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Departing aliens and the sailing permit

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By Karl L. Fava, CPA

 

Sec. 6851(d) indicates that no alien, subject to exceptions by regulations, "shall depart from the United States unless he first procures from the Secretary a certificate that he has complied with all the obligations imposed upon him by the income tax laws." The rules of Sec. 6851(d) were initially codified as Section 250(g) of the Revenue Act of 1921 and were enacted to thwart departing aliens from leaving the country with outstanding income tax liabilities. The Code section laid the groundwork for what is commonly known as a "sailing permit" or "departure permit."

 

With the enactment of Sec. 7345, some taxpayers may be contemplating the horror of being detained in an airport security line when attempting to use their passport for foreign travel. The IRS has indicated that it will not be issuing proposed regulations on this new law and will begin enforcement upon issuance of a notice. Practitioners must wait and see how the IRS proceeds in this area, but one wonders if this new law will "fall through the cracks" similar to the sailing permit rules that have existed for nearly a century. Sec. 7345 requires the transfer of taxpayer information between the IRS and the State Department, whereas the sailing permit rules would require the Department of Homeland Security or the State Department to provide information to the IRS for enforcement.

 

Even with a specific Code section promulgating this rule, along with Internal Revenue Manual Section 21.3.4.18 providing that all resident aliens and certain nonresident aliens must obtain a "Certificate of Compliance" before leaving the United States, in practice this is rarely done. Attorney Virginia La Torre Jeker has written:

 

Research indicates that the IRS does not monitor or actively enforce compliance with this statutory requirement even though departing foreign nationals can owe significant tax dollars to the US government for services they have performed while in the US. ["Can the 'Sailing Permit' Become the Next FBAR? Bringing Home the Money."]

 

The website titled "immihelp"  suggests in its section detailing the requirements for a departing U.S. immigrant that "[n]o one is being asked for a sailing permit for the last several years."

 

The passport revocation rule was implemented as a mechanism to aid the IRS in collecting past due tax. As noted, the sailing permit rule was also implemented to collect tax from taxpayers who had avoided filing tax returns and paying tax. On the surface, both seem to be worthy methods to aid the IRS in tax collections, but it is uncertain how the IRS will use the new passport rules. With regard to the sailing permit rules, it is important to understand the compliance requirements should the IRS begin using the sailing permit to aid its collection efforts.

 

IRS Publication 519, U.S. Tax Guide for Aliens, includes Chapter 11, "Departing Aliens and the Sailing or Departure Permit." As discussed in Chapter 11 of the publication and the IRS website, before a resident or nonresident alien leaves the United States, he or she must obtain a certificate of compliance. This certificate, known as a sailing permit or departure permit, is issued by the IRS after the individual files a properly completed Form 1040-C, U.S. Departing Alien Income Tax Return, or Form 2063, U.S. Departing Alien Income Tax Statement and Annual Certificate of Compliance.

 

Who is not required to obtain a sailing permit?

Some aliens are not required to obtain a sailing permit before leaving the United States. If an alien is not required to obtain the permit, that individual will need to have proper identification to support that claim. The following categories of aliens do not need a sailing permit:

 

A representative of a foreign government who holds a diplomatic passport; a member of the representative's household; a servant who accompanies the representative; an employee of an international organization or foreign government whose pay for official services is exempt from U.S. taxes and who has no other U.S.-source income; or a member of the employee's household who was not paid by U.S. sources. However, if the individual signed a waiver of nonimmigrants' privileges as a condition of holding both his or her job and his or her status as an immigrant, this exception does not apply, and the individual must obtain a certificate.

 

A student, industrial trainee, or exchange visitor, or the spouse or child of such an individual. To qualify for this exception, the individual must have an F-1, F-2, H-3, H-4, J-1, J-2, Q-1, Q-2, or Q-3 visa. Additionally, the individual must not have received any income from sources in the United States other than:

• Allowances covering expenses incident to study or training in the United States (including expenses for travel, maintenance, and tuition);

 

• The value of any services or accommodations furnished incident to such study or training;

 

• Income from employment authorized under U.S. immigration laws; or

 

• Interest on deposits, but only if that interest is not effectively connected with a U.S. trade or business.

 

A student, or the spouse or child of a student, with an M-1 or M-2 visa. To qualify, the individual must not have received any income from sources in the United States other than:

• Income from employment authorized under U.S. immigration laws; or

 

• Interest on deposits, but only if that interest is not effectively connected with a U.S. trade or business.

 

If any of the following applies:

• The individual is on a pleasure trip and has a B-2 visa;

 

• The individual is on a business trip, has a B-1 visa or a combined B-1/B-2 visa, or is present in the United States under visa waiver and does not stay in the United States or any of its possessions for more than 90 days during the tax year;

 

• The individual is passing through the United States or any of its possessions, including travel on a C-1 visa or under a contract, such as a bond agreement, between a transportation line and the U.S. attorney general;

 

• The individual is admitted on a border-crossing identification card;

 

• The individual does not need to carry passports, visas, or border-crossing identification cards because he or she is (1) visiting for pleasure or (2) visiting for business and does not stay in the United States or any of its possessions for more than 90 days during the tax year;

 

• The individual is a resident of Canada or Mexico who commutes frequently to the United States to work and his or her wages are subject to income tax withholding; or

 

• The individual is a military trainee admitted for instruction under the Department of Defense, and he or she will leave the United States on official military travel orders.

 

The exception to the sailing permit does not apply to an individual in the last category if the area director believes the individual had taxable income during the tax year, up through his or her departure date, or during the preceding tax year and that his or her leaving the United States would hinder collecting the tax.

 

How to obtain a sailing permit.

 

If an alien does not fall under one of the categories listed above, the IRS recommends obtaining a sailing permit at least two weeks before planning to leave. However, the alien cannot apply any earlier than 30 days prior to his or her departure date. To get a permit, Form 1040-C or Form 2063 (whichever applies) must be filed first with the local IRS office. Any tax due from prior tax years must be paid along with any amount shown as due on Form 1040-C. The IRS advises aliens who have been working in the United States to go to a local IRS office in the area of their employment to apply, but applicants may also go to an IRS office in the area of their departure.

 

Before leaving to go to an IRS office, applicants should gather documents related to their stay and income in the United States to help speed up the process of obtaining a sailing permit. The following is a list of documents that applicants should bring to their local IRS office:

 

Passport and alien registration card or visa.

 

Copies of U.S. income tax returns filed for the past two years. If the individual was in the United States for less than two years, he or she should bring the income tax returns filed for that period.

Receipts for income taxes paid on these returns.

 

Receipts, bank records, canceled checks, and other documents that prove deductions, business expenses, and dependents claimed on the individual's tax returns.

 

A statement from each employer showing wages paid and tax withheld from Jan. 1 of the current year to the date of departure if the individual was an employee. If the individual was self-employed, he must bring a statement of income and expenses up to the planned date of departure.

Proof of estimated tax payments for the past year and current year.

Documents showing any gain or loss from the sale of personal property, including capital assets and merchandise.

 

Documents relating to scholarship or fellowship grants including verification of the grantor, source, and purpose of the grant.

 

Documents indicating the individual qualifies for any special tax treaty benefits claimed.

Document verifying the individual's date of departure from the United States, such as an airline ticket.

Document verifying the individual's U.S. taxpayer identification number, such as a Social Security card or an IRS-issued CP 565 showing his or her individual taxpayer identification number.

Employees in the IRS offices will assist in filing Form 1040-C and Form 2063. Both forms include a "certificate of compliance" section, which must be signed by an IRS field assistance area director to certify that the individual's U.S. tax obligations have been fulfilled.

 

Form 2063

Form 2063 is a short, informational form that does not include a tax computation. Before being issued a sailing permit, aliens filing Form 2063 must file any delinquent tax returns and pay any outstanding tax liabilities. Departing aliens in the following two categories can file Form 2063 to get their sailing permit:

 

Aliens, whether resident or nonresident, who have had no taxable income for the tax year up to and including the date of departure and also for the preceding tax year, if the period for filing the income tax return for that year has not expired.

Resident aliens who have received taxable income during the tax year or preceding year and whose departure will not hinder the collection of any tax. However, if the IRS has information indicating that the aliens are leaving to avoid paying their income tax, they must file a Form 1040-C.

 

Form 1040-C

Those who do not fall into one of the two categories listed above must file Form 1040-C to obtain a sailing permit. Income that is received during the tax year up to and including the departure date must be reported on Form 1040-C. Before being issued a sailing permit, aliens filing Form 1040-C must file any delinquent tax returns and pay any outstanding tax liabilities, including any amount shown as due on Form 1040-C.

 

If a departing alien plans on returning to the United States and can provide evidence to prove this claim to the IRS's satisfaction, he or she can file Form 1040-C without the need to pay the tax that is shown as due on the form and still receive a sailing permit. All delinquent income tax returns must be filed, and any tax due on those returns must be paid.

 

Departing husbands and wives who are nonresident aliens cannot file joint returns. However, if both spouses are resident aliens, they can file a joint return on Form 1040-C, if:

 

Both spouses can reasonably be expected to qualify to file a joint return at the normal close of their tax year, and The tax years of the spouses end at the same time.

 

Form 1040-C filers must pay all tax shown as due at the time of filing, except when a bond is furnished or the IRS is satisfied that the taxpayer's departure does not jeopardize the collection of income tax. If Form 1040-C indicates the taxpayer has overpaid, the IRS cannot provide a refund at the time of departure. Taxpayers due a refund are required to file a Form 1040-NR at the end of the tax year to make a claim for the refund.

 

A taxpayer who has satisfied all prior-year tax liabilities can furnish a bond guaranteeing payment on the current-year amount due as reflected on Form 1040-C. The bond must equal the tax due plus interest to the date of payment as figured by the IRS. Information about the form of the bond and security on it can be obtained from the taxpayer's IRS office.

 

The filing of Form 1040-C is not a replacement for the annual U.S. individual income tax return. If an income tax return was required to be filed, then the filing needs to be made even though the Form 1040-C has already been filed. The tax paid with the Form 1040-C filing is taken as a credit against the tax liability calculated on the taxpayer's annual individual income tax return.

 

Budgetary restraints of the IRS and its attempt to provide more services online have resulted in a significant reduction of IRS offices throughout the country. The bulk of the offices closed were local "walk up" offices that provided taxpayers an opportunity to talk directly with IRS personnel. Older practitioners who had assisted taxpayers with sailing permits in the past may recall visiting a local office to have a client's Form 1040-C stamped. If the IRS were to increase its enforcement in this area, it may be tough for taxpayers to comply given the lack of IRS offices and the present state of the Service's phone operations.

 

As the IRS makes its determination on how it will implement the new passport revocation rule, it may also want to strengthen its mechanisms for enforcing the sailing permit rule. Enforcement of both laws would significantly increase the agency's tax collection efforts.  

 

 

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Employment tax enforcement is trending

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By Jason B. Freeman, CPA, J.D., Dallas

Editor: Valrie Chambers, CPA, Ph.D.

 

Employment tax enforcement is a critical element of the IRS's overall tax enforcement effort. It is an area in which the IRS has unique tools at its disposal—tools that some practitioners may find surprising. Recent government reports indicate a growth in "egregious employment tax noncompliance" and focus on the need to combat this trend through increased use of civil and criminal enforcement mechanisms (see, e.g., Treasury Inspector General for Tax Administration (TIGTA), "A More Focused Strategy Is Needed to Effectively Address Egregious Employment Tax Crimes," Rep't No. 2017-IE-R004). The need for increased employment tax enforcement is driven in part by the essential role that such taxes play in funding vital government programs and services, as well as the fact that the government views employers who willfully fail to account for and deposit employment taxes as effectively stealing from their employees and the U.S. Treasury. In light of these trends and reports, practitioners should have a basic awareness of some of the unique tools the government uses to enforce employment tax laws.

 

Employment taxes, defined to include withheld income, Social Security, and Medicare taxes, account for nearly 70% of federal taxes collected by the IRS. They are collected primarily through withholding and are, as the numbers suggest, vital to the integrity of the tax system. But while they make up a substantial portion of federal revenue, recent government reports indicate that they should be even greater. For instance, the IRS estimates that unpaid employment taxes accounted for $91 billion of the 2008-2010 average annual gross tax gap of taxes owed but not paid voluntarily and timely (IRS Publication 1415, Federal Tax Compliance Research: Tax Gap Estimates for Tax Years 2008-2010, p. 2 (May 2016)).

 

The IRS and the Department of Justice have made special efforts to publicly warn taxpayers that employment tax enforcement is currently among the nation's top tax enforcement priorities. The TIGTA report cited above indicates that even greater efforts are needed, hinting that the IRS should more aggressively assert trust fund recovery penalty assessments and recommending that the IRS expand its criteria for criminal referrals in the employment tax context. The report, while generally critical of inadequate employment tax enforcement, comes on the heels of the IRS's release of its 2016 Data Book, which indicates a greater than 40% increase in all employment tax civil penalties assessed in fiscal 2016 from those in 2015. These factors and trends signal that a greater focus on employment tax enforcement is underway and likely to continue.

 

A potent tool: The trust fund recovery penalty

 

The trust fund recovery penalty under Sec. 6672 is a basic procedural weapon that allows the IRS to assess a civil penalty against any "responsible person" who willfully fails to pay over a business's withheld employment taxes. In addition, Sec. 7202 makes it a crime to willfully fail to collect or pay over these taxes. There is significant overlap between the two provisions, and civil trust fund recovery penalty investigations are often a ripe source for criminal referrals. Practitioners advising or representing taxpayers with civil trust fund penalty exposure should, therefore, always remain cognizant of potential criminal implications.

 

Sec. 6672 provides for the imposition of a civil trust fund recovery penalty, also known as the 100% penalty because it equals the total amount of the unpaid withheld tax, against any responsible person who willfully fails to collect, truthfully account for, and pay over any federal tax. The statute, in other words, holds a responsible person personally liable for the penalty, effectively piercing the business's veil where the elements of responsible-person status and willfulness are present. Any given business may have multiple responsible persons, and the IRS often asserts the full amount of the penalty against more than one person associated with the business, pursuing each person until one or more of them pay the balance in full, without regard to each person's share of culpability for the underpayment.

 

The IRS has generally taken a broad view of who qualifies as a responsible person. It has found business owners, board members, officers, employees, and even outside accountants, among others, to have such status in various contexts. Whether a person will be deemed a responsible person is ultimately a question of his or her "status, duty, and authority" with respect to the business (Mazo, 591 F.2d 1151, 1156 (5th Cir. 1979)). The IRS inquiry focuses on factors such as ownership of, or formal roles in, the business; managerial-type authority; authority over disbursements and payments to creditors; preparation of tax returns or assisting in making employment tax deposits; and check-signing authority, among others. In the final analysis, responsible-person status is a fact-intensive question.

 

When it comes to the willfulness element, the IRS takes the position that a person acts willfully when he or she chooses to pay other creditors rather than the IRS even though he or she is aware, or should be aware, of the tax liability. This generally includes paying any other creditor in preference to the IRS, even employees. Importantly, willfulness in this context does not require bad faith or an intent to defraud the government, and courts have found that reckless disregard of a duty to collect and pay over taxes can be sufficient to satisfy the element of willfulness.

 

Criminal penalties also a distinct hazard

 

In addition to this unique civil enforcement tool, severe criminal penalties can apply in the employment tax context. The line between a civil and criminal violation is often quite thin. The elements necessary to establish a trust fund recovery penalty under Sec. 6672 are virtually identical to those necessary to establish criminal liability under Sec. 7202. Almost by definition, then, taxpayers facing a trust fund recovery penalty assessment often exhibit many characteristics that could support a criminal referral. That, of course, can increase the stakes when employment tax violations are at issue. And with TIGTA's recent report recommending an expansion of the criteria for referring potential criminal employment tax cases, practitioners may see a renewed focus on developing such cases.

 

Practitioners counsel compliance amid heightened enforcement

 

Moving forward, employment tax enforcement is likely to continue to increase, despite drops in overall tax enforcement in recent years due to budget and personnel constraints. Both the IRS and Department of Justice have openly signaled that addressing employment tax noncompliance is a high priority. Recent statistics underscore those signals, and recent government reports have recommended that the IRS do even more to enforce the employment tax laws. In this environment, practitioners should pay particular attention to their clients' employment tax compliance issues and advise them accordingly.

 

 

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A Tax-Friendly Way to Pay for School

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By KIMBERLY LANKFORD

 

Are there any tax-advantaged ways to save for high school expenses?

 

Yes, a Coverdell education savings account lets you save up to $2,000 per beneficiary each year tax-free if the money is used for education expenses, from kindergarten through college. You can contribute the maximum to a Coverdell if your modified adjusted gross income is less than $95,000 for single filers or $190,000 on a joint tax return (you can make a partial contribution if your income is as high as $110,000 if single or $220,000 on a joint return). You have until April 18, 2017, to contribute for 2016.

 

For elementary and secondary school, you can withdraw money tax-free not only for tuition and fees but also for books, supplies and equipment, academic tutoring, and services for a special-needs beneficiary. You can also use the money for room and board, uniforms, transportation, and extended day programs if required or provided by the school. Coverdell money can also be used tax-free for a computer, related equipment and internet access for the student.

