electronically.

"It is just insane that they made such progress in customer service with the e-services program, and now they are shoving everything into reverse," said CPA George Prytula, III. "This is tantamount to all major banks telling us that they are shutting down all of their ATM machines and going back to just lobby counter service."
 
Some practitioners also pointed to a lack of IRS outreach when it comes to educating practitioners and publicizing the various uses of e-services incentive products.
 
"I think they just haven't promoted it enough generally to practitioners," said Pamela Britz, EA. "I use these two [DA and EAR] – especially filing POAs – quite often."
 
A Look at the Alternatives

The IRS has not been explicit about electronic alternatives it will offer to support functions previously available in DA and EAR, though it promised in its announcement June 7 it would look for electronic solutions going forward.
 
As an alternative to DA, the IRS instructed tax professionals to fax or mail authorizations to the appropriate IRS location and allow at least four days for processing.
 
Tax professionals can use the Online Payment Arrangement tool in lieu of the installment agreement request in the EAR product, although a number of practitioners have expressed difficulty using this tool. There are currently no other online options to replace the other six EAR functions. As a general alternative, the IRS directed practitioners to call the PPS line at 1-866-860-4259 for help resolving account-related issues.

However, many practitioners expressed dissatisfaction with that alternative, citing long wait times. According to the Government Accountability Office (GAO), in 2012, the average PPS hold time was more than twenty-two minutes per call – up from just under five minutes per call in 2009.
 
CPA John Stanbery is one practitioner who prefers using e-services to calling the IRS. "It certainly beats being on hold for forty-five minutes," Stanbery said.
 
Budget Setbacks

Reduced IRS budgets and staffing may also affect PPS customer service, as representatives are forced to accommodate the extra workload resulting from e-services cutbacks.
 
In 2012, the IRS experienced its second straight year of budget cuts, brought on by the sequester, totaling almost $1 billion over the past two years. From 2010 to 2012, the IRS also reduced its staff by 7,000 employees.
 
With budget and staff reductions at the IRS, many practitioners think it is a surprising decision for the IRS to move from an electronic customer service system back to one-on-one, phone-based support.

A Step Backward?

Although the IRS announced it is responding to e-services cutbacks with more employees to process authorizations, the IRS decision to retire two online tools appears out of step with government reports and advisory board recommendations on enhancing technology for tax administration. A variety of reports point to the IRS' need for new and better technology – at a time when taxpayers and practitioners are increasingly adopting electronic tools.
 
According to an electronic road map set forth by the Office of Online Services and reported by the GAO earlier this year, the IRS continues to plan for enhanced online tools for taxpayers. However, providing electronic tools to tax professionals, who prepare 60 percent of all tax returns, is a cost-effective strategy described by the Internal Revenue Service Advisory Council in its 2012 Public Report:
 
"The IRS would like to increase practitioner reliance on e-service tools and decrease reliance on one-on-one contact through the IRS Practitioner Priority Service. Transferring practitioners to e-services when appropriate can increase assistor availability for issues that require an assistor's support."
 
The IRS decision to retire two e-services products also appears counterintuitive in light of several technology initiatives being developed by the IRS, such as various information matching and identity verification programs. On April 9, in his testimony before Congress, former IRS Acting Commissioner Steven Miller made clear the agency's IT priorities.
 
"If you were to ask me, 'If you had one last dollar...and that dollar was for bodies or for IT,' I would take it for IT, because that is the lifeblood of our efficiency," Miller said.
 
Practitioners Are Using e-Services

In its announcement about retiring DA and EAR e-services products, the IRS cited low usage of the products as a reason for the scale back. However, according to a Treasury Inspector General for Tax Administration (TIGTA) study from June 2012, there has been a demonstrated and steady increase in practitioner usage of e-services DA since its inception.
 
In October and November 2011, there were more than 153,000 authorizations filed via DA, according to TIGTA.
 
DA is popular among practitioners because it offers an efficient alternative to filing authorizations with the IRS Centralized Authorization File (CAF) unit, which experiences long average processing times. Currently, processing of disclosure authorizations by faxing the CAF is taking ten business days, according to the IRS. Access via DA is instantaneous.
 
Without electronic filing of authorizations, delays like Prytula's will be inevitable for practitioners.
 
"I mailed a power of attorney to the IRS two weeks ago and then faxed another one two days ago, and both of them are still not yet in the IRS CAF system," Prytula said.
 
Many practitioners are upset about the IRS' decision to retire these products. Their responses have spurred a grassroots movement to petition the IRS to abandon its plans to retire the e-services products or replace the products with other electronic solutions.

By Jim Buttonow, CPA, CITP

Published: June 11, 2013

Most Outrageous Tax Cheats

From a restaurant owner who hid cash receipts in "seasoned octopus" boxes to a self-proclaimed governor of Alabama who buried gold coins in his yard, here are some of the wildest tax fraud investigations the IRS has undertaken in the past year.

Hiding Boxes of "Seasoned Octopus"

To reduce his tax liability, Michael Chen, the owner of Fune Ya Japanese Restaurant in San Francisco, hid cash transaction records in 26 boxes labeled "Seasoned Octopus" in a crawl space under his restaurant and pretended they were never made, according to the IRS.

While he had an encrypted spreadsheet showing total sales of nearly $2 million between 2004 and 2006, he only reported sales of a little over $500,000 on his tax returns. Chen was sentenced to almost three years in prison in January, and he must pay restitution of $459,105.

Draingin An Adopted Child's Trust Fund

Lori Wiley-Drones and Edward Drones, of Anchorage, Alaska, adopted a child who had a trust fund of more than $830,000. The child, who was abused by previous foster parents, was granted the trust as the result of a lawsuit claiming the state of Alaska failed to protect him.

The Drones were required to keep the trust completely separate from their own accounts, but they couldn't resist dipping into the money. They allegedly used it to remodel their home, pay credit card bills, buy cars and even splurge on Coach purses and jewelry -- leaving only $15.05 in the child's trust fund.

They also neglected to report the the funds as income on their tax returns, according to the IRS. But they were finally caught, and in March the couple was sentenced to nearly four years in prison and required to pay restitution of $829,417.

Stealing $3 Million From An Armored Truck

Archie Cabello, from Portland, Ore., used his job as an armored truck driver to cash in on a huge pile of cash that he was supposed to protect. Cabello was transporting $7 million for Oregon Armored Services.

To carry out the scheme, his brother took two bricks of hundred dollar bills totaling $3 million from the back of the truck and drove it to a safe deposit box, while Cabello handcuffed himself to the truck door to make it look like he had been robbed and told a passerby to call the police, according to the IRS.

Cabello allegedly spent $1 million by the time he was caught. The IRS nabbed him for failing to report the stolen funds on his taxes. Even if money is received illegally, it's still considered income so you're required to report it to the IRS. He pleaded guilty to a number of charges, including conspiracy to commit bank larceny, money laundering and filing a fraudulent tax return, and he was sentenced to 20 years in jail.

Can't Pay Taxes, I'm Unconscious

To get out of paying $220,000 in taxes, James Stuart, from Hartland, Wisc., failed to report $900,000 in income between 2005 to 2007 -- allegedly telling the IRS he didn't have a social security number, he wasn't an American citizen and the IRS didn't have the right to tax him.

But perhaps his most bizarre claim of all was that he had "loaned his consciousness to a trust entity" and therefore couldn't pay taxes, according to the IRS. Stuart was sentenced to nearly three years in prison and fined $6,000.

Burying Gold Coins in Yard

Monty Ervin, from Montgomery, Ala., allegedly neglected to report more than $9 million in rental income from his property management company and failed to pay $1 million in income tax. To justify the tax evasion, Ervin attempted to renounce his U.S. citizenship multiple times, saying he was a "sovereign citizen" and not subject to the law.

He even allegedly claimed that he was the governor of Alabama in its "original jurisdiction," and the government found that he had buried $350,000 worth of gold coins in his yard. When he was arrested this March, the Justice Department said he was carrying a notebook with coordinates for an island off the coast of Honduras.

Ervin was sentenced to 10 years in prison and is required to pay $1.4 million in restitution to the IRS.

Identity Theft Ring of Basketball Referees

To avoid paying taxes, a group of New York City basketball referees allegedly used stolen identities of local firefighters and police officers to receive paychecks and failed to disclose that income on their tax returns, according to the IRS.

Peter Iulo, who was identified as one of the scheme's ringleaders, was sentenced to two years in prison at the end of 2012 and ordered to pay $200,000 in restitution to the IRS.

Stealing from Nursing Home Residents

After submitting claims to Medicare and Medicaid for nearly $33 million worth of bogus services for the nursing home he ran, George Houser from Sandy Springs, Ga., allegedly took $8 million for himself and failed to report that money to the IRS.

He allegedly bought a new home and other real estate investments, while "his elderly and defenseless nursing home residents went hungry and lived in filth and mold," United States Attorney Sally Quillian Yates said in a statement about the case.

Houser also deducted more than $800,000 in payroll taxes from employee paychecks and held onto that money rather than giving it to the IRS as required. Houser was sentenced to 20 years in jail.

Bogus "Harmony and Happiness" Charity

Instead of reporting the $380,000 per year that he had earned as an accountant, Mark Pybrum, from Santa Barbara, Calif., claimed that money had been earned by his charitable organization for marital counseling, the Foundation for Harmony and Happiness.

In court, prosecutors argued that the foundation wasn't a charity and that Pybrum was simply trying to evade the $1 million in taxes he owed between 1999 and 2002. With that extra money, Pybrum allegedly rented a mansion and bought a fishing boat, an SUV and a plane. He was sentenced to three years in prison in March.

Filing Fraudulent Returns for Gang Members

Daion Ali Bowers allegedly conspired with gang members, including Tashanda "Big Momma Blood" Parker, to file fraudulent returns in their names in the hopes of raking in big refunds.

Bowers, from Columbia, S.C., was charged with filing more than 600 fake returns -- claiming more than $2.5 million refunds -- for clients including Bloods gang members. Last month, he was sentenced to 5 years in jail and ordered to pay restitution of $1.2 million.

Compiled from Stories by Blake Ellis for @CNNMoney

Published: June 10, 2013

3 Ways to Invest a Tax Refund for Smart Gains

The job market remains rocky in parts of the U.S., and many consumers are reluctant to spend lavishly after some lean years. For many Americans, this year's tax refund will go to paying down bills or be deposited into savings, where it will stay until a rainy day.

But a decent tax refund can be more than a quick fix to household finances. If you plan to retire with some degree of comfort, it's crucial to put your savings to work if you can, and build a decent nest egg.

Keep in mind that if you get a modest 5% rate of return each year, $2,500 today turns into almost $8,500 in 25 years, more than tripling your savings.

If you find a way to invest an additional $2,500 every year, you'll be sitting on more than $133,000 in 25 years.

That's the power of compound interest over time: You make a little bit of money on your investment, then reinvest those returns, which can grow your savings substantially over the long haul.

If you can't find a way to scrape together the cash, a tax refund is a great chance to get the ball rolling. A check of $1,000 or more from the IRS can provide a great springboard to retirement savings.

Here are a few long-term investing ideas to try to generate a decent return on that 2012 tax refund.

Divert Tt to Your 401(k)

Technically, you can't deposit money into a 401(k) that doesn't come through your employer. But there is a work-around if you talk to your benefits co-ordinator. Use your tax refund for living expenses, as you would a paycheck, and have the same sum shunted directly into your 401(k) plan.

Here's an example: You take home roughly $1,200 a month after taxes and health insurance. Your tax refund is for $2,400. For two months, you will live off your tax refund while your regular paycheck is diverted to your 401(k). After two months, everything goes back to normal.

Buy Low-Cost Funds In An IRA

If you don't have a 401(k), starting a similar program on your own via an IRA is easy, and it comes with a tax deduction worth up to $5,000.

An IRA, or individual retirement account, gives you access to a broader range of investments. That may sound intimidating, but don't fret; the simplest options are often the best for long-term investors.

Those options include low-cost index funds that mirror a broad-based benchmark such as the S&P 500 Index. You'll have built-in diversification for stability without managing a complicated portfolio.

One place to start might be an S&P 500 ETF, which spreads your money across the components of the S&P 500, some of the biggest corporations in America, such as Walmart, Google and Ford. Such funds are a good value, too costing as little as $1 a year for every $2,000 you've invested.

If you're intimidated, why mess around with researching lots of other investments when you can hold a piece of 500 different stocks for a dollar a year? It takes out the guesswork and protects you, because if one stock crashes, you still have 499 others that can offset any losses.

With the IRA tax break and easy access to diversification, low-cost funds are a great option, even for investors with only a small amount of money to invest.

Invest In Yourself

One option many people overlook is the notion of investing in themselves. This tax refund may be your opportunity to do that.

If you have a knack for writing, a few hundred bucks can build you a website. If you're handy, buy some tools and take out a few classified ads. If you're a shutterbug, buy some top-notch gear and build a portfolio that might get you into the wedding photography business.

The downside is that your plans may never pan out. But there's risk in everything, from the stock market to entrepreneurship. Wouldn't you rather lose your money on your dream business than on Wall Street?

The upside is that the ceiling is limitless. Your initial investment may pay for itself quickly, and the satisfaction of being your own boss and living out your dreams may be beyond any dollar amount.

Saving for your retirement is wise. But making a living doing what you love may mean you never have to truly retire at all.

By Jeff Reeves for USA Today Personal Finance

Published: June 7, 2013

The 4 Worst Tax Breaks

Over the past 40 years, the number of tax breaks - deductions, credits, exemptions and other tax benefits - has more than tripled. Tax policy experts say it's time to rethink many of them.

"It's hard to rank stupid tax provisions because there are so many candidates," said Len Burman, the incoming director of the Tax Policy Center.

"Worst" can mean a provision that disproportionately benefits some more than others, doesn't serve its intended purpose or otherwise provides an unjustified windfall.

Here are just four that experts flagged:

Carried interest: Managers of private equity, venture capital and hedge funds don't pay ordinary income tax rates on a portion of their income.

That portion, known as carried interest, represents a share of profits from the funds they manage. They are paid that share even if they were not required to invest their own money in the funds.

Carried interest is taxed at the long-term capital gains rate of 20% -- well below the top two income tax rates of 35% and 39.6%.

Proponents of the special rate contend that managers assume some risk because they provide hands-on management, connections and their reputations to the companies their funds buy, often for long periods. And there's no guarantee the investments will turn a profit.

Critics of the lower rate contend, among other things, that the managers are really performing a service for a fee -- and therefore should be paying regular income tax rates.

"Fund managers claim risk-based compensation, which require no financial investment on their part," said Martin Sullivan, chief economist of Tax Analysts.

President Obama has repeatedly proposed taxing carried interest as ordinary income. Such a change could raise $17.4 billion over 10 years, according to estimates from the Joint Committee on Taxation.

Tax exclusion for health insurance: Besides a steady paycheck, one of the biggest workplace benefits for 160 million Americans is the employer subsidized health insurance they receive.

Yes, workers pay for some of the cost of their insurance. But their employers pick up the lion's share, and that share is treated as tax-free income to the worker. It's not subject to income or payroll taxes.

 That "health exclusion" also accounts for the lion's share of the cost of federal tax breaks to the government. The Joint Committee on Taxation estimates it will cost $760.4 billion over the next five years, just counting the exclusion from income tax. If the payroll tax exclusion were also counted, the cost would jump by tens of billions of dollars a year.

"Health care benefits represent a large and growing share of compensation, and the exclusion exacerbates the problems of excessive spending on health care, the high cost of health care, and the lack of mobility of health insurance," said Will McBride, chief economist of the Tax Foundation.

State and local tax deduction: Only about one-third of tax filers itemize deductions. Those who do may deduct their state and local taxes (income or sales tax, plus property taxes).

The deduction is a form of federal subsidy to state and local governments. "Theory would suggest that taxpayers are willing to accept higher state and local tax rates and greater state and local public spending because of lower federal income taxes arising from the deduction," according to the nonpartisan Congressional Research Service.

 As with other itemized deductions, the state and local deduction disproportionately benefits higher income filers. And it disproportionately benefits those who live in high-tax states and cities. The deduction has become even more valuable to high-income residents in California, where top state income tax rates recently rose to as high as 13.3%.

For this reason, Burman thinks lawmakers should rethink this break.

"The subsidy is most valuable in states with lots of high-income people, which are the places that least need fiscal assistance because they have a robust tax base," Burman said.

If the federal government wants to offer states a hand, he'd rather it give straight grants to states most in need of aid.

The JCT estimates the state and local deduction will cost federal coffers about $278 billion over five years.

 Exclusion of capital gains at death: This provision is known among tax wonks as a "step-up in basis."

Essentially, if someone bequeaths to you an investment that has appreciated in value since the day it was first purchased, you won't have to pay any tax on the capital gains that accrued before you inherited it. You would only owe tax on the capital gains that accrue from the day you get it -- and only if you choose to sell the asset.

"Holding stock until death exempts it from capital gains tax. This is a huge and largely unnoticed tax benefit for the super-rich," Sullivan said.

The provision will cost federal coffers an estimated $258 billion over five years.

By Jeanne Sahadi for @CNNMoney

Published: June 5, 2013

Boot the Budget? Why Rolling Forecasts Might Make More Sense

When it comes to budgeting, accountants should stop presenting the numbers and letting others analyze what those numbers mean. If accountants don’t change, warns consultant Steve Player, CPA, CGMA, they’ll lose relevance and possibly lose jobs.

“It’s our process that’s broken,” Player said. “We’ve got smart people in finance doing dumb stuff.”

Player, founder of management consulting company The Player Group, said traditional budgeting processes don’t work and that organizations must adapt by going to a model of continuous planning and rolling forecasts. He said several large, successful companies, including American Express and Unilever, have done away with traditional budgeting.

Traditional budgeting is a broken tool, particularly in a more volatile business environment, Player said.

“The biggest problem with most traditional budgets is that they’re based on a bunch of assumptions,” he said. “Assumptions about what the economy’s going to do, assumptions about future competitive actions, future customer actions, governmental actions, regulation, currency movement, a whole series of things, the vast majority of which are outside the control of the organization.

“And when those assumptions turn out to be wrong, the plans based on them pretty much are wrong, too,” he said. “Yet, as finance professionals, we rigidly want to adhere to those plans and do monthly variance explanations when we’re not inside the line, and we tell people to get back inside the lines. Well, had we known the storms that were coming, we never would have drawn the lines there to begin with. In that respect, finance becomes part of the problem, not part of the solution.”

The back of the boat

Player likes nautical analogies. He says that if an organization was a cruise ship, the finance department would be at the back of the boat.

“In most situations, finance is positioned on the stern,” he said. “We’re sitting on the back, looking at the weight, at the historical things that have happened. And we’re yelling to the captain, ‘We seem to be moving this fast, and we may be turning.’ There’s just not a lot of strategic value you can add from staring off the back of the boat.

“Finance has got to get off the back of the boat and get up on the bridge, beside the captain, constantly looking forward, looking at change, what we try to do, and what our options are.”

That’s where forecasting comes in, plotting a course for the future. “We need to define what this ship’s capabilities will be in five years,” he said. “That five-year vision has to be very, very flexible because the environment can change radically, but it still creates the compass of where we’re trying to go.”

The current model that some finance departments use—offer up data but no analysis—is a problem the profession must address, Player said.

“In finance, we produce rows and rows of numbers, so much so that it makes us blind,” he said. “We can throw out a lot of numbers. People get a lot of comfort in the numbers, but the problem is they don’t tell a story very well. We put numbers up there, and we don’t know which ones are important and which ones aren’t. It’s easy to miss something.

“If we can become trusted advisers to highlight and illuminate the right things in meaningful ways, there’s a real valuable role for us,” he said. “By nature, we in the accounting profession say we don’t know what’s important. And that’s not a real comfortable place to be if a company’s looking to downsize.”

Finance professionals who are hesitant to let go of traditional budgeting methods shouldn’t be, Player added. “The message is that there is a better way to do things, a better way to hold people accountable, a better way to plan, and a better way to drive performance,” he said. “They’re not giving up anything; they get better ways to plan and control.”

By Neil Amato for the Journal of Accountancy

Published: June 4, 2013

IRS Fine-Tunes e-File System to Prevent Processing Delays

After performance issues to its electronic filing system caused delays in processing tax returns during the 2012 filing season, the IRS has made several enhancements to the system over the past year that are expected to improve the tax-filing process, according to a report released May 30 by the Treasury Inspector General for Tax Administration (TIGTA).
 
The electronic filing system, called Modernized e-File (MeF), enables real-time processing of tax returns while improving error detection, standardizing business rules, and expediting acknowledgments to taxpayers.
 
However, during the 2012 filing season, the IRS had to suspend MeF system processing on at least two occasions to correct system performance issues.
 
"IRS management noted that the performance issues first experienced on January 17, 2012, might have been caused by the large volume of tax returns received by the MeF system during the first day of processing. According to the IRS, the volume of returns received by the MeF system on January 17, 2012, was one of the largest the IRS had ever received to date," the TIGTA report states. "The second incidence of MeF system performance issues started in late January 2012. These issues primarily included delays sending files to downstream systems and delivering of acknowledgments, which resulted in delays in processing individual tax returns."
 
The IRS reviewed the problems with the MeF system and identified four major work stream categories where the issues were occurring: 

  • Performance test
  • On-demand services (ODS)
  • Portal readiness and testing
  • Monitoring

Enhancements Made

The performance test and portal readiness and testing work streams directly affect the timely submission of tax returns for processing. According to the report, the IRS modified its testing strategy by incorporating enhancements, such as the use of a production-sized database and performance testing for a duration of forty-eight hours, to ensure that the agency could process the anticipated volume of returns for the 2013 filing season. The tests concluded that the MeF system would meet peak-performance requirements.
 
Additionally, the IRS increased the bandwidth of the portal that serves as the entry point for web-based access to IRS applications and data, from 45 megabits per second (Mbps) to 155 Mbps. Because other IRS applications use the same portal as the MeF system, this increased bandwidth helps guard against a decrease in overall performance.
 
The IRS developed requirements for the ODS to deliver files to downstream systems. For example, the ODS will deliver data to the Generalized Mainline Framework (GMF) at specified times each day, according to the TIGTA report. The GMF is a service center pipeline processing system that validates and perfects data from a variety of input sources. Tax returns, remittances, information returns, and adjustment and update transactions are controlled, validated, corrected, and passed on for master-file posting.
 
The ODS will also deliver data to the IRS Electronic Fraud Detection System (EFDS) every hour on the hour. The EFDS is a stand-alone automated system designed to maximize fraud detection at the time tax returns are filed to prevent questionable refunds from being issued.
 
Summary data is then created for reports showing the counts of the returns submitted downstream. The ODS removes data that have aged past their required retention period.
 