 

The beneficiary must be younger than 18 when you make the contributions and must use the money before age 30. You can contribute to a Coverdell ESA even if you’re also contributing to a 529 college-savings account. If the child doesn’t use the money, you can choose another family member as the beneficiary.

 

Eligible expenses for college costs are similar to those for 529s, including tuition, fees, books, supplies and equipment, as well as a computer, software and internet access used by the student. Expenses for room and board count for college students who are enrolled at least half-time – up to the amount they pay to live on campus, or up to the amount the college counts in the cost of attendance for financial aid purposes if they live off-campus (this number may be listed on the college’s Web site, or you can get it from the college’s financial aid office).

 

Among brokerage firms and mutual fund companies that provide Coverdells, TD Ameritrade and Charles Schwab charge no setup or maintenance fees. Both offer the same investment choices as in their IRAs, including stocks, mutual funds, exchange-traded funds and other investments available to their brokerage customers (giving you more investing options in Coverdells than in 529s). TD Ameritrade has no minimum investment requirements. You need an initial investment of $1,000 to open a Coverdell with Schwab, which is waived if you set up an automatic monthly transfer of $100 through direct deposit or Schwab MoneyLink.

 

Fidelity doesn’t offer Coverdells, and Vanguard and T. Rowe Price no longer offer them (although it still services accounts that were established when it did offer them).

 

For more information, see IRS Publication 970 Tax Benefits for Education

 

 

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Petya ransomware: All you need to know about the cyber-attack and how to tell if you are at risk

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The global ransomware attack that hit major corporations from shipping giant Maersk Copenhagen Stock Exchange: MAERSK.B-DK) to the world’s biggest advertiser WPP (London Stock Exchange: WPP-GB), has affected over 12,000 machines, with companies and security researchers scrambling to find a fix. Ransomware is a malicious piece of software that locks files on a computer and demands payments to unlock them. The files on the computers are not accessible and are therefore useless. So far, major businesses have been attacked. You will know if you have been infected as a screen will appear demanding payment of $300 in bitcoin to unlock the file. Researchers have warned against paying the ransom because the email now associated with the hackers has been decommissioned, meaning even if you pay, there is no way to contact the criminals. If your organization is running a vulnerable version of Windows that hasn’t patched (updated with the latest fix) then your business could be at risk.

 

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International information return penalties remain a significant issue for taxpayers and advisers

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By Shamik Trivedi, J.D., LL.M., and Cory Perry, CPA, Washington

 

This item explores the risks to taxpayers and return preparers alike for certain delinquent or substantially incomplete international information returns that provide information to the IRS to satisfy various reporting requirements under Secs. 6038 and 6038A. While no tax is directly due with the filing of these returns, the failure to timely file or substantially complete these international information returns can result in significant penalties, as well as indefinitely extend the statute of limitation on assessment for the taxpayer's entire return. This item addresses ways to attempt to mitigate these penalties, including the use of reasonable cause and first-time abatement (FTA). It should be noted that similar penalties exist for other international information returns, but they are not discussed in this item.

 

Congress imposes dozens of penalties for a variety of failures under the Internal Revenue Code. Some penalties relate to understating income or overstating basis, while others relate to the late filing of a tax return or the late payment of tax. The law typically imposes these penalties as a percentage of the tax owed, and they are usually increased if a taxpayer acted intentionally.

 

In other cases, however, the penalties may have no relation whatsoever to an underlying tax liability. For example, Congress has imposed steep penalties for the failure to timely file or substantially complete certain international information returns, such as Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations, or Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business. The failure to timely file or substantially complete one of these international information returns may result in a flat $10,000 penalty, per form, per year—even when no income tax was owed with the taxpayer's return.

 

In addition to carrying monetary penalties, the various failures noted above may have other ramifications. The statute of limitation on assessment—the IRS's time limit for collecting tax from a particular period—may be extended for several years if the failure is significant enough, or even potentially indefinitely in the case of certain international information returns. Of course, if the taxpayer acted fraudulently or never filed the return itself, then the statute of limitation on assessment also may remain open indefinitely.

 

In some cases, however, a taxpayer may obtain an abatement of penalties by affirmatively arguing reasonable cause. In fewer cases, a taxpayer may obtain an abatement of penalties automatically, through the use of the IRS's FTA administrative penalty waiver procedures outlined in Internal Revenue Manual (IRM) Section 20.1.1.3.6.1.

 

Although options are available, obtaining relief from the penalties by establishing reasonable cause may be a difficult, time-consuming endeavor and is never guaranteed. Worse still, the statute of limitation on assessment for the taxpayer's entire tax return may be extended or open indefinitely unless the taxpayer takes certain actions. With the IRS systemically assessing many of these penalties, taxpayers have few options but to seek relief or pay the consequences. These, among others, are risks to otherwise compliant taxpayers and their advisers.

 

Remedies

As is customary in tax law, resolution of issues can be time-consuming, complex, or in some cases, unavailable. The ability to obtain abatement of penalties imposed under Secs. 6038 and 6038A (collectively, international information return penalties, or IIRPs), and related to late-filed Forms 5471 or 5472, depends on numerous factors. The two primary remedies for IIRPs are FTA and reasonable-cause relief.

 

FTA: Generally speaking, FTA, which is outlined under IRM Section 20.1.1.3.6.1, allows taxpayers to request abatement of certain failure-to-file penalties (e.g., Sec. 6651(a)(1)). To qualify, taxpayers must (1) have not previously been required to file a return or have no prior penalties (except the estimated tax penalty) for the preceding three years, and (2) have filed, or filed a valid extension for, all currently required returns and paid, or arranged to pay, any tax due. The taxpayer must also not have incurred an unreversed penalty for a "significant amount" during the tax period in the prior three years.

 

An FTA generally does not apply to "event-based" filing requirements such as with Forms 5471 and 5472. However, notably, the International Department at the Ogden Accounts Management Center will abate IIRPs if the "related Form 1120" penalty has been abated (through either an FTA or some other means of reasonable cause) and the required returns have posted to the IRS Master File. IRM Sections 20.1.9.3.5 and 20.1.9.5.5 generally outline these procedures.

 

For most penalties, taxpayers generally can request an FTA by telephone or through writing. However, exhibits within the IRM for IIRPs instruct the agent to not accept FTA requests for Sec. 6038 penalties over the phone. Rather, the taxpayer must make those requests in writing to the International Department, which will make its determination on IIRPs consistent with the determination made on the related Form 1120, U.S. Corporation Income Tax Return, according to IRM Section 21.8.2.21.2(5). While these sections of the IRM are dense and difficult to read, practitioners dealing with these types of penalties would do well to review them carefully, as they provide the road map by which the IRS may abate those penalties.

 

Reasonable cause: The second, and generally more common, remedy for IIRPs is reasonable-cause relief. Both Secs. 6038 and 6038A contain language allowing the IRS to abate penalties assessed under those provisions based on reasonable cause. The determination of whether a taxpayer acted with reasonable cause is made on a case-by-case basis, taking into account all pertinent facts and circumstances. A taxpayer's reliance on the advice of a professional, for example, may constitute reasonable cause, assuming that such reliance was reasonable, under Regs. Secs. 1.6038A-4(b) and 1.6038-2(k)(3). Of course, "reasonable cause" is not specifically defined in the Code or regulations, and so taxpayers must look to other authorities, such as case law and the IRM, when demonstrating reasonable cause and good faith.

 

IRM Section 20.1.1.3.2(1) describes reasonable cause as being based on all the facts and circumstances and instructs agents to grant relief when taxpayers have exercised ordinary business care and prudence in determining their tax obligations but, nevertheless, failed to comply with those obligations. The IRM defines ordinary business care and prudence as "making provisions for business obligations to be met when reasonably foreseeable events occur." The IRM also instructs agents to take into account a taxpayer's compliance history in determining whether the taxpayer exercised ordinary business care and prudence, among other things.

 

As noted, taxpayers must often look to case law when demonstrating reasonable cause and good faith. Although there are several ways to establish reasonable cause, the balance of this item focuses on reasonable reliance on a tax adviser. Case law offers numerous examples and legal precedents for taxpayers attempting to prove reasonable cause, only a few of which are discussed below.

 

In Neonatology Associates, P.A., 115 T.C. 43 (2000), the Tax Court ruled that reliance on a tax professional constitutes reasonable cause if (1) the taxpayer reasonably believed that the tax professional was a competent tax professional with sufficient expertise to justify reliance; (2) the tax professional was provided or had access to all necessary information; and (3) the taxpayer actually relied in good faith on the tax professional.

 

In Boyle, 469 U.S. 241, 245 (1985), the Supreme Court, in defining reasonable cause, looked to the regulations under Sec. 6651, which relate to the failure to timely file or pay tax, in determining that "[w]hen an accountant or attorney advises a taxpayer on a matter of tax law, such as whether a liability exists, it is reasonable for the taxpayer to rely on that advice." The Court went on to say that the exercise of ordinary business care and prudence does not require the taxpayer to challenge an attorney, seek a second opinion, or "monitor counsel."

 

Boyle is both a sword for the IRS and a shield for taxpayers in the context of reasonable cause. While the Supreme Court described the reasons for which a taxpayer could reasonably rely on a competent adviser, the case itself turned on the adviser's failure to timely file a tax return. Boyle concludes that "[t]he failure to make a timely filing of a tax return is not excused by the taxpayer's reliance on an agent, and such reliance is not 'reasonable cause' for a late filing under § 6651(a)(1)." Such ministerial acts performed by an adviser would not, therefore, be covered by a reasonable-cause exception.

 

In a more recent case, Specht, No. 15-3095 (6th Cir. 2016), aff'g No. 1:13-cv-00705 (S.D. Ohio 2015), the tax adviser assured the taxpayer that an extension to file had been obtained. However, the taxpayer never asked for proof that the tax adviser had in fact obtained an extension, and the assurances turned out to be false—a request for extension had never been filed. Following Boyle, the court found that "complete reliance" on a tax adviser to carry out a nondelegable act such as filing a timely return, rather than circumstances beyond the taxpayer's control, is not reasonable cause. The court found that this holds true even if the taxpayer otherwise may have exercised ordinary business care and prudence. But what of an adviser who determines that a filing responsibility does not exist, or an adviser who fails to notify a taxpayer of an existing filing obligation?

 

That answer may turn on the complexity of the return the taxpayer is filing. Practically, as Boyle suggests, all taxpayers should know of their responsibility to file an income tax return. The failure to timely file is the sole responsibility of the taxpayer, which cannot delegate it to an adviser. The responsibility to file an information return, such as a Form 5471, and navigate the complex international information-reporting rules, however, would appear to be something a lay taxpayer would never have an inclination to know. In fact, these rules often mystify even the most seasoned practitioners.

 

There are generally two situations under which a taxpayer fails to timely file an international information return: (1) The taxpayer obtained a tax adviser who filed the income tax return but failed to attach the required international information returns; or (2) the taxpayer obtained a tax adviser who failed to timely file the underlying income tax return—perhaps because a request for extension had never been filed.

 

In the first situation where the taxpayer timely filed its income tax return, but its adviser failed to file the appropriate international information return, the remedies are reasonably clear. The IRS's "Options Available for U.S. Taxpayers with Undisclosed Foreign Financial Assets," available at www.irs.gov, offers taxpayers with delinquent international information returns a procedure to submit those filings without an immediate penalty under certain circumstances. These procedures, found under the fourth option listed under this program (Option 4), replace frequently asked question (FAQ) No. 18 of the Offshore Voluntary Disclosure Program (OVDP).

 

If the taxpayer does not qualify for Option 4 (as discussed further below), the taxpayer may also seek relief by making an affirmative showing of all the facts alleged as reasonable cause for the failure in a written statement filed with the district director containing a declaration that it is made under penalties of perjury. The statement must establish that the taxpayer has substantially complied with its requirements (Regs. Sec. 301.6723-1A(d)(3)).

 

Option 4 provides the simplest avenue to submit delinquent international information returns for those taxpayers that (1) have not filed one or more required international information returns; (2) have reasonable cause for not timely filing the information returns; (3) are not under IRS civil examination or criminal investigation; and (4) have not already been contacted by the IRS about the delinquent returns.

 

A taxpayer that submits a delinquent filing under Option 4 will not be automatically subject to audit, penalty, or review, but the IRS may still select it for examination through "the existing audit selection processes that are in place for any tax or information returns."

 

Importantly, under Option 4, taxpayers must make delinquent filings on an amended return, attaching the delinquent information returns to the amended return with a statement of all facts establishing reasonable cause for the failure to file and a required certification filed under delinquent international information return submission procedures asserting that the entity for which the information return relates was not engaged in tax evasion. This is a departure from FAQ No. 18, which did not require a taxpayer to show reasonable cause or certify that the taxpayer was not involved in tax evasion, and specifically excluded those late filings, assuming the proper procedures were followed, from penalty.

 

Under the second scenario, where a taxpayer has failed to timely file an original income tax return, upon which an information return would be attached, the remedies are much less clear. When an original return has not been timely filed, seemingly the taxpayer would not be eligible for filing under Option 4 because the plain language describing Option 4 requires an "amended" tax return. This situation poses significant risk to a taxpayer and adviser, given the ability of the IRS to impose systemically assessed penalties on late-filed returns and taxpayers' inability to request relief under reasonable cause when the late return is the result of a missed or late extension.

 

Seemingly similar circumstances, from the taxpayer's perspective, can result in drastically different results. Under the first scenario, there is a clear path for relief, but under the second, an FTA may be the only option, and as discussed further below, may not always be available.

 

Systemically assessed penalties

 

As described in IRM Sections 21.8.2.22.1 and 21.8.2.22.2, beginning in March 2013, the IRS automatically assesses penalties under Secs. 6038 and 6038A on late-filed Forms 1120, on which are attached Forms 5471 or 5472. Similarly, beginning in March 2014, automatic penalties apply to late-filed Forms 1065, U.S. Return of Partnership Income, with Forms 5471 and 5472 attached. The assessment results in the IRS's issuing a CP215 notice to the taxpayer, which would then require the taxpayer to respond with a valid argument for reasonable cause, submit a qualified request for an FTA, or pay the penalty.

 

Those IRM sections also contain decision trees for agents to follow. As one may expect, most of the branches of those decision trees end with a denial of reasonable-cause relief. Accordingly, it is important for taxpayers to be ready with the correct, well-articulated argument.

 

The imposition of a systemically assessed penalty may occur on one of two types of late-filed tax returns: those with tax shown and those without. Late-filed returns with tax shown, necessitating the payment of tax with the late-filed return, would be subject to failure-to-file and/or failure-to-pay penalties imposed under Sec. 6651. As many taxpayers know, those penalties may be abated under an FTA. Further, the accompanying Sec. 6038 or 6038A penalties, if imposed due to such a systemic assessment, may also be abated by an FTA, assuming the taxpayer ­otherwise qualifies.

 

However, where the late-filed income tax return does not have any tax due, the taxpayer may not have a Sec. 6651 penalty to address and may not be able to so easily remove the systemically assessed Sec. 6038 or 6038A penalties through an FTA. An FTA provides relief for penalties imposed under Sec. 6651(a)(1), 6698(a)(1), 6699(a)(1), 6651(a)(2), 6651(a)(3), or 6656—essentially for those penalties that relate to a failure to file, failure to pay, or failure to deposit. Accordingly, as discussed above, if no such penalty exists on the income tax return, then an FTA does not apply to the "event-based" penalty of an international information return.

 

This leaves taxpayers and advisers in a delicate position. Consider the following example:

 

Example: EuroCo, a French company based in Paris, manufactures certain products and maintains a U.S. branch through an office it keeps in Kansas City. The U.S. branch has a single employee who attempts to make sales in the United States. The U.S. branch does not turn a profit and is effectively controlled by EuroCo's management in France. EuroCo relies on French tax advisers, who fail to advise the company that the U.S. branch has a filing requirement in the United States. Several years later, with sales taking off in the United States, EuroCo decides to engage a U.S. tax adviser. The U.S. tax adviser determines that the U.S. branch should have been filing a Form 1120-F, U.S. Income Tax Return of a Foreign Corporation, as well as Forms 5472 to report certain related-party transactions.

 

The U.S. branch in this example has not only delinquent income tax returns, but also delinquent Forms 5472. The statute of limitation for assessment under Sec. 6501(c)(8) has not begun to run until and unless the income tax returns and the Forms 5472 are filed for each year. The U.S. branch's U.S. tax adviser determines that in each of the years that the branch should have filed, the branch did not incur a tax liability because of current losses or net operating loss carryforwards. The adviser files the Forms 1120-F late and attaches the appropriate Forms 5472.

 

The U.S. branch at this point will likely receive a CP215 notice imposing a $10,000 penalty for each year that it failed to file Forms 5472 and for each form that the branch was required to attach. An FTA will not be available to the U.S. branch because there is no underlying failure-to-file penalty on the Form 1120-F, since there is no tax liability. The U.S. branch will have to assert that its French tax advisers failed to properly advise it of the filing requirement. This process will likely result in the first-level reasonable-cause submission being dismissed by the International Department, based on a broad reading of IRM Exhibit 21.8.2-2(3), which states that "[o]rdinary business care and prudence requires the taxpayer to determine their tax obligations when establishing a business in a foreign country." Moreover, "reliance" is a category that the IRM gives a blanket denial of reasonable cause under Exhibit 21.8.2-2(9).