The IRS is working on implementing new monitoring tools and automated ticket generation to improve its ability to monitor and measure the MeF system's availability, as well as to help address the system's eighty-nine technical monitoring requirements for the 2013 filing season, the TIGTA report states.
 
As of February 10, 2013, the IRS has implemented sixty-seven of the eighty-nine requirements. Unresolved issues caused a delay in implementing the remaining twenty-two requirements.
 
"Some of the unresolved issues include problems with the functionalities of a monitoring application, monitoring solutions not yet developed, and events initiating the auto-tickets not being generated or received," the TIGTA report states. "The IRS planned to deploy the remaining technical monitoring requirements during the 2013 filing season; however, it has yet to identify the implementation dates."
 
The IRS invested approximately $6.7 million to correct the issues that were plaguing the four work streams, according to the TIGTA report.
 
"The MeF system is a critical component to meet the needs of taxpayers, reduce taxpayer burden, and broaden the use of electronic interactions," Treasury Inspector General for Tax Administration J. Russell George said in a press release. "Collectively, the various categories of work should provide the enhancements intended to correct problems associated with the 2012 filing season and give the IRS assurance of the MeF system's readiness for the 2013 filing season."

By Jason Bramwell for the Inspector General for Tax Administration

Published: June 3, 2013

Modified First Time Abate Policy Provides Penalty Relief in Certain Situations

The Internal Revenue Service recently updated policy to modify its First Time Abate policy for penalty relief. This type of penalty removal for taxpayers is a one-time consideration available only for a first-time penalty charge and based on taxpayers’ compliance history.

According to policy, the FTA penalty relief option for failure to file, failure to pay and failure to deposit penalties, under certain conditions, does not apply if the taxpayer has not filed all returns and paid, or arranged to pay, all tax currently due. For example, the taxpayer is considered current if they have an open installment agreement and are current with their installment payments.

The FTA relief only applies to a single tax period for a taxpayer. For example, if a request for penalty relief is being considered for two or more periods of a taxpayer, and the earliest period meets the FTA criteria, FTA would apply only to the earliest period, and not for all periods.

Penalty relief under the first time abatement provision does not apply to returns with an event-based filing requirement, such as Form 706, U.S. Estate Tax Return; Form 709, United States Gift (and Generation - Skipping Transfer) Tax Return; Form 1120, U.S. Corporation Income Tax Return; and Form 1120S, U.S. Income Tax Return for an S Corporation if, in the prior three years, at least one Form 1120S was filed late but not penalized. This list is not all-inclusive.

IRS will base decisions on removing any future failure to file, failure to pay or failure to deposit penalties on any information taxpayers provide that meets reasonable cause criteria.

Taxpayers billed for penalty charges who feel they have reasonable cause can contact our office to further discuss their options.

Published: May 31, 2013

3 Questions Business Owners Need to Ask About Employee Expenses

Assume you have a person making a $50,000 gross salary. Assume their true cost — including health insurance, overhead, work space, computers, Internet, electric power, payroll taxes, etc. — is $80,000. That person costs your company about $40 per hour.

For that calculation, I divide the $80,000 by 49 to calculate the weekly cost of $1,633 (I take off two of the 52 weeks in a year for vacation and another for national holidays). I divide that weekly cost by 40 to get $40.82 per hour.  And then for convenience I round that to $40 per hour.

So, with that hourly cost in mind, I’d ask myself these questions:

1. Thinking about computers and Internet connections: Do I really cut costs by having employees working with old technology?
2. Books and magazines: I’m betting $15-20 per business book, or annual magazine subscription, on saving my people some time, generating good ideas, helping them work better. So the marketing books for the marketing team, programming magazines, business magazines, how expensive are they, really? How much do they have to help to pay for themselves?
3. Meeting expenses: how much does it cost me to start a meeting 10 or 15 minutes late? Is it worth it to bring lunch into a meeting to save my team members the time of going out to lunch?

Conclusion: spend the money. Keep your technology up to date, encourage employees to get whatever books and magazines or website subscriptions help them, and combine meetings with meals a lot.

by Tim Berry for Planning Startups

Published: May 30, 2013

How to Calculate Hourly Cost of an Employee

For the sake of occasional business analysis — such as calculating return on investment (ROI) on a project, hiring a new employee, allocating costs — here’s a simple formula for calculating the hourly cost of an employee:

cost per hour = annual gross salary/1000

So the $75,000/year salary costs the company $75 per hour. The $30,000/year data entry person costs the company $30 per hour.

This quick and practical calculation is based on the assumption that the overhead, including payroll taxes, health insurance, benefits, office space, office equipment, telephone, Internet, electric power, transportation, and so forth costs the company about as much as the employee gross salary.

The step-by-step calculation, using a $75,000 salary, is:

Step 1: Double the gross salary ($150,000)
Step 2: Divide by 50 because a work year includes 50 weeks ($150,000/50 = $3,000)
Step 3: Divide by 40 because a work week includes 40 hours ($3,000/40 = $75)

By Tim Berry for Planning Startups

Published: May 29, 2013

The 'Chicken Poop' Credit and Other Bad Tax Breaks

What makes a bad tax break? There's no single definition. Some encourage companies to do dumb things just to save money on their tax bill. Some allow a business to escape paying tax on income that any reasonable person would agree should be taxed. And others are just so badly set up by Congress that they make tax planning a nightmare.

Here are five of the top picks from the experts surveyed:

Claim the 'chicken poop' credit: Okay, it's really called "Section 45." This tax credit may be taken by businesses that produce electricity using certain renewable resources.

That includes chicken poop, said Len Burman, the incoming director of the Tax Policy Center.

"It's a total windfall for chicken producers," he said.

Federal rules already bar chicken farmers from polluting the water when disposing of "poultry litter," Burman explained. Burning it to create electricity is a low-cost way to comply with those rules.

"It serves no recognizable social objective and is an example of misguided industrial policy that pervades the code," Burman said.

The Joint Committee on Taxation estimates the tax break will cost federal coffers $9.7 billion over five years.

Deduct "manufacturing": The "domestic manufacturing deduction" is one of the biggest business tax breaks on the books, and it gets a nearly unanimous "boo!" from tax experts.

It lets companies deduct from their income tax 9% of the cost of qualified manufacturing expenses.

While the United States has increasingly become a service economy, come tax time, many businesses will claim they "manufacture" something that qualifies for the deduction.

"Every industry finds a way to take this deduction. Grinding coffee and making hamburgers become manufacturing," said William McBride, chief economist of the Tax Foundation.

Making movies qualifies too, Burman said. But apparently the scones made by the place that grinds the coffee would not.

To be eligible for the deduction, the manufacturing must occur "substantially" in the United States. "Substantially" means "at least 20%."

"It seems difficult for some people to understand how 'at least 20%' can be 'substantial,' therefore leading to more confusion," said enrolled agents David and Mary Mellem, who represent taxpayers before the IRS.

The manufacturing deduction is one of the most expensive business tax breaks, costing federal coffers an estimated $78.2 billion over five years.

Depreciate assets: Businesses may write off the cost of equipment and sometimes intangible property such as computer software.

What's aggravating to the Mellems is the perpetually changing rules governing depreciation. "Thirty-five years ago the depreciation rules were logical. They required a taxpayer to spread the cost of an asset over the asset's anticipated useful life," they said.

Since then, however, lawmakers have defined and redefined the "useful life" for different assets. They've set, then reset and set again the maximum dollar amounts on costs that can be written off. They've created different types of temporary "bonus depreciation" for some assets for limited periods that then get extended ... temporarily.

Shift profits offshore: U.S. multinationals, like Apple (AAPL, Fortune 500), can enter into "cost-sharing agreements" with their offshore subsidiaries in low-tax countries to pay for things like research and development conducted in the United States.

That, in turn, lets the subsidiaries enjoy the economic benefits that result from the R&D -- namely the profits from the intellectual property that's created, noted Martin Sullivan, chief economist at the publisher Tax Analysts.

 The problem, Sullivan and other tax experts say, is that the subsidiaries may get a sweetheart deal for their R&D investment -- the kind of deal that the company wouldn't give to an outside entity that might want to get in on the ground floor of the next great product.

Given the intangible value that the U.S.-based business provides to the subsidiary -- namely the facilities, talent and know-how to conduct R&D -- the subsidiary may pay less than a fair-market price for the profits it books. That seems to be what happened with Apple's subsidiaries in Ireland, Sullivan noted.

The end result can be billions of dollars in profit that escapes U.S. taxation for years because it's parked offshore indefinitely.

Borrow from a low-tax subsidiary: This next maneuver is what Sullivan's colleague Lee Sheppard at Tax Analysts calls "the big enchilada of tax planning."

When U.S. multinationals borrow money from an offshore subsidiary in a low-tax country, the company gets a double tax benefit.

The U.S.-based operation gets to deduct the interest it pays on the loan. And the subsidiary that receives the interest payments only has to pay a very low income tax rate on it, far less than the 35% it would owe if the income were booked in the United States.

By Jeanne Sahadi for @CNNMoney

Published: May 28, 2013

In Tax Overhaul Debate, Large vs. Small Companies

In America’s contentious tax reform debate, it is seen as C-Suite versus Main Street.

Some of the biggest and most powerful companies in the United States are fighting for a cut in the official corporate tax rate, arguing that it is necessary to allow them to compete more effectively in the global market. But the nation’s millions of small businesses fear they will be the ones paying for it.

“We are in favor of comprehensive tax reform that includes both corporate and personal tax, but we are not happy with anything that raises the rate for us,” said Chris Whitcomb, the tax counsel for the National Federation of Independent Business, the leading small business lobbying and advocacy group, representing about 350,000 members.

The conflict, which in some ways is even larger than the controversial issue of how to properly tax multinational corporations on their global profits, arises because the vast majority of American businesses, including some large, well-known companies and prominent Wall Street firms, actually do not pay corporate taxes at all.

Beginning in earnest in the 1980s, millions of businesses shed their traditional corporate status to become what are known as pass-through companies. That led to a boon for business, but was a drain on the Treasury.

But what began as a typical Washington dispute between big and small business has been transformed into a fierce lobbying battle that pits some of the richest firms in the country against one another. Some big pass-throughs “are trying to conflate themselves with smaller pass-throughs,” said one official working on tax reform in Washington — so much so that they could be accused of “small business identity theft.”

Business executives have long complained that a traditional corporation’s profits are taxed twice, first at the corporate level, and then again on the dividends received by shareholders. Pass-throughs, by contrast, are allowed to distribute their profits directly to their owners and investors, who then pay federal taxes on their personal income tax schedule.

This arrangement, previously used almost exclusively by partnerships, very small businesses and the self-employed, proved especially attractive after the major 1986 tax overhaul, which cut personal rates below corporate ones. That spurred a vast migration to pass-through status, a shift that has continued up to the present day.

Of the 34 million business tax returns filed in 2009, the most recent data available, 32 million were pass-throughs, representing about 70 percent of net business income, compared with about one-quarter in 1980.

“Most businesses are pass-throughs,” said Eric Toder, institute fellow at the Urban Institute in Washington. “They dominate the business landscape.”

Companies that switched said the simpler, generally lower single-tax rules gave them a leg up and helped them grow.

McGregor Metalworking Companies, a family-owned business in Ohio and South Carolina, had 80 employees when it converted in 1986 and now has a work force of 370.

“It has been a real force for reinvestment,” said Dan McGregor, 69, chairman of the company, which has seven shareholders.

Even though the top personal income tax rate of 39.6 percent once again exceeds the maximum corporate rate of 35 percent, the pass-through arrangement remains attractive to companies like McGregor Metalworking, analysts say, by avoiding double taxation. And it is even more appealing to firms that are able to treat some of their income as long-term capital gains, which are taxed at no more than 20 percent.

In the 1990s, the introduction of “check the box” tax return procedures sped the growth of pass-through businesses. Other rule changes, allowing companies with more shareholders to qualify and affording investors increased protection against personal liability for their business’s debts, made pass-throughs even more popular — and not only among smaller companies.

“The rules were originally written with small businesses in mind like restaurants, laundromats and small real estate developers,” said Victor Fleischer, a professor at the University of Colorado Law School. “But the same rules are being used by some of the largest companies.”

A recent study by the Congressional Budget Office estimated that the switch by corporations to pass-through status cost the federal government about $76 billion in tax revenue in 2007 alone.

“Crossing the line has been way too easy,” said Chuck Marr, director of federal tax policy at the Center on Budget and Policy Priorities in Washington. “More and more these are very large companies, and they should be paying corporate taxes.”

In 2007, there were almost as many pass-throughs — 15,360 — with revenue exceeding $50 million annually as there were traditional corporations earning that amount. Among the big names escaping corporate taxes and paying taxes as pass-throughs is Bechtel, the global construction and engineering giant. A spokeswoman for Bechtel said it was a private company and would not comment on its tax status.

Companies typically surrender their pass-through status when they go public, but some energy firms won an exemption. Kinder Morgan has organized its units as publicly traded partnerships, and investors pay taxes at individual rates, as do investors at Enbridge Energy Partners.

Some financial giants were also able to opt out when they became publicly traded partnerships.

The Fortress Investment Group, the first hedge fund and private equity company to go public in the United States; Blackstone; the Carlyle Group; Apollo Global Management; and Kohlberg Kravis Roberts all pay as pass-throughs.

A spokesman for Blackstone said it supported “comprehensive tax reform that puts everything on the table including a possible tax increase” as part of a broader tax package that manages, in its view, to simplify and improve the overall business tax landscape. The Private Equity Growth Capital Council, a lobbying group, said the spread of pass-through companies had created jobs and helped the economy, arguing that adding another layer of tax by treating them as corporations would run counter to bipartisan efforts to streamline the tax code.

To pay for a cut in corporate tax rates, some large corporations and the Obama administration propose eliminating some of the billions of dollars in tax deductions and credits that both corporations and pass-through businesses enjoy. The White House has also broached taxing some of the largest pass-through companies as corporations.

“Large companies are increasingly avoiding tax by organizing themselves as pass-through businesses” an administration issue paper noted, putting traditional corporations at a disadvantage.

In 2011, Timothy F. Geithner, who was the Treasury secretary, told the Senate Finance Committee: “Congress has to revisit this basic question about whether it makes sense for us as a country to allow certain businesses to choose whether they are treated as corporations for tax purposes or not. It is not a fundamentally sustainable balance now.”

The pass-throughs are fighting back.

“We just want a level playing field,” said Ron Travis, vice president for tax and legal affairs at O’Neal Industries, one of the largest metals distribution and manufacturing companies in the United States, with headquarters in Birmingham, Ala. O’Neal switched to pass-through status in 1987. It has a work force of 3,800, in the United States and abroad.

“If you do a corporate-only tax reform, we don’t get a rate benefit,” Mr. Travis said.

The bigger pass-throughs have plenty of allies among the vast ranks of small businesses that lawmakers are particularly attuned to. “We would lose critical deductions and benefits and gain nothing back by a lower corporate tax rate,” said Forrest McConnell, whose father started his family-owned car dealership business in Montgomery, Ala., in 1919.

And that alliance between the larger and smaller pass-throughs helps explain why any plan to cut corporate tax rates faces such tough sledding.

“This is one of the reasons why it is going to be difficult,” said Howard Gleckman, a fellow at the nonpartisan Tax Policy Center in Washington. “As long as it is seen as raising taxes on America’s yeomen business sector in order to cut taxes for Exxon, that is a really hard political sell.”

By Graham Bowley for New York Times' Who's The Boss

Published: May 24, 2013

Keep the Child Care Credit in Mind for Summer

If you are a working parent or look for work this summer, you may need to pay for the care of your child or children. These expenses may qualify for a tax credit that can reduce your federal income taxes. The Child and Dependent Care Tax Credit is available not only while school’s out for summer, but also throughout the year. Here are eight key points the IRS wants you to know about this credit.

1. You must pay for care so you – and your spouse if filing jointly – can work or actively look for work. Your spouse meets this test during any month they are full-time student, or physically or mentally incapable of self-care.

2. You must have earned income. Earned income includes earnings such as wages and self-employment. If you are married filing jointly, your spouse must also have earned income. There is an exception to this rule for a spouse who is full-time student or who is physically or mentally incapable of self-care.

3. You must pay for the care of one or more qualifying persons. Qualifying children under age 13 who you claim as a dependent meet this test. Your spouse or dependent who lived with you for more than half the year may meet this test if they are physically or mentally incapable of self-care.

4. You may qualify for the credit whether you pay for care at home, at a daycare facility outside the home or at a day camp. If you pay for care in your home, you may be a household employer. For more information, see Publication 926, Household Employer's Tax Guide.

5. The credit is a percentage of the qualified expenses you pay for the care of a qualifying person. It can be up to 35 percent of your expenses, depending on your income.

6. You may use up to $3,000 of the unreimbursed expenses you pay in a year for one qualifying person or $6,000 for two or more qualifying person.

7. Expenses for overnight camps or summer school tutoring do not qualify. You cannot include the cost of care provided by your spouse or a person you can claim as your dependent. If you get dependent care benefits from your employer, special rules apply.

8. Keep your receipts and records to use when you file your 2013 tax return next year. Make sure to note the name, address and Social Security number or employer identification number of the care provider. You must report this information when you claim the credit on your return.

For more details about the rules to claim this credit, feel free to contact our office.

Published: May 22, 2013

IRS Gives Tax Relief To Oklahoma Tornado Victims

After Monday’s devastating tornado in Moore and Oklahoma City, the Internal Revenue Service today provided tax relief to individuals and businesses affected by this and other severe storms occurring in parts of Oklahoma.

Following Monday’s disaster declaration for individual assistance issued by the Federal Emergency Management Agency, the IRS announced today that affected taxpayers in Cleveland, Lincoln, McClain, Oklahoma and Pottawatomie counties will receive special tax relief. Other locations may be added in coming days based on additional damage assessments by FEMA.

The tax relief postpones various tax filing and payment deadlines that occurred starting on May 18, 2013. As a result, affected individuals and businesses will have until Sept. 30, 2013 to file these returns and pay any taxes due. This includes the June 17 and Sept. 16 deadlines for making estimated tax payments. A variety of business tax deadlines are also affected including the July 31 deadline for second quarter payroll and excise tax returns and the Sept. 3 deadline for truckers filing highway use tax returns.

The IRS will abate any interest, late-payment or late-filing penalty that would otherwise apply. The agency automatically provides this relief to any taxpayer located in the disaster area. Taxpayers need not contact the IRS to get this relief.

Beyond the relief provided to taxpayers in the FEMA-designated counties, the IRS will work with any taxpayer who lives outside the disaster area but whose books, records or tax professional are located in the areas affected by these storms. All workers assisting the relief activities who are affiliated with a recognized government or philanthropic organization also qualify for relief.  Taxpayers qualifying for relief who live outside the disaster area need to contact the IRS at 866-562-5227.

Individuals and businesses who suffered uninsured or unreimbursed disaster-related losses can choose to claim them on either last year’s or this year’s return. Claiming these casualty loss deductions on either an original or amended 2012 return will get the taxpayer an earlier refund but waiting to claim them on a 2013 return could result in greater tax savings depending upon other income factors.

In addition, the IRS is waiving failure-to-deposit penalties for federal payroll and excise tax deposits normally due on or after May 18 and before June 3 if the deposits are made by June 3, 2013.

The tax relief is part of a coordinated federal response to the damage caused by these storms and is based on local damage assessments by FEMA.

Published: May 21, 2013

Summer Job Tax Information for Students

When summer vacation begins, classroom learning ends for most students. Even so, summer doesn’t have to mean a complete break from learning. Students starting summer jobs have the opportunity to learn some important life lessons. Summer jobs offer students the opportunity to learn about the working world – and taxes.

Here are six things about summer jobs that the IRS wants students to know.

1. As a new employee, you’ll need to fill out a Form W-4, Employee’s Withholding Allowance Certificate. Employers use this form to figure how much federal income tax to withhold from workers’ paychecks. It is important to complete your W-4 form correctly so your employer withholds the right amount of taxes. You can use the IRS Withholding Calculator tool at IRS.gov to help you fill out the form.

2. If you’ll receive tips as part of your income, remember that all tips you receive are taxable. Keep a daily log to record your tips. If you receive $20 or more in cash tips in any one month, you must report your tips for that month to your employer.

3. Maybe you’ll earn money doing odd jobs this summer. If so, keep in mind that earnings you receive from self-employment are subject to income tax. Self-employment can include pay you get from jobs like baby-sitting and lawn mowing.

4. You may not earn enough money from your summer job to owe income tax, but you will probably have to pay Social Security and Medicare taxes. Your employer usually must withhold these taxes from your paycheck. Or, if you’re self-employed, you may have to pay self-employment taxes. Your payment of these taxes contributes to your coverage under the Social Security system.

5. If you’re in ROTC, your active duty pay, such as pay received during summer camp, is taxable. However, the food and lodging allowances you receive in advanced training are not.

6. If you’re a newspaper carrier or distributor, special rules apply to your income. Whatever your age, you are treated as self-employed for federal tax purposes if:

  • You are in the business of delivering newspapers.
  • Substantially all your pay for these services directly relates to sales rather than to the number of hours worked.
  • You work under a written contract that states the employer will not treat you as an employee for federal tax purposes.

If you do not meet these conditions and you are under age 18, then you are usually exempt from Social Security and Medicare tax.

Published: May 20, 2013

IRS To Be Closed May 24 & Four Other Days Due to Budget and Sequester

The Internal Revenue Service announced details about the closures planned for May 24, June 14, July 5, July 22 and Aug. 30, 2013.

Due to the current budget situation, including the sequester, all IRS operations will be closed on those days. This means that all IRS offices, including all toll-free hotlines, the Taxpayer Advocate Service and the agency’s nearly 400 taxpayer assistance centers nationwide, will be closed on those days. IRS employees will be furloughed without pay. No tax returns will be processed and no compliance-related activities will take place.

The IRS noted that taxpayers should continue to file their returns and pay any taxes due as usual.

Taxpayers needing to contact the IRS about their returns or payments should be sure to take these furlough dates into account. In some instances, this may include taxpayers with returns or payments due soon after a furlough day, such as the June 17 deadline for taxpayers abroad and those making a second-quarter estimated tax payment as well as the Sept. 3 deadline for truckers filing a highway use tax return.

Because none of the furlough days are considered federal holidays, the shutdown will have no impact on any tax-filing deadlines. The IRS will be unable to accept or acknowledge receipt of electronically-filed returns on any day the agency is shut down.

Similarly, tax-payment deadlines are also unaffected. The only tax payment deadlines coinciding with any of the furlough days relate to employment and excise tax deposits made by business taxpayers. These deposits must be made through the Treasury Department’s Electronic Federal Tax Payment System (EFTPS), which will operate as usual.