 

So, the U.S. branch may appeal the decision of the International Department by timely filing a protest. The likelihood of obtaining a face-to-face meeting with a field Appeals Officer is low, given recent changes in the IRS Appeals Division procedures, generally found under IRM Section 8.6.1, and so the U.S. branch will be relegated to a Campus Appeals telephone conference where the substantive argument will be that EuroCo's French tax advisers failed to advise the company of its U.S. tax obligations. Such reliance hardly seems reasonable and is certainly not the strongest argument for the IRS to accept. After thousands of dollars of professional fees and many months of time having passed, the U.S. Branch may be out of luck.

 

Or consider another example, a nightmare scenario whereby a U.S. tax adviser has properly advised a taxpayer of all relevant filing obligations, including its international information returns, and, through an inadvertent error, the taxpayer's Form 7004, Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns, is never filed. As a result, the taxpayer fails to timely file 30 Forms 5472 and 10 Forms 5471. The tax adviser, believing the return has been properly extended, files the return on or before the extended due date.

 

Because the taxpayer did not properly extend the return, it will receive a CP215 notice imposing a penalty of $400,000. Assuming the taxpayer was fully paid in or in a loss position, an FTA will not be available as the IRS will not impose a Sec. 6651 penalty on the income tax return. Moreover, the standard set in Boyle renders it virtually impossible for the taxpayer to obtain relief under the reasonable-cause options set forth above. Here, there is an otherwise compliant taxpayer, who owes no tax, files its return in what would otherwise be a timely manner, and has exercised ordinary business care and prudence. Nevertheless, the $400,000 penalty will stand, and the taxpayer and tax adviser will suffer the consequences. The same holds true if the taxpayer was responsible for filing the extension and, due to an internal administrative error, never filed it.

 

IRM Section 20.1.1.2 states that "penalties exist to encourage voluntary compliance by supporting the standards of behavior required by the Internal Revenue Code." Penalties provide the IRS with an important tool to achieve voluntary compliance by taxpayers. Systemically assessing penalties against taxpayers under the scenarios set forth above does not seem to enhance voluntary compliance especially because the taxpayers voluntarily submitted the returns. Nor should the taxpayers be on uneven ground when an adviser fails to include a required form as compared to an adviser who fails to properly extend a return.

 

Things to consider

 

As described previously, the impact of IIRPs can be dramatic and unexpected. IRM Section 20.1.1.2.1 provides that penalties are supposed to "support and encourage voluntary compliance," even though they may "serve to bring additional revenues into the Treasury and indirectly fund enforcement costs." Nonetheless, "these results are not reasons for creating or imposing penalties." Yet, the IIRPs effectively do just that.

 

Systemically assessed penalties throw a taxpayer into the IRS's labyrinth, exposing the taxpayer not just to the monetary penalty imposed by statute, but also to the administrative costs imposed by bureaucratic inertia. A business taxpayer with a single Form 5471 penalty may want to seriously consider simply paying the penalty rather than attempting to abate it, given the time and costs involved.

 

For advisers, the routine act of filing a tax return or an extension may be complicated by a taxpayer's international dealings. That simple task may turn complex through an inadvertent failure. Such risks challenge not just taxpayers but also their advisers. Should advisers change their procedures to account for potential missed extensions or filings? Should taxpayers request transcripts from the IRS verifying receipt of an extension filed by an adviser?

 

For its part, the IRS has been, at least on the surface, receptive of such considerations. Yet, the impact on taxpayers and tax advisers, coupled with the growing number of cases in Campus examination and Appeals related to such penalties, draws questions as to whether the intended goal of providing transparency for ownership in foreign assets by domestic taxpayers, or by ownership of domestic taxpayers by foreign entities, is somehow outweighed by the significant cost and burden from such strict and automatic enforcement. This is especially true for taxpayers who may not have any actual tax liability.

 

If anything, advisers must be vigilant to spot situations where penalties may be imposed, especially if the ability to abate those penalties is burdensome or impossible.

 

 

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FBARs Are Automatically Extended Until Oct. 15, FinCEN Announces

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By Sally P. Schreiber, J.D. -

The Treasury Department's Financial Crimes Enforcement Network (FinCEN) said that, to implement the new due date for FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), of April 15 (April 18 for 2017), it will automatically grant all taxpayers filing the form a six-month extension every year to Oct. 15 (Oct. 16 in 2017 because Oct. 15 is a Sunday). FinCEN explained that this six-month extension will be automatic each year and that taxpayers do not have to request extensions.

Section 2006(b)(11) of the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015, P.L. 114-41, changed the due date of FBARs to April 15 to coincide with the due date for individual income tax returns. Before the change, the form was due on June 30, a date that did not coincide with any other individual income tax return deadline, and no extensions were allowed.

The Bank Secrecy Act, P.L. 91-508, and its regulations require FBAR reporting from "[e]ach United States person having a financial interest in, or signature or other authority over, a bank, securities, or other financial account in a foreign country" (31 C.F.R. §1010.350(a)), if the aggregate maximum values in that person's foreign accounts exceed $10,000 at any time during the calendar year (31 C.F.R. §1010.306(c)).

For more on FBAR filing requirements, see Holloway and Schuldt, "An Update on Foreign Financial Account Reporting," The Tax Adviser (December 2016).

 

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Taxes on Retirement Assets: How to Pay Less

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By Roger Wohlner

 

Retirement planning can be tough. It is hard enough to save for a comfortable retirement during your working years. Once you actually retire, managing your withdrawals and your spending can be complicated. One important and complex area in both parts of your life is managing the process in the most tax-efficient manner.

 

If you have portions of your nest egg in various types of accounts ranging from tax-deferred to tax-free (a Roth) or taxable, it can be a challenge to decide which accounts to tap and in what order.

 

Required minimum distributions (RMDs) also come into play after age 70½. Here are some tips for those saving for retirement, for retirees and for financial advisors advising them.

 

Fatten Up Your 401(k)

Contributing to a traditional 401(k) account is a great way to reduce your current tax liability while saving for retirement. Beyond that your investments grow tax-deferred until you withdraw them down the road.

 

For most workers, contributing as much as possible to a 401(k) plan or a similar defined contribution plan like a 403(b) is a great way to save for retirement. The maximum salary deferral for 2016 and 2017 is $18,000 with an additional catch-up for those age 50 or over of $6,000, bringing the total maximum to $24,000. Add any company matching or profit-sharing contributions in and this is a significant tax-deferred retirement savings vehicle and a great way to accumulate wealth for retirement.

 

The flip side is that with a traditional 401(k) account, taxes – at your highest marginal rate – will be due when you withdraw the money. With a few exceptions, a penalty in addition to the tax will be due if you take a withdrawal prior to age 59½. The assumption behind the 401(k) and similar plans is that you will be in a lower tax bracket in retirement. As people live longer and the tax laws change, though, we are finding this is not always the case. This should be a planning consideration for many investors.

 

Use IRAs

Money invested in an individual retirement account (IRA) grows tax-deferred until withdrawn. Contributions to a traditional IRA may be made on a pre-tax basis for some, but if you are covered by a retirement plan at work, the income limitations are pretty low.

 

The real use for an IRA for many is the ability to roll over a 401(k) plan from an employer when they leave a job. Considering that many of us will work at several employers over the course of our careers, an IRA can be a great place to consolidate retirement accounts and manage them on a tax-deferred basis until retirement.

 

Considerations with a Roth IRA

A Roth account, whether an IRA or within a 401(k), can help retirement savers diversify their tax situation when it comes time to withdraw money in retirement. Contributions to a Roth while working will be made with after-tax dollars so there are no current tax savings. However, Roth accounts grow tax-free and if managed correctly, all withdrawals are made tax-free.

 

This can have a number of advantages. Besides the obvious benefit of being able to withdraw your money tax-free after age 59½ and – assuming that you’ve had a Roth for at least five years – Roth IRAs are not subject to RMDs, the required minimum distributions that have to begin when you reach 70½. That's a big tax savings for retirees who do not need the income and who want to minimize their tax hit. (For more, see: Why Boomer Retirements Will Be Vastly Different Than What They Planned For.) For money in a Roth IRA, your heirs will need to take required distributions, but they will not incur a tax liability if all conditions have been met.

 

It is generally a good idea to roll a Roth 401(k) account into a Roth IRA rather than leaving it with your former employer in order to avoid the need to take required distributions at age 70½ if that is a consideration for you.

 

Those in or nearing retirement might consider converting some or all of their traditional IRA dollars to a Roth in order to reduce the impact of RMDs when they reach 70½ if they don’t need the money. Retirees younger than that should look at their income each year and in conjunction with their financial advisor, decide if they have room in their current tax bracket to take some additional income from the conversion for that year. For more, see Why Age 70 Is Pivotal for Retirement Planning.

 

Open an HSA Account

If you have one available to you while you are working, think about opening an HSA account if you have a high-deductible health insurance plan. In 2016, individuals can contribute up to $3,350 per year; it rises to $3,400 in 2017. Families can contribute $6,750 in both years. If you're age 55 or older, you can put in an additional $1,000.

 

The funds in an HSA can grow tax free. The real opportunity here for retirement savers is for those who can afford to pay out-of-pocket medical expenses from other sources while they are working and let the amounts in the HSA accumulate until retirement to cover medical costs that Fidelity now projects at $245,000 for a retiree couple where both spouses are age 65. (For more, see: How to Use Your HSA for Retirement.) Withdrawals to cover qualified medical expenses are tax-free.

 

Choose the Specific Share Method for Cost Basis

For investments held in taxable accounts, it is important to choose the specific share identification method of determining your cost basis when you have purchased multiple lots of a holding. This will allow you to maximize strategies such as tax-loss harvesting and to best match capital gains and losses. Tax-efficiency in your taxable holdings can help ensure that more is left for your retirement.

 

Financial advisors can help clients to determine cost basis and advise them on this method of doing so.

 

Manage Capital Gains

In years when your taxable investments are throwing off large distributions – to the extent that a portion of them are capital gains – you might utilize tax-loss harvesting to offset the impact of some of these gains.

 

As always, executing this strategy should only be done if it fits with your overall investment strategy and not simply as a tax-saving measure. That said, tax management can be a solid tactic in helping the taxable portion of your retirement savings portfolio grow.

 

 

The Bottom Line

Saving for retirement is mostly about the amount that is saved. But at all phases of saving for retirement there are things investors can do to help mitigate taxes that can add to the amount ultimately available in retirement. This is an area where knowledgeable and experienced financial advisors can add real value to your retirement planning. (For more, see: 5 Investments You Can't Hold in an IRA.)

 

 

Read more: Taxes on Retirement Assets: How to Pay Less | Investopedia 

What Will Get You Audited by the IRS on 2016 Taxes

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By Amy Fontinelle | Updated April 8, 2017

 

The Internal Revenue Service (IRS) collects about $7 for every $1 it spends on enforcement, so it’s no wonder the agency audited more than 1.2 million tax returns for 2015, often finding them through the use of IRS audit flags. Even though at present Chances of a Tax Audit [Are] Lowest in Years – Maybe Ever, it still pays to play it safe. Certain items will always put you at higher risk of an audit, such as having a high income or claiming travel and entertainment expenses for your business.

 

What you may not know is that the IRS also has specific enforcement priorities each year, generally based on areas in which it is losing a lot of money due to fraud.

 

IRS Audit Triggers for 2016 Individual Tax Returns

You should know about these five enforcement priorities so you can be extra careful about only claiming what you’re allowed to claim and keeping thorough records to support your return in case you are audited. This is not a complete list; rather, it’s a compendium of items that are likely to affect large numbers of taxpayers. (For more, see 10 IRS Audit Red Flags and 6 Big IRS Red Flags for Retirees.)

 

1. 100% Business-Vehicle-Usage Claims

 

“It’s a red flag to say you have a vehicle and use it 100% for business,” says enrolled agent, accredited tax advisor, and accredited tax preparer Abby Eisenkraft, author of “101 Ways to Stay Off the IRS Radar” and CEO of Choice Tax Solutions Inc. in New York City. While 100% business usage might be legitimate for a few people, most people will also use that vehicle to drive to and from work, and the IRS considers this a commuting expense, which is not a business deduction but a personal expense. People also commonly use business vehicles for personal errands. “To claim 100% business usage, you would need another vehicle to get to and from work and show that you didn’t use the business vehicle for personal use,” Eisenkraft explains.

 

The IRS specifies the rules for deducting the cost of a vehicle you use for business in Topic 510, Business Use of a Car. You can choose from two methods: the standard mileage rate (54 cents per mile in 2016) or the actual expense method. If you qualify to use either method, then you are encouraged to use the one that gives you the larger deduction. You must keep detailed records of your business vehicle use and expenses to substantiate your deduction. (For more, see What to Do If You Get Audited.)

 

2. Alimony Deductions

 

The first requirement for a payment to be considered alimony for IRS purposes is that it is stipulated by a divorce decree – in other words, it is not voluntary. The payer and recipient also must not file a joint return with each other and, if legally divorced, must not be members of the same household. The money must be specifically for spousal support – not child support, property support or some other form of payment. Alimony payments are deductible to the payer even if the taxpayer doesn’t itemize and are counted as taxable income to the recipient. IRS Publication 504 has further details.

 

“If you received alimony and omit reporting it on your tax return, it’s an easy crosscheck for the IRS,” Eisenkraft writes in her book. “The payer, who certainly wants the deduction, must report your name and Social Security number in order to get the deduction. The IRS will compare returns to make sure everything is in order.” Joshua Zimmelman, president of Westwood Tax & Consulting in Rockville Centre, N.Y., adds that if two ex-spouses unevenly report the payment and receipt of alimony, it may cause one or both parties to be audited. (For more, see Why People Don’t Lie on Their Tax Returns.)

 

3. Rental-Property-Loss Deductions

 

“The red flag of rental losses comes into play when someone claims to be a real estate professional when they have a few rental properties,” Eisenkraft says. People like to claim to be real estate pros so they can treat their real estate income as business income and gain more business deductions.

 

The IRS generally considers rental real estate activities to be passive activities – ones where you receive income from the use of tangible property rather than from providing a service. As a result of this categorization, you can’t usually deduct your losses unless you have income from other passive activities, such as trade or business activities in which you did not materially participate, to offset those losses. You can, however, carry excess losses forward to the next tax year.

 

The only time real estate rental income is not considered passive income is if you are a real estate professional, defined by the IRS as someone who performs more than 750 hours of real estate business per year and more than half of whose annual business activity is in real property trades or businesses in which that person materially participates. See IRS Publication 925 for details. The IRS will look at a number of factors, Eisenkraft says – including whether an individual has a full-time day job that is the source of most of his or her income and that accounts for most of his or her time – to see if the taxpayer truly qualifies for business treatment as opposed to passive activity treatment.

 

4. Large Schedule C Loss From an Activity That Looks Like a Hobby

 

Some people are tempted to classify their hobbies as businesses so they can deduct their expenses. If your hobby is consistently profitable, your deductions may be justified. If not, watch out.

 

The IRS defines a business activity as something you do primarily for income or profit and that you are involved in continually and regularly. The IRS will likely consider your activity a business that you engage in for profit if it is profitable for three out of five consecutive years. But that five-year period doesn’t begin until the first year when you show a profit, and you don’t get the benefit of the doubt until you have three profitable years.

 

These are just guidelines, not rules, but they are tricky, and you may need the help of a tax professional to glean how you’d likely be judged in an IRS audit. Furthermore, the IRS instructs its examiners to “be alert for situations where the taxpayer may have manipulated income and or expenses to meet the presumption rule determination.”

 

Just because your income comes from a hobby doesn’t mean you don’t have to report it; you do, on line 21 of form 1040. And you can offset the income associated with your hobby with the expenses associated with your hobby. You just can’t claim a loss for your hobby to offset your ordinary income.

 

Activities with a large tax benefit to the taxpayer or with large expenses and little or no income will be scrutinized more carefully. The IRS even lists certain activities that it deems to have a higher chance of actually being hobbies and not businesses: airplane charter, artist, auto racing, bowling, craft sales, direct sales, dog breeding, entertainer, farming, fishing, gambling, horse racing, horse breeding, motorcross racing, photography, rentals, stamp collecting, yacht charter, and writing.

 

Eisenkraft writes in her book that a former client of hers bragged about reporting a loss on a side business for 20 years. She says that while business can have losses, so many years of losses just means that the taxpayer hasn’t been caught yet. “If you haven’t made any profit in decades, that’s a good indication that you have no profit motive, no business acumen and it’s time to shut down. Or admit that it’s a hobby, not a business,” Eisenkraft writes.

 

5. Earned Income Tax Credit Claims

 

The IRS has experienced so much fraud related to refundable tax credits that it is delaying refunds this year to filers who claim some of them, including the earned income tax credit (EITC or EIC). Refundable tax credits are especially susceptible to fraudulent claims, because you can still get paid for them even if you have no tax liability, whereas other credits at best reduce your tax liability to zero. People commit EITC fraud by inventing a fake business or underreporting business income and/or by claiming someone else’s children as their own.

 

Taxpayers may qualify to claim the EITC if they have a limited amount of earned income: for example, a maximum of $44,846 in 2016 for taxpayers who are married filing jointly and have one qualifying child. This family would qualify for a credit of up to $3,373. Penalties for fraudulent claiming of tax credits include being barred from claiming the credit in future years and civil penalties.