On the other hand, the agency will give taxpayers extra time to comply with a request to provide documents to the IRS. This includes administrative summonses, requests for records in connection with a return examination, review or compliance check, or document requests related to a collection matter. No additional time is given to respond to other agencies or the courts.

Where the last day for responding to an IRS request falls on a furlough day, the taxpayer will have until the next business day. If the last day to respond is Friday, May 24, for example, the taxpayer will have until Tuesday, May 28, to comply (Monday, May 27 is Memorial Day). Further details on the impact of the shutdown on IRS procedures will be available on IRS.gov.

Some web-based online tools and phone-based automated services will continue to function on furlough days, while others will be shut down. Available services include Withholding Calculator, Order A Transcript, EITC Assistant, Interactive Tax Assistant, the PTIN system for tax professionals, Tele-Tax and the Online Look-up Tool for those needing to repay the first-time homebuyer credit. Services not available on those days include Where’s My Refund? and the Online Payment Agreement.

At a later date, the IRS may possibly announce one or two additional furlough days if necessary.

Published: May 16, 2013

Tips for Taxpayers Who Missed the Tax Deadline

Some advice for taxpayers who missed the tax filing deadline:

  • File as soon as possible.  If you owe federal income tax, you should file and pay as soon as you can to minimize any penalty and interest charges. There is no penalty for filing a late return if you are due a refund.
  • Penalties and interest may be due.  If you missed the April 15 deadline, you may have to pay penalties and interest. The IRS may charge penalties for late filing and for late payment. The law generally does not allow a waiver of interest charges. However, the IRS will consider a reduction of these penalties if you can show a reasonable cause for being late.
  • E-file is your best option.  IRS e-file programs are available through Oct. 15. E-file is the easiest, safest and most accurate way to file. With e-file, you will receive confirmation that the IRS has received your tax return. If you e-file and are due a refund, the IRS will normally issue it within 21 days.
  • Free File is still available.  Everyone can use IRS Free File. If your income is $57,000 or less, you qualify to e-file your return using free brand-name software. If you made more than $57,000 and are comfortable preparing your own tax return, use Free File Fillable Forms to e-file. This program uses the electronic versions of paper IRS forms. IRS Free File is available only through IRS.gov.  
  • Pay as much as you can.  If you owe tax but can’t pay it all at once, you should pay as much as you can when you file your tax return. Pay the remaining balance due as soon as possible to minimize penalties and interest charges.
  • Installment Agreements are available.  If you need more time to pay your federal income taxes, you can request a payment agreement with the IRS. Apply online using the IRS Online Payment Agreement Application tool or file Form 9465, Installment Agreement Request.
  • Refunds may be waiting.  If you’re due a refund, you should file as soon as possible to get it. Even if you are not required to file, you may be entitled to a refund. This could apply if you had taxes withheld from your wages, or you qualify for certain tax credits. If you don’t file your return within three years, you could forfeit your right to the refund.

 

Published: May 15, 2013

Where the Mortgage Deduction Really Pays

The mortgage interest deduction is one of the most expensive tax breaks on the books, but its benefits are distributed unevenly across the country, according to a new report by the Pew Charitable Trusts.

In 2010, the year that Pew analyzed, the mortgage deduction resulted in $80 billion of forgone revenue to the federal government. Over five years, the tax break is expected to reduce revenue by about $380 billion.

The deduction is claimed by fewer than a third of federal tax filers and less than half of homeowners. Only those with mortgages who itemize their deductions, rather than claim the standard deduction, can benefit from it.

As Congress starts to pursue tax reform, who benefits from the deduction and how it affects different states will be a factor in any discussion about changing it.

"[F]ederal taxes could increase in some areas and decrease in others. These results could, in turn, affect economic activity both across and within states," the Pew report noted.

Generally speaking, Pew found that states on parts of the East and West Coasts had the highest number of people filing for the mortgage deduction and also claiming the highest average amounts compared with states in the South and Midwest.

Minnesota is an exception: It had a high percentage of filers using the deduction and claiming relatively high average amounts.

Within states, filers in large metropolitan areas were most likely to claim the deduction and to claim higher amounts.

More specifically, Pew found that California took the No. 1 spot in a few categories: It had the most tax filers in the country (16.7 million). It also had the highest number of mortgage deduction claims (4.6 million). And in aggregate the state claimed the highest number of mortgage deduction dollars (nearly $72 billion).

But when it came to averages claimed among filers, California actually took a backseat to Maryland. Among all federal filers in California, the average mortgage deduction claimed was $4,311, whereas among all Maryland filers it was $4,580, or more than 1.5 times the U.S. average of $2,713.

When calculated just among filers who actually claimed the mortgage deduction, however, California retains its top-dog position. Its average deduction was $15,755, which is about 50% higher than the U.S. average of $10,640 and more than double the lowest average, $7,177 in Iowa.

North Dakota had both the lowest number of claims (50,000), and the lowest average deduction of $1,192 across all filers. Other states with relatively low numbers of claims and low averages include West Virginia, Mississippi, Louisiana, Arkansas and South Dakota.

No one has seriously proposed getting rid of the mortgage deduction altogether. It's very popular and eliminating it entirely might disrupt the housing market.

But if lawmakers choose to reform the mortgage break, many experts say it should be rejiggered so it does a better job of promoting homeownership, while not disproportionately benefiting high-income households anymore.

"The mortgage interest deduction should be restructured, with more of the subsidy directed to low- and middle-income taxpayers who are more likely to be deciding whether to own or rent," Eric Toder, a co-director of the nonpartisan Tax Policy Center, said at a hearing of the House Ways and Means Committee last month.

One proposal would convert the deduction to a credit equal to a percentage of interest one pays, and capping how much interest is eligible. For example, a taxpayer could take a credit for 15% on no more than $25,000 in interest.

That would broaden the reach of the break, since all homeowners with a mortgage could claim it, regardless of whether they itemize.

And it would no longer skew the benefit in favor of higher-income homeowners.

Here's why?

Currently, the deduction reduces tax liability by a percentage equal to one's top tax rate. In other words, the higher your income, the higher your top rate, and the bigger your deduction.

By contrast, a tax credit is a dollar-for-dollar reduction of the taxes your owe. And capping it at a given level -- say 15% of mortgage interest paid -- means everyone gets the same break regardless of income.

Other ideas include further limiting the size of the loan eligible for the interest tax break, and allowing the break only for loans on principal residences. Right now, homeowners may deduct interest on second homes as well as principal residences so long as the combined amount borrowed doesn't exceed $1 million, and they may deduct interest on home equity loans up to $100,000.

By Jeanne Sahadi for @CNNMoney

Published: May 13, 2013

Many Early Tax Filers Still Waiting for Refunds

More than three months after rushing to file their taxes early, some filers still haven't received refunds from the IRS.

Taxpayers claiming education credits on Form 8863 encountered their first delay. The IRS was unable to start processing forms until mid-February because the fiscal cliff debate forced it to put off updating its systems.

Then, on March 12, the IRS said several tax software providers erroneously filed more than 600,000 returns containing the 8863 form --resulting in delays of up to six weeks from the date they were filed.

That meant most of these filers were expecting refunds by the end of March or beginning of April at the latest.

But since then, hundreds of angry comments have been posted on Facebook and other online tax forums from filers who claim they still haven't received their refunds.

"Sooooo effing angry!!!! Still processing three months now no update," one member of the Club 8863 Facebook group wrote last week.

"Still waiting I've had no changes since feb. starting to getting mad bc I was told I would definitely have it by April 22 and then that changed to May 6. And now nothing," wrote another filer. Another woman said her electricity was going to be shut off unless she gets the money soon.

Jolee Singleton, from Lakeland, Fla., filed her taxes on Feb 14. She said she made sure to get them in as soon as possible because she needed the $1,000 refund for rent and car payments as she searched for a full-time job. But after calling the IRS every week to check in on the status, she's still waiting. In the meantime, her truck was repossessed because she couldn't keep up with payments, and she doesn't start her new job until next week.

"When you owe the government money they want it right away. When they owe you money, they are not in a hurry," she said. "I have almost lost my house too, and will soon if I don't get my refund."

Some taxpayers' filing fees have already been put into collections because they aren't able to afford them without their refunds, while others took out refund anticipation loans and are paying steep interest as they wait for their refunds -- which they needed in order to pay off the loans, Fisher said.

The IRS wouldn't say how many Form 8863 filers still haven't received their refunds, but it said a small group may have been impacted by additional issues that the IRS was continuing to work on -- and that these returns have finally been processed.

"A small additional set of returns with education credits cleared our review process in recent days. As a result, these taxpayers should start seeing their refunds or refund dates shortly -- assuming there are no other issues with their tax returns," the IRS said in a statement.

As these people anxiously watch their mailboxes or bank accounts for that direct deposit from the IRS, nearly 98 million taxpayers have already received refunds, according to the latest IRS filing statistics. The IRS says that most refunds are issued in less than 21 days, and the average refund is $2,657 -- down slightly from last year's average refund of $2,716.

By Blake Ellis for @CNNMoney

Published: May 9, 2013

Small Business Owners File Lawsuit Against IRS

Small business owners in states that did not establish healthcare exchanges in advance of the implementation of the Affordable Care Act will be harshly impacted by a recent rule enacted by the Internal Revenue Service. Some small business owners have filed a lawsuit in Federal court over it.

The Competitive Enterprise Institute (CEI) reports on a lawsuit filed by six small business owners and several individuals against the U.S. government, challenging the IRS rule.   The IRS rule seeks to provide tax credits to people in states that did not opt to create state healthcare exchanges under Obamacare.

CEI noted in a prepared statement last week:

“The Affordable Care Act authorizes health insurance subsidies to qualifying individuals in states that created their own healthcare exchanges. Those subsidies trigger the employer mandate (a $2,000/employee penalty) and expose more people to the individual mandate.  But last spring, without authorization from Congress, the IRS vastly expanded those subsidies to cover states that refused to set up such exchanges.  Under the Act, businesses in these nonparticipating states should be free of the employer mandate, and the scope of the individual mandate should be reduced as well.  But because of the IRS rule, both mandates will be greatly enlarged in scope, depriving states of the power to protect their residents.”

One effect of the lawsuit is to make sole proprietors subject to consequences they otherwise would not be subject to. For instance, Jacqueline Halbig, one of the plaintiffs, is a sole proprietor who says that under the IRS rule she would be subject to paying a penalty for her own coverage.  In the lawsuit she asserts she “will be forced to either pay a penalty or purchase more insurance than she wants.”

Chuck Willey, an MD who also is a plaintiff in the lawsuit, said in a statement through CEI: “Contrary to the clear language in the Affordable Care Act, government is directly impeding my ability to design a quality affordable health plan for my employees. The IRS will extra-legislatively extend this onerous benefit requirement (which will increase premiums and costs of care) and impose the employer penalty in states with federally-run exchanges. I maintain the right to choose my own employees’ health plan without government intervention into its benefit design and without penalty.”

Thirty-three states have opted not to establish state healthcare exchanges.  Those states that have not established their own exchanges include Wyoming, Wisconsin, Virginia, West Virginia, Texas, Tennessee, South Dakota, South Carolina, Pennsylvania, Oklahoma, Ohio, North Dakota, North Carolina, New Jersey, New Hampshire, Nebraska, Montana, Missouri, Mississippi, Michigan, Maine, Louisiana, Kansas, Iowa, Indiana, Illinois, Georgia, Florida, Delaware, Arkansas, Arizona, Alaska, and Alabama.

From SmallBizTrends.com

Published: May 7, 2013

How to Lower Your Company's Property Taxes

Property taxes are often burdensome for small business owners because real property taxes in most states are higher for commercial properties than they are for residential, says Molly Brogan, vice president of public affairs for the National Small Business Association, a small business advocacy group. For instance, the Wayne County Homestead Exemption allows the appraised valuation of a primary residence to be reduced before calculating the property tax owed, resulting in a lower annual property tax rate for homeowners and home-based businesses.

According to a 2012 NSBA survey (PDF), property taxes ranked third on a list of most financially burdensome taxes, coming in after income and payroll taxes for pass-through entities such as S-corps and sole proprietorships. You should keep in mind, however, that your local property tax can typically be deducted 100 percent as a business expense on your federal tax return and may provide a deduction on your state taxes as well.

“This is a huge issue in multiple states, including New Jersey, New York, Connecticut, and elsewhere,” says Jack Mozloom, senior regional media manager for the lobbying group National Federation of Independent Business. “Local budgets are approved by local officials, but property taxes are authorized by state law, and so are employee pensions, labor rules, medical benefits, and salaries for municipal and county employees,” expenses that are funded by local tax revenues.

The NFIB supported a 2 percent cap on New York State property tax increases that took effect in 2012, but the cap is being challenged in court by the state teacher’s union. If you want to make the case for reducing property taxes in your area, you’ll need to contact your state representatives, Mozloom says. Governor Andrew Cuomo’s Mandate Relief Council may be a good place to start.

Use data to show the burden you face, Brogan suggests, including what proportion of your business budget is taken up by property tax, what percentage of your total tax burden your property tax constitutes, and what other states and counties are doing to reduce tax rates and attract businesses. Lay out the economic impact your business has on your community, such as how many people you employ, what goods and services you provide, and any local charitable organizations your business supports.

Try to mobilize a group of business owners who share your concerns, says Amy Handlin, an associate professor at the Monmouth University School of Business and author of Be Your Own Lobbyist (Praeger, 2010).

Ask every member of your group to contact their elected officials by e-mail or in person and attend public meetings to speak up about their concerns, Handlin suggests: “It’s key for everyone to communicate the same message—that this tax is causing serious harm to the local economy as a whole, not just to a few isolated businesses.”

Put together a fact sheet about the negative impact of high property taxes and ask your peers to disseminate it via social media, blog posts, and letters to the editors of your local publications, Handlin says. “Remember that every politician wants to be a small business hero. Offer to support and publicize the efforts of any official who indicates a willingness to help.”

By Karen E. Klein for Bloomberg BusinessWeek

Published: May 6, 2013

Americans are Feeling the Effects of Money Stress

For many Americans money stress brought on by lighter paychecks this year is affecting more than their wallets — it’s taking a toll on their waistlines, friendships and the amount of sleep they get. That’s according to results of a new survey fielded for the American Institute of CPAs by Harris Interactive in recognition of National Financial Capability Month.

The telephone survey, conducted between March 14 and March 17, asked 1,011 U.S. adults to name all the ways financial stress is affecting their lives. Of those who rate their financial stress “very” or “somewhat high,” almost half, 47 percent, said they are sleeping less; 43 percent said they have less patience with friends or are seeing them less often and 31 percent are eating more junk food or gaining weight.

“Mounting money pressures are making Americans cranky, tired and unhealthy,” said Ernie Almonte, CPA, CGMA, chair of the AICPA’s National CPA Financial Literacy Commission. “This can lead to a double whammy, with ensuing physical and emotional stress potentially leading to higher long-term costs. Americans must find ways to cope with money stress even when financial challenges seem daunting.”

Even worse, financial stress is fairly common and doesn’t seem to be going away any time soon.

As Plan Sponsor reports, the AICPA survey found 44 percent of U.S. adults currently register a high level of financial stress—with women almost twice as likely as men to say it is “very high.” Only 28 percent of adults see a reduction in financial stress over the next six months.  

AccountingWEB discussed the survey results, with Sharon Lechter, CPA, member of AICPA’s National CPA Financial Literacy Commission financial literacy expert and author.

“The findings really underscore the tremendous effects of financial stress. The simple fact is this: It costs to live. We have to pay for shelter, food, clothes, transportation, child care, health care, and the list goes on, Lechter said.” “When you have a financial setback, the challenge confronts you constantly and can seem overwhelming. It will absolutely take a toll on other parts of your life. That's why it's so important to have a firm understanding of your financial situation and a plan to move forward. What's the old saying? 'If you fail to plan, you plan to fail.' A budget and a plan can help mute the ill effects of financial stress.”

By James Schiavone for AICPA Insights

Published: May 3, 2013

Self-Employed Travel Expenses

If you are self-employed you may have a number of customers you go to regularly to work at their premises. This could apply to mobile hairdressers, cleaners, gardeners, and even medical professionals who work at private clinics. The miles you drive to reach each of your customers from your business base are used to calculate the amount of travel expenses you claim in your business accounts.

This is all good, but the Taxman has recently argued in a tax case that where the business is based at the person’s home, that home-office can’t be treated as the starting point for travel when the work is performed almost entirely at customers’ properties. The Taxman has particularly challenged travel expenses claimed by doctors who work at private clinics and do not see patients at their home-office. The Taxman has tried to ignore the necessary preparation and report writing work the doctor has to perform at his home-office.

The Taxman has agreed that travel between customers is allowable, so the mobile hairdresser or cleaner who travels to several customers each day should be able to claim the majority of their travel expenses. However, travel from the home-office to say one private clinic and back home again is in question.

This doesn’t mean you should stop claiming the cost of travelling to customers, but to head-off any challenge in the future, you should record every business related journey; where it started, number of miles and the reason for the journey – who were you seeing. Using an estimate of your total business mileage for the year is no longer an acceptable method of calculating your travel expenses. You should also record what part of your business you conduct at your home-office, such as preparing estimates or writing reports.

If you are concerned you may be affected, please contact us for advice.

By Chris Thomas for the ONE Accounting Blog

Published: May 1, 2013

Six Facts on Tax Refunds and Offsets

Certain financial debts from your past may affect your current federal tax refund. The law allows the use of part or all of your federal tax refund to pay other federal or state debts that you owe.

Here are six facts from the IRS that you should know about tax refund ‘offsets.’

1. A tax refund offset generally means the U.S. Treasury has reduced your federal tax refund to pay for certain unpaid debts.

2. The Treasury Department’s Financial Management Service is the agency that issues tax refunds and conducts the Treasury Offset Program.

3. If you have unpaid debts, such as overdue child support, state income tax or student loans, FMS may apply part or all of your tax refund to pay that debt.

4. You will receive a notice from FMS if an offset occurs. The notice will include the original tax refund amount and your offset amount. It will also include the agency receiving the offset payment and that agency’s contact information.

5. If you believe you do not owe the debt or you want to dispute the amount taken from your refund, you should contact the agency that received the offset amount, not the IRS or FMS.

6. 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.

Published: April 30, 2013

Unreported Cash Income Costs U.S. Taxes on $2T A Year

When we all finished filing our tax returns last week, there was a little something missing: two trillion dollars. That’s how much money Americans may have made in the past year that didn’t get reported to the I.R.S., according to a recent study by the economist Edgar Feige, who’s been investigating the so-called underground, or gray, economy for thirty-five years. It’s a huge number: if the government managed to collect taxes on all that income, the deficit would be trivial. This unreported income is being earned, for the most part, not by drug dealers or Mob bosses but by tens of millions of people with run-of-the-mill jobs—nannies, barbers, Web-site designers, and construction workers—who are getting paid off the books. Ordinary Americans have gone underground, and, as the recovery continues to limp along, they seem to be doing it more and more.

Measuring an unreported economy is obviously tricky. But look closely and you can see the traces of a booming informal economy everywhere. As Feige said to me, “The best footprint left in the sand by this economy that doesn’t want to be observed is the use of cash.” His studies show that, while economists talk about the advent of a cashless society, Americans still hold an enormous amount of cold, hard cash—as much as seven hundred and fifty billion dollars. The percentage of Americans who don’t use banks is surprisingly high, and on the rise. Off-the-books activity also helps explain a mystery about the current economy: even though the percentage of Americans officially working has dropped dramatically, and even though household income is still well below what it was in 2007, personal consumption is higher than it was before the recession, and retail sales have been growing briskly (despite a dip in March). Bernard Baumohl, an economist at the Economic Outlook Group, estimates that, based on historical patterns, current retail sales are actually what you’d expect if the unemployment rate were around five or six per cent, rather than the 7.6 per cent we’re stuck with. The difference, he argues, probably reflects workers migrating into the shadow economy. “It’s typical that during recessions people work on the side while collecting unemployment,” Baumohl told me. “But the severity of the recession and the profound weakness of this recovery may mean that a lot more people have entered the underground economy, and have had to stay there longer.”

The increasing importance of the gray economy isn’t only a reaction to the downturn: studies suggest that the sector has been growing steadily over the years. In 1992, the I.R.S. estimated that the government was losing $80 billion a year in income-tax revenue. Its estimate for 2006 was $385 billion—almost five times as much (and still an underestimate, according to Feige’s numbers). The U.S. is certainly a long way from, say, Greece, where tax evasion is a national sport and the shadow economy accounts for twenty-seven per cent of G.D.P. But the forces pushing people to work off the books are powerful. Feige points to the growing distrust of government as one important factor. The desire to avoid licensing regulations, which force people to jump through elaborate hoops just to get a job, is another. Most important, perhaps, are changes in the way we work. As Baumohl put it, “For businesses, the calculus of hiring has fundamentally changed.” Companies have got used to bringing people on as needed and then dropping them when the job is over, and they save on benefits and payroll taxes by treating even full-time employees as independent contractors. Casual employment often becomes under-the-table work; the arrangement has become a way of life in the construction industry. In a recent California survey of three hundred thousand contractors, two-thirds said they had no direct employees, meaning that they did not need to pay workers’-compensation insurance or payroll taxes. In other words, for lots of people off-the-books work is the only job available.

Sudhir Venkatesh, a sociologist at Columbia and the author of a study of the underground economy, thinks that many workers, particularly younger ones, have become comfortable with casual work arrangements. “We have seen the rise of a new generation of people who are much more used to doing things in a freelance way,” he said. “That makes them more amenable to unregulated work. And they seem less concerned about security, which they equate with rigidity.” The growing importance of services in the economy is also crucial. Tutors, nannies, yoga teachers, housecleaners, and the like are often paid in cash, which is hard for the I.R.S. to track. In a 2006 study, the economist Catherine Haskins found that between eighty and ninety-seven per cent of nannies were paid under the table.

It’s obviously a good thing that people are able to find work to keep themselves afloat when the legitimate economy has been terrible at creating new jobs and raising incomes. And the size of the shadow economy means that our economy as a whole is probably doing better than we think. But the damaging effects of this trend are clear. It’s hard for businesses to play by the rules if their competitors aren’t paying payroll taxes or workers’ comp. And off-the-books workers have no benefits or Social Security, and not much recourse if a boss decides to shortchange them. What’s more, when a sizable chunk of the population avoids taxes, confidence in the system diminishes. “Too much off-the-books work is not good for the social contract,” Venkatesh says. “Economies work best when people have some sense, however abstract, that they are all tied together.”