 

Eisenkraft writes that the government can easily spot fraudulent returns, because taxpayers claim just the right amount of income to qualify. Using a tax preparer won’t spare you; you’ll get in trouble, and so will the preparer if you’re caught. Use the IRS’s EITC Assistant to see if you qualify to claim this credit. If you claim the EITC, be prepared to substantiate it with income and expense records for your business (if applicable) and with proof that the children you have claimed live with you and qualify.

 

Xavier Epps, owner of XNE Financial Advising in Alexandria, Va., and an IRS registered tax return preparer, says that the IRS will have more time this year to review in detail the returns of filers claiming the EITC and check systems to see if the person claiming the refund is due it. In the past the IRS would issue the refund and only later look into whether the taxpayer was qualified to claim it. (For more, see Are IRS Audits Random?)

 

How to Avoid Tax Trouble

“The best way for taxpayers to avoid making mistakes on these items is to keep all documentation and to remember to have an open dialogue with your tax preparer when preparing your taxes,” says Raymond Haller, a tax partner at accounting firm Grassi & Co. in Jericho, N.Y. “If your tax preparer believes you may be pushing the envelope, stop and ask yourself these questions,” he says:

 

Is the expense really ordinary and necessary, and do I have proper documentation to provide the IRS if I am audited? If the answer is no to either, then the question becomes:

Is saving a few thousand dollars in tax today worth the headache in the future if I am selected for audit and have to pay these taxes with penalties and interest plus additional professional fees to represent me?

Further, he explains, once you get on the IRS’s radar, it will likely audit you again in the future to make sure you’re complying with tax law. (For more, see Should You Represent Yourself vs. the IRS?)

 

The Bottom Line

A final note: Scammers love to use peoples’ deep-seated fear of an IRS audit to steal from them. Don’t talk to anyone who calls you saying they are from the IRS and don’t respond to any emails purporting to be from the IRS. Identity theft is another problem: Take immediate action by filing a police report and alerting the IRS if you receive any tax notices regarding a business you don’t own or a W-2 from a company for which you haven’t worked.

 

If you have any questions about the legitimacy of any tax-related notice or phone call, contact the IRS directly, using the information at IRS.gov, the official IRS website. (For more, see 5 Tips to Stay Safe From IRS Tax Scams.)

 

 

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How to Handle Missing or Incorrect Forms W-2

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From Parker’s Federal Tax Bulletin. Issue 134

 

If a missing or corrected Form W-2 is not received by the end of February, the IRS should be contacted, and will attempt to obtain the information from the employer.

 

The Protecting Americans from Tax Hikes (PATH) Act now requires employers to submit Form W-2 to the Social Security Administration (SSA) by January 31. The PATH Act did not alter the long-standing January 31 deadline for furnishing copies of these forms to employees. According to the IRS, if a Form W-2 is not received by January 31 or the information is incorrect on the form, the taxpayer should contact the employer.

 

Missing or Incorrect Forms W-2

If a missing or corrected Form W-2 is not received by February 28, the IRS should be contacted at 800-829-1040 for assistance. When calling the IRS, have the following information on hand:

(1) The taxpayer's name, address (including zip code), social security number, phone number, and dates of employment.

 

(2) The employer's name and complete address (including zip code), employer identification number if known (taxpayers can look at the prior year's form if the same employer), and phone number.

The IRS will send the employer a letter requesting it furnish a corrected Form W-2 within 10 days. The letter also reminds the employer of its responsibility to provide a correct Form W-2 and the penalties for failing to do so.

 

The IRS will send the taxpayer a letter with instructions and Form 4852, Substitute for Form W-2, Wage, and Tax Statement, or Form 1099-R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. The taxpayer can submit the Form 4852 with their Form 1040 if the employer doesn't provide a corrected Form W-2 by the return filing deadline. If that occurs, the taxpayer will need to estimate the wages earned and taxes withheld by that employer, which can be based on the end-of-year pay stub, if available. As would be expected, filing Form 4852 with the return may result in processing delays while the IRS verifies the information provided.

 

The IRS recommends that taxpayers keep a copy of the Form 4852 until they begin receiving social security benefits, in case there's a question about their work record and/or earnings for the year. After September 30 following the year entered on line 4 of the Form 4852, taxpayers can access their online Social Security account or contact their local SSA office to verify the wages reported by the employer.

 

Amended Return May be Necessary

Taxpayers must file their tax return or request an extension of time by the due date of the return, even if Form W-2 has not been received. Taxpayers who receive a corrected form after they file their return with information differing from what was reported on the return should amend the return on Form 1040X, Amended U.S. Individual Income Tax Return.

 

 

For further discussion on missing Form W-2s, see Parker Tax ¶252,595.

A Tax Primer for Homeowners

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By Lisa Smith | Investopedia

 

The tax deductibility of mortgage interest is a familiar benefit to homeowners, but it is not the only tax-related issue that homeowners need to know about. Some of the greatest challenges of owning a home come in the form of the tax regulations that relate to points and cost basis. Fortunately, a little knowledge goes a long way toward clearing up the mysteries. In this article, we'll give you the lowdown on mortgage basis points and show you how they figure into your home's value, cost basis and, ultimately, your tax liability.

 

A Primer on Points

Points are specific charges that are paid by a borrower to enter into a mortgage. Since points are considered prepaid interest, a borrower can use them as deductions. However, when it comes to mortgages, it's easy to be confused about whether a homebuyer may take a full tax deduction for points, which generally amount to 1-3% of the loan value. Generally, because points are prepaid interest, you must deduct them over the term of the mortgage. However, the Internal Revenue Service (IRS) states that points are deductible in the year of actual payment, as long as the following requirements are met:

 

- The loan is secured by your primary residence (the one you live in most of the time)

 

- Paying points is an established practice in your area

 

- The points paid were not more than the amount generally charged in your geographical area

 

- You use the cash method of accounting, which means that you report income in the year that you receive it and deduct expenses in the year that you pay them

 

- The points were not paid for items that are usually stated separately on the settlement sheet, such as appraisal fees, inspection fees, title fees, attorney fees or property taxes

 

- You provided funds at or before closing that were at least as much as the points charged, not counting points paid by the seller, and you did not borrow the funds from your lender or mortgage broker to pay the points

 

- You used your loan to buy or build your primary residence

 

- The points were computed as a percentage of the principal of the mortgage, and the amount is clearly shown on your settlement statement

 

In some circumstances, the points must be deducted over the lifetime of the loan. For example, points for a 30-year loan would be deducted at a rate of 1/30 per year. Points that fall into this category include those paid:

 

- on a mortgage for a second home;

 

- to refinance a loan (unless the loan is used to improve your primary residence), which includes points paid when refinancing to obtain a lower interest rate;

 

- on a home-equity loan that is not used to buy, build or improve your primary residence. If a portion of the loan is used to buy, build or improve your primary residence, the corresponding amount of points may be deducted in the year that the points are paid.

 

If the loan is repaid early, all remaining points may be deducted immediately. Also, you need to keep in mind that the IRS Form 1098 that you will receive in January lists the amount of deductible interest that you have paid on your mortgage but does not keep track of amortized points. Be sure to include an appropriate explanation of any deduction for amortized points when you file your tax return. If the points were paid by the seller, the buyer can deduct them on his or her tax return but must reduce the cost basis of the home by a corresponding amount. For a comprehensive overview of points from the IRS, please visit the most recent report.

 

Buying and Selling: A Closer Look at Basis

Cost basis, which is the original value of an asset for tax purposes, is often the last thing on most buyers' minds when they purchase a new home. While you may not be thinking about it, the method by which you acquired the property and what you do with it after the acquisition affects the determination of basis and, ultimately, the gain on which any tax must eventually be paid.

 

Understanding the Tax

If you owned and lived in your home (primary residence) for at least two of the five years prior to selling it, you may not need to pay any tax at all, thanks to the Taxpayer Relief Act of 1997. Prior to May 7, 1997, homeowners were required to pay capital gains tax on profits from the sale of a home, unless the proceeds were used to purchase a more expensive primary residence within two years, or the homeowner was at least 55 years old and claimed a once-in-a-lifetime tax exemption on up to $125,000 in profits from the sale.

 

Today, a single person pays no tax on up to $250,000 in capital gains generated by the sale of a primary residence, and married couples pay no tax on up to $500,000, provided you lived in your home for no fewer than two years in the five-year period before the sale. If you sold a home before 1997 and rolled the profit into your new primary residence, you must include the amount of rollover profit when calculating your tax basis. Under special circumstances, such as declining health, a change in employment or divorce, the two-year requirement is waived, and the tax exemption is based on the number of months lived in the home. For example, if the seller lived in the home for 12 months, the number of months lived in the home is divided by 24 (the number of months in two years). The result is 0.5, which entitles the homeowner to a 50% exemption on any capital gains generated by the sale of the property. Military personnel who move due to a mandatory redeployment are exempt from the two-year rule.

 

While $250,000 worth of capital gains ($500,000 for married couples) may seem like a significant exemption, skyrocketing housing markets in many areas of the country over the past decade, have caused even modest homes to appreciate significantly over time. Since you never know what the future will bring in your local real estate market, it is important to keep track of your cost basis and understand what, if any, tax liability will be generated when you sell.

 

Calculating Basis

To determine the cost basis on your home, you need to add the cost of any capital improvements that you've made to the home to the price that you paid for the home. Capital improvements are generally defined as anything that increases your property's value and its life expectancy. Such improvements could include enlarging a kitchen, installing a swimming pool or adding an extra bedroom. Next, you need to subtract the amount of any seller-paid points, depreciation, and losses.

 

Example: Calculating Cost Basis

Home Purchase Price: $300,000

Seller-Paid Points: -$6,000

Swimming Pool: $20,000

Adjusted Cost Basis: $314,000

 

The Bottom Line

Although housing prices took a major hit in the mortgage crisis that occurred in 2007, if history continues to repeat itself in a fashion similar to previous housing booms, many homeowners will see the value of their homes appreciate over the long term. Likewise, the odds are good that the capital gains tax laws will change yet again. Because nobody can tell for sure what the future will bring, it is best to have a full understanding of your home's value, basis, and tax liability at all times. Someday, when you need the information, you'll be glad to have it close at hand.

 

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There is a fine line between COOPERATION and INCRIMINATION with the IRS

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Written by Weisberg Kainen Mark, PL

The manner in which one responds to being selected for an IRS audit can run the gamut of possible reactions, but typically the response of the average taxpayer will be one of two possible extremes. One extreme is sticking the head in the sand and completely ignoring the request or giving so little information as to be considered uncooperative. The other is to provide excessive information in order to prove how cooperative you are, including information that could lead to a further tax liability or worse. As with most situations, the middle ground might be the safest place to be.

In the middle ground, there is cooperation without oversharing. There is responsiveness, but not solicitousness. There is honesty, but not self-incrimination. If you are the subject of an IRS audit, you may want to be in that middle ground because the consequences of the two extremes may be devastating.

Failure to cooperate with the IRS in an audit matter may lead to a staggering array of penalties and if the revenue agent believes there are badges of fraud it could include a referral to a special agent of Criminal Investigation to commence an IRS criminal tax investigation. If the investigation remains civil it may lead to substantial penalties on top of what is already owed in taxes. Other consequences of the increased liability may later include garnishment for whatever is ultimately owed and the freezing of bank accounts and assets. Failing to provide complete and accurate information to the IRS in an audit can trigger a cascade of consequences. Of course, collection issues would be better dealt in a separate blog.  Enough to say, owing money to the IRS is not good.

On the flip side, over- enthusiastic cooperation is equally fraught with hazards. Typically, the IRS may ask very specific questions in an audit, usually geared toward a particular area of the return or even a specific transaction. This would not be the time to offer that you are concerned about whether your deductions are legitimate or to claim that you gave an educated guess as to how much income you made from a particular side business since you didn’t bother to keep records. In other words, stick to the questions that the IRS is asking and do not look to open up a can of worms.

The consequences of over-cooperation can be as disastrous as not cooperating at all. The scope of the audit might be widened resulting in higher liability and exposure, or you may not have as advantageous of a bargaining position should it come to negotiating at a higher level within the IRS such as at an Appeal conference.

The IRS is a large and powerful agency that has the potential to make your life hard. You can unknowingly compound this potential by how you respond to the IRS’ inquiries. So, the best step that you can take when you receive that notice of audit or a letter requesting more information is to contact a skilled tax dispute attorney first. This attorney can help you understand the requests that are being made, the type of information that is being sought, and most importantly, how to respond and with what type of information. They can advise as to when certain requests are overbroad and require a more narrow and nuanced response or when disclosure may be the best road forward.

Since it is so crucial to have competent and experienced tax dispute counsel on the front end, should you receive that letter from IRS, consider making your first call to the attorneys at Weisberg Kainen Mark. They have the necessary experience dealing with the IRS to assist you and can give invaluable guidance on how and when to respond to the IRS to minimize liability while satisfying the IRS’ inquiries.    

 

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The Top Five Business Tax Issues of 2017

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Written by ISAAC M. O'BANNON, Managing Editor of CPA Practice Advisor

 

“The tax action list for business leaders in 2017 is relatively short, but it is critical for organizational success,” says Jeffrey C. LeSage, Vice Chairman-Tax at KPMG LLP. “In an uncertain and disruptive business environment, the watchword for success is ‘nimble.’ Our list of issues highlights how tax can continue to be a key driver of success in 21st century organizations.”

 

Here are LeSage’s five action items for business leaders in 2017:

 

1.            Monitor New U.S. Tax Landscape – For the first time in decades, the prospects for substantive tax reform appear very good – if Senate Republicans and Democrats can agree to the outlines of a major tax overhaul, or if Republicans can push through the plan on their own. On the table: significant corporate rate reductions, a tax system where only income earned inside the U.S. is taxed, a border adjustable tax and special rates for pass-through income.

 

“U.S. tax reform is more than just rate reduction, and any plan will likely have winners and losers. Company leaders need to model the impact of various proposals, aggressively engage with legislators and make their voices heard as the process moves ahead,” said KPMG’s LeSage.

 

2.            Unravel International Regulation – Companies will continue to grapple with the impact of the OECD’s Base Erosion and Profit Shifting (BEPS) initiative in countries where they operate this year—especially around country-by-country reporting. On the plus side, complying with new regulations often can ultimately improve their business operations. “Putting in systems that unlock and share tax data and sharing information across the entire organization can give companies a competitive advantage,” says KPMG’s LeSage.

 

3.            Corral Compliance Issues – New laws, more demands from global regulators, and increased risk of tax audits are making tax compliance more complicated, time-consuming and costly. “Transforming their tax departments into state-of-the-art, scalable, integrated compliance functions should be on every chief tax officer’s (CTOs) agenda in 2017,” says LeSage. “Being able to access and act on information quickly, with minimal disruption to their business, can reap benefits.”

 

4.            Enhance Innovation – In 2017, a high priority for business leaders should be digitally enabling their workforces – through data and analytics, automation, robotics, and cognitive intelligence – so they remain relevant to their organizations. “Combining tax technical knowledge, large sets of data and powerful new tools can enable CTOs to help their organizations make smarter, innovative, real-time decisions that positively impact the bottom line,” says LeSage.

 

5.            Transforming Tax Talent – As the scope and role of the tax function continue to evolve, so do the skills that tax professionals need to be business-minded, digitally-savvy collaborators within their teams and the broader organization. “Sometimes it’s tough to attract, develop and retain these professionals in tax departments,” says LeSage, “but savvy leaders know that investing in rotations, cognitive training and leadership experience will help their people develop the skill sets and knowledge they need for them and their companies to succeed.”

 

 

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Growing number of Americans retiring outside the US

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A growing number of Americans are retiring outside the United States.In many cases, they’re looking for a way to stretch their retirement income.The percent of American retirees living abroad rose 17 percent between 2010 and 2015. All told, the Social Security Administration says there are just under 400,000 American retirees living elsewhere.Countries they’ve chosen most often: Canada, Japan, Mexico, Germany and the United Kingdom. Viviana Rojas, an associate professor at the University of Texas at San Antonio, says not speaking the language or knowing the culture may be a hurdle for retirees moving to another country.

 

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How tax changes will impact you

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By Raul Amoros.  HowMuch.net

 

“Reduce taxes across-the-board, especially for working and middle-income Americans”: that was Trump’s campaign pledge. And now the Donald is about to move into the White House and is backed by Republican majorities in both House and Senate. Which means he has a real shot at fulfilling that pledge to the letter. So, what are the specifics of his plan, and how would it affect you?

 

First and foremost, Trump’s income tax reform is a simplification: he wants to cut down the number of tax bands from seven to three. But simplifying is not necessarily the same as reducing taxes. As this graph demonstrates, some taxpayers would definitely benefit from Trump’s tax reform – especially those at the higher end of the income scale. There are others, however, who would see their tax rates go up. Especially those on lower incomes.

 

The current income tax bands range from 10% and 15% at the lower end of the scale over 25%, 28%, 33% and 35% in the middle to the top band of 40%. Under the Trump plan, only three tax bands would remain: 12%, 25% and 33%.

 

This would be good news for everyone currently in the top two brackets (35% and 40%). These taxpayers would see their effective rate drop down to 33%, by 2 and 7 percentage points respectively. Conversely, the simplification would bad news for the taxpayers in the lowest bracket (10%). These would see their effective tax rate go up by 2 percentage points, to 12%.

 

But even in the middle, where many would stay in the same bands as before (25% and 33%), there would be losers as well as winners. Most people in the 15% bracket would drop down to a 12% rate. But a tiny sliver of top earners in this bracket (earning between $37,500 and $37,650) would have the misfortune of seeing their effective tax rate go up by 10 percentage points, to 25%.

 

A similar thing would happen to the old 28% bracket: taxpayers with incomes between $91,150 and $112,500 would drop three percentage points to 25%, while those between $112,500 and $190,150 would see their tax rate go up 5 percentage points to 33%.

 

All income amounts quoted here apply to single filers (left side of the graph); but the graph also shows the changes for joint filers (on the right). The calculation is pretty easy – double the amounts for the single filers.

 

The graph does not take into account other aspects of the Trump tax plan not directly related to the changes to income tax bands, such as the increase of standard deductions and a cap on itemized deductions, although of course these would also have an impact on net incomes.

 

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State-by-State Minimum Wage Changes for 2017

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By James Paille, CPP

 

Several states and localities have announced minimum wage changes for 2017.

 

Twenty-five states, plus the District of Columbia, index their minimum wages to rise automatically with the cost of living. Four more states, also including the District of Columbia, will index minimum wage increases annually beginning in future years: Alaska (2017), Washington, D.C. (2017), Minnesota (2018), Michigan (2019) and Vermont (2019).

 

The following table shows the state minimum wages (as well as some localities) and 2017 changes and proposals. This list changes daily, so make sure to keep an eye out for changes.

 

State   City     2017 Minimum Wage

AK                 $8.75

AL                 FED ($7.25; $9.50/$10.10 proposed)

AR                 $7.50; $8.50 (new) 2017

AZ                 $8.05; $10 (proposed) 1/1/17

CA                 $10; $10.50 (new) 2017 >25 employees

            Oakland          $12.25

            San Diego       $10.50; $11.50 (new) 2017; $11.05

            San Francisco $13; $14; $15 (7/16, 17, 18)

            San Jose Berkeley – NEW     10.30; new wages: $10.40 1/1/17, $11 .00, $12.53 10/1/16, $13.75 10/1/17, $15 10/1/18

            San Mateo      12.25; $12 (proposed) 1/1/17

            California computer professionals     Overtime: $41.85 2016, $42.39 2017

CO                 8.31; $8.56 (proposed) 1/1/17

CT                  $9.60

DC                 $11.50 7/1/2016

DE                 $8.25

FL                  $8.05; $8.10 (new) 1/1/17

GA                 $5.15 (state has lower minimum wage than FED, but FED prevails)

HI                  $8.50 2016; new wages: $9.25 2017, $10.10 2018

IA                  $7.25

ID                  $7.25

IL                   $8.25

IN                  $7.25

KS                  $7.25

KY                 $7.25

LA                 FED ($7.25; $9.50/$10.10 proposed)

MA                $9.00 ; new wages: $10.00 1/16, $11.00 1/17 (needs governor signing)

            MA (Sundays)            $12.00

MD                $8.75 (7/1/16); new wages: $9.25 (7/1/17), $10.10 (7/1/18)

ME                 $7.50; $9 (proposed) 1/1/17

            Portland          new wages: $10.10,   $10.68 1/1/17

MI                  $8.50 1/1/16; new wages: $8.90 1/1/17, $9.25 1/1/18

MN                $9.50 8/1/16; $7.75 (new) <$500,000 gross sales; $10 (proposed) 1/1/17

MO                $7.65

            Kansas City    $8.50; $9.00 1/1/16

            St. Louis         new wages: $10.00 1/1/17, $11.00 1/1/18

MS                 FED ($7.25; $9.50/$10.10 proposed)

MT                 $8.05; $8.15 (new) 1/1/17

NC                 $7.25

ND                 $7.25

NE                 $9.00 (proposed)

NH                 $7.25

NJ                  $8.38; $8.44 (new) 1/1/17

NM                $7.50 ($1.00 less healthcare)

            Albuquerque   $8.75; $7.75 with healthcare

            Santa Fe          $10.84

NV                 $8.25, $7.25

NY                 new wages: $9.00 2016, $9.70 2017 (NYC higher)

            New York City – living wage 10/14 new wages: $13.13 without health insurance, $11.50 with health insurance

            Rochester        new wages: $12.81 without health insurance, $11.47 with health insurance

OH                 $8.10, $7.25 (if revenue is <$295,000); new wages: $8.15 1/1/17, $7.25 <299,000

OK                 $7.25

OR                 $9.25

PA                  $7.25

PR                  $7.25

RI                   $9.60

SC                  FED ($7.25; $9.50/$10.10 proposed)

SD                  $8.55; $8.65 1/1/17

TN                  FED ($7.25; $9.50/$10.10 proposed)

TX                  $7.25

UT                  $7.25

VA                 $7.25

VT                  $9.60; new wages: $10.00 2017, $10.50 2018

WA                $9.47 2016; $9.53 (new) 1/1 17

            Seattle new wages: $13-12 2016, $15-13 2017 (if the business has <500 employees)

WI                  $7.25

WV                $8.75 1/1/16

WY                $5.15 (state has lower minimum wage than FED, but FED prevails)

Many additional localities have pending legislation for minimum wage changes so stay on the lookout for more increases. Minimum wage rules are always a moving target, so it’s important to watch for changes that affect your and your clients’ companies.

 

The tables above are regular minimum wage rules. Many states have tipped employee minimum wage rules and amounts that are lower. One notable exception is California, which does not have a lower minimum wage for tipped employees. And one industry to watch is restaurants—across the country, more restaurants are eliminating tips and increased wages to staff to state regular minimums.

 

If your firm uses Accounting CS® Payroll, the Payroll Form and Filing Information portlet on the Home dashboard provides the following information: payroll form availability, form due dates, form filing addresses, tax payment information, agency contact information and other payroll resources. Learn more with a detailed list of recent updates to payroll tax rates, limits and minimum wage updates.

_______

James Paille CPP is the Director of Operations for Thomson Reuters myPay Solutions. He has been an executive manager in the payroll service industry for more than 30 years, specializing in managing multi-location offices. Jim is President of the American Payroll Association as well as a member of the National Speakers Bureau and chair of the CPP Certification Review Panel. He holds a Bachelor of Science in Accounting from St. John Fisher College in Rochester, NY.

 

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TIGTA Presses IRS To Pursue High Income Nonfilers

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By Ashlea Ebeling.  Forbes Staff

 

The Internal Revenue Service watchdog TIGTA says the IRS is ignoring delinquent taxpayers who owe billions of dollars, and it looks like a lot of them won’t ever hear from the IRS. The IRS failed to identify and contact approximately 1.9 million nonfilers in tax years 2012 and 2013 with expired extensions, and as of May 2016, they still owed an estimated $7.4 billion, according to a new Treasury Inspector General for Tax Administration audit report. At a minimum, TIGTA says the IRS should be pursuing high-income nonfilers on extension. A typical balance due: $42,735.

 

“ It’s a great time to be a tax dodger” says Robert E. Mckenzie, a tax lawyer with Arnstein & Lehr in Chicago. But he doesn’t put the blame on the IRS, rather on Congress. “Our Congress continues to empower and enable noncompliant taxpayers by cutting the IRS budget. The 81% of Americans who are fully compliant are receiving less and less service while the IRS lacks the resources to pursue known noncompliant taxpayers,” he says.

 

Nonfilers account for $26 billion (6%) of the $458 billion estimated tax gap—that measures taxpayers who don’t file their tax returns and pay the correct tax on time. In a typical year, the IRS identifies more than 7 million nonfilers and sends them delinquency notices. High-income nonfilers are supposed to be a high priority, according to IRS procedures. In February 2014, the IRS outlined goals to increase nonfiler compliance, but as of July 2016, it hadn’t implemented any of the proposed initiatives, the report says.

 

The TIGTA report, Improvements Are Needed to the IRS’ Nonfiler Program, explores how programming errors, managerial decisions and resource constraints led to the nonfiler shortcomings and substantial losses to the Treasury. Tax collections from nonfilers in tax years 2012 and 2013 were only $433 million and $290 million, compared to $4.3 billion and $3.6 billion for TY 2010 and 2011.

 

How does the IRS track down nonfilers in the first place? There’s third party reporting—those are forms sent to both the IRS and the taxpayer, including Form W-2 for wages, Form 1099-Misc. for self-employment income, and Form 1099-B for stock sales. The IRS also looks at past filers who later fail to file.

 

The snafu in 2012 was that programming errors basically meant the system overlooked nonfilers who had expired extensions, and approximately half of the high income nonfilers weren’t identified. They’re the ones who typically have a higher filing rate with higher tax dollars collected per return once they get an IRS notice. The nonfiler program is done on a stand-alone basis for each tax year, so it’s unlikely the IRS will revisit the missed 2012 tax year nonfiler population.

 

The IRS caught the lack of notification problems while the nonfiler program for tax year 2013 was underway and fixed the programming mistakes. But it canceled notifications to the 2013 tax year nonfilers on extension due to reduced staffing and the unavailability of overtime. Instead, IRS officials told TIGTA that it chose to work on establishing installment agreements—payment plans—for taxpayers who had filed returns but failed to pay in full. TIGTA was critical of this: “While we understand the resource constraints, a decision to not address any nonfilers with expired extensions is concerning, especially because IRS procedures require that notices be sent to certain nonfiler cases, regardless of the balance due, as such cases have historically been considered to be high compliance risk cases.”

 

TIGTA calculated that notifying the 2013 high income nonfilers with expired extensions could bring $3.8 billion alone in collections and recommended that the IRS notify them now since they’ve already been identified, just not notified. The IRS agreed to review this subset of 127,000 outstanding cases, but noted that it expects potential collections more in the $2.7 billion range.

 

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IRS Offshore Tax Compliance Push Nets $10 Billion

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By Michael Cohn

Washington, D.C. By Michael Cohn

 

The Internal Revenue Service’s efforts to prod taxpayers to disclose their offshore bank accounts and pay taxes on their holdings have reached the $10 billion mark and prompted over 100,000 taxpayers to come forward, the IRS said Friday.

 

The latest figures indicate 55,800 taxpayers have entered the IRS’s Offshore Voluntary Disclosure Program to resolve their tax obligations, paying more than $9.9 billion in taxes, interest and penalties since 2009. On top of that, an additional 48,000 taxpayers who have not willfully avoid paying taxes have made use of separate streamlined procedures to correct their previous omissions and meet their federal tax obligations, paying approximately $450 million in taxes, interest and penalties.

 

The Offshore Voluntary Disclosure Program, or OVDP, allows taxpayers who have undisclosed income from foreign financial accounts and assets the chance to catch up with their tax filings and information reporting obligations. Taxpayers can either voluntarily disclose their foreign financial accounts and assets, or else risk detection by the IRS at a later date, exposing them to more severe penalties and possible criminal prosecution.

 

The IRS has passed several major milestones in our offshore efforts, collecting a combined $10 billion with 100,000 taxpayers coming back into compliance,” said IRS Commissioner John Koskinen in a statement. “As we continue to receive more information on foreign accounts, people’s ability to avoid detection becomes harder and harder. The IRS continues to urge those people with international tax issues to come forward to meet their tax obligations.”

 

The IRS has developed a Streamlined Filing Compliance Procedures that is open to taxpayers who have not been willfully avoiding taxes. Taxpayers in the U.S. and in other countries have been making submissions under the streamlined program. The procedures have led to the submission of over 96,000 delinquent and amended income tax returns from 48,000 taxpayers using these procedures. A separate process exists for taxpayers who have paid their income taxes but not filed certain other information returns, such as the Report of Foreign Bank and Financial Accounts, also known as the FBAR.

 

The IRS recently revised the certification forms used for the streamlined procedures. The most current versions of Forms 14653 and 14654 are available on IRS.gov. In addition, some of the most commonly used phone numbers for the Offshore Voluntary Disclosure Program and the Streamlined Filing Compliance Procedures have changed.

 

The IRS’s series of Offshore Voluntary Disclosure Programs are not the only factor prompting taxpayers to disclose their foreign bank accounts. In 2010, Congress passed the Foreign Account Tax Compliance Act, or FATCA, as part of the HIRE Act. The legislation requires foreign financial institutions to report on the holdings of U.S. customers or else face stiff penalties of up to 30 percent on their income from U.S. sources. To implement the controversial legislation, the Treasury Department signed a series of intergovernmental agreements with the tax authorities in other countries, under most of which the information is first given to the local tax authority, which in turn passes it along to the IRS.

 

This form of automatic third-party account reporting has now entered its second year and is convincing more taxpayers to voluntarily disclose their holdings before their bank provides it to the tax authorities. More information also continues to come to the IRS as a result of the Justice Department’s Swiss Bank Program, the IRS noted. As part of a series of non-prosecution agreements with banks such as UBS, the participating banks continue to offer information on potential non-compliance by U.S. taxpayers.

IRS Grows Increasingly Aggressive In Subjecting Income Of LLC Member To Self-Employment Tax

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Written by Tony Nitti, Forbes contributor. Opinions expressed by Forbes contributors are their own

 

If you’ve worked in the tax preparation world for any measure of time, you’ve assuredly run into the following conundrum:

My client is a member in an LLC. Is his/her share of the LLC’s income subject to self-employment income?

At that point, you went one of two directions:

 

    1. Opened up your tax research software/hard copy Code/Google machine, or

    2. Said “screw it, I’ll exclude it,” and went on with your life. (Ed note: this is the option you took).

 

Had you bothered to take the first option, however, you would have rued your decision, as it likely would have wasted a good chunk of your day. This is because, as hard is it may be to believe, the Code and regulations do not provide any guidance on how to treat an LLC member for purposes of the self-employment tax rules. Late last Friday, however, the IRS provided another form of informal authority that shows just aggressive it will be in pursuing self-employment taxes from certain LLC members, and  to be quite honest, it’s a first of its kind and a stance that warrants our attention.

 

Perhaps we’ve gotten a little ahead of ourselves, however. After all, you can’t appreciate the gravity of as void in the statutory and regulatory authority or the Service’s increasingly aggressive positions on the matter unless you first understand the gravity of the underlying issue: why do we care whether an LLC member is subject to SE tax, and why does no authority exist?

 

Let’s take it on with a little Q&A:

 

Q: I’m glad you decided to start from the beginning, because I confess I’m a bit lost. So…first things first: what is this self-employment tax you speak of?

 

A: /Gives disapproving shake of head and quotes Akryod from Ghostbusters: you never studied.

 

Under IRC Section 1401, “self-employment income” is taxed at 15.3%– 12.4% goes to the Old-Age, Survivors, and Disability Insurance tax, with the remaining 2.9% earmarked for the Hospital Insurance tax. In addition, beginning January 1, 2013, an extra 0.9% tax is tacked on to a taxpayer’s self-employment income in excess of $250,000 (if married filing jointly, $200,000 if single). Thus, the total self-employment tax burden under current law can reach as high as 16.2%, before considering the deduction for one-half of the self-employment tax (not including the new 0.9% surtax) as permitted by IRC Section 164(f).

 

Q: Got it. But that begs another question: What is self-employment income?

 

A: Well, that speaks to the very crux of the issue addressed in the ILM. It gets complicated, so lets take it one step at a time. Under IRC Section 1402, self-employment income is generally defined as the gross income derived by an individual from any trade or business carried on by the individual, less deductions allocated to the business.

 

Q: So how does that apply to a partner in a partnership?

 

A: Great question. Because of the pass-through nature of partnerships, partners are generally considered to be conducting the business of the partnership. As a result, explicitly included within the definition of self-employment income is a partner’s distributive share of income or loss from any trade or business carried on by a partnership.

 

Q: Got it. But what exactly is a partner’s “distributive share” of partnership income?

 

A: There are three ways a partner can receive income from a partnership. If the partner renders services to the partnership, he can be paid wages and receive a W-2, just like any other employee. While this treatment is popular, it’s also very wrong, as Revenue Ruling 69-184 states that “members of a partnership are not employees of the partnership.”

 

The right way to compensate an employee for services rendered is to pay them a “guaranteed payment.” This amount is governed by IRC Section 707 and is subject to self-employment tax (more on this later). Lastly, any net income of the partnership that isn’t paid out to the partners as guaranteed payments is divided among the partners, with each partner including his allocable share of the partnership’s net income (or loss) in his taxable income, whether or not the partnership actually distributes this income to the partner. This is known as the partner’s “distributive share” under IRC Section 702.

 

Q: How ’bout an example?

 

A: Sure. Partnership AB has two equal general partners, A and B. AB generates $100,000 of net income in 2016 before considering guaranteed payments. A performs services for AB, and is paid $20,000 in guaranteed payments. This guaranteed payment is included in the taxable income of A, but is also deductible by AB, reducing AB’s net income to $80,000. This $80,000 is then divided equally between A and B, with each including $40,000 attributable to the partnership in their taxable income. This $40,000 represents each partner’s “distributive share” of the partnership income, and is included in the income of A and B regardless of whether they ever see a penny in cash distributions. From a self-employment income  perspective, A would include in his self-employment income both the $20,000 of guaranteed payment and his $40,000 distributive share. B would include in his self-employment income only his $40,000 distributive share.