By James Surowiecki for The New Yorker

Published: April 29, 2013

The So-Called 'Internet Sales Tax' Explained

Senators are wrapping up discussions about the Marketplace Fairness Act, better known by its nickname, the Internet Sales Tax. A vote to advance the bill is expected Friday morning.

The proposed legislation would force many online retailers to begin collecting taxes on their wares in all states, not just where they have offices.

Any online store that makes more than $1 million annually in online sales would have to send taxes back to the states where their goods are delivered, based on the rates required in those jurisdictions.

In a time when states and towns are struggling to make ends meet, this bill would mean extra revenue to make up for federal dollars lost to sequester cuts. It's no wonder some lawmakers are looking to cash in on what has become a sizeable chunk of American commerce.

Revenue from purchases made on the Internet in the United States has grown steadily since 2003. That year, they made up about 1.6 percent of total retail sales in the U.S. By 2012 they had risen more than three-fold to 5.2 percent, bringing in $225.5 billion.

The bill can find support on the right despite many Republicans' pledges not to raise taxes, because it does not subject any new items to taxation. Online buyers legally should be paying these fees already, but they rarely do. There is even a section in the bill called "No New Taxes," that explains this.

Some big name retailers, like Amazon, have come out in favor of the bill.

But opponents say the act would impose a burdensome system on small businesses that don't have the administrative resources to keep such complex books. Retailers would have to determine how much to pay in taxes on an item based on the thousands of tax jurisdictions in the United States.

As an example of how that could get complicated, five states do not have state-wide sales tax, but two of those states – Montana and Alaska – allow localities to charge a sales tax. So a business owner in New Hampshire – which has no sales tax – sending a fishing pole to a customer in Juneau, Alaska, would have to collect a 5 percent sales tax, but would charge no sales tax to the buyer in Denali Borough.

Althea Erickson, director of public policy for Etsy, an online marketplace where crafters can sell their creative goods, wrote an op-ed this week urging lawmakers to raise the revenue rate that differentiates between small and big businesses in the act.

"If you're thinking, '$1 million, phew, that excludes me,' that's understandable," Erickson wrote of the threshold for businesses affected by the bill. "$1 million in sales, however, is well below other federal definitions of small business. And the top 500 largest internet retailers make up 93 percent of lost state revenues. A lower exception hurts small businesses more than it helps states."

By Sarah Parnass for ABC News

Published: April 26, 2013

How to Survive a Tax Audit

Tax season has finally wrapped up, but audit season is just about to begin.

The chances of being dealt an audit are low -- about one in 100. But if you happen to be selected, you can take certain steps to make the process a little less painful.

1. Know what to expect.

Envisioning a visit from a suit-clad IRS agent with a briefcase? That's not usually how an audit plays out. The vast majority, or 76%, are correspondence audits, meaning the IRS requests information by mail instead of questioning a taxpayer in person.

These tend to focus on specific items on a return -- like itemized deductions for medical expenses -- and simply ask for documentation, said John Lieberman, CPA at Perelson Weiner LLP. In-person field audits are broader inquiries about a tax return and often involve verifying income, he said.

In either case, you'll likely receive a notification by mail explaining which parts of your return the IRS has questions about.

2. Don't ignore the letter.

Shoving the letter you get from the IRS in a drawer and pretending it's not there won't make it go away. You're usually given 30 days to respond, so make sure to write back promptly or certain items may be disallowed or automatically corrected. The IRS will then begin collecting on any extra tax it believes you owe, said Lieberman.

3. Get documentation together.

Once you find out what parts of your tax return are in question, you should start collecting any relevant paperwork.

The rule of thumb is to keep tax-related documents for three years from the date a return was filed. If you can't find the documentation you need in your files, you can usually get another copy elsewhere. If you're missing the bill for a medical expense you claimed, for example, you can contact your doctor's office. If you donated money to a charity but lost your receipt, the charity will probably be able to send you a duplicate.

If you're unable to get the proof the IRS is asking for, any unsubstantiated claim or deduction on your return will be disallowed, said Lieberman.

4. Stay calm.

Spending time with the IRS may not be your idea of a fun time, but it won't help to be rude or difficult.

"Make sure you show respect for the individual on the other side," said Mark Everson, vice president of tax service firm alliantgroup and former head of the IRS. "It's not something you look forward to, but it's going to go better if you're respectful and friendly, recognizing that he or she is just trying to do their job."

Hiding information is another obvious no-no.

"If you think you've made an error on your return, don't try to cover that up -- figure out why that happened and what needs to be done to correct it," Everson said.

Lieberman recommends pointing out any mistakes -- and explaining why they occurred -- in a cover letter replying to your audit notification.

5. Get help.

For correspondence audits with straightforward requests, it's usually unnecessary to hire outside help, said Lieberman. But you can always let your tax preparer know about the audit, in case they have advice about how to respond.

 With in-person audits, though, it's often in your best interest to hire a CPA or tax professional to assist you -- unless you're very confident in your tax knowledge.

"It's best to have someone who understands and is able to explain what you did and why you did it," said Lieberman.

6. Pay up.

If you end up owing extra money, you'll get a bill in the mail that's typically due within 30 days, unless you ask to set up a payment plan. If your federal return ends up being changed, you'll typically have 90 days to amend your state return as well.

Disagree with the outcome of an audit? Ask to talk with a manager, who can conduct an internal review. If that doesn't help, you can request assistance from the Taxpayer Advocate Service, the IRS's watchdog arm. As a last resort, you can appeal the audit in U.S. Tax Court, a federal court specializing in tax cases.

But these avenues can be time-consuming and expensive, so make sure the fight is worth it, said Lieberman.

By Blake Ellis for @CNNMoney

Published: April 25, 2013

Tips to Start Planning Next Year's Tax Return

For most taxpayers, the tax deadline has passed. But planning for next year can start now. The IRS reminds taxpayers that being organized and planning ahead can save time and money in 2014. Here are six things you can do now to make next April 15 easier.

1. Adjust your withholding.  Each year, millions of American workers have far more taxes withheld from their pay than is required. Now is a good time to review your withholding to make the taxes withheld from your pay closer to the taxes you’ll owe for this year. This is especially true if you normally get a large refund and you would like more money in your paycheck. If you owed tax when you filed, you may need to increase the federal income tax withheld from your wages. Use the IRS Withholding Calculator at IRS.gov to complete a new Form W-4, Employee's Withholding Allowance Certificate.

2. Store your return in a safe place.  Put your 2012 tax return and supporting documents somewhere safe. If you need to refer to your return in the future, you’ll know where to find it. For example, you may need a copy of your return when applying for a home loan or financial aid. You can also use it as a helpful guide for next year's return.

3. Organize your records.  Establish one location where everyone in your household can put tax-related records during the year. This will avoid a scramble for misplaced mileage logs or charity receipts come tax time.

4. Shop for a tax professional.  If you use a tax professional to help you with tax planning, start your search now. You’ll have more time when you're not up against a deadline or anxious to receive your tax refund. Choose a tax professional wisely. You’re ultimately responsible for the accuracy of your own return regardless of who prepares it. Find tips for choosing a preparer at IRS.gov.

5. Consider itemizing deductions.  If you usually claim a standard deduction, you may be able to reduce your taxes if you itemize deductions instead. If your itemized deductions typically fall just below your standard deduction, you can ‘bundle’ your deductions. For example, an early or extra mortgage payment or property tax payment, or a planned donation to charity could equal some tax savings. See the Schedule A, Itemized Deductions, instructions for the list of items you can deduct. Planning an approach now that works best for you can pay off at tax time next year.

6. Keep up with changes.  Find out about tax law changes, helpful tips and IRS announcements all year by subscribing to IRS Tax Tips through IRS.gov or IRS2Go, the mobile app from the IRS. The IRS issues tips regularly during the summer and tax filing season.

Published: April 24, 2013

IRS Fresh Start Program Helps Taxpayers Who Owe the IRS

The IRS Fresh Start program makes it easier for taxpayers to pay back taxes and avoid tax liens. Even small business taxpayers may benefit from Fresh Start. Here are three important features of the Fresh Start program:

Tax Liens
 
The Fresh Start program increased the amount that taxpayers can owe before the IRS generally will file a Notice of Federal Tax Lien. That amount is now $10,000. However, in some cases, the IRS may still file a lien notice on amounts less than $10,000.

When a taxpayer meets certain requirements and pays off their tax debt, the IRS may now withdraw a filed Notice of Federal Tax Lien. Taxpayers must request this in writing using Form 12277, Application for Withdrawal.

Some taxpayers may qualify to have their lien notice withdrawn if they are paying their tax debt through a Direct Debit installment agreement. Taxpayers also need to request this in writing by using Form 12277.

If a taxpayer defaults on the Direct Debit Installment Agreement, the IRS may file a new Notice of Federal Tax Lien and resume collection actions.

Installment Agreements

The Fresh Start program expanded access to streamlined installment agreements. Now, individual taxpayers who owe up to $50,000 can pay through monthly direct debit payments for up to 72 months (six years). While the IRS generally will not need a financial statement, they may need some financial information from the taxpayer. The easiest way to apply for a payment plan is to use the Online Payment Agreement tool at IRS.gov. If you don’t have Web access you may file Form 9465, Installment Agreement, to apply.

Taxpayers in need of installment agreements for tax debts more than $50,000 or longer than six years still need to provide the IRS with a financial statement. In these cases, the IRS may ask for one of two forms: either Collection Information Statement, Form 433-A or Form 433-F.

Offers in Compromise 


An Offer in Compromise is an agreement that allows taxpayers to settle their tax debt for less than the full amount. Fresh Start expanded and streamlined the OIC program. The IRS now has more flexibility when analyzing a taxpayer’s ability to pay. This makes the offer program available to a larger group of taxpayers.

Generally, the IRS will accept an offer if it represents the most the agency can expect to collect within a reasonable period of time. The IRS will not accept an offer if it believes that the taxpayer can pay the amount owed in full as a lump sum or through a payment agreement. The IRS looks at several factors, including the taxpayer’s income and assets, to make a decision regarding the taxpayer’s ability to pay. Use the Offer in Compromise Pre-Qualifier tool on IRS.gov to see if you may be eligible for an OIC.

Published: April 22, 2013

April 15 Deadline Ends Tumultuous Tax Season

Tax experts and taxpayers alike are breathing a sigh of relief that this year's tax season is finally over at midnight tonight.

Following a flurry of technological hiccups, sudden tax changes and delays caused by Congressional debates with the fiscal cliff, it's been an infamous year for taxes many would wish to not repeat.

"This has been the strangest filing season on record," says Bill Nemeth, an enrolled agent in Atlanta, Ga. "It's never been seen like this before."

The most recent mar on the tax season occurred late Sunday night when the top tax preparation tool, TurboTax online, went down for roughly an hour. But that was relatively minor given the other trials taxpayers endured, including:

  • Compressed tax season. Typically, the Internal Revenue Service is up and ready to start accepting returns on Jan. 13, Nemeth says. But due to last-minute discussions in Congress, the IRS wasn't ready for returns until Jan. 30, he says. But that was just the start. Some returns with certain credits didn't have forms ready until Valentine's Day and those with rental property had to wait until March 7, he says. "Because of Congress, things got real compressed this year," Nemeth says.
  • Lifestyle changes raising new tax questions. Given the state of the economy, tax experts found taxpayers struggling on new issues. One of the biggest changes had to do with greater questions about who qualifies as a dependent, says Eva Rosenberg, an enrolled agent and operator of the taxmomma.com Web site. Many more parents are wondering who they can claim as dependents, as their children return home unable to find jobs, she says.
  • Changes with investment taxes. Starting last year, brokerages have had the obligation to report the cost basis of most investments at tax time. And while most brokerages have gotten these forms out on time this tax year, many were wrong and needed to be fixed with amendments, says Jerry Love, a certified public accountant in Abilene, Tx. Several brokerages were sending fixes up until April. This only complicated the fact that many of the software packages that accountants used werealso being patched to incorporate the year's last-minute tax changes.

Taxpayers who haven't filed yet need to get in motion, tax experts say. That's especially important for those who owe taxes. Filing for an extension can save big fees, as failing to do so results in a maximum 25% failure to file penalty and a 20% failure to pay, Nemeth says. The failure to file fee is 5% a month. Taxpayers unable to pay may qualify for a 3% annual interest rate and payment plans are also available for bills of less then $50,000, Nemeth says.

The IRS is less tough on taxpayers who miss the deadline but who are getting money back. There's no penalty, Nemeth says. But even these taxpayers will want to get current since if there's money due, and they don't file for three years, they forfeit their refund to the government, he says.

But above all, now's the time to plan for next April, says Love. Big changes in the code will likely hit high income earnings hard. "If you make more than $250,000, your taxes are going up. Count on it," he says.

By Matt Krantz for USA Today

Published: April 15, 2013

Significant Decline in IRS Staff Leads to Fewer Audits

The Transactional Records Access Clearinghouse (TRAC), reports that the IRS plans to expend 18% fewer staff hours auditing large businesses with assets of more than $10 million in fiscal year 2013 (which ends Sept. 30) than it did in FY 2011. These lower numbers do not take into account the effects of budget cuts that resulted from the sequester.  

TRAC, a data research organization at Syracuse University, based the report on information it has received after filing a Freedom of Information Act (FOIA) suit against the IRS.

The report also notes ongoing reductions in IRS staff in the individual tax area, explaining that the number of IRS employees fell 23% between 1992 and 2012, while the number of tax returns filed increased by 27% during the same period. Some of the reduction in IRS staff is compensated for by the increase in correspondence audits, Form 1099 matching programs, and expanded math error correction authority, but it is impossible to tell how much. The report says that an individual’s chance of being audited declined 7% from FY 2011 to FY 2012 and that face-to-face audits declined by 10%.

As a result of its FOIA suit, TRAC now receives monthly planning reports from the IRS and is in a position to track ongoing trends. Nonetheless, it mentioned that it was impossible to tell how big the IRS needs to be to do its job adequately because there are no systematic reports studying those needs. It pointed out that there used to be a program called the Taxpayers Compliance Measurement System that calculated the IRS’s effectiveness in allocating its resources. However, that program, which began in the Kennedy administration, was ended by the Reagan administration.

Without this information, TRAC questions the IRS’s ability to live up to its mission statement: “Provide America’s taxpayers top quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all.” While the IRS currently has a program called the National Research Program that is intended “to design and implement a successful strategy to collect data that will be used to measure payment, filing and reporting compliance,” TRAC says these efforts have not been successful.

By Sally P. Schreiber, J.D. for the Journal of Accountancy

Published: April 11, 2013

Many Proposed Tax Changes in 2014 Budget

President Barack Obama released his proposed FY 2014 budget. In it, he aims to raise approximately $580 billion in revenue through new taxes, limits on deductions, and other tax proposals. The revenue-raising portion of the proposed budget generally mirrors the president’s proposals made during the fiscal cliff negotiations last December.

One big part of the revenue proposal is the so-called Buffett rule, which would ensure that households with income over $1 million pay at least 30% of their income (after charitable donations) in tax. Its name derives from Warren Buffett’s observation that his effective tax rate is lower than his secretary’s. A White House press release describes this as “prevent[ing] millionaires from taking advantage of special provisions to pay taxes at lower rates than many middle-class families do.”

The Buffett rule proposal would implement a new “Fair Share Tax,” which would equal 30% of the taxpayer’s adjusted gross income, less a charitable donation credit equal to 28% of itemized charitable contributions allowed after the overall limitation on itemized deductions. The Fair Share Tax would be phased in, starting at adjusted gross incomes of $1 million, and would be fully phased in at adjusted gross incomes of $2 million. The Office of Management and Budget estimates that this rule would increase government revenues by $99 billion over 10 years.

Another large proposal is to limit the value of tax deductions and other tax preferences. This would affect married taxpayers filing jointly with income over $250,000 and single taxpayers with income over $200,000. The proposal would limit the tax rate at which these taxpayers can reduce their tax liability to a maximum of 28%. This limit would apply to all itemized deductions; foreign excluded income; tax-exempt interest; employer-sponsored health insurance; retirement contributions; and certain above-the-line deductions. This proposal was also in the president’s 2013 budget but was not enacted.

The proposed $3.77 trillion budget also contains many proposals beyond tax initiatives, and according to the White House it “contains $2 in spending cuts for every $1 of new revenue” and would reduce the federal deficit by $1.8 trillion over 10 years.

Other tax proposals include expanding the tax credit for child and dependent care, a tax credit to encourage employers to offer retirement savings plans, and a $3 million limit on the size of individual retirement accounts and other tax-preferred savings accounts.

In another proposal that has turned up several times in the past few years, the budget would tax carried interests in partnerships (such as those held by hedge fund managers and private-equity partners) at ordinary income rates, instead of as capital gains. This change is estimated to raise $16 billion over 10 years.

The budget also promises to make permanent the increased Sec. 179 expensing amounts currently in effect.

The proposed budget would also reintroduce the estate, gift, and generation-skipping transfer (GST) tax rules that were in effect in 2009, except that portability of the estate tax exclusion between spouses would be retained. This change would take effect in 2018. Under the proposal, the top tax rate would be 45% and the exclusion amount would be $3.5 million for estate and GST taxes, and $1 million for gift taxes.

The president’s budget would also change the depreciation rules for corporate aircraft. Currently, airplanes, such as corporate jets, that are not used in commercial aviation or to carry freight can be depreciated over five years. Commercial aircraft, on the other hand, have a seven-year depreciation period. The budget proposes applying the seven-year deprecation period to all aircraft. It is estimated that this change would reduce the deficit by $2.7 billion over 10 years.

In another proposal carried over from last year’s proposed budget, the 2014 budget would repeal a number of tax preferences that are currently available for oil, gas, and coal production. It is estimated that this would reduce the deficit by almost $44 billion over 10 years.

By Alistair M. Nevius, J.D. for the Journal of Accountancy

Published: April 10, 2013

Survey Shows How Americans Plan to Use Tax Refunds This Year

Americans have some decidedly unsexy plans for their tax refunds this year.

Forget about impulse buys or impromptu holidays. These days, taxpayers expect to use the money for the basics: savings, day-to-day expenses, and paying down debt.

A new survey conducted for the AICPA by Harris Interactive found that 46% of U.S. adults expect to put their refund into savings. Another 37% will use it for day-to-day expenses, while a third will pay down debt.

“It just goes to show people are still feeling the effects of a bad economy,” says Ernie Almonte, CPA, CGMA, chair of the AICPA’s National CPA Financial Literacy Commission. He adds that people are still struggling to find a way to save for long-term goals.

The telephone survey of 1,011 U.S. adults was conducted between March 14 and March 17 as part of activities for National Financial Capability Month in April. The AICPA has conducted similar annual surveys since 2007. The question was asked as a “select all those that apply,” which is why the answer totals are greater than 100%.

The survey found that 43% of those who expect to receive a refund consider it more important to their financial well-being this year than in years past. That’s partly because American workers saw their paychecks shrink in January as the payroll tax cut expired, returning Social Security withholding to 6.2% from 4.2% and effectively reducing take-home pay for most workers by 2%.

More than 7 in 10, or 71%, of those employed have felt at least some impact from the paycheck reduction, according to the survey results, and nearly all of those, 96%, have made some kind of adjustment. According to the survey, 70% are putting less in their emergency funds; 51% are cutting back on cable and digital entertainment; 45% are contributing less to retirement accounts; and 17% are skipping payments on credit cards, utilities, rent, or mortgages.
 
Last year the IRS sent refund checks totaling nearly $310 billion to taxpayers. “It’s critical that they [taxpayers] have a well-thought-out plan for using the funds to maximize the benefit to their financial well-being,” Almonte says. A refund is also an opportunity for a CPA to provide clients with prudent advice.

And if the refund is really large, accountants may need to advise clients to adjust the amount that is withheld from their paychecks in the first place. In such cases, they’re essentially making a free loan to the federal government. Almonte points out that clients could produce a higher rate of return if they had the money themselves.

By Chris Baysden for the Journal of Accountancy

Published: April 9, 2013

Get Credit for Making Your Home Energy-Efficient

If you made your home more energy efficient last year, you may qualify for a tax credit on your 2012 federal income tax return. Here is some basic information about home energy credits that you should know.

Non-Business Energy Property Credit

  • You may claim a credit of 10 percent of the cost of certain energy saving property that you added to your main home. This includes the cost of qualified insulation, windows, doors and roofs.
  • In some cases, you may be able to claim the actual cost of certain qualified energy-efficient property. Each type of property has a different dollar limit. Examples include the cost of qualified water heaters and qualified heating and air conditioning systems.
  • This credit has a maximum lifetime limit of $500. You may only use $200 of this limit for windows.
  • Your main home must be located in the U.S. to qualify for the credit.
  • Not all energy-efficient improvements qualify, so be sure you have the manufacturer’s credit certification statement. It is usually available on the manufacturer’s website or with the product’s packaging.
  • The credit was to expire at the end of 2011. A recent law extended it for two years through the end of 2013.


Residential Energy Efficient Property Credit

  • This tax credit is 30 percent of the cost of alternative energy equipment that you installed on or in your home.
  • Qualified equipment includes solar hot water heaters, solar electric equipment and wind turbines.
  • There is no limit on the amount of credit available for most types of property. If your credit is more than the tax you owe, you can carry forward the unused portion of this credit to next year’s tax return.
  • You must install qualifying equipment in connection with your home located in the United States. It does not have to be your main home.
  • The credit is available through 2016.
Published: April 8, 2013

Six Tips on Making Estimated Tax Payments

Some taxpayers may need to make estimated tax payments during the year. The type of income you receive determines whether you must pay estimated taxes. Here are six tips from the IRS about making estimated tax payments.

1. If you do not have taxes withheld from your income, you may need to make estimated tax payments. This may apply if you have income such as self-employment, interest, dividends or capital gains. It could also apply if you do not have enough taxes withheld from your wages. If you are required to pay estimated taxes during the year, you should make these payments to avoid a penalty.

2. Generally, you may need to pay estimated taxes in 2013 if you expect to owe $1,000 or more in taxes when you file your federal tax return. Other rules apply, and special rules apply to farmers and fishermen.

3. When figuring the amount of your estimated taxes, you should estimate the amount of income you expect to receive for the year. You should also include any tax deductions and credits that you will be eligible to claim. Be aware that life changes, such as a change in marital status or a child born during the year can affect your taxes. Try to make your estimates as accurate as possible.

4. You normally make estimated tax payments four times a year. The dates that apply to most people are April 15, June 17 and Sept. 16 in 2013, and Jan. 15, 2014.

5. You should use Form 1040-ES, Estimated Tax for Individuals, to figure your estimated tax.

6. You may pay online or by phone. You may also pay by check or money order, or by credit or debit card. You’ll find more information about your payment options in the Form 1040-ES instructions.