 

Q: OK, so what’s the big deal? You said that guaranteed payments are included in self-employment income, and IRC Section 1402 provides that a partner’s distributive share of partnership income is included in self-employment income, so where’s the controversy?

 

A: IRC Section 1402, like many provisions of the Code, starts off by setting the general rule– i.e., all trade or business income, including a partner’s distributive share of partnership income, is included in self-employment income–before listing a host of exceptions to that general rule. Specific to this discussion, IRC Section 1402(a)(13) provides that the distributive share of partnership income of a limited partner– other than guaranteed payments–is NOT included in self-employment income.

 

Q: Great. On to our next definition. What is a limited partner?

 

A: That, good sir, is exactly what everybody is struggling to figure out, because there is no definition to be found anywhere in the Code. Understand this, however: when IRC Section 1402(a)(13) was added to the statute in 1977, LLCs–the most popular form of doing business as a partnership today–did not yet exist. So when the statute was written, it was intended for conventional partnership forms like limited partnerships.

 

In a limited partnership, there are two types of partners under state law: general partners and limited partners. General partners are free to manage and control the business; the price they pay for that control, however, is that they have unlimited legal liability. If a creditor cannot be repaid from the partnership, they can pursue the assets of the general partner. A limited partner, to the contrary, has, you guessed it…limited legal liability. A creditor can only take from the limited partner that partner’s investment in the limited partnership, it cannot pursue the limited partner’s personal assets. The cost of that limited liability to the limited partner, at least at the time the exception from self-employment income for limited partners was written into the law– is that under the Revised Uniform Limited Partnership Act of 1976, the limited partner could not take part in control of the partnership.

 

Q: So if a limited partner was barred from participating in the control of the partnership, what did the limited partners really add to the business?

 

A: Great question, and it speaks to the intent of Congress in excluding the distributive share of limited partners from self-employment income. Because a limited partner couldn’t participate in any management of the partnership, the limited partner’s involvement was essentially limited to his cash investment in the partnership. It would follow, then, that the limited partner’s distributive share of partnership income was akin to earnings on a passive investment, rather than income from the active conduct of a trade or business. As a result, Congress decided, it shouldn’t be included in self-employment income. If the limited partner performed any services for the partnership and was paid a guaranteed payment, that guaranteed payment would be included in his self-employment income, however.

 

Q: OK. So, a general partner’s distributive share of partnership income is self-employment income. A limited partner’s distributive share of partnership income is not self-employment income. Seems simple enough. What’s the issue?

 

A: The issue, smart guy, is that after IRC Section 1402(a)(13) was added to the Code,  “Limited Liability Companies” became a thing. In an LLC, unlike a general or limited partnership, ALL of the members of the partnership have limited legal liability. That would seem to indicate that ALL of the members are limited partners. As opposed to limited partners, however, LLC members are permitted to some degree to participate in the management of the LLC, with that permissible degree varying from state to state. As a result, LLC members are a hybrid of general partnership and limited partnership interests that didn’t exist back in 1977, and this poses a huge problem for a tax law that doesn’t yet specifically address the issues created by these hybrid partnership interests.

 

Q: I just checked Wikipedia, and it says LLCs started in Wyoming in 1977. Last time I checked, it’s now 2016. Are you telling me that in 39 years, the IRS couldn’t address how to treat a distributive share of LLC income for self-employment income purposes?

 

A: That’s exactly what I’m telling you. Though, if it makes you feel better, the IRS hasn’t found the time to address how to treat an LLC interest for purposes of the passive activity rules of IRC Section 469, either, but that’s an entirely different conversation. Here’s the problem: In 1997, the IRS issued proposed regulations that would govern whether the distributive share of partnership income of LLC members was included in self-employment income. It basically provided that an LLC member would be treated as a limited partner — and thus the distributive share would NOT be self-employment income– unless the LLC member either 1) had personal liability for the debts of the LLC under state law (this would be pretty rare), 2) has authority under state law to contract on behalf of the LLC, or 3) participated in the trade or business of the LLC for more than 500 hours during the year.

 

Q: Let me guess…the proposed regulations were never finalized?

 

A: That’s right, largely through no fault of the IRS, but rather because powerful people in Congress and media went ballistic at the idea of this “hidden tax increase,” and that’s why were in the mess we’re in. Without any concrete guidance, the IRS and the courts are left to determine whether an LLC interest is akin to a limited partnership interest on a case-by-case basis.

 

Q: So if there’s no guidance saying otherwise, we can exclude the distributive income of an LLC member from SE income, right?

 

A: Sure you can. But as Chris Rock once said, you can also drive a car with your feet, but that doesn’t make it a good idea. Just because nothing in the Code or regulations says you can’t do something, doesn’t mean the IRS won’t argue that you can’t, nor does it mean the courts won’t agree with them.

 

Q: So you’re saying this issue has ended up in the courts? Do tell?

 

A: Fine, but you know…you can read these cases just as easily as I can. Just sayin’. In Renkmeyer, 137 T.C. 137 (2011), a group of practicing lawyers formed an LLP. The partners made minimal capital contributions, and rendered significant legal services on behalf of the LLP. As a service partnership, nearly all of the revenue generated by the LLP could be traced directly to the efforts of its members. As a result, the court sided with the IRS that the members were not “limited partners” under the meaning of Section 1402(a)(13), determining that their distributive shares of LLP income were not attributable to their passive investment in the LLP; rather, the income was attributable to the services provided. Because a true “limited partner” is typically limited under state law from providing management functions and significant services, the partners in Renkmeyer more closely resembled general partners, and thus their distributive shares of income were subject to self-employment tax.

 

In Riether, 919 F. Supp.2d 1140 (D. N.M. 2012), the IRS and courts applied the principles of Renkmeyer to an LLC. A husband and wife set up an LLC that provided radiological imaging services. The services, as you might have guessed, were provided by the husband and wife members. To try and get around the self-employment issue, the members paid themselves a W-2 (don’t do this), and then argued that because they were “employees” of the LLC, they can’t aslo be self-employed — thus, they excluded the remaining share of LLC income from self-employment income. The IRS was not convinced; nor was the court, stating that because the members managed the LLC and provided all of its services, the LLC was not a “limited partnership” and the members were not “limited partners.” As a result, all of their LLC income — not just the income from the W-2 — was subject to SE tax.

 

Q: Is that it? That’s all the authority we’ve got?

 

A: Nope. In 2014, the IRS issued CCA 201436049, and I wrote about it back then. If you’ve been paying attention, you may have noticed that the first few items of this Q&A were stolen directly from that column, but hey: it ain’t plagiarism if you rip off yourself. In the CCA, an LLC was a large investment management company which acted as an investment manager of a family of funds. The management company managed and controlled the affairs and business of each fund, and performed activities such as purchasing, managing, restructuring, and selling all of the funds’ investment assets. Of course, partnerships don’t provide services, people do, so the actual services were provided by the members of the management company LLC. Each partner worked full-time and performed a wide range of services to the LLC.

Because the IRS had no regulations on which to rely, it began its analysis by looking to the legislative history to IRC Section 1402(a)(13). In doing so, the IRS reiterated that the exclusion from self-employment income for limited partners was intended to protect partners whose interest in the partnership represented merely a passive investment. In the facts of the ILM, however, the IRS argued that by virtue of their considerable management services, the members of the LLC represented service partners in a service partnership acting in the manner of self-employed persons. It was not the intention of Congress, the Service noted, to exempt partners who performed services for a partnership in their capacity as partners from self-employment income on their distributive share.

 

Relying on  the legislative history and the decisions in Renkmeyer and Riether, the IRS concluded in the ILM that the services provided by the management company LLC’s members were extensive, and that those services directly correlated to the income earned by the LLC from the funds. As a result, each member’s distributive share did not represent income which is basically of an investment nature that Congress intended to exclude from self-employment income when it enacted IRC Section 1402(a)(13). Thus, each LLC member was not a limited partners, and each member’s share of the distributive income was self-employment income.

 

Q: OK, so after 2,500 words, I’m guessing you’re finally ready to tell us about this latest IRS determination, and what makes it so important?

 

A: Yes, yes I am. On Friday, the IRS issued Chief Counsel Memo 201640014, which represents the Service’s most expansive application to date of the self-employment tax rules to an LLC member. In the memo, a taxpayer purchased a number of restaurant franchises and dropped them into an LLC, with the remaining ownership interest owned by the taxpayer’s wife and a trust.

 

The franchise agreements required the taxpayer to personally devote full time to the operation and management of the restaurants. As a result, he was the operating manager and CEO, and conducted the day-to-day affairs of the LLC, including purchasing and selling LLC property, hiring and firing employees, establishing pension plans, and hiring the accountants, investment advisors, and legal counsel.

 

These were large restaurants, however; as a result, they required many employees to man the various grills, shake machines, and drive-thru windows. More importantly, as opposed to the facts in Renkmeyer, Riether, and CCA 201436049, a restaurant sells goods, not services. Thus, one could argue that the efforts of the taxpayer, while key to managing the restaurants, were not directly responsible for the LLC’s revenue; after all, if the taxpayer didn’t show up for work one day, the food would still be prepared and the resulting sales generated. Lastly, restaurants, as opposed to investment advisory firms, law firms, and radiological imaging companies, require significant capital; nearly all of which was provided by the taxpayer.

 

Based on these facts, the taxpayer believed that his income from the LLC was not subject to self-employment tax. Yes, he had provided significant services to the LLC, but he had also been paid a guaranteed payment for those services, which would be subject to self-employment tax.

 

He had also, however, contributed significant capital to the LLC, and thus it was his belief that the distributive share that flowed to him from the LLC was a return on his investment. And this, he maintained, differentiated him from the taxpayers in the previous authorities — who provided services to a service partnership, where capital was not a material income producing factor – and made him a “limited partner” in the manner that was intended when Congress enacted Section 1402(a)(13).

 

The IRS disagreed, subjecting the taxpayer’s distributive share of LLC income to self-employment tax.

 

The Service was dissuaded by the taxpayer’s appeal that he made significant capital contributions, opting instead to focus on his role in the management of the LLC:

 

Here, taxpayer has sole authority over the LLC and is the majority owner, operating manager, president, and CEO with ultimate authority over every employee and each aspect of the business. Even though LLC has many employees, including several executive-level employees, taxpayer is the only partner of the LLC involved with the business and is not a mere investor, but rather actively participates in the LLC’s operations and performs extensive executive and operational management services for LLC in his capacity as a partner. Therefore, the income taxpayer earns through the LLC is not income of a mere passive investor that Congress sought to exclude from self-employment tax…

 

Undeterred, the taxpayer argued that as opposed to service partnerships, when an LLC member 1) derives LLC income from the sale of products, 2) has made substantial capital investments, and 3) has delegated significant management responsibilities to executive-level employees, a different analysis should apply. In summary, the LLC member should be permitted to receive a “reasonable return on his capital investment” in the form of LLC income that is NOT subject to SE tax.

 

Once again, the IRS disagreed, concluding that even if the guaranteed payments made to the LLC member represented reasonable compensation for his services, that did not mean that the remaining income allocated to the member should be excluded from SE tax as a return of capital invested. Instead, the IRS just kept it simple: because the taxpayer participated in the management of the LLC by performing significant services, he was not a “limited partner,” and as a result, all of the income allocated to the member — even that income that may very well have represented his return on capital invested — was required to be included in SE income under Section 1402.

 

Q: Hey, man…this has been fun and enlightening and all, but we’re at 3,200 words. Can you wrap this up so I can move on with my life? Maybe just a quick summary?

 

A: No problem, I’m sure you have veerry pressing matters to tend to. Take away this from the 3,200 words: in the past, the IRS has made it clear that if an LLC member provides significant services to a service LLC, then the member is not a limited partner, because the income of the LLC is attributable to the services rendered by the members. In this latest memo, however, the IRS determined that even when the LLC is not a service partnership, but instead sells a product, it doesn’t matter…if the LLC member manages the LLC, it is the opinion of the IRS that all of the income attributable to the member is subject to SE tax, even if a portion of that income could reasonable be argued to represent a return of the LLC member’s capital investment to the LLC.

 

This forces us to reevaluate the way we handle our clients who are members in an LLC. The bottom line: if the LLC member is actively involved in the management of the LLC, the income needs to be subject to SE tax.

 

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Worlwide growth creates opportunity

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By Nestor Guillen, MBA, CPA. September/October 2016 - Florida CPA TODAY is a publication of the Florida Instituted of Certified Public Accountants, Inc (FICPA).

Know your options for business interest transfers

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Business owners should always know their options when it comes to their company and its relation to their estate plans. Let’s take a look at some commonly chosen vehicles for transferring ownership interests in a business.

 

The great GRAT

With a grantor retained annuity trust (GRAT), you transfer business interests or other assets to an irrevocable trust. The trust then pays you a fixed annuity for a specified number of years, and at the end of the trust term the trust assets are transferred to your children or other beneficiaries free of any additional gift tax, even if the property has appreciated while held in trust.

 

GRATs offer several important advantages. Gift tax is based on the actuarial value of your beneficiaries’ future interest in the trust assets at the time the trust is funded. Depending on the size of the annuity payments and the length of the term, this value can be very low and can even be “zeroed out.” Also, you remain in control of the business during the trust term. And the annuity payments provide a source of income to fund your retirement or other needs.

 

Keep in mind that for a GRAT to succeed you must survive the trust term, and your business must generate enough income to cover the annuity payments. Also, be aware that legislation has been proposed that would limit the benefits of a GRAT.

 

The intriguing IDGT

An intentionally defective grantor trust (IDGT) is an irrevocable trust designed so that contributions to the trust are considered completed gifts for gift and estate tax purposes even though the trust is considered a “grantor trust” for income tax purposes. (That’s the “defect”)

But the trust is very effective because the trust assets won’t be included in your estate.

 

Selling your business to an IDGT, rather than giving it to your beneficiaries outright, allows you to retain control over the business during the trust term while still enjoying significant tax benefits.

 

Maintaining grantor trust status is important for two reasons: First, you pay income taxes on the trust’s earnings. Because those earnings stay in the trust rather than being used to pay taxes, you’re essentially making additional tax-free gifts to your beneficiaries. Second, because a grantor trust is considered your “alter ego” for income tax purposes, distributions you receive from the trust generally will be tax-free.

 

The need for a plan

For business owners, strategic planning and estate planning should go hand in hand. To achieve your goals, develop an integrated approach that addresses ownership and management succession issues together with estate planning issues. For help gathering the right information and making the best choice for you, please contact us.

 

Sidebar: 4 more options for transferring ownership interests

In addition to GRATs and IDGTs (see main article), there are several other options for transferring family business interests to the younger generation, including:

 

1.       Outright gifts. If you’re willing to relinquish control, you can transfer substantial interests tax-free using the $5.45 million exemption.

 

2.       Installment sales to family members. These offer significant gift and estate tax savings, provided you’re ready to part with the business.

 

3.       Self-canceling installment notes. These require the buyer to pay a significant premium. But, if the seller dies before the note is paid off, the remaining payments are canceled without triggering additional gift or estate taxes.

 

4.       Family limited partnerships. These arrangements enable you to transfer large interests in the business to family members at discounted gift tax values, while retaining management control. The IRS does scrutinize them closely, however.

 

© 2016

Beware the transfer-for-value rule when dealing with life insurance

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Life insurance typically is a key component of an estate plan. To keep the value of a life insurance policy you already own out of your taxable estate, or to achieve other planning goals, it may make sense to transfer the policy. But income tax traps exist. One is the transfer-for-value rule. So before making a transfer, it pays to become familiar with this rule.

 

Concept and exceptions

Normally, life insurance proceeds payable by reason of death (that is, death benefits) are not subject to income tax. However, when the transfer-for-value rule applies, the transferee — the person receiving the policy — will be subject to ordinary income taxes on the policy’s death proceeds, excluding the consideration paid for the policy and any premiums or other charges he or she pays after the transfer.

 

The transfer-for-value rule is intended to discourage speculation in insurance policies by people who lack an insurable interest. An insurable interest is a legitimate reason for someone to be insured against your death — typically, this means the person would suffer a financial hardship. Examples of people with an insurable interest on you could include your spouse, child and business partner.

 

Unfortunately, the rule’s design doesn’t necessarily jibe with its underlying rationale. For example, though the rule contains several exceptions, there isn’t one for transfers to children or other family members who typically do have an insurable interest.

So what are the exceptions? One is when the transfer is made to the insured, a partner of the insured, a partnership in which the insured is a partner, or a corporation in which the insured is a shareholder or officer. Be aware that this exception doesn’t apply in reverse, when the transfer is to an officer or shareholder.

 

Potential pitfalls

One reason the transfer-for-value rule is so dangerous is that the term “transfer” goes well beyond an outright sale or physical transfer of a policy. A transfer can occur, for example, when you name a beneficiary or assign someone an interest in the policy.

 

A transfer won’t cause the death benefits to become subject to income taxes unless the transferee provides “valuable consideration,” but this aspect of the rule can be treacherous as well. Valuable consideration isn’t limited to money. It can be virtually anything of value to the transferor — the person transferring the policy or interest.

It’s logical to assume that the transfer-for-value rule won’t apply to a gift of a policy or of an interest in a policy. In most cases, that’s true, but even gift transfers should be examined closely to avoid the transfer-for-value trap.

 

Plenty of thought

If you want to transfer a policy, give it plenty of thought. The transfer-for-value rule is a tax trap to which many individuals fall prey. We can help you decide whether a policy transfer is really a good idea and, if so, how to prepare for the tax impact.

 

© 2016

Summer Tax Tips

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Written by Michael Sonnenblick of Thomson Reuters Checkpoint.

The summer has started and summer camp bills have been paid. Summer camp is a great way to keep our children busy and looked after while we are working. But it comes at a steep price. Summer camp costs are, on average, about $300 per week. And for our children who are graduating from high school, we are looking at college tuition fees coming due this August ranging from an average of $9,139 (for state residents at public colleges) to $31,231 (private college). There are some tax advantaged ways, though, to help pay these expenses.

 

The Child and Dependent Care Credit might be useful if a parent pays for camp for his or her children while working or looking for work. As the IRS points out in its Special Edition Tax Tip 2016-10, for the expenses to qualify, certain conditions must be met:

 

1. Care for Qualifying Persons.

The expenses must be for the care of one or more qualifying persons. A dependent child or children under age 13 usually qualify. Publication 503, Child and Dependent Care Expenses, contains more information.

 

2. Work-Related Expenses.

The expenses for care must be work-related. This means taxpayers must pay for the care so they can work or look for work. This rule also applies to the taxpayer’s spouse if they file a joint return. Spouses meet this rule during any month they are full-time students. Spouses also meet it if they are physically or mentally incapable of self-care.

 

3. Earned Income Required.

The taxpayers must have earned income, such as from wages, salaries and tips. It also includes net earnings from self-employment. A taxpayer’s spouse must also have earned income if they file jointly. Spouses are treated as having earned income for any month they are full-time students or incapable of self-care. This rule also applies to the taxpayer if they file a joint return. Refer to Publication 503 for more details.

 

4. Joint Return if Married.

Generally, married couples must file a joint return. A parent can still take the credit, however, if the parents are legally separated or living apart.

 

5. Type of Care.

Expenses may qualify for the credit whether the care takes place at home, at a daycare facility or at a day camp.

 

6. Credit Amount.

The credit is worth between 20 and 35 percent of the allowable expenses. The percentage depends on the amount of the taxpayers’ income.

 

7. Expense Limits.

The total expense that can be used in a year is limited. The limit is $3,000 for one qualifying person or $6,000 for two or more.

 

Certain care does not qualify. Expenses do not include the cost of certain types of care, including:

• Overnight camps or summer school tutoring costs.

• Care provided by a spouse or a sibling who is under age 19 at the end of the year.

• Care given by a person whom the taxpayer can claim as a dependent.

 

Keep Records and Receipts.

Taxpayers should keep all receipts and records for when they file tax returns next year. Taxpayers will need the name, address and taxpayer identification number of the care provider. Taxpayers must report this information when they claim the credit on Form 2441, Child and Dependent Care Expenses.

 

Dependent Care Benefits.

Special rules apply if taxpayers get dependent care benefits from their employer. See Publication 503 for more on this topic.

Remember this credit is not just a summer tax benefit. Taxpayers may be able to claim it for qualifying care paid for at any time during the year.

 

529 Plans

As for college, 529 plans have become very popular. At the end of 2012, over $166 billion was invested in the various state plans. While each state provides different tax benefits for its plan, on the federal level all plans are treated the same. Contributions are made after tax, earnings grow tax-deferred, and distributions are tax free if used for qualifying higher education expenses.

 

Qualifying Higher Education Expenses

Qualifying higher education expenses include:

1. Tuition and fees as required for enrollment.

2. Books, supplies, computers and other equipment required for enrollment.

3. Expenses for special needs services for a special needs beneficiary (which must be incurred in connection with enrollment or attendance at an eligible educational institution).

4. Expenses for room and board, but only for students who are enrolled at least half-time. The room and board expense qualifies only to the extent that it is not more than the greater of the following two amounts.

 

a. The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student.

b. The actual amount charged if the student is residing in housing owned or operated by the eligible educational institution.

The taxpayer must contact the eligible educational institution for qualified room and board costs.

 

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10 New Findings About The Millennial Consumer

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by Dan Schawbelm. Forbes contributor

 

Companies are fiercely competing for millennial mindshare and it’s only the beginning. There are eighty million millennials in America alone and they represent about a fourth of the entire population, with $200 billion in annual buying power.  They have a lot of influence over older generations and are trendsetters across all industries from fashion to food. Companies have been struggling connecting with this generation because many of the traditional methods of advertising have proven ineffective at capturing their attention. Furthermore, many companies believe in certain myths about millennials that are just plain inaccurate, including that they aren’t brand loyal.

 

As a millennial myself, born in 1983, I know how we operate and with my peer network, I always confirm my own assumptions as well. In order to better understand this extremely important consumer, we partnered with Elite Daily, the voice of Generation Y, on a new comprehensive study released today. “Our findings confirmed that millennials are highly educated, career-driven, politically progressive and–despite popular belief–do indeed develop strong brand loyalty when presented with quality products and actively engaged by brands,” says David Arabov, CEO Co-founder Elite Daily. Here are the top ten new findings that we gathered through this study, where we interviewed 1,300 millennials:

 

1. They aren’t influenced at all by advertising. Only 1% of millennials surveyed said that a compelling advertisement would make them trust a brand more. Millennials believe that advertising is all spin and not authentic. That’s why they use Tivo to skip commercials regularly and avoid banner advertisements on Facebook and various news websites.

 

2. They would rather buy a car and lease a house. 71% of millennials would rather buy than rent a car, where as 59% would rather rent a house than buy one. 61% admit that they can’t afford a house. The economy has had a major impact on millennials, many of whom still live with their parents, have crushing student loan debt and are underemployed. Since they are getting married, having children and getting decent paying jobs later in life, they are putting off owning a home. A car is cheaper and they need one to get around even if they’re still in their parents basement.

 

3. They review blogs before making a purchase. 33% of millennials rely mostly on blogs before they make a purchase, compared to fewer than 3% for TV news, magazines and books. Older generations rely more on traditional media, whereas millennials look to social media for an authentic look at what’s going on in the world, especially content written by their peers whom they trust.

 

4. They value authenticity as more important than content. 43% of millennials rank authenticity over content when consuming news. They first have to trust a company or news site before they even bother reading the content that they produce. Blogs are meant to be authentic and many of them are run by a single individual. Millennials connect best with people over logos.

 

5. Their future inheritance won’t change their buying behavior. Despite the $30 billion inheritance that Accenture predicts will transfer from Baby Boomers to millennials in the upcoming years, 57% said that the money won’t change their spending habits. This is surprising because most people would think that this money exchange would make millennials spend even more yet our findings report that it won’t have an impact.

 

6. They want to engage with brands on social networks. 62% of millennials say that if a brand engages with them on social networks, they are more likely to become a loyal customer. They expect brands to not only be on social networks, but to engage them. This obviously takes more labor from companies to be able to maintain social networking feeds, but it’s worth it if you want to reach millennials.

 

7. They want to co-create products with companies. 42% said they are interested in helping companies develop future products and services. In our society, companies usually create products and hope that their target market will consume them. When it comes to millennials, they want to be more involved with how products get created. Companies that enable them to be part of the product development process will be more successful.

 

8. They are using multiple tech devices. 87% of millennials use between two and three tech devices at least once on a daily basis. 39% are either very or completely likely to purchase a tablet computer in the next five years, while 30% are for wearable devices. When there’s new technology available, you can bet that millennials will be all over it! In order to keep your brand relevant, and appealing to millennials, you need to be able to engage them on new platforms as they are released. For instance, having an application on the iWatch could be a good long term investment.

 

9. They are brand loyal. 60% said that they are often or always loyal to brands that they currently purchase. The sooner you build a relationship and deep connection with millennials, the better because they will continue to purchase from you as an adult.

 

10. They expect brands to give back to society. 75% said that it’s either fairly or very important that a company gives back to society instead of just making a profit. They are sick and tired of corporate greed and are still recovering in the aftermath of the financial crisis. Millennials love brands that support their local communities and would rather purchase from them than competitors.

 

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"Dreamers know how to enjoy their business" our new campaign.

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We want to introduce our new communication campaign, we named it "Dreamers" for its aspirational content and life achievements of this new generation of entrepreneurs;  a generation that not only pursues economic success but the satisfaction of creating while enjoying life to its full extent.
 
"Dreamers" is based on the premise of offering varied, entertaining, informative and valued information to our clients and associates. Along our usual topics on business,  trade, finance and taxes, you will also find news on technology, tourism, lifestyle and automotive, among others.
 
We want to invite you to follow our social networks and visit our blog to stay updated in a pleasant, simple and entertaining way. Your participation and likes in  our different social networks will help us identify what you want to see and how we can better meet your expectations.
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Queremos presentarles nuestra nueva campaña, la cual hemos llamado "Soñadores" por su contenido aspiracional y de logros de esta nueva generación de emprendedores; una generación  que no solo busca el éxito económico sino la satisfacción de crear mientras disfrutan su vida a plenitud.

"Soñadores" ofrecerá información variada, entretenida, informativa y con valor agregado a nuestros clientes y relacionados. Además de tratar temas en el área de negocios, comercio,  finanzas e impuestos, estaremos compartiendo noticias en tecnología, turismo, estilo de vida, automotriz, entre otros.

Queremos invitarle a seguir nuestras redes sociales y visitar nuestro blog para estar actualizado de forma amena, sencilla y entretenida, su interacción con nuestras distintas redes  sociales nos ayudarán a identificar sus preferencia y nos ayudarán a mejorar para cumplir sus expectativas.


Guillen, Serrano & Associates

Determining your life insurance needs

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What, if any, role life insurance should play in your financial plan depends on a variety of factors, such as whether you’re single or married, if you have minor children or other dependents, your net worth and your estate planning goals. If you decide that you do need coverage, you have to determine how much and what type of coverage will best help you achieve your goals.

Looking at your situation

Life insurance is appealing because relatively small payments now can produce a proportionately much larger payout at death. But the fact that the return on the investment generally isn’t realized until death can also be a downside, depending on your financial situation and goals.

If you have others depending on you financially, your No. 1 priority is likely ensuring that they will continue to be provided for after you’re gone. Life insurance can be a useful tool for achieving this goal.

If you’re single and have no dependents, life insurance may be less important or even unnecessary. Perhaps you’ll want just enough coverage so that your mortgage can be paid off and your home can pass unencumbered to the designate heir(s) — or just enough to pay your funeral expenses.

If your net worth is high, you may not need life insurance for any of the aforementioned purposes, but it might serve other purposes in your estate plan. For example, it can provide liquidity to pay estate taxes without having to sell assets that you want to keep in the family. Or it can be used to equalize inheritances for children who aren’t involved in a family business so that family business interests can go only to those active in the business.

Calculating the coverage

If you determine that you need life insurance, the next step is calculating how much you need.

If the coverage is to replace income and support your family, this starts with tallying the costs that would need to be covered, such as housing and transportation, child care, and education — and for how long. For many families, this will be only until the youngest children are on their own.

Next, identify income available to your family from Social Security, investments, retirement savings and any other sources. Insurance can help bridge any gaps between the expenses to be covered and the income available.

If you’re purchasing life insurance for another reason, the purpose will dictate how much you need:

Funeral costs. An average funeral bill can top $7,000. Gravesite costs typically add thousands more to this number.

Mortgage payoff. You’ll need coverage equal to the amount of your outstanding mortgage balance.

Estate planning. If the goal is to pay estate taxes, you’ll need to estimate your estate tax liability. If it’s to equalize inheritances, you’ll need to estimate the value of business interests going to each child active in your business and purchase enough coverage to provide equal inheritances to the inactive children.

Something else you’ll need to keep in mind is how taxes factor in. See the sidebar “The tax impact of life insurance.”

Term vs. permanent

The next question is what type of policy to purchase. Life insurance policies generally fall into two broad categories: term or permanent.

Term insurance is for a specific period of time. If you die during the policy’s term, it pays out to the beneficiaries you’ve named. If you don’t die during the term, it doesn’t pay out. It’s typically much less expensive than permanent life insurance, at least if purchased while you’re relatively young and healthy.

Permanent life insurance policies last until you die, so long as you’ve paid the premiums. Most permanent policies build up a cash value that you may be able to borrow against. Over time, the cash value also may reduce the premiums.

Because the premiums are typically higher for permanent insurance, you need to consider whether the extra cost is worth the benefits. It might not be if, for example, you may not require much life insurance after your children are grown.

But permanent life insurance may make sense if you’re concerned that you could become uninsurable, if you’re providing for special-needs children who will never be self-sufficient, or if the coverage is to pay estate taxes or equalize inheritances.

Fulfilling your goals

While no one likes to think about leaving loved ones behind, most people find some comfort in knowing their family’s financial needs will be covered and their estate planning goal will be fulfilled. A suitable life insurance policy can help.

Sidebar: The tax impact of life insurance

While proceeds are generally income-tax-free to the beneficiary, they will be included in your taxable estate as long as you’re the owner. If your estate might exceed your estate tax exemption ($5.43 million for 2015 or $5.45 million for 2016), some or all of the life insurance proceeds could be subject to estate taxes. To avoid this result, consider having someone else own the policy. This can create other tax complications, however, so it’s important to consult your tax advisor.

© 2016

Tenancy-in-common: A versatile estate planning tool

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If you hold significant real estate investments, tenancy-in-common (TIC) ownership can be a powerful, versatile estate planning tool. Let’s take a closer look at a few common questions regarding this strategy.

What is tenancy-in-common?

A TIC interest is an undivided fractional interest in property. Rather than splitting the property into separate parcels, each owner has the right to use and enjoy the entire property. An individual TIC can’t sell or lease the underlying property, or take other actions with respect to the property as a whole, without the other owners’ consent. But each owner has the right to sell, mortgage or transfer his or her TIC interest. This includes the right to transfer the interest, either directly or in trust, to his or her heirs or other beneficiaries.

Someone who buys or inherits a TIC interest takes over the original owner’s undivided fractional interest in the property, sharing ownership with the other tenants in common. Each TIC interest holder has a right of “partition.” That is, in the event of a dispute among the co-owners over management of the property, an owner can petition a court to divide the property into separate parcels or to force a sale and divide the proceeds among the co-owners.

How is it used in estate planning?

Here are a few of the ways TIC interests can be used to accomplish your estate planning goals.

Distributing your wealth. If real estate constitutes a significant portion of your estate, dividing it among your heirs can be a challenge. If you transfer real estate to your heirs — your children, for example — as joint tenants, their options for dealing with the property individually will be limited. What if one child wants to hold on to the real estate, but the other two want to cash out? Transferring TIC interests can avoid disputes by giving each heir the power to dispose of his or her interest without forcing a sale of the underlying property.

Reducing gift and estate taxes. Fractional interests generally are less marketable than whole interests. Plus, because an owner must share management with several co-owners, they provide less control. As a result, TIC interests may enjoy valuation discounts for gift and estate tax purposes.

Equalizing estates. Historically, an important estate planning strategy for affluent married couples was to “equalize” their estates. In other words, if one spouse owned a disproportionate amount of the couple’s wealth, transferring assets to the “poorer” spouse could significantly reduce their estate tax bill. Why? Because if the poorer spouse died first, his or her exemption would be wasted. If the “richer” spouse’s estate exceeded his or her exemption amount, the excess would be exposed to estate taxes.

Higher exemption amounts and portability of exemptions have made estate equalization less important than it used to be. But if you and your spouse have wealth that substantially exceeds your combined exemptions (currently, $10.86 million), equalization continues to provide a tax advantage. One effective way to equalize your ownership of real estate is to convert it into TIC property and then transfer a TIC interest from one spouse to the other.

Get an appraisal

If you’re considering using TIC interests as part of your estate plan, it’s critical to obtain an appraisal to support your valuation of these interests. Keep in mind that appraising a TIC interest is a two-step process: an appraisal of the real estate as a whole, followed by an appraisal of the fractional interest. In some cases, it may be desirable to use two appraisers: a real estate appraiser for the underlying property and a business valuation expert to quantify and support any valuation discounts you claim.

© 2016

Special estate planning is necessary if you are a non-US citizen

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Juanita is a citizen of the United States; however, her spouse, Esteban, is a U.S. resident, not a U.S. citizen. Thus, not all of the estate planning strategies that Juanita has in place are available to him. Because Esteban isn’t a U.S. citizen, he must consider additional planning because special rules apply to him.

Difference between resident and citizen

If you’re a U.S. resident, but not a citizen, you’re treated similarly to a U.S. citizen by the IRS. You’re subject to federal gift and estate taxes on your worldwide assets, but you also enjoy the benefits of the $5.43 million exemption and the $14,000 annual exclusion. And you can double the annual exclusion to $28,000 through gift-splitting with your spouse, so long as your spouse is a U.S. citizen or resident. Special rules apply to the marital deduction, however, as will be discussed.

Residency is a complicated subject. IRS regulations define a U.S. resident for federal estate tax purposes as someone who had his or her domicile in the United States at the time of death. One acquires a domicile in a place by living there, even briefly, with a present intention of making that place a permanent home.

Whether you have your domicile in the United States depends on an analysis of several factors, including the relative time you spend in the United States and abroad, the locations and relative values of your residences and business interests, visa status, community ties, and the location of family members.