Published: April 5, 2013

Senate Votes for Online Sales Tax, But Only Hypothetically

Last Friday, the possibility that retailers in all 50 states might soon begin collecting sales taxes on Internet purchases seemed to take a big step toward reality. Seventy-five U.S. Senators voted, in principle, in favor of a law called the Marketplace Fairness Act, a much-debated bill that is vigorously backed by a coalition of offline retailers such as Wal-Mart (WMT) and Home Depot (HD)—and even has the tacit support of the Internet’s largest retailer, Amazon.com (AMZN).

Alas, for those who think retailers both online and offline should collect the same taxes, the vote sounded far more promising than it actually is. The senators did not approve the law but endorsed only a vague, non-binding 21-word summary of it, which is appended to a budget—a congressional resolution that doesn’t even become law. In other words, last week’s vote was little more than a public symbol—a bid by the law’s backers to muster public support and create the appearance of momentum.

Not only will the bill not become law, “it is unlikely to even be ‘conferenced’ with the U.S. House,” says Brian Bieron, senior director for global public policy at EBay (EBAY). “It’s an indication of them continuing to have problems” turning the Main Street Fairness Act into actual law.

Those problems are varied and may be intractable. The bill has powerful opponents. Senators such as Max Baucus, chairman of the Senate Finance Committee and a Democrat from Montana, a state without any sales tax, does not want local businesses in his state to have to reckon with the complexity of collecting sales taxes from residents elsewhere in the country. Virginia Representative Bob Goodlatte, the Republican chairman of the House Judiciary Committee, has also said he sees the bill as overly complex and an undue burden for small retailers.

Then there’s the thorny issue of an exemption for small businesses—a hot-button topic that the non-binding resolution conveniently side-stepped. Marketplaces such as EBay are lobbying for such an exemption; they say that for mom-and-pop outfits selling hand-made crochets on the Web, complying with a complex quilt of sales tax laws in thousands of jurisdictions would be unnecessarily onerous. Making for odd bedfellows, companies like Walmart, Home Depot, and Amazon oppose any significant exemption, which would recast the balance of power in e-commerce toward smaller retailers who don’t have a significant array of physical stores or warehouses.

Finding common ground amid this complex network of intersecting interests could be difficult: Supporters believe they’ll need a filibuster-proof 60 votes in the Senate to pass the bill. In the vote last week, 25 Senators appeared staunchly opposed even to the vague, nonbinding summary. Senator Dick Durbin (D-Ill.) has been championed the legislation; spokesperson Christina Mulka says Durbin has not made a decision on how to proceed, but she boldly claims that with “the strong showing last week, we are confident it would pass again in the Senate as a stand-alone, or as part of a larger piece of legislation.”

In the meantime, states aren’t waiting for the federal government to act. By the end of the year, New Jersey will join California, New York, Illinois, and some dozen other states that have acted independently to require retailers to collect sales taxes on Internet purchases made within their borders.

By Brad Stone for Bloomberg BusinessWeek

Published: April 3, 2013

Top Six Tax Tips for the Self-Employed

When you are self-employed, it typically means you work for yourself, as an independent contractor, or own your own business. Here are six key points the IRS would like you to know about self-employment and self-employment taxes:

1. Self-employment income can include pay that you receive for part-time work you do out of your home. This could include income you earn in addition to your regular job.

2. Self-employed individuals file a Schedule C, Profit or Loss from Business, or Schedule C-EZ, Net Profit from Business, with their Form 1040.

3. If you are self-employed, you generally have to pay self-employment tax as well as income tax. Self-employment tax includes Social Security and Medicare taxes. You figure this tax using Schedule SE, Self-Employment Tax.

4. If you are self-employed you may have to make estimated tax payments. People typically make estimated tax payments to pay taxes on income that is not subject to withholding. If you do not make estimated tax payments, you may have to pay a penalty when you file your income tax return. The underpayment of estimated tax penalty applies if you do not pay enough taxes during the year.

5. When you file your tax return, you can deduct some business expenses for the costs you paid to run your trade or business. You can deduct most business expenses in full, but some costs must be ’capitalized.’ This means you can deduct a portion of the expense each year over a period of years.

6. You may deduct only the costs that are both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business.

Published: April 2, 2013

Don’t Miss the Health Insurance Deduction if You’re Self-Employed

If you are self-employed, the IRS wants you to know about a tax deduction generally available to people who are self-employed.

The deduction is for medical, dental or long-term care insurance premiums that self-employed people often pay for themselves, their spouse and their dependents. The insurance can also cover your child who was under age 27 at the end of 2012, even if the child was not your dependent.

You may be able to take this deduction if one of the following applies to you:

  • You had a net profit from self-employment. You would report this on a Schedule C, Profit or Loss From Business, Schedule C-EZ, Net Profit From Business, or Schedule F, Profit or Loss From Farming.
  • You had self-employment earnings as a partner reported to you on Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc.
  • You used an optional method to figure your net earnings from self-employment on Schedule SE, Self-Employment Tax.
  • You were paid wages reported on Form W-2, Wage and Tax Statement, as a shareholder who owns more than two percent of the outstanding stock of an S corporation.
  • There are also some rules that apply to how the insurance plan is established. Follow these guidelines to make sure the plan qualifies:
  • If you’re self-employed and file Schedule C, C-EZ, or F, the policy can be in your name or in your business’ name.
  • If you’re a partner, the policy can be in your name or the partnership’s name and either of you can pay the premiums. If the policy is in your name and you pay the premiums, the partnership must reimburse you and include the premiums as income on your Schedule K-1.
  • If you’re an S corporation shareholder, the policy can be in your name or the S corporation’s name and either of you can pay the premiums. If the policy is in your name and you pay the premiums, the S corporation must reimburse you and include the premiums as wage income on your Form W-2.
Published: April 1, 2013

Protect Yourself from the Dirty Dozen Tax Scams

The IRS’s annual ‘Dirty Dozen’ list includes common tax scams that often peak during the tax filing season. The IRS recommends that taxpayers be aware so they can protect themselves against claims that sound too good to be true. Taxpayers who buy into illegal tax scams can end up facing significant penalties and interest and even criminal prosecution.

The tax scams that made the Dirty Dozen list this filing season are:  

Identity Theft.  Tax fraud through the use of identity theft tops this year’s Dirty Dozen list. Combating identity theft and refund fraud is a top priority for the IRS. The IRS’s ID theft strategy focuses on prevention, detection and victim assistance. During 2012, the IRS protected $20 billion of fraudulent refunds, including those related to identity theft. This compares to $14 billion in 2011. Taxpayers who believe they are at risk of identity theft due to lost or stolen personal information should immediately contact the IRS so the agency can take action to secure their tax account. If you have received a notice from the IRS, call the phone number on the notice. You may also call the IRS’s Identity Protection Specialized Unit at 800-908-4490. Find more information on the identity protection page on IRS.gov.

Phishing.  Phishing typically involves an unsolicited email or a fake website that seems legitimate but lures victims into providing personal and financial information. Once scammers obtain that information, they can commit identity theft or financial theft. The IRS does not initiate contact with taxpayers by email to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels. If you receive an unsolicited email that appears to be from the IRS, send it to phishing@irs.gov.

Return Preparer Fraud.  Although most return preparers are reputable and provide good service, you should choose carefully when hiring someone to prepare your tax return. Only use a preparer who signs the return they prepare for you and enters their IRS Preparer Tax Identification Number (PTIN).  For tips about choosing a preparer, visit www.irs.gov/chooseataxpro.

Hiding Income Offshore.  One form of tax evasion is hiding income in offshore accounts. This includes using debit cards, credit cards or wire transfers to access those funds. While there are legitimate reasons for maintaining financial accounts abroad, there are reporting requirements taxpayers need to fulfill. Failing to comply can lead to penalties or criminal prosecution. Visit IRS.gov for more information on the Voluntary Disclosure Program.

“Free Money” from the IRS & Tax Scams Involving Social Security.  Beware of scammers who prey on people with low income, the elderly and church members around the country. Scammers use flyers and ads with bogus promises of refunds that don’t exist. The schemes target people who have little or no income and normally don’t have to file a tax return. In some cases, a victim may be due a legitimate tax credit or refund but scammers fraudulently inflate income or use other false information to file a return to obtain a larger refund. By the time people find out the IRS has rejected their claim, the promoters are long gone.

Impersonation of Charitable Organizations. Following major disasters, it’s common for scam artists to impersonate charities to get money or personal information from well-intentioned people. They may even directly contact disaster victims and claim to be working for or on behalf of the IRS to help the victims file casualty loss claims and get tax refunds. Taxpayers need to be sure they donate to recognized charities.

False/Inflated Income and Expenses.  Falsely claiming income you did not earn or expenses you did not pay in order to get larger refundable tax credits is tax fraud. This includes false claims for the Earned Income Tax Credit. In many cases the taxpayer ends up repaying the refund, including penalties and interest. In some cases the taxpayer faces criminal prosecution. In one particular scam, taxpayers file excessive claims for the fuel tax credit. Fraud involving the fuel tax credit is a frivolous claim and can result in a penalty of $5,000.

False Form 1099 Refund Claims.  In this scam, the perpetrator files a fake information return, such as a Form 1099-OID, to justify a false refund claim.

Frivolous Arguments.  Promoters of frivolous schemes advise taxpayers to make unreasonable and outlandish claims to avoid paying the taxes they owe. These are false arguments that the courts have consistently thrown out. While taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the law.

Falsely Claiming Zero Wages.  Filing a phony information return is an illegal way to lower the amount of taxes an individual owes. Typically, scammers use a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 to improperly reduce taxable income to zero. Filing this type of return can result in a $5,000 penalty.

Disguised Corporate Ownership.  Scammers improperly use third parties form corporations that hide the true ownership of the business. They help dishonest individuals underreport income, claim fake deductions and avoid filing tax returns. They also facilitate money laundering and other financial crimes.

Misuse of Trusts.  There are legitimate uses of trusts in tax and estate planning. But some questionable transactions promise to reduce the amount of income that is subject to tax, offer deductions for personal expenses and reduced estate or gift taxes. Such trusts rarely deliver the promised tax benefits. They primarily help avoid taxes and hide assets from creditors, including the IRS.

For more on the Dirty Dozen, see IRS news release IR-2013-33.

Published: March 27, 2013

Time is Running Short to Claim Your 2009 Refund

If you haven’t filed your 2009 federal tax return, you may still have time to claim your tax refund. The IRS has $917 million in unclaimed refunds from an estimated 984,000 tax returns that people didn’t file for the 2009 tax year. The IRS estimates that half the potential refunds for 2009 are more than $500.

Here are some things the IRS wants you to know about unclaimed refunds:

1. Not required to file.  You may not have filed a 2009 tax return because you didn’t earn enough income to have a filing requirement. If you had taxes withheld from your wages or made quarterly estimated payments, you can still file a return and claim your refund.

2. Three-year window.  You have three years to claim a refund. If you don’t claim your refund within three years, the money becomes property of the U.S. Treasury. For 2009 returns, the window closes on April 15, 2013. You must properly address, postmark and mail your return by that date. There is no penalty for filing a late return if you are due a refund.

3. Don’t miss the EITC.  By not filing a return, you may miss an important credit — the Earned Income Tax Credit. For 2009, the credit is worth as much as $5,657. The EITC can put extra money in the pockets of individuals and families with low and moderate incomes. If you are eligible for the EITC, you must file a federal income tax return to claim the credit. This is true even if you are not otherwise required to file.

4. Some refunds applied.  The IRS may hold your refund if you have not filed tax returns for 2010 and 2011. The law allows the use of your federal tax refund to pay any amounts still owed to the IRS or your state tax agency. If you have unpaid debts, such as overdue child support or student loans, your refund may be applied to pay that debt.

Published: March 26, 2013

IRS Offers Top 10 Tax Time Tips

The end of the tax filing season is almost here. Even though your tax return is not due until April 15, you can make tax time easier on yourself by starting now. Here are 10 important tips to ensure a smooth process.

1. Gather your records.  Round up any documents you will need when filing your taxes, including receipts, canceled checks and other documents that support income or deductions you will be claiming on your tax return. Store them in a safe place.

2. Report all your income.  You will need all your Forms W-2, Wage and Tax Statements, and 1099 income statements to report your income when you file your tax return. To ensure you don’t misplace them, add them to your other records.

3. Get answers to questions.  Use the Interactive Tax Assistant tool available on the IRS website to find answers to your questions about tax credits and deductions.

4. Use Free File.  There is at least one option available for everyone to prepare and e-file a tax return at no cost. Let IRS Free File do the work for you with brand-name tax software or online fillable forms. It's available exclusively at IRS.gov. If your income was $57,000 or less, you qualify to use free tax software. If your income was higher, or you are comfortable preparing your own tax return, there's Free File Fillable Forms, the electronic version of IRS paper forms. Visit IRS.gov/freefile to review your options.

5. Try IRS e-file.  IRS e-file is the best way to file an accurate tax return. It’s safe, easy and the way most taxpayers file their return. Last year, more than 80 percent of taxpayers used IRS e-file. Many tax preparers are now required to use e-file. If you owe taxes, you have the option to file early and pay by April 15.

6. Weigh your filing options.  You have several options for filing your tax return. You can prepare it yourself or go to a tax preparer. You may be eligible for free, face-to-face help at a volunteer site. Weigh your options and choose the one that works best for you.

7. Use direct deposit.  Combining e-file with direct deposit is the fastest and safest way for you to get your refund.

8. Visit the IRS website.  The IRS website at IRS.gov is a great place to find everything you need to file your tax return. This includes many online tools, filing tips, answers to frequently asked questions, the latest tax law changes, forms and publications.

9. Remember number 17.  Check out Publication 17, Your Federal Income Tax, on the IRS website. It’s a complete tax resource that includes information such as whether you need to file or how to choose your filing status.

10. Review your return.  Don’t rush. We all make mistakes when we rush. Mistakes slow down the processing of your return. Be sure to double check all Social Security numbers and math calculations on your return as these are the most common errors.

Published: March 25, 2013

Obamacare's Tax Breaks for Small Business

For Obamacare to succeed, its state-run health insurance exchanges must enroll small businesses. But one of the main incentives aimed at encouraging enrollment, a health-care tax credit that reduces the cost of providing insurance for the country’s smallest employers, is still woefully underutilized, two years after it became available.

Providence (R.I.) accountant Pat Thompson says only about 1 percent of the 2012 returns she is preparing will claim the small business tax credit. “The IRS is doing a good job with the marketing, but the qualifications for the tax credit are just too narrow and it is very limited,” says Thompson, tax partner at Piccerelli, Gilstein & Co., and former chair of the American Institute for Certified Public Accountants’ tax executive committee. “Most of our clients are still not taking advantage of it.”

Starting in 2014, the tax credit created by the 2010 Affordable Care Act will allow certain businesses with fewer than 25 full-time employees to get a 50 percent reduction in the cost of providing health coverage—if they participate in the exchanges being set up by the states. Since 2010, the credit has offered up to 35 percent off health-care costs to all eligible small employers who provide coverage for their workers.

New data show that a majority of business owners are confused about or unaware of basic tenets of the health-care law. That state of affairs stretches to the tax credits as well, a fact that could blunt the appeal of the exchanges when they open for business on Jan. 1, 2014.

David Chase, an outreach director at Small Business Majority, a lobbying group that supports health-care reform, says his group’s polling shows that many small employers are unaware of the tax credit. “The takeup on it is relatively low,” he says.

Initially, it was expected that the credits would cost $2 billion in 2010, but in May 2012 the U.S. Government Accountability Office reported that only $468 million in tax credits were claimed by 170,300 small businesses covering 770,000 workers.

That’s just over 10 percent of the 1.4 million businesses believed to be the minimum number eligible. By some estimates, as many as 4 million businesses might qualify for the credit, according to the GAO report. The IRS hasn’t yet compiled data on the health-care tax credits claimed by small businesses in tax year 2011, according to spokesman Eric L. Smith.

One reason that the credit has been underused is that the country’s smallest employers—who get the biggest benefit from the credit—are the least likely to offer health insurance. Only half of all businesses with three to nine workers offered employees insurance in 2012, according to the Kaiser Family Foundation.

Another problem is the complexity of the tax break and the time needed to calculate it. The credit applies fully to companies with 10 or fewer full-time employees who earn on average below $25,000. It phases out as the number of employees rises to 25 and wages go up to $50,000.

Jeff Porter, chair of the AICPA’s tax executive committee, says his firm, Porter & Associates in Huntington, W.Va., will charge clients extra for preparing returns that claim the credit. That’s because it usually involves one to two hours’ extra work on the part of his staff.

“It’s incredibly complicated in terms of getting enough information. We have created Excel spreadsheets to deal with it and the IRS has put out bunches and bunches of worksheets,” Porter says. For small employers who prepare their own tax returns, trying to calculate the credit themselves would be a Herculean task, he says. “Oh gosh, small business owners generally do not have accounting departments. They don’t accumulate employees’ hours on a yearly basis. They don’t know how much they are paying for insurance for each employee and how much they withhold on an annual basis. It’s crazy.”

By Karen E. Klein for Bloomberg BusinessWeek

Published: March 22, 2013

The IRS's Worker-Classification Rules Aren't Working

The U.S. Internal Revenue Service has ramped up payroll audits of small employers to determine whether they’re misclassifying employees as independent contractors to dodge taxes, the Wall Street Journal reported recently. Congress should stop this effort, which brings in little revenue and imposes an unfair burden on business owners because the classification rules are simply too confusing. Fix them, then tackle enforcement.

Federal officials claim that business owners have increased their use of independent contractors to avoid paying Social Security and Medicare taxes. However, the Treasury Inspector General for Tax Administration concedes (PDF) that the last time the IRS studied this question was in 1984, so it isn’t really sure. My guess is that the large majority of employers are seeking to manage labor costs legally to remain competitive.

Most of small business owners’ increased reliance on contract workers—IRS data on sole proprietors show an uptick from 2003 to 2010—probably reflects the disproportionate rise in benefits costs and the increasing need for flexibility in changing work force size. It also reflects the byzantine tax code and conflicting tax court opinions, which offer no clear standard for worker classification and lead many business owners to make mistakes in classifying employees.

The increased payroll tax audit effort hardly seems worth the cost. Worker misclassification accounts for virtually none of the taxes Americans owe—but do not pay—every year. My estimate, using the IRS’s most recent figures (PDF), puts it at 0.8 percent of the tax gap (the difference between what was collected and what was owed).

Even a complete revamping of independent contractor rules would bring in little revenue. The Congressional Research Service estimates (PDF) that if the IRS were able to modify its “safe harbor” rules to make it more difficult for business owners to classify workers as independent contractors, the tax agency would collect less than an additional $900 million per year. Moreover, the CRS notes that bringing in the additional revenue “would impose significant costs” that would reduce the net gain to the Treasury.

Payroll tax audits also unfairly burden small business owners, many of whom who are in complete compliance. While IRS audits will always ensnare some law abiding citizens, the agency should consider who is being hit by their increased vigilance. Research by Nicole and Mark Crain of Lafayette College shows that companies with fewer than 20 employees spend more than three times the per-employee cost of tax compliance as businesses with 500 or more employees do, while those with from 20 to 499 workers spend 47 percent more.

Despite widespread belief that a big part of the misclassification results from the difficulty of understanding complex rules, the federal government has done little to improve education before resorting to increased audits. A 2009 Government Accountability office report (PDF) criticized the government’s efforts, which it said many experts view as inadequate.

Before allowing the IRS to audit a greater number of small business owners, Congress should take responsibility for its own contribution to the classification problem: It has failed repeatedly to pass legislation that would have made it easier for business owners to correctly classify workers as employees or as independent contractors. Again, let’s make the rules clear before we subject small business owners to further payroll audits.

By Scott Shane for Bloomberg BusinessWeek

Published: March 20, 2013

Tax Rules on Early Withdrawals from Retirement Plans

Taking money out early from your retirement plan can cost you an extra 10 percent in taxes. Here are five things you should know about early withdrawals from retirement plans.

1. An early withdrawal normally means taking money from your plan, such as a 401(k), before you reach age 59½.

2. You must report the amount you withdrew from your retirement plan to the IRS. You may have to pay an additional 10 percent tax on your withdrawal.

3. The additional 10 percent tax normally does not apply to nontaxable withdrawals. Nontaxable withdrawals include withdrawals of your cost in participating in the plan. Your cost includes contributions that you paid tax on before you put them into the plan.

4. If you transfer a withdrawal from one qualified retirement plan to another within 60 days, the transfer is a rollover. Rollovers are not subject to income tax. The added 10 percent tax also does not apply to a rollover.

5. There are several other exceptions to the additional 10 percent tax. These include withdrawals if you have certain medical expenses or if you are disabled. Some of the exceptions for retirement plans are different from the rules for IRAs.

For more information on early distributions from retirement plans, call our office!

Published: March 18, 2013

IRS Has $917 Million for People Who Have Not Filed a 2009 Income Tax Return

Refunds totaling just over $917 million may be waiting for an estimated 984,400 taxpayers who did not file a federal income tax return for 2009, the Internal Revenue Service announced today. However, to collect the money, a return for 2009 must be filed with the IRS no later than Monday, April 15, 2013.

The IRS estimates that half the potential refunds for 2009 are more than $500.

Some people may not have filed because they had too little income to require filing a tax return even though they had taxes withheld from their wages or made quarterly estimated payments. In cases where a return was not filed, the law provides most taxpayers with a three-year window of opportunity for claiming a refund. If no return is filed to claim a refund within three years, the money becomes property of the U.S. Treasury.

For 2009 returns, the window closes on April 15, 2013. The law requires that the return be properly addressed, mailed and postmarked by that date. There is no penalty for filing a late return qualifying for a refund.

The IRS reminds taxpayers seeking a 2009 refund that their checks may be held if they have not filed tax returns for 2010 and 2011. In addition, the refund will be applied to any amounts still owed to the IRS or their state tax agency, and may be used to offset unpaid child support or past due federal debts such as student loans.

By failing to file a return, people stand to lose more than refund of taxes withheld or paid during 2009. In addition, many low-and-moderate income workers may not have claimed the Earned Income Tax Credit (EITC). For 2009, the credit is worth as much as $5,657. The EITC helps individuals and families whose incomes are below certain thresholds. The thresholds for 2009 were:

$43,279 ($48,279 if married filing jointly) for those with three or more qualifying children,

$40,295 ($45,295 if married filing jointly) for people with two qualifying children,

$35,463 ($40,463 if married filing jointly) for those with one qualifying child, and

$13,440 ($18,440 if married filing jointly) for people without qualifying children.

For more information, call our office to set up a meeting with one of our associates about getting caught up with filing past years' tax returns!

Published: March 15, 2013

Five Tax Credits that Can Reduce Your Taxes

A tax credit reduces the amount of tax you must pay. A refundable tax credit not only reduces the federal tax you owe, but also could result in a refund.

Here are five credits the IRS wants you to consider before filing your 2012 federal income tax return:

1. The Earned Income Tax Credit is a refundable credit for people who work and don’t earn a lot of money. The maximum credit for 2012 returns is $5,891 for workers with three or more children. Eligibility is determined based on earnings, filing status and eligible children. Workers without children may be eligible for a smaller credit. If you worked and earned less than $50,270, use the EITC Assistant tool on IRS.gov to see if you qualify. For more information, see Publication 596, Earned Income Credit.

2. The Child and Dependent Care Credit is for expenses you paid for the care of your qualifying children under age 13, or for a disabled spouse or dependent. The care must enable you to work or look for work. For more information, see Publication 503, Child and Dependent Care Expenses.

3. The Child Tax Credit may apply to you if you have a qualifying child under age 17. The credit may help reduce your federal income tax by up to $1,000 for each qualifying child you claim on your return. You may be required to file the new Schedule 8812, Child Tax Credit, with your tax return to claim the credit. See Publication 972, Child Tax Credit, for more information.

4. The Retirement Savings Contributions Credit (Saver’s Credit) helps low-to-moderate income workers save for retirement. You may qualify if your income is below a certain limit and you contribute to an IRA or a retirement plan at work. The credit is in addition to any other tax savings that apply to retirement plans. For more information, see Publication 590, Individual Retirement Arrangements (IRAs).

5. The American Opportunity Tax Credit helps offset some of the costs that you pay for higher education. The AOTC applies to the first four years of post-secondary education. The maximum credit is $2,500 per eligible student. Forty percent of the credit, up to $1,000, is refundable. You must file Form 8863, Education Credits, to claim it if you qualify. For more information, see Publication 970, Tax Benefits for Education.

Make sure you qualify before claiming any tax credit. You can always call our office with questions!

Published: March 14, 2013

A New Way to Trade Shares in Private Companies

Nasdaq and SharesPost announced a joint venture on Wednesday that will offer wealthy investors a new way to trade shares in companies before they are listed publicly, as the weak performance of Facebook (FB) and other young tech firms encourages startups to remain private longer.

The new exchange, to be called Nasdaq Private Market, is scheduled to be launched later this year and will be based in San Francisco. Brokers and “accredited investors”—basically, people that the Securities and Exchange Commission deems to be wealthy or “sophisticated” enough to take losses in shadowy investments—will be able to pursue the risky buying and selling of private company shares, this time under the aegis of Nasdaq (NDAQ).

In theory, such trading provides a source of funding for startups and rewards employees and venture backers with an early chance to cash in equity. The danger is that the small pool of bettors, coupled with the lack of reliable information on company performance, can overinflate valuations. Facebook shares were hotly traded on secondary markets in the runup to its initial public offering in 2012—then promptly fell, amid Nasdaq technical glitches, once the public could trade them. Facebook stock still sits more than 27 percent below its offering price.

Other faltering startups offer a warning sign to those considering an IPO: Zynga (ZNGA) shares are down nearly 65 percent since a December 2011 float, and Groupon (GRPN) has lost more than 70 percent on the public market. The latter company fired its chief executive officer, Andrew Mason, last week. Mason’s exit e-mail to employees listed just some of the problems that had dogged the company since it became subject to public trading regulations: “From controversial metrics in our S1 to our material weakness to two quarters of missing our own expectations and a stock price that’s hovering around one quarter of our listing price, the events of the last year and a half speak for themselves,” he wrote.

The joint venture with SharesPost gives Nasdaq a piece of the trading action in companies that choose to remain private. It also gave a SharesPost rival the opportunity to suggest Nasdaq was repudiating its core business. “We congratulate Nasdaq on the joint venture,” the competitor, SecondMarket, said in a statement. “Coupled with the recent reports that Nasdaq itself was considering going private, this announcement is a telling admission that companies increasingly wish to avoid the casino-like atmosphere of the U.S. public markets.”

Private markets have their own issues. SharesPost paid a $100,000 fine in March 2012 to resolve SEC claims of improper activity.

The Jumpstart Our Business Startups, or JOBS, Act, signed into law by President Obama in 2012, was meant to grease the pipeline of public offerings. One of the bill’s major components, though, has actually made it easier for startups to stay private, by quadrupling the number of shareholders a company can have before it is required to publish quarterly data. Now a young business can have up to 2,000 investors while enjoying the benefits of keeping its revenue, debt, and other metrics secret. Such big names as Twitter, Dropbox, Square, and Spotify have all been valued at more than $3 billion—privately, anyway. The public markets might have a different opinion.

By Nick Summers for Bloomberg BusinessWeek

Published: March 13, 2013

Tax Prep Basics for Small Business Owners

Tax season got off to a bit of a late start this year, because of fiscal cliff legislation passed on Jan. 1, and filings are now pouring in. To help self-employed individuals and small business owners get through tax time with as little stress and hassle as possible, here are some suggestions for small business owners and the self-employed:

Get prepared. It’s easier for everyone if you show up for your tax appointment with some of the number-crunching already done. Most tax preparers send clients an organizing document that shows figures from previous years’ returns: Use that as a starting point and fill out as much of it as possible in advance. “We try to train our clients. I only have a couple of clients who still bring in the shoeboxes full of receipts and dump them out” on the desk, Fox says. If you’ve switched tax preparers, bring in copies of your federal and state returns for the last three years.

Collect paperwork. It seems obvious, Fox says, but sometimes clients show up without vital documents such as partnership or corporate returns, W-2s and 1099s, or Schedule K-1s that show income from partnerships and trusts. Bring in your company’s income statement and balance sheet if you have them, plus receipts for any fixed assets you’ve purchased in 2012. If you have children in college, make sure you get their tuition statements, called 1098-Ts. They can be used to take an American Opportunity refundable tax credit of up to $2,500 for qualified education expenses. If you made quarterly self-employment tax payments in 2012, bring in a record of the amounts you paid and on what dates.

Claim deductions. If your home office is exclusively used for your business, you may qualify for the home office deduction. Keep records of how much you spend on such items as homeowners’ insurance, mortgage, utilities, and maintenance. (A simplified home office deduction is in the works but will not be available until tax year 2013.) Likewise, if you use your personal vehicle for business purposes, keep records of your business miles, repairs, fuel, oil changes, and other expenses. If you purchased a vehicle in 2012 that you’re using for your business, bring in the sales receipt: The state sales tax you paid may be deductible on your federal return, depending on where you live, Fox says.

Think retirement. If you don’t have a qualified retirement account, you may still be able to set one up and reduce your tax liability until April 15, or even later if you file for an extension on your return, Fox says. “Some plans, like an individual 401(k), have to be established by Dec. 31 of the tax year. But other plans, like a traditional IRA or a SEP-IRA, allow you to make 2012 contributions in 2013. Those are some of my favorite deductions because they represent the largest dollar amount changes to your tax return that can still be done today for 2012,” he says. The contribution limit for an IRA is $5,000 for 2012; $6,000 if you’re over 50. The SEP-IRA plan allows for contributions of up to $50,000 for 2012, or 25 percent of your total compensation.

Ask questions. Note anything you’re uncertain about as you’re pulling your records together and use your appointment to get answers from your tax pro. Despite worries about delays caused by sequestration-induced cutbacks, Fox says he expects refunds to be issued in the usual 10 to 21 days after returns are processed. “The IRS has said they’re not doing anything with personnel until after tax season is done,” he says. The IRS reported that the average refund received by individuals in 2012 was about $2,700; you can use the “Where’s My Refund” tool at IRS.gov to check the status of your refund. The site is updated only once daily, so don’t check it more often than that or the IRS website quickly gets overwhelmed, the agency says.

By Karen E. Klein for Bloomberg BusinessWeek

Published: March 11, 2013

Important Facts about Mortgage Debt Forgiveness

If your lender cancelled or forgave your mortgage debt, you generally have to pay tax on that amount. But there are exceptions to this rule for some homeowners who had mortgage debt forgiven in 2012.

Here are 10 key facts from the IRS about mortgage debt forgiveness:

1. Cancelled debt normally results in taxable income. However, you may be able to exclude the cancelled debt from your income if the debt was a mortgage on your main home.

2. To qualify, you must have used the debt to buy, build or substantially improve your principal residence. The residence must also secure the mortgage.

3. The maximum qualified debt that you can exclude under this exception is $2 million. The limit is $1 million for a married person who files a separate tax return.

4. You may be able to exclude from income the amount of mortgage debt reduced through mortgage restructuring. You may also be able to exclude mortgage debt cancelled in a foreclosure.

5. You may also qualify for the exclusion on a refinanced mortgage. This applies only if you used proceeds from the refinancing to buy, build or substantially improve your main home. The exclusion is limited to the amount of the old mortgage principal just before the refinancing.

6. Proceeds of refinanced mortgage debt used for other purposes do not qualify for the exclusion. For example, debt used to pay off credit card debt does not qualify.

7. If you qualify, report the excluded debt on Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness. Submit the completed form with your federal income tax return.

8. Other types of cancelled debt do not qualify for this special exclusion. This includes debt cancelled on second homes, rental and business property, credit cards or car loans. In some cases, other tax relief provisions may apply, such as debts discharged in certain bankruptcy proceedings. Form 982 provides more details about these provisions.

9. If your lender reduced or cancelled at least $600 of your mortgage debt, they normally send you a statement in January of the next year. Form 1099-C, Cancellation of Debt, shows the amount of cancelled debt and the fair market value of any foreclosed property.

10. Check your Form 1099-C for the cancelled debt amount shown in Box 2, and the value of your home shown in Box 7. Notify the lender immediately of any incorrect information so they can correct the form.

Published: March 8, 2013

Four Things You Should Know if You Barter

Small businesses sometimes barter to get products or services they need. Bartering is the trading of one product or service for another. Usually there is no exchange of cash. An example of bartering is a plumber doing repair work for a dentist in exchange for dental services.

The IRS reminds all taxpayers that the fair market value of property or services received through a barter is taxable income. Both parties must report as income the value of the goods and services received in the exchange.

Here are four facts about bartering:

1. Barter exchanges.  A barter exchange is an organized marketplace where members barter products or services. Some exchanges operate out of an office and others over the internet. All barter exchanges are required to issue Form 1099-B, Proceeds from Broker and Barter Exchange Transactions, annually. The exchange must give a copy of the form to its members and file a copy with the IRS.

2. Bartering income.  Barter and trade dollars are the same as real dollars for tax reporting purposes. If you barter, you must report on your tax return the fair market value of the products or services you received.

3. Tax implications.  Bartering is taxable in the year it occurs. The tax rules may vary based on the type of bartering that takes place. Barterers may owe income taxes, self-employment taxes, employment taxes or excise taxes on their bartering income.

4. Reporting rules.  How you report bartering varies depending on which form of bartering takes place. Generally, if you are in a trade or business you report bartering income on Form 1040, Schedule C, Profit or Loss from Business. You may be able to deduct certain costs you incurred to perform the bartering.

Published: March 7, 2013

Four Tax Tips about Your Unemployment Benefits

If you received unemployment benefits this year, you must report the payments on your federal income tax return.

Here are four tips from the IRS about unemployment benefits.

1. You must include all unemployment compensation you received in your total income for the year. You should receive a Form 1099-G, Certain Government Payments. It will show the amount you were paid and the amount of any federal income taxes withheld from your payments.

2. Types of unemployment benefits include:

  • Benefits paid by a state or the District of Columbia from the Federal Unemployment Trust Fund
  • Railroad unemployment compensation benefits
  • Disability payments from a government program paid as a substitute for unemployment compensation
  • Trade readjustment allowances under the Trade Act of 1974
  • Unemployment assistance under the Disaster Relief and Emergency Assistance Act

3. You must include benefits from regular union dues paid to you as an unemployed member of a union in your income. However, other rules apply if you contribute to a special union fund and your contributions are not deductible. If this applies to you, only include in income the amount you received from the fund that is more than your contributions.

4. You can choose to have federal income tax withheld from your unemployment benefits. You make this choice using Form W-4V, Voluntary Withholding Request. If you complete the form and give it to the paying office, they will withhold tax at 10 percent of your payments. If you choose not to have tax withheld, you may have to make estimated tax payments throughout the year.

Published: March 6, 2013

A Tax Windfall From the Housing Bust

As Karen Jacobs, an economist in Arizona’s Department of Revenue, was reviewing income tax data for 2010, she came across a puzzling trend: Refunds were down and tax liability was up even though the state’s unemployment rate peaked that year, at 10.8 percent. “My first thought was: ‘Taxable income? Why would that be up if people are losing jobs?’ ” says Jacobs.

With new houses sitting vacant in the desert and foreclosures soaring, it didn’t take long to figure out the reason. Home ownership rates, real estate prices, and interest rates were all falling, so fewer people were deducting mortgage interest and mortgage holders had often borrowed less or had refinanced at lower rates. The value of itemized deductions dropped 20 percent for the year—led by a decline in the tax break for mortgage interest. “I was shocked about how much I owed,” says Stephen Buckman, who had to pay the Internal Revenue Service $1,500 when he filed his 2011 taxes. In December 2010, a bank foreclosed on his Phoenix townhouse, which had plunged in value to $50,000 from the $196,000 he paid in 2006.

Like Buckman, people across the U.S. have seen their tax bills increase due to the housing bust. On federal tax returns, claims for the mortgage interest deduction dropped by 14 percent, from 2007 to 2009, IRS data show. For 2010, preliminary data indicate that use of the write-off fell by a further 7.2 percent. The decline saved the U.S. government between $13 billion and $26 billion from 2007 to 2010, estimates Andrew Hanson, an assistant professor of economics at Georgia State University who has researched the tax break. The shift “is not surprising, given what we know happened to the housing market,” Hanson says.

Use of the mortgage interest deduction peaked in 2007 when it showed up on 40.8 million returns. That fell to 36.5 million for 2009, according to the IRS, and the amount deducted declined from $491 billion to $421 billion for those years. Preliminary data show the number of returns on which taxpayers claimed the tax break edged up to 36.9 million in 2010, though the dollar value of the write-offs fell to $387 billion. “You’re seeing 5 million fewer returns between 2007 and 2009 claiming the deduction,” says Matthew Gardner, executive director for the Institute on Taxation and Economic Policy, a nonprofit research group. “It is a real drop.”

In Arizona, the change led to about $170 million in unanticipated revenue for fiscal 2011, a pleasant surprise after a $3 billion drop in tax revenue during the previous three years, says John Arnold, Governor Jan Brewer’s budget director. “We’re in a budget crisis, and an extra $170 million shows up,” Arnold says. “We understand that is the result of people losing their homes. If I could say it was the result of people refinancing, we’d be all smiles.”

Other states, especially where foreclosures have been high, have seen a similar trend. In California, just behind Arizona with the third-highest foreclosure rate in the U.S. last year, the number of filers taking the deduction for mortgage interest fell 9 percent while the value of the write-offs fell almost 20 percent from 2007 to 2009, according to data from the state’s Franchise Tax Board. “It’s helping the state governments,” says David Albouy, assistant professor of economics at the University of Michigan at Ann Arbor, “because they are not giving away as much as they were before in the mortgage interest deduction.”

By Amanda J. Crawford for Bloomberg BusinessWeek

Published: March 4, 2013

IRS Plans to Enable Remaining Tax Forms to Be Filed

The Internal Revenue Service plans to allow more of the remaining tax forms that have not been available for electronic filing yet this tax season to go through during the first week of March.

In an email to software developers and transmitters on Wednesday, the IRS noted that due to late legislation, the IRS delayed startup for the tax forms listed below until the first week in March.

To ensure there are no issues with accepting the forms for downstream processing, the IRS is asking software developers and transmitters to adhere to the following plan:

The schemas and business rules will be deployed in the Production environment during the March 3, 2013 Sunday maintenance window.

When the Production environment becomes operational at 7:00 am Eastern Time, transmitters should only send their stockpiled inventory of tax returns they have held back, evenly spread throughout the day on Sunday, This will allow the IRS’s Modernized e-File system team to quickly review the reject trends for the returns to ensure the schemas and business rules work as intended. “Please do not enable online filing for the forms until the IRS officially announces the processing of these forms targeted for the first week of March,” the IRS asked.

Barring any problems, the IRS will then send out a QuickAlert email early in the week announcing the official opening. At that time, it will ask companies to enable online filing for these forms.

“As we have communicated throughout the filing season, we appreciate your continued partnership and support to ensure a successful startup!” the IRS added.

Tax Year 2012 Tax Forms Scheduled for Startup:

Form 3800 General Business Credit
Form 4136 Credit for Federal Tax Paid on Fuels
Form 5074 Allocation of Individual Income Tax to Guam or the Commonwealth of the Northern Mariana Islands
Form 5471 Information Return of U.S. Persons With Respect to Certain Foreign Corporations
Form 5695 Residential Energy Credits
Form 5735 American Samoa Economic Development Credit  
Form 5884 Work Opportunity Credit
Form 6478 Credit for Alcohol Used as Fuel
Form 6765 Credit for Increasing Research Activities
Form 8396 Mortgage Interest Credit
Form 8582 Passive Activity Loss Limitations
Form 8820 Orphan Drug Credit
Form 8834 Qualified Plug-in Electric and Electric Vehicle Credit
Form 8839 Qualified Adoption Expenses
Form 8844 Empowerment Zone and Renewal Community Employment Credit
Form 8845 Indian Employment Credit
Form 8859 District of Columbia First-Time Homebuyer Credit
Form 8864 Biodiesel and Renewable Diesel Fuels Credit
Form 8874 New Markets Credits
Form 8900 Qualified Railroad Track Maintenance Credit
Form 8903 Domestic Production Activities Deduction
Form 8908 Energy Efficient Home Credit
Form 8909 Energy Efficient Appliance Credit
Form 8910 Alternative Motor Vehicle Credit
Form 8911 Alternative Fuel Vehicle Refueling Property Credit
Form 8912 Credit to Holders of Tax Credit Bonds
Form 8923 Mine Rescue Team Training Credit
Form 8932 Credit for Employer Differential Wage Payments
Form 8936 Qualified Plug-in Electric Drive Motor Vehicle Credit

Published: February 27, 2013

Parents and Students: Check Out College Tax Benefits

The Internal Revenue Service today reminded parents and students that now is a good time to see if they qualify for either of two college education tax credits or any of several other education-related tax benefits.

In general, the American opportunity tax credit, lifetime learning credit and tuition and fees deduction are available to taxpayers who pay qualifying expenses for an eligible student. Eligible students include the primary taxpayer, the taxpayer’s spouse or a dependent of the taxpayer.

Though a taxpayer often qualifies for more than one of these benefits, he or she can only claim one of them for a particular student in a particular year. The benefits are available to all taxpayers – both those who itemize their deductions on Schedule A and those who claim a standard deduction. The credits are claimed on Form 8863 and the tuition and fees deduction is claimed on Form 8917.

The American Taxpayer Relief Act, enacted Jan. 2, 2013, extended the American opportunity tax credit for another five years until the end of 2017. The new law also retroactively extended the tuition and fees deduction, which had expired at the end of 2011, through 2013. The lifetime learning credit did not need to be extended because it was already a permanent part of the tax code.

For those eligible, including most undergraduate students, the American opportunity tax credit will yield the greatest tax savings.  Alternatively, the lifetime learning credit should be considered by part-time students and those attending graduate school. For others, especially those who don’t qualify for either credit, the tuition and fees deduction may be the right choice.

All three benefits are available for students enrolled in an eligible college, university or vocational school, including both nonprofit and for-profit institutions. None of them can be claimed by a nonresident alien or married person filing a separate return. In most cases, dependents cannot claim these education benefits.

Normally, a student will receive a Form 1098-T from their institution by the end of January of the following year. This form will show information about tuition paid or billed along with other information. However, amounts shown on this form may differ from amounts taxpayers are eligible to claim for these tax benefits. Taxpayers should see the instructions to Forms 8863 and 8917 and Publication 970 for details on properly figuring allowable tax benefits.

Many of those eligible for the American opportunity tax credit qualify for the maximum annual credit of $2,500 per student. Here are some key features of the credit:

  • The credit targets the first four years of post-secondary education, and a student must be enrolled at least half time. This means that expenses paid for a student who, as of the beginning of the tax year, has already completed the first four years of college do not qualify. Any student with a felony drug conviction also does not qualify.
  • Tuition, required enrollment fees, books and other required course materials generally qualify. Other expenses, such as room and board, do not.
  • The credit equals 100 percent of the first $2,000 spent and 25 percent of the next $2,000. That means the full $2,500 credit may be available to a taxpayer who pays $4,000 or more in qualified expenses for an eligible student.
  • The full credit can only be claimed by taxpayers whose modified adjusted gross income (MAGI) is $80,000 or less. For married couples filing a joint return, the limit is $160,000. The credit is phased out for taxpayers with incomes above these levels. No credit can be claimed by joint filers whose MAGI is $180,000 or more and singles, heads of household and some widows and widowers whose MAGI is $90,000 or more.
  • Forty percent of the American opportunity tax credit is refundable. This means that even people who owe no tax can get an annual payment of up to $1,000 for each eligible student. Other education-related credits and deductions do not provide a benefit to people who owe no tax.

The lifetime learning credit of up to $2,000 per tax return is available for both graduate and undergraduate students. Unlike the American opportunity tax credit, the limit on the lifetime learning credit applies to each tax return, rather than to each student. Though the half-time student requirement does not apply, the course of study must be either part of a post-secondary degree program or taken by the student to maintain or improve job skills. Other features of the credit include:

  • Tuition and fees required for enrollment or attendance qualify as do other fees required for the course. Additional expenses do not.
  • The credit equals 20 percent of the amount spent on eligible expenses across all students on the return. That means the full $2,000 credit is only available to a taxpayer who pays $10,000 or more in qualifying tuition and fees and has sufficient tax liability.
  • Income limits are lower than under the American opportunity tax credit. For 2012, the full credit can be claimed by taxpayers whose MAGI is $52,000 or less. For married couples filing a joint return, the limit is $104,000. The credit is phased out for taxpayers with incomes above these levels. No credit can be claimed by joint filers whose MAGI is $124,000 or more and singles, heads of household and some widows and widowers whose MAGI is $62,000 or more.

Like the lifetime learning credit, the tuition and fees deduction is available for all levels of post-secondary education, and the cost of one or more courses can qualify. The annual deduction limit is $4,000 for joint filers whose MAGI is $130,000 or less and other taxpayers whose MAGI is $65,000 or less. The deduction limit drops to $2,000 for couples whose MAGI exceeds $130,000 but is no more than $160,000, and other taxpayers whose MAGI exceeds $65,000 but is no more than $80,000.

Eligible parents and students can get the benefit of these provisions during the year by having less tax taken out of their paychecks. They can do this by filling out a new Form W-4, claiming additional withholding allowances, and giving it to their employer.

There are a variety of other education-related tax benefits that can help many taxpayers. They include:

  • Scholarship and fellowship grants—generally tax-free if used to pay for tuition, required enrollment fees, books and other course materials, but taxable if used for room, board, research, travel or other expenses.
  • Student loan interest deduction of up to $2,500 per year.
  • Savings bonds used to pay for college—though income limits apply, interest is usually tax-free if bonds were purchased after 1989 by a taxpayer who, at time of purchase, was at least 24 years old.
  • Qualified tuition programs, also called 529 plans, used by many families to prepay or save for a child’s college education.

Taxpayers with qualifying children who are students up to age 24 may be able to claim a dependent exemption and the earned income tax credit.

Published: February 25, 2013

Higher Minimum Wage Backed by Small Business

President Barack Obama’s recent proposal to raise the federal minimum wage from $7.25 to $9 an hour by the end of 2015 has an unlikely ally: a sizable swath of America’s 6 million small employers. Historically, lobbyists representing small business almost unanimously condemned any increases in the federal minimum wage, arguing employers would be forced to fire workers. Now, with public anger over income inequality deepening and economic research challenging the notion that higher wages suppress employment, a growing number of small business advocates support a hike.

That includes dozens of business groups and networks composed primarily of small business owners such as the Main Street Alliance, the National Latino Farmers & Ranchers Trade Association, and the Greater New York Chamber of Commerce. “Our women [business owners] who pay a living wage have an advantage over their larger counterparts who don’t,” says Margot Dorfman, chief executive officer of the U.S. Women’s Chamber of Commerce, an organization with 500,000 members, three-quarters of whom are small business owners. “Whether Obama’s proposal is high enough or the time frame is fast enough is the question.”

Taking inflation into account, a worker earning a minimum wage today is worse off than one who made the base hourly wage of $1.60 in 1968. “It’s just really ridiculous to think that business owners can’t pay today at least as much as what they paid four decades ago,” says Holly Sklar, founder of Business for a Fair Minimum Wage, which has attracted support from more than 4,000 small business groups and owners. Main Street businesses suffer if “the economy is falling apart around them,” she says. “If the customer base is undermined because wages are so low, they feel it directly.”

Two of the nation’s biggest small business groups, the National Federation of Independent Business and the National Small Business Association, oppose any increase. “Ben Bernanke isn’t printing the money. It has to come from somewhere,” says Jack Mozloom, a spokesman at the NFIB. “If you artificially increase demand in the form of minimum wages, you’re going to suppress demand elsewhere, and that’s going to come directly from the employer’s side.” The International Franchise Association is against any increase, too, though Vice President of Government Affairs and Public Policy Jay Perron says it’s not yet a primary concern for its members.

Both sides of the wage debate acknowledge that most small businesses pay more than the federal minimum to attract qualified workers, and 19 states already have wage floors that are higher than $7.25 an hour. Because a hike would predominantly affect businesses (large and small) in low-wage industries or less prosperous regions of the country, “you are talking about a relatively small part of the business community,” says Todd McCracken, president of the NSBA, who argues that any wage hike is problematic. “I think this is being proposed primarily because the politics work for the president here.”

John Schall, whose Mongolian barbecue restaurant Fire + Ice in Harvard Square employs around 40, starts his workers at $10 an hour. The argument about a minimum wage hike imperiling small business “never rings true,” says the longtime restaurateur. “If somebody came to you with a business plan and said, ‘If I can pay $8 an hour, this is a great business and you should invest in it, but if I have to pay $9 an hour, I’m screwed,’ nobody would” take the business seriously, he says. “It would be way better if the minimum wage was higher across the board for everybody, and everybody had to pay an entry-level position at a living wage.”

By Karen E. Klein and Nick Leiber for Bloomberg Businessweek

Published: February 22, 2013

IRS Reminds Taxpayers to Report 2010 Roth Conversions on 2012 Returns

The Internal Revenue Service reminds taxpayers who converted amounts to a Roth IRA or designated Roth account in 2010 that in most cases they must report half of the resulting taxable income on their 2012 returns.

Normally, Roth conversions are taxable in the year the conversion occurs. For example, the taxable amount from a 2012 conversion must be included in full on a 2012 return. But under a special rule that applied only to 2010 conversions, taxpayers generally include half the taxable amount in their income for 2011 and half for 2012, unless they chose to include all of it in income on their 2010 return.

Roth conversions in 2010 from traditional IRAs are shown on 2012 Form 1040, Line 15b, or Form 1040A, Line 11b. Conversions from workplace retirement plans, including in-plan rollovers to designated Roth accounts, are reported on Form 1040, Line 16b, or Form 1040A, Line 12b.

Taxpayers who also received Roth distributions in either 2010 or 2011 may be able to report a smaller taxable amount for 2012. For details, see the discussion under 2012 Reporting of 2010 Roth Rollovers and Conversions on IRS.gov. In addition, worksheets and examples can be found in Publication 590 for Roth IRA conversions and Publication 575 for conversions to designated Roth accounts.

Taxpayers who made Roth conversions in 2012 or are planning to do so in 2013 or later years must file Form 8606 to report the conversion.

As in 2010 and 2011, income limits no longer apply to Roth IRA conversions.

Published: February 20, 2013

Important Reminders about Tip Income

If your pay from your job includes tips, the IRS has a few important reminders about tip income:

  • Tips are taxable. Individuals must pay federal income tax on any tips they receive. The value of non-cash tips, such as tickets, passes or other items of value are also subject to income tax.
  • Include all tips on your return. You must include all tips that you receive during the year on your income tax return. This includes tips you received directly from customers, tips added to credit cards and your share of tips received under a tip-splitting agreement with other employees.
  • Report tips to your employer. If you receive $20 or more in cash tips in any one month, you must report your tips for that month to your employer. Your employer is required to withhold federal income, Social Security and Medicare taxes on the reported tips.
  • Keep a daily log of tips. You can use IRS Publication 1244, Employee's Daily Record of Tips and Report to Employer, to record your tips.

For more information, contact our office. We're always happy to assist you!

Published: February 19, 2013

IRS Warns of Delays with Child Tax Credit Claims

The Internal Revenue Service is cautioning tax preparers about delays in processing tax returns claiming the Child Tax Credit because of incorrectly filled out forms.

“We have observed instances in which the Schedule 8812 is attached to form 1040 and 1040A and is not filled out correctly,” the IRS wrote in an email to tax professionals Monday. “These instances are causing downstream processing delays.”

The IRS noted that it has experienced the following two conditions: (1) The Schedule 8812 Part 1 checkboxes A, B, C, and D are checked when taxpayers list a dependent child with a Social Security Number qualifying for the Child Tax Credit; and (2) the Schedule 8812 Part 1 checkboxes A, B, C, and D not being checked when taxpayers have a child with an Individual Taxpayer Identification Number, or ITIN, on Form 1040 and 1040A line 6c identified as qualifying for the Child Tax Credit in column 4.

The Schedule 8812 instructions direct the taxpayer, the IRS noted, to “use Part I of Schedule 8812 to document that any child for whom you entered an ITIN on Form 1040, line 6c; Form 1040A, line 6c; or Form 1040NR, line 7c; and for whom you also checked the box in column 4 of that line, is a resident of the United States because the child meets the substantial presence test and is not otherwise treated as a nonresident alien.”

The IRS said it is working to implement business rules to reject these incorrectly completed returns, but the date of the fixes has yet to be determined.

In the meantime, the IRS is requesting tax prep software providers to include an alert to help tax preparers identify inconsistencies when they are completing the Schedule 8812. It also asked for communication with the tax practitioner community to avoid delays in processing tax returns.

By Michael Cohn for AccountingToday

Published: February 18, 2013

IRS Statement on "Where's My Refund?" Tool

The IRS alerted taxpayers and the tax community it is experiencing high traffic on Where's My Refund as more tax returns come in. The heavy volume of refund inquiries means that the IRS anticipates both "Where's My Refund?" on IRS.gov and the refund feature on the IRS2go phone app will have limited availability during busier periods.

Due to the large number of inquiries and to avoid service disruptions, the IRS strongly urges taxpayers to only check on their refunds once a day. IRS systems are only updated once a day, usually overnight, and the same information is available whether on the internet, IRS2go smartphone app or on IRS toll-free lines. While "Where's My Refund" is updated nightly, your account will not change that frequently.

The IRS is seeing a good start to the filing season, and tax refunds are being issued timely. Nine out of 10 taxpayers typically receive refunds in less than 21 days when they use e-file with direct deposit.

The IRS expects to see the number of tax returns -- and related refund inquiries --steadily increase around the President's Day holiday week.

Here are some tips to help taxpayers with their refund questions:

  • Have the right tax information ready before using any of the IRS refund tools. This includes Social Security number, filing status and refund amount.
  • You don't need to check Where's My Refund more than once a day as your information will not change.
  • To avoid system delays, the best time to check on refunds is evening and weekends.
  • There is no need to call the IRS about your refund; the telephone service has the same information that is available on Where’s My Refund.
Published: February 15, 2013

Determining Your Correct Filing Status

It’s important to use the correct filing status when filing your income tax return. It can impact the tax benefits you receive, the amount of your standard deduction and the amount of taxes you pay. It may even impact whether you must file a federal income tax return.

Are you single, married or the head of your household? There are five filing statuses on a federal tax return. The most common are “Single,” “Married Filing Jointly” and “Head of Household.” The Head of Household status may be the one most often claimed in error.

The IRS offers these seven facts to help you choose the best filing status for you.

1. Marital Status. Your marital status on the last day of the year is your marital status for the entire year.

2. If You Have a Choice. If more than one filing status fits you, choose the one that allows you to pay the lowest taxes.

3. Single Filing Status. Single filing status generally applies if you are not married, divorced or legally separated according to state law.

4. Married Filing Jointly. A married couple may file a return together using the Married Filing Jointly status. If your spouse died during 2012, you usually may still file a joint return for that year.

5. Married Filing Separately. If a married couple decides to file their returns separately, each person’s filing status would generally be Married Filing Separately.

6. Head of Household. The Head of Household status generally applies if you are not married and have paid more than half the cost of maintaining a home for yourself and a qualifying person.

7. Qualifying Widow(er) with Dependent Child. This status may apply if your spouse died during 2010 or 2011, you have a dependent child and you meet certain other conditions.

Published: February 13, 2013

Eight Tax Benefits for Parents

Your children may help you qualify for valuable tax benefits, such as certain credits and deductions. If you are a parent, here are eight benefits you shouldn’t miss when filing taxes this year.

1. Dependents. In most cases, you can claim a child as a dependent even if your child was born anytime in 2012. You are allowed one exemption for each person you can claim as a dependent.

2. Child Tax Credit. You may be able to claim the Child Tax Credit for each of your children that were under age 17 at the end of 2012. If you do not benefit from the full amount of the credit, you may be eligible for the Additional Child Tax Credit. We'll assess your individual situation and employ the most advantageous approach to preparing your personal income tax return.

3. Child and Dependent Care Credit. You may be able to claim this credit if you paid someone to care for your child or children under age 13, so that you could work or look for work. If you believe this credit may be applicable to you, make sure to bring a record of your payments with the past year's tax material needed to prepare your return.

4. Earned Income Tax Credit. If you worked but earned less than $50,270 last year, you may qualify for EITC. If you have qualifying children, you may get up to $5,891 dollars extra back when you file a return and claim it.

5. Adoption Credit. You may be able to take a tax credit for certain expenses you incurred to adopt a child. Make sure you've amassed a detailed record of the applicable expenses to ensure you recieve the maximum benefit possible.

6. Higher education credits. If you paid higher education costs for yourself or another student who is an immediate family member, you may qualify for either the American Opportunity Credit or the Lifetime Learning Credit. Both credits may reduce the amount of tax you owe. If the American Opportunity Credit is more than the tax you owe, you could be eligible for a refund of up to $1,000.

7. Student loan interest. You may be able to deduct interest you paid on a qualified student loan, even if you do not itemize your deductions. If the loan interest you paid out in 2012 was less than $600, make sure to request a 1098-E, Student Loan Interest Statement, from the instituion(s) servicing your loan. These financial institutions typically automatically issue these documents only if they've recieved over $600 in payments from the borrower, however, any amount of interest paid could be eligable for the deduction.

8. Self-employed health insurance deduction. If you were self-employed and paid for health insurance, you may be able to deduct premiums you paid to cover your child. It applies to children under age 27 at the end of the year, even if they are not your dependent.

If you have any questions or concerns about your tax benefits as a parent, please feel free to contact our office.

Published: February 11, 2013

Missing Your W-2? Here’s What to Do

It’s a good idea to have all your tax documents together before preparing your 2012 tax return. You will need your W-2, Wage and Tax Statement, which employers should send by the end of January. Give it two weeks to arrive by mail.

If you have not received your W-2, follow these three steps:

1. Contact your employer first.  Ask your employer – or former employer – to send your W-2 if it has not already been sent. Make sure your employer has your correct address.

2. Contact the IRS. After February 14, you may call the IRS at 800-829-1040 if you have not yet received your W-2. Be prepared to provide your name, address, Social Security number and phone number. You should also have the following information when you call:

  • Your employer’s name, address and phone number;
  • Your employment dates; and
  • An estimate of your wages and federal income tax withheld in 2012, based upon your final pay stub or leave-and-earnings statement, if available.

3. File your return on time. You should still file your tax return on or before April 15, 2013, even if you have not yet received your W-2. File Form 4852, Substitute for Form W-2, Wage and Tax Statement, in place of the W-2. Use the form to estimate your income and withholding taxes as accurately as possible. The IRS may delay processing your return while it verifies your information.

If you need more time to file you can get a six-month extension of time. File Form 4868, Application for Automatic Extension of Time to File US Individual Income Tax Return.  If you are requesting an extension, you must file this form on or before April 15, 2013.

If you receive the missing W-2 after filing your tax return and the information on the W-2 is different from what you reported using Form 4852, then you must correct your tax return. File Form 1040X, Amended U.S. Individual Income Tax Return to amend your tax return.

Published: February 8, 2013

IRS Extends Tax Relief to Some New Jersey and New York Victims of Hurricane Sandy

In the aftermath of Hurricane Sandy, the Internal Revenue Service announced additional tax relief to affected individuals and businesses. The IRS is further extending tax deadlines of that relief until April 1 for the following localities:

  • In New Jersey (starting Oct. 26): Monmouth and Ocean counties.
  • In New York (starting Oct. 27): Nassau, Queens, Richmond and Suffolk counties.

Beyond the relief provided by law to taxpayers in the FEMA-designated counties, the IRS will work with any taxpayer who resides outside the disaster area but whose books, records or tax professional are located in the areas affected by Hurricane Sandy. All workers assisting the relief activities in the covered disaster areas who are affiliated with a recognized government or philanthropic organization are eligible for relief. Taxpayers who live outside of the impacted area and think they may qualify for this relief need to contact the IRS at 866-562-5227.

The IRS also announced today that Taxpayer Assistance Centers in several New York and New Jersey locations will be open additional hours to provide help to taxpayers impacted by Hurricane Sandy. There will also be special assistance available at several New Jersey and New York locations on Saturday, February 23 from 9 a.m. until 2 p.m. More information will be available on irs.gov.

The tax relief postpones various tax filing and payment deadlines that occurred starting in late October. As a result, affected individuals and businesses will have until April 1, 2013, to file these returns and pay any taxes due. This includes the fourth quarter individual estimated tax payment, normally due Jan. 15, 2013. It also includes payroll and excise tax returns and accompanying payments for the third and fourth quarters, normally due on Oct. 31, 2012 and Jan. 31, 2013 respectively, and calendar year corporate income tax returns due March 15. It also applies to tax-exempt organizations required to file Form 990 series returns with an original or extended deadline falling during this period.  

The IRS will abate any interest, late-payment or late-filing penalty that would otherwise apply. The IRS automatically provides this relief to any taxpayer located in the disaster area. Taxpayers need not contact the IRS to get this relief.

Published: February 6, 2013

Useful Tax Tips From Our Accountants

Tax season is here and it’s important that you and your business are prepared well before the deadlines. We wrangled our most useful tax filing tips to ensure you get the best return possible.

General Tips:

  • Always itemize your deductions if you exceed the standard deduction threshold.
  • Review the tax documents you gave to your tax preparer last year to ensure nothing is missing from your current year documents.
  • Inform your tax preparer of major changes from last year that may affect your tax return. Changes include moving, new dependent, marriage/divorce, new job etc.

Refund/Balance Due Advice:

  • Always remember to e-file and setup direct deposit for a quicker refund.
  • File early for a quicker refund.
  • Use Direct Withdrawal if you owe taxes. You can file your return at any time and the funds will not be withdrawn until April 15th.

Penalties:

  • Always file on time regardless of your ability to pay tax liabilities. This will avoid the automatic failure-to-file penalty.
  • Be sure to determine your estimated taxes that are due for the current year in order to avoid estimated tax penalties.

Retirement:

  • Contribute the maximum amount on your 401k to reduce your tax liability.
  • Make contributions to a regular or Roth IRA by April 15th. The upper limit to put in is $5,000 ($6,000 if you are 50 or older), and you must have earned income at least equal to the contribution. Regular IRA contributions are usually tax-deductible, but withdrawals are taxable. Roth account contributions aren’t deductible, while withdrawals are usually tax-free. Income and other limits apply for both. Taxpayers stymied by the limits can do a “backdoor” Roth IRA: put up to $5,000 ($6,000, 50 or older) in a “nondeductible” regular IRA, and then convert it to a Roth account soon after. Income taxes are due on the conversion, but they will be minimal because the account won’t have earned much.
  • Filing an extension also provides self-employed taxpayers an extra six-months (until October 15th) to fund a SEP-IRA or SIMPLE IRA.

Medical:

  • Medical deductions need to exceed 7.5% of your adjusted gross income to be deductible on Schedule A (if you qualify).
  • Contribute to health savings accounts. You may deduct up to $6,250 per family ($3,100 single) for a health savings account if you had an approved “high-deductible” health plan linked to the health-savings account. The contributions may be made until April 15th.

Real Estate:

  • Remember to deduct your personal real estate taxes and mortgage interest on Schedule A.
  • If you refinanced your mortgage, be sure to properly deduct the points paid if any.
  • Points paid when you refinance may be able to be amortized and deducted over the life of the loan.

Charitable Gifts:

  • Employees who donate to charities via payroll deduction often forget to include the donations on their personal tax returns. The number isn’t on the W-2 form, and often there is no letter from the charity.
  • Donors may not deduct their labor or time, but they may deduct mileage or uniforms. For 2012 the allowance is 14 cents a mile. Board members or certain others may also deduct unreimbursed expenses for attending a conference.

Important Dates:

  • Feb 28th: File information returns, including Forms 1098, 1099, W-2G and form W-3 with Copy A for payments made during 2012.
  • March 15th: S Corporation tax returns and tax payments are due.
  • Remember April 15th is when Individual and Partnership tax returns and tax payments are due. Only tax returns can receive a six-month extension, not tax payments.
Published: February 5, 2013

10 Easy Ways to Adjust for a Changing Budget

With the expiration of the Social Security payroll tax break, many employees will see a reduction in their paychecks. Employees will want to adjust their budgets now so they don’t run into any unwanted surprises. Below are ten ways to help you find extra money to offset the loss:

Adjust your withholding. The IRS has a worksheet that allows you to calculate the proper number of allowances, helping you keep more money every month.

Pay with cash. Doing so typically saves consumers 20% compared with their credit spending levels.

Refinance your mortgage. With mortgage rates so low right now, you might be able to lower your monthly payment if you refinance.

Save $10 in 10 categories. Ten dollars may not seem like a lot of money, but if you cut back $10 in spending in 10 different categories it can add up.

Do it yourself. Stop paying people to do things that you can do yourself, such as wash your car or mow your lawn.

Quit bad habits. Smoking, gambling and drinking are all expensive habits that could save you significant dollars if stopped.

Clean out your storeroom. You’ll earn some cash selling your unwanted things as well as stop paying for extra storage space.

Shop for insurance. Compare rates and ask about ways to lower your premium.

Examine your bank statement. This is a good way to see where all your money is going and cut out goods and services you don’t necessarily need.

Earn extra income. Look for a part-time job that uses a skill or talent you already have so it won’t feel like you’re working.

From Fox Business

Published: February 4, 2013

Pricier Penalties for Tax-Reporting Scofflaws

January 31, is the deadline for businesses to issue tax forms, including W-2s and 1099s, for work performed in 2012. Missing that deadline, or issuing improper documents, used to draw the equivalent of a wrist slap from the IRS. But in the past couple of years, many penalties—including those on small businesses—have more than doubled, and deadlines are being strictly enforced.

What tax forms do small employers and self-employed individuals need to be aware of by the Jan. 31 deadline?

If your business hired freelancers or subcontractors in 2012, and you paid them more than $600 in total during the year, you have to issue them a 1099-MISC. So if you hired a company to paint your office, and you paid them more than $600, you have to send them a 1099-MISC. If you’re an employer—of any size—you have to issue W-2s to all your employees, also by Jan. 31.

There are later deadlines for filing both those documents with the federal agencies and in some cases, with the states, depending on where your company is located.

Are paper copies of these forms still the norm, or are more companies issuing statements electronically?

There is a trend toward electronic delivery, but you have to have your employees’ consent. They have to show that they have the ability to retrieve those documents electronically, for instance, if they are going to be posted to a website for download.

What happens if you miss the deadline?

There are extension options. If you fill out IRS Form 8809, you’re automatically granted a 30-day filing extension for both W-2s and 1099s. However, that extension only applies to filing these documents with federal agencies, not sending them to your employees or subcontractors. The standard deadlines, if you’re going to file them on paper, give you until Feb. 28 to file with the feds; the deadline is April 1 if you’re filing electronically. If you get the extension, you have another 30 days on those deadlines, but not on getting the information out to your employees and subcontractors.

Congress toughened the penalties in 2011 and indexed them for inflation, so they’ll increase every five years. What are the monetary penalties for noncompliance now?


For small businesses, which are defined as having $5 million or less in annual gross receipts for the three most recent tax years, the maximum failure-to-file penalty is $500,000, up from $100,000 before 2011. That’s if you do not file these documents at all, or you file after Aug. 1. The maximum penalty for organizations that file incorrect statements but issue corrections within 30 days is $75,000. If you issue corrections more than 30 days past the deadline but before Aug. 1, the maximum penalty is $200,000.

There was a penalty structure in place before, but the penalties got quite a bit pricier. The first penalties under the new rules started to be levied in mid-2012, so companies that got hit with them are feeling the pain now.

For tax year 2011, credit-card and online payment providers were required to issue Form 1099-K, which documented all the transactions they processed for individuals who did more than 200 transactions and $20,000 in annual gross receipts. This was aimed at online sellers, to make sure their electronic payments are properly counted as income. Is that process in place for tax year 2012 and beyond?


Yes, that requirement will continue. It’s a way for the IRS to monitor income and close the tax gap. The latest estimate of the net tax gap is $385 billion, and we know that there’s very little nonreporting of wages and salaries that are listed on W-2s. But the misreporting is estimated at 56 percent for income that is subject to little or no information reporting. That’s why the 1099-K was required, to bring about more compliance.

What should individuals receiving 1099-K forms do with them?

They should be used to report that income on your tax returns, depending on what type of business you are running. The IRS compares the amount you report as income with the amount reported on your 1099-Ks. So if you had payment-card transactions of $100,000 according to the payment companies, but you reported only $80,000 as business income, that’s going to be a red flag for the IRS to check and see if you are underreporting income.

The 1099-K reports gross income, not net income, which would include such things as chargebacks and transaction fees, right?

Right, so you as a business owner must document all those expenses and make sure you list them on your tax return, so you are paying taxes on the proper amount of income.

By Karen E. Klein for BloombergBusinessweek

Published: January 31, 2013

Who Should File a 2012 Tax Return?

If you received income during 2012, you may need to file a tax return in 2013. The amount of your income, your filing status, your age and the type of income you received will determine whether you’re required to file. Even if you are not required to file a tax return, you may still want to file. You may get a refund if you’ve had too much federal income tax withheld from your pay or qualify for certain tax credits.

Even if you’ve determined that you don’t need to file a tax return this year, you may still want to file. Here are five reasons why:

1. Federal Income Tax Withheld.  If your employer withheld federal income tax from your pay, if you made estimated tax payments, or if you had a prior year overpayment applied to this year’s tax, you could be due a refund. File a return to claim any excess tax you paid during the year.

2. Earned Income Tax Credit.  If you worked but earned less than $50,270 last year, you may qualify for EITC. EITC is a refundable tax credit; which means if you qualify you could receive EITC as a tax refund. Families with qualifying children may qualify to get up to $5,891 dollars. You can’t get the credit unless you file a return and claim it. Use the EITC Assistant to find out if you qualify.

3. Additional Child Tax Credit.  If you have at least one qualifying child and you don’t get the full amount of the Child Tax Credit, you may qualify for this additional refundable credit. You must file and use new Schedule 8812, Child Tax Credit, to claim the credit.

4. American Opportunity Credit.  If you or someone you support is a student, you might be eligible for this credit. Students in their first four years of postsecondary education may qualify for as much as $2,500 through this partially refundable credit. Even those who owe no tax can get up to $1,000 of the credit as cash back for each eligible student. You must file Form 8863, Education Credits, and submit it with your tax return to claim the credit.

5. Health Coverage Tax Credit.  If you’re receiving Trade Adjustment Assistance, Reemployment Trade Adjustment Assistance, Alternative Trade Adjustment Assistance or pension benefit payments from the Pension Benefit Guaranty Corporation, you may be eligible for a 2012 Health Coverage Tax Credit. Spouses and dependents may also be eligible. If you’re eligible, you can receive a 72.5 percent tax credit on payments you made for qualified health insurance premiums.

Want more information about filing requirements and tax credits? Call our office to set up an appointment so we can determine your needs!

Published: January 30, 2013

IRS To Accept Returns Claiming Education Credits by Mid-February

Taxpayers using Form 8863, Education Credits, can begin filing their tax returns after the IRS updates its processing systems. Form 8863 is used to claim two higher education credits -- the American Opportunity Tax Credit and the Lifetime Learning Credit.

The IRS emphasized that the delayed start will have no impact on taxpayers claiming other education-related tax benefits, such as the tuition and fees deduction and the student loan interest deduction. People otherwise able to file and claiming these benefits can start filing Jan. 30.

As it does every year, the IRS reviews and tests its systems in advance of the opening of the tax season to protect taxpayers from processing errors and refund delays. The IRS discovered during testing that programming modifications are needed to accurately process Forms 8863.  Filers who are otherwise able to file but use the Form 8863 will be able to file by mid-February. No action needs to be taken by the taxpayer or their tax professional.  Typically through the mid-February period, about 3 million tax returns include Form 8863, less than a quarter of those filed during the year.

The IRS remains on track to open the tax season on Jan. 30 for most taxpayers. The Jan. 30 opening includes people claiming the student loan interest deduction on the Form 1040 series or the higher education tuition or fees on Form 8917, Tuition and Fees Deduction. Forms that will be able to be filed later are listed on IRS.gov.

Updated information will be posted on IRS.gov.

Published: January 29, 2013

Big-Box Backlash: The Rebirth of Mom-and-Pop Shops

Call it a retail revival.

After getting crushed by big-box stores during the 1980s and 1990s, mom-and-pop shops are enjoying something of a rebirth among U.S. consumers.

Thanks to a little thing called the internet and the ubiquity of computing devices, consumers don't have to settle for more commoditized versions of their groceries, clothing or housewares. Between the corner coffee shop selling its dark roast across the U.S. and cheesemongers detailing the delights of Rogue River Blue to out-of-state shoppers, consumers can access the neighborhood store even if they move.

"Being online gives shops the opportunity to reach the world rather than just the tourist trade and local shoppers," says Marshal Cohen, a retail analyst at the Port Washington, N.Y., market researcher NPD Group. "Mom-and-pops have reached out and are using online in a real way that works."

While the internet has long promised to serve as a vehicle for democratizing industries like retail, that appraisal is only now starting to add up.

Online sales accounted for 5.2 percent of total retail sales in the third quarter of 2012, according to the latest reading from the U.S. Department of Commerce, which tracks the category. That was up 17.3 percent from the same quarter a year earlier. By contrast, total retail sales over the period rose by only 4.6 percent.

"You have a whole generation of people brought up on the internet," says Richard Sylla, an economics and entrepreneurship professor at New York University's Stern School of Business. "I remember I had students saying you should check out Amazon."

So while the days of being able to walk to the local butcher shop for your meat, the produce guy for veggies and the bakery for a loaf of rye may be over forever, that relationship - along with the kind of customized service prized by smaller shops - is still available today. And as consumers' appetites for small-store goods grows, so too are the companies' footprints.

Not only did Etsy recently give more than 100 online shop owners an opportunity to showcase their wares in real life at the store's holiday pop-up shop in New York City, six-year-old online men's clothier Bonobos announced in April that it would sell its line to retail-powerhouse Nordstrom.

Similarly, the once online-only glasses-maker Warby Parker this year expects to open up its first wholly-owned retail location in Manhattan. The three-year-old outfit has experimented with other physical-retail concepts including: pop-up shops, showrooms in select cities and even a mobile-sales vehicle, fashioned out of a yellow school bus.

So why the shift to offline? "We expect that online sales to take share overtime," says Warby Parker co-founder David Gilboa. "But if the vast majority of people who buy glasses do so through brick-and-mortar stores, it makes sense for us to cater to them."

In essence, going online when you're offline and offline if you're online is a hedging strategy. "It's like having a portfolio of stocks and bonds," says Murray's Cheese store owner Rob Kaufelt, who just last year ushered in a major redesign of the company's site. "You're never sure if anything is going to tank...Some things might do better one year, relatively speaking to the others."

Kaufelt adds that another reason to beef up a company's website is social media and overall online communication. "It's both about ecommerce and marketing your brand. As we expand, we spend more and more time with the fun stuff - more videos, blogs, entertaining things become increasingly vital," says the entrepreneur who purchased the Greenwich Village cheese shop in 1991.

Meanwhile, giant retailers are feeling the pangs of progress. Between same-day delivery and "showrooming," internet businesses with lower-overhead expenses are cutting into their larger counterparts' margins and, in some cases, pushing companies out of business.

Among other examples, the once mighty bookseller Borders Group filed for bankruptcy protection in 2011, while Sears Holdings Corp., the parent of Sears, Roebuck and Co., in April moved to sell off properties and business units under the weight of declining sales. Also in April, Best Buy announced that it would shutter 50 stores, as customers flock to lower-priced online competitors.

To stave off a similar fate, traditional retailers have been experimenting with pricing strategies and even opening their doors on holidays once viewed as sacrosanct. In addition to opening on Thanksgiving to receive early Black Friday shoppers, retailers including Target Corp. and Best Buy also offered to match competitors' prices during the overheated holiday-shopping season. In January, Target announced its plan to implement a year-round price matching program.

"Capitalism is creative destruction," says Sylla. "Old models get outmoded, and new models come in and take over."

While the jury is still out as to whether smaller shops like Murray's Cheese and Warby Parker could one day pose a larger threat to their giant counterparts, one thing's for certain: Catering to consumers wherever they are - and in a robust, customized way - is a key growth strategy.

"Online a decade ago didn't even represent 4 percent of [total retail] sales," says Cohen. In most categories today, he notes that online represents 16 percent of retail sales or more. "Think what will happen with smartphones in two years...You have to shoot it at where the target will be, not where it is now."

Warby Parker's Gilboa agrees: "The future of our business and the future of all retail will have some online component and offline component." Plus, he adds, "We'll look nothing like a LensCrafters."

By Diana Ransom for Entrepreneur.com

Published: January 28, 2013

January 30th Tax Season Opening For 1040 Filers

Following the January tax law changes made by Congress under the American Taxpayer Relief Act (ATRA), the Internal Revenue Service announced that it plans to open the 2013 filing season and begin processing individual income tax returns on Jan. 30.

The IRS will begin accepting tax returns on that date after updating forms and completing programming and testing of its processing systems. This will reflect the bulk of the late tax law changes enacted Jan. 2. The announcement means that the vast majority of tax filers — more than 120 million households — should be able to start filing tax returns starting Jan 30.

The IRS estimates that remaining households will be able to start filing in late February or into March because of the need for more extensive form and processing systems changes. This group includes people claiming residential energy credits, depreciation of property or general business credits. Most of those in this group file more complex tax returns and typically file closer to the April 15 deadline or obtain an extension.

“We have worked hard to open tax season as soon as possible,” IRS Acting Commissioner Steven T. Miller said. “This date ensures we have the time we need to update and test our processing systems.”

The IRS will not process paper tax returns before the anticipated Jan. 30 opening date. There is no advantage to filing on paper before the opening date, and taxpayers will receive their tax refunds much faster by using e-file with direct deposit.

“The best option for taxpayers is to file electronically,” Miller said.

The opening of the filing season follows passage by Congress of an extensive set of tax changes in ATRA on Jan. 1, 2013, with many affecting tax returns for 2012. While the IRS worked to anticipate the late tax law changes as much as possible, the final law required that the IRS update forms and instructions as well as make critical processing system adjustments before it can begin accepting tax returns.

The IRS originally planned to open electronic filing this year on Jan. 22; more than 80 percent of taxpayers filed electronically last year.

Who Can File Starting Jan. 30?

The IRS anticipates that the vast majority of all taxpayers can file starting Jan. 30, regardless of whether they file electronically or on paper. The IRS will be able to accept tax returns affected by the late Alternative Minimum Tax (AMT) patch as well as the three major “extender” provisions for people claiming the state and local sales tax deduction, higher education tuition and fees deduction and educator expenses deduction.

Who Can’t File Until Later?

There are several forms affected by the late legislation that require more extensive programming and testing of IRS systems. The IRS hopes to begin accepting tax returns including these tax forms between late February and into March; a specific date will be announced in the near future.

As part of this effort, the IRS will be working closely with the tax professional community to minimize delays and ensure as smooth a tax season as possible under the circumstances.

Published: January 25, 2013

Lean Business Tip: Hiring Contractors for Fun and Profit(ability)

We write often about ways small business can reduce expense, increase productivity, and operate more efficiently. Today we're talking about outsourcing. When we hear that word, we typically envision massive call centers or bucket shops filled with developers writing code half-way across the world. We're not talking about outsourcing work to other big companies, but rather finding, hiring, and developing a network of freelance vendors or contractors.

When businesses find great providers, often the relationships developed can lead to long-term working partnerships between that particular independent contractor and your small business. The business benefits by gaining a capability that it may have lacked and the contractor by gaining a paying client.

Small businesses hire contractors that range from professional services such as attorneys and accountants, but also by leveraging skills and services ranging from software developers to delivery drivers to computer repair technicians. Outsourcing to an independent contractor allows us to gain expertise that we didn’t have, save money, gain flexibility in our workforce, and experiment with different contractors at significantly lower risk than hiring full or part-time employees.

One of the side-effects of the economic downturn is that literally hundreds of thousands of skilled workers lost their jobs in the last 5 years and have populated the freelance marketplace. By leveraging this abundance of skills, experience, and talent many businesses are taking advantage of a game-changing opportunity. There are many reasons that this strategy works well for lots of these businesses but, particularly for small business and startups, but here are 5 reasons why it can provide your business with incredible value.

Reduce, Reduce, Reduce
Expense, that is. By hiring outside vendors companies can reduce expense in several very meaningful ways. First of all, every employee that a company hires represents not just a salary expense, but everything that goes along with it. When we budget for a new hire, we typically use 135% of the annual salary as their full employment cost; payroll taxes, health benefits, worker compensation insurance, and 401k expense add a significant amount to the cost of each new employee. In addition, every worker we hire needs a computer, monitor, keyboard, etc which can represent a significant capital expense associated with that hire. Finally, a new worker needs a space to work. According to the United States General Service Administration (USGSA) study, 218 rentable square feet per employee is a reasonable benchmark. With commercial office space in Chicago renting at around $20/sf that is an annual expense of $4,360 per employee and that doesn’t count the cost of the desk, the chair, and the various other furniture and office supplies each worker requires! By reducing headcount, we not only save the fringe payroll expense, but reduce other expense in a meaningful way.

Increase Workforce Capacity
Capacity management has as much to do with human capacity as it does with technological capacity, factory capacity, or logistic capacity. Many companies have cyclical business demands that require them to increase capacity at certain times while reducing it at others. Instead of endless cycles of hiring, training, layoffs, and re-hiring companies can benefit through a flexible workforce that can be expanded or contracted as demand requires. For instance, many graphic design firms leverage crowdSPRING to increase their creative capacity during times of high demand without having to make the investments that would be demanded by traditional hiring strategies. In addition, because independent contractors will typically start as part-time help, once they are fully trained and understand your company and their role, it is a simple matter to increase their hours without having to train another new worker and move them up the learning curve.

Build Competencies
Most small businesses do not have an ability to draft a contract, prepare a complex tax return, or design and code a great web page. Nor do they have enough need for these to hire a worker and develop one of these competencies in-house. Outsourcing specific skilled work to independent contractors is one way that even the smallest of businesses can compete effectively with larger firms that might be able to afford these skill-sets. This does not just go for skills that require a great deal of training or a high-priced education; even the hands-dirtiest forms of expertise can be added to the list of competencies that your company leverages.

Save the Planet
Every worker who has to travel to your office, store, factory, restaurant, or shop has an impact on our environment and uses resources in the simple act of showing up to work. Contractors often perform their work at a location remote from your own and do not need to travel to you to perform their tasks. Imagine the positive impact on our environment if even 10% of the overall workforce was abe to work from home or another remote location!

Experiment in Small Batches
Hiring contractors also allows a business to get a “look” at a potential new hire without taking the risk that things might not work out. Companies waste millions of dollars every year on hires that don’t work out; administrative costs, training costs, and HR expense are several lines in the budget that can take a real hit when a new employee isn’t a good fit fr any number of reasons. By hiring contractors, a small business can get a good look at someone and then, if they decide they want to, can bring that person on as an employee.

Article adapted from the crowdSPRING blog.

Published: January 24, 2013

Top 10 Small Business Trends for 2013

Technology

1. Big Data for the Little Guy:  Big data is big news these days. Yet much of the discussion has been about how big data will help big businesses.  But the data and analytics revolution will also benefit small businesses. 2013 will see rapid increases in the number of small businesses using powerful yet inexpensive cloud-based data and analytical tools.  These systems will deliver meaningful insights on customers, markets and competition and will also improve bottom-line business results.

2. Smartphones, Tablets and the Cloud Rule the World:  The growth of smartphones, tablets and cloud computing – and their impact on business – is hard to overestimate.  In 2013 small businesses will need to do more than just make their websites mobile device friendly (few currently do), they will need to re-think how they operate and serve customers in a world dominated by mobile and cloud computing.

Economic

3. The Solo Support Industry Grows Up: 2013 will see the continued growth of products and services designed to make it easier for solopreneurs and the self-employed to start and operate their businesses.  Expect more niche online marketplaces like Elance and Task Rabbit to connect independent workers with the organizations looking to tap their services; more educational programs and government support for starting and operating a self-employed business; more services and tools to help manage a solopreneur business; and more coworking and solopreneur-oriented commercial workspaces.

4. Small Business Hits the Road: One of the most interesting findings from our food truck research project is how quickly other industries are discovering the advantages of taking to the road and going to their customers.  We expect this form of “mobile commerce” will take off in 2013 as personal service firms, retailers of all kinds and even industrial firms take advantage of the lower costs, increased flexibility and high levels of customer satisfaction that mobile business provides.

5. Go Midwest Young Man (and Woman):  There’s an economic renaissance happening in the Midwest driven by the rising demand for commodities, an energy boom taking place in many Midwestern states and the growth of reshoring of services and manufacturing to the U.S.   Technology now better connects the Midwest to the rest of the world, and the cost of doing business is lower than in many coastal states. These trends are resulting in strong Midwestern economies, low unemployment rates, strong net migration and lots of small business opportunities.  

6. Angels Will Fear to Tread: Over the past few years there’s been a boom in Angel investing.  According to the Center for Venture Research at the University of New Hampshire, 66,230 companies received $22.5 billion from Angels in 2011.  They also report 2012 will likely see an increase in these numbers. But at the same time, A and later round funding by traditional VCs has declined, with only about 4,000 firms receiving these rounds in 2012. Traditional funding is expected to be even harder to come by in 2013. This, coupled with intense startup competition, will result in many Angel backed firms failing.  Because of this, Angels will learn how hard it is to make money as a startup investor and the Angel investing frenzy will subside.  

7. Small Manufacturing Gets Big:  2013 will see the continued growth of the small manufacturing sector. Driven by 5 strong trends – (1) technology and variable cost business models are making it easier and cheaper to be a small manufacturer; (2) rising overseas costs are making U.S. manufacturing cost competitive; (3) developing world economic growth is leading to stronger export opportunities; (4) the Internet and online systems are improving the ability of small manufacturers to find, sell and support customers; and (5) growing demand for customized and niche products both locally and globally – small manufacturing will thrive.

Social

8. Time is More than Money - Time has become the scarce commodity of the 21st century. Life for both consumers and small businesses has become more connected, complex and on-demand, making it hard to get a day’s tasks done.  The debated work-life balance has morphed into a more realistic discussion of work-life flexibility as we become more aware of a limited hourglass. In 2013, products that help users manage time, life and work effectively will be in demand, as will services targeted to relieve our schedules of mundane tasks and improve personal experience (see trend 4, Small Businesses Hit the Road). Time scarcity will spur growth in the personal services economy and related employment.

9. Consumers Embrace Hyper-Transparency:  2012 was the year showrooming - the trend towards shoppers visiting stores to see a product, but then buying it online or from some other store – reached the mainstream.  2013 will see the showrooming trend gain even more traction and expand beyond price with smart phone and data-powered customers and competitors getting ever-greater, real-time access to information on small business products, services and business performance.

Health Care

10. Planning for Obamacare: The election results means Obamacare will be the law of the land for at least the next 4 years.  With most of its major provisions coming online in 2014, 2013 will be a year of health care planning for small businesses.  While most of the focus of the law is on firms with more than 50 employees, owners of smaller firms will also need to review their personal and business health coverage due to changes caused by the law.

From the blog Small Business Labs

Published: January 23, 2013

IRS Provides Penalty Relief to Farmers and Fishermen

The Internal Revenue Service announced today that it will issue guidance in the near future to provide relief from the estimated tax penalty for farmers and fishermen unable to file and pay their 2012 taxes by the March 1 deadline due to the delayed start for filing tax returns.

The delay stems from this month’s enactment of the American Taxpayer Relief Act (ATRA). The ATRA affected several tax forms that are often filed by farmers and fishermen, including the Form 4562, Depreciation and Amortization (Including Information on Listed Property).  These forms will require extensive programming and testing of IRS systems, which will delay the IRS’s ability to accept and process these forms.  The IRS is providing this relief because delays in the agency’s ability to accept and process these forms may affect the ability of many farmers and fishermen to file and pay their taxes by the March 1 deadline. The relief applies to all farmers and fishermen, not only those who must file late released forms.

Normally, farmers and fishermen who choose not to make quarterly estimated tax payments are not subject to a penalty if they file their returns and pay the full amount of tax due by March 1. Under the guidance to be issued, farmers or fishermen who miss the March 1 deadline will not be subject to the penalty if they file and pay by April 15, 2013. A taxpayer qualifies as a farmer or fisherman for tax-year 2012 if at least two-thirds of the taxpayer’s total gross income was from farming or fishing in either 2011 or 2012.

Published: January 21, 2013

Tax-Free Transfers to Charity Renewed For IRA Owners 70½ or Older

Certain owners of individual retirement arrangements (IRAs) have a limited time to make tax-free transfers to eligible charities and have them count for tax-year 2012, the Internal Revenue Service said today.

IRA owners age 70½ or older have until Thursday, Jan. 31 to make a direct transfer, or alternatively, if they received IRA distributions during December 2012, to contribute, in cash, part or all of the amounts received to an eligible charity.

The American Taxpayer Relief Act of 2012, enacted Jan. 2, extended for 2012 and 2013 the provision authorizing qualified charitable distributions (QCDs)—otherwise taxable distributions from an IRA owned by someone, 70½ or older, paid directly to an eligible charitable organization. Each year, the IRA owner can exclude from gross income up to $100,000 of these QCDs. First available in 2006, this provision had expired at the end of 2011.

The QCD option is available regardless of whether an eligible IRA owner itemizes deductions on Schedule A. Transferred amounts are not taxable and no deduction is available for the transfer. QCDs are counted in determining whether the IRA owner has met his or her IRA required minimum distributions for the year.

For tax-year 2012 only, IRA owners can choose to report QCDs made in January 2013 as if they occurred in 2012. In addition, IRA owners