Planning for a nonresident alien

If you’re a nonresident alien — that is, if you’re neither a U.S. citizen nor a U.S. resident — there’s good news and bad news in regard to estate tax law. The good news is that you’re subject to U.S. gift and estate taxes only on property that’s “situated” in the United States. Also, you can take advantage of the $14,000 annual exclusion (although you can’t split gifts with your spouse).

The bad news is that your estate tax exemption drops from $5.43 million to a minuscule $60,000, so substantial U.S. property holdings can result in a big estate tax bill. Taxable property includes U.S. real estate as well as tangible personal property — such as cars, boats and artwork — located in the United States.

Determining the location of intangible property — such as stocks, bonds, partnership interests or other equity or debt interests — is more complicated. For example, if a nonresident alien makes a gift of stock in a U.S. corporation, the gift is exempt from U.S. gift tax. But a bequest of that same stock at death is subject to estate tax. On the other hand, a gift of cash on deposit in a U.S. bank is subject to gift tax, while a bequest of the same cash would be exempt from estate tax.

Your estate planning advisor can help you determine which property is situated in the United States and explore strategies for minimizing your tax exposure. For example, it may be possible to avoid U.S. estate taxes by setting up a foreign corporation to hold U.S. property.

Options for making tax-free transfers

The unlimited marital deduction isn’t available for gifts or bequests to noncitizens. However, there are certain options for making tax-free transfers to a noncitizen spouse. For example, you can use the transferor’s $5.43 million exemption (provided the transferor is a U.S. citizen or resident). You can also make annual exclusion gifts. (Currently, the limit for gifts to a noncitizen spouse is $147,000.) And last, you can bequeath assets to a qualified domestic trust, which contains provisions designed to ensure that the assets are ultimately taxed as part of the recipient’s estate.

Know that the marital deduction is available for transfers from a noncitizen spouse to a citizen spouse.

What are the right strategies for you?

If you have a family situation similar to Juanita and Esteban’s, where one spouse is a U.S. citizen and the other is a U.S. resident, traditional estate planning strategies may not be applicable. Your estate planning advisor can help you understand your options and identify strategies for minimizing your tax liability.

© 2016

GDP is a bad gauge of material well-being. Time for a fresh approach

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WHICH would you prefer to be: a medieval monarch or a modern office-worker? The king has armies of servants. He wears the finest silks and eats the richest foods. But he is also a martyr to toothache. He is prone to fatal infections. It takes him a week by carriage to travel between palaces. And he is tired of listening to the same jesters. Life as a 21st-century office drone looks more appealing once you think about modern dentistry, antibiotics, air travel, smartphones and YouTube.

 

The question is more than just a parlour game. It shows how tricky it is to compare living standards over time. Yet such comparisons are not just routinely made, but rely heavily on a single metric: Gross Domestic Product (GDP). This one number has become shorthand for material well-being, even though it is a deeply flawed gauge of prosperity, and getting worse all the time (see article). That may in turn be distorting levels of anxiety in the rich world about everything from stagnant incomes to disappointing productivity growth.

 

Faulty speedometer

Defenders of GDP say that the statistic is not designed to do what is now asked of it. A creature of the 1930s slump and the exigencies of war in the 1940s, its original purpose was to measure the economy’s capacity to produce. Since then, GDP has become a lodestar for policies to set taxes, fix unemployment and manage inflation.

 

Yet it is often wildly inaccurate: Nigeria’s GDP was bumped up by 89% in 2014, after number-crunchers adjusted their methods. Guesswork prevails: the size of the paid-sex market in Britain is assumed to expand in line with the male population; charges at lap-dancing clubs are a proxy for prices. Revisions are common, and in big, rich countries, bar America, tend to be upwards. Since less attention is paid to revised figures, this adds to an often exaggerated impression that America is doing far better than Europe. It also means that policymakers take decisions based on faulty data.

 

If GDP is failing on its own terms, as a measurement of the value-added in an economy, its use as a welfare benchmark is even more dubious. That has always been so: the benefits of sanitation, better health care and the comforts of heating or air-conditioning meant that GDP growth almost certainly understated the true advance in living standards in the decades after the second world war. But at least the direction of travel was the same. GDP grew rapidly; so did quality of life. Now GDP is still growing (albeit more slowly), but living standards are thought to be stuck. Part of the problem is widening inequality: median household income in America, adjusted for inflation, has barely budged for 25 years. But increasingly, too, the things that people hold dear are not being captured by the main yardstick of value.

 

With a few exceptions, such as computers, what is produced and consumed is assumed to be of constant quality. That assumption worked well enough in an era of mass-produced, standardised goods. It is less reliable when a growing share of the economy consists of services. Firms compete for custom on the quality of output and how tailored it is to individual tastes. If restaurants serve fewer but more expensive meals, it pushes up inflation and lowers GDP, even if this reflects changes, such as fresher ingredients or fewer tables, that customers want. The services to consumers provided by Google and Facebook are free, so are excluded from GDP. When paid-for goods, such as maps and music recordings, become free digital services they too drop out of GDP. The convenience of online shopping and banking is a boon to consumers. But if it means less investment in buildings, it detracts from GDP.

 

Stop counting, start grading

Measuring prosperity better requires three changes. The easiest is to improve GDP as a gauge of production. Junking it altogether is no answer: GDP’s enduring appeal is that it offers, or seems to, a summary statistic that tells people how well an economy is doing. Instead, statisticians should improve how GDP data are collected and presented. To minimise revisions, they should rely more on tax records, internet searches and other troves of contemporaneous statistics, such as credit-card transactions, than on the standard surveys of businesses or consumers. Private firms are already showing the way—scraping vast quantities of prices from e-commerce sites to produce improved inflation data, for example.

 

Second, services-dominated rich countries should start to pioneer a new, broader annual measure, that would aim to capture production and living standards more accurately. This new metric—call it GDP-plus—would begin with a long-overdue conceptual change: the inclusion in GDP of unpaid work in the home, such as caring for relatives. GDP-plus would also measure changes in the quality of services by, for instance, recognising increased longevity in estimates of health care’s output. It would also take greater account of the benefits of brand-new products and of increased choice. And, ideally, it would be sliced up to reflect the actual spending patterns of people at the top, middle and bottom of the earnings scale: poorer people tend to spend more on goods than on Harvard tuition fees.

 

Although a big improvement on today’s measure, GDP-plus would still be an assessment of the flow of income. To provide a cross-check on a country’s prosperity, a third gauge would take stock, each decade, of its wealth. This balance-sheet would include government assets such as roads and parks as well as private wealth. Intangible capital—skills, brands, designs, scientific ideas and online networks—would all be valued. The ledger should also account for the depletion of capital: the wear-and-tear of machinery, the deterioration of roads and public spaces, and damage to the environment.

 

Building these benchmarks will demand a revolution in national statistical agencies as bold as the one that created GDP in the first place. Even then, since so much of what people value is a matter of judgment, no reckoning can be perfect. But the current measurement of prosperity is riddled with errors and omissions. Better to embrace a new approach than to ignore the progress that pervades modern life.

 

Source: The Economist

Using Budgets and Forecasts as a Tool for Value Creation

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by Campbell Valuation Partners Limited

 

Many business owners and executives are reluctant to prepare budgets and forecasts for their company on the premise that the future is just too difficult to predict. The one thing that is true about forecasts is that they are always wrong. Despite that reality, where properly done, budgets and forecasts can be a useful tool for shareholder value creation.

 

Budgets vs. Forecasts

Before proceeding further, we should distinguish between budgets and forecasts. A budget normally refers to the financial projections for a near term time frame, such as the following fiscal year. It represents the targets and objectives for the company and often serves as a basis for setting management performance objectives. As such, budgets are (or should be) established prior to the commencement of a fiscal year and not modified once approved by senior management or the board of directors.

 

Forecasts normally refer to a longer-term projection, such as a 5-year period. However, an even lengthier time horizon may be appropriate where the industry in which the company operates tends to experience longer term cycles.

 

Forecasts normally flow from a company’s long term strategic plan. Forecasts are also prepared in the context of predicting a company’s financial results for its current fiscal year and are updated based on year-to-date actual results and recent industry and economic developments. The current year forecast is compared to budgeted results to determine whether the company likely will fall short of, achieve, or exceed its targets.

 

Budgets and forecasts normally are prepared on the basis of annual operating results. However, it is important that monthly and quarterly budgets and forecasts also be prepared (at least for the near term) in order to assess the impact of seasonality within a business and to identify times during the year where additional financing may be required or capacity limitations may be reached.

 

Decision Making and Shareholder Value

By taking the time and effort necessary to prepare a rigorous budget and forecast, business owners and executives can make more informed decisions. This is because the budgeting and forecasting process forces business owners and executives to ask themselves tough questions, and to be better prepared to deal with different scenarios. For example, if the forecast calls for revenue growth or 10% per year, at what point will the company need to increase capacity, in terms of expanded facilities, additional headcount, and other infrastructure requirements? These costs should be factored into the forecast, and management should begin planning for the initiatives that will have to be undertaken to facilitate growth at an early stage.

 

One of the most significant benefits of proper forecasting is that it helps business owners and executives to assess whether the company’s growth initiatives will lead to incremental shareholder value. Business owners and executives often look at measures such as revenues and EBITDA (earnings before interest, taxes, depreciation and amortization) to assess how their company is doing. However, growth in revenues and EBITDA does not necessarily translate into greater shareholder value. This is because shareholder value is based on a collective assessment of three inter-related factors:

- Invested Capital

- Cash flow

- Risk profile

Cash flow, and specifically discretionary cash flow, which goes beyond EBITDA and takes into account capital expenditure requirements, working capital requirements and income taxes;

 

The risk profile of a business, which takes into account the likelihood that forecast cash flows will be achieved; and

 

Invested capital, which refers to the ability of an organization to use debt in lieu of equity in order to generate cash flows, as well as managing its asset base.

 

Therefore, a proper forecast will help business owners and executives to assess whether the investments that are made in order to generate future cash flows will ultimately serve to increase shareholder value.

 

Characteristics of Meaningful Budgets and Forecasts

It takes time and effort to prepare a budget and forecast that will be meaningful for decision-making purposes. In this regard, properly-prepared budgets and forecasts should have:

 

Detailed Revenues and Expenses

High-level forecasts, which are restricted to gross revenues, total expenses, and profit levels, are of little use. While they may reflect the long-term objectives of the organization, significantly more detail is required in order to form the basis for executive decision-making.

 

For example, revenues should be forecast by the customer and by product / service offering. This can be a significant undertaking and difficult to predict. However, it forces business owners and managers to address important issues, such as:

 

  • What proportion of the company’s revenues will come from recurring customers;
  • do any customers represent a significant amount of the company’s revenues (e.g. more than 10%); and,
  • to what extent will new product and service offerings have to be introduced in order to achieve revenue targets?

 

These factors have a significant impact on a company’s risk profile, which is one of the key determinants of shareholder value.

 

Similarly, expenses should be sufficiently detailed in order to distinguish between variable costs, fixed costs and step costs, for the purpose of sensitivity analysis (discussed below).

 

Supportable and Internally Consistent Assumptions

Budgets and forecasts are based on assumptions, which inherently are subjective. However, the assumptions adopted in the budget and forecast should be reasonable and supportable. This means that, where possible and practical, the assumptions should be supported by third party evidence, such as independently published industry growth rates.

 

As a general rule, the assumptions adopted in budgets and forecasts tend to be more optimistic than not. A meaningful budget or forecast should adopt assumptions that weigh both positive and negative factors.

 

In any event, regardless of the assumptions that are adopted, it is critical that they are applied in an internally consistent manner. For example, if revenues are projected to grow by 10% in the next year, then the forecast must reflect all of the operating expenses, capital expenditures and working capital required to generate and support that rate of growth. Internal inconsistency is one of the most common deficiencies in financial forecasts.

 

Sensitivity Analysis

Given that the inputs to a budget or forecast are subjective, it is important that the budgeting or forecasting model allows for sensitivity analysis. Sensitivity analysis is an important tool for decision making. It forces business owners and executives to consider the key “value-drivers” within their business, and the variability of economic returns (e.g. profits and cash flows) to changes in assumptions. As such, sensitivity analysis can be a useful tool for risk assessment and risk mitigation.

 

As part of the sensitivity analysis exercise, business owners and executives should consider the “degree of operating leverage” within their business. Degree of operating leverage measures the percentage change in earnings before interest expense and income taxes (EBIT) for a given change in revenues. For example, if a 5% decline in revenues results in a 5% decline in EBIT, the degree of operating leverage is 1:1, which suggests a relatively low level of operating risk (at the expense of reduced upside potential). Conversely, if the degree of operating leverage within a company is 5:1, then a 5% change in revenues will result in a 25% change in EBIT. If this level of volatility (i.e. risk) is considered too great, then management may want to adopt a more variable-based expense structure (e.g. paying commissions rather than fixed salaries to sales personnel).

 

Complete Set of Financial Statements

Too often, budgets and forecasts only contain an income statement. In order to be an effective tool for both decision making and shareholder value measurement, a full set of financial statements is required (i.e. income statement, balance sheet and cash flow statement). Cash flow statements will identify the capital expenditure and working capital requirements in order to generate growth, and whether additional financing will be required to do so. The balance sheet will help in assessing the total capital requirements within the organization, and provide the foundation for metrics such as borrowing capacity, asset utilization and return on capital.

 

Financial and Non-Financial Performance Indicators

The budgeting and forecasting model should incorporate both financial and non-financial performance indicators. Financial indicators are measures such as profit margins (e.g. net income as a percentage of revenues), financial leverage (e.g. total debt to equity) and asset utilization (e.g. revenues divided by total assets). The various financial indicators should ultimately culminate in a return on equity, which is an important measure of shareholder value.

 

The problem with financial indicators is that they tend to measure end results and symptoms of underlying issues. Therefore, it is important to consider non-financial indicators as well. Non-financial indicators include such measures as revenues per employee, capacity utilization, and gross profit per unit. Trends in non-financial measures tend to be leading indicators of potential issues and opportunities. In particular, non-financial indicators can help management in assessing possible capacity constraints (in terms of employee availability, production capabilities and so on), which in turn can help in the company’s strategic planning process.

 

Other Benefits of an Established Budgeting and Forecasting Process

A credible and internally consistent forecast forms the basis for measuring shareholder value pursuant to the discounted cash flow valuation methodology, which in both theory and practice is the preferred basis for value determination. This can help business owners and executives to measure whether shareholder value is being created over time.

 

Another benefit of the budgeting and forecasting process is that it helps to communicate the concept of shareholder value among employees and middle-level managers, which may influence their decision making. Having management participate in the budgeting and forecasting process can also help in securing employee buy-in to the longer term goals of the organization.

 

Finally, business owners and executives who are considering a corporate divestiture at some point in the future will benefit from a well established budgeting and forecasting process. Creating a credible forecast will help in demonstrating value to a prospective buyer and in negotiating a better price and deal terms.

 

Initially, a considerable amount of time may be needed to prepare the financial model and consider all of the variables. However, the budgeting and forecasting process generally becomes easier over time, as business owners and executives begin to develop a mindset for the variables that need to be considered, and relatively minor modifications to the financial model are required.

 

Source: mondaq.com

 

Social engineering now preferred attack technique of cybercriminals

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By Tiffany Robertson. Thomson Reuters contributor.

 

Human vulnerabilities are often a sophisticated hacker’s best friend when seeking to break through a company’s data security system. A 2015 report by tech trade association CompTIA found the “human element” was the source of more than half of security breaches. This means no matter how strong a company’s technical safeguards, people are its weakest link when it comes to protecting sensitive information. Such findings emphasize the need for companies to bolster their data security with training such as Thomson Reuters’ online Data Privacy and Security training course.

 

Recent Data Breach Highlights Simplicity of Social Engineering Tactics

As if to reinforce CompTIA’s findings, a recent data breach at a popular photo-sharing service highlighted the ease with which cyber criminals can use “social engineering” techniques to access information. In this case, a hacker simply pretended to be the company’s chief executive and asked an employee for — and received — an email with data containing the names, Social Security numbers and wage data of 700 current and former company employees.

 

Social Engineering Tactics Can Sway Individuals to Make Harmful Choices

This simple request is one example of a variety of ruses criminals use to evade technical security measures and get employees to do their dirty work for them. Social engineering efforts aim to convince individuals to:

-Disable or ignore security measures;

-Click on malicious links;

-Open documents containing macros that run malicious code;

-Download files that install malware on laptops, tablets and smart phones;

-Hand over valued credentials, such as usernames and passwords, to crucial systems or valuable services; or

-Make wire transfers to fraudulent bank accounts under the belief they are following orders from their superiors.

 

Social Media Sites Are a Popular Playground for Cybercriminals

According to data protection firm ProofPoint, last year saw a spike in social media phishing scams. Their recent whitepaper reported that 40% of Facebook accounts and 20% of Twitter accounts allegedly representing well-known brands are, in fact, unauthorized. They also noted the popularity of malicious mobile apps as a method of stealing information or compromising data security, with more than two billion malicious mobile apps willingly downloaded from rogue marketplaces or authorized app stores.

 

Companies Not Keeping Pace with Social Engineering Trend

While the scope of the problem seems obvious, findings suggest companies are not taking the threat of social engineering seriously enough. Only 30% of the companies in the CompTIA survey considered the “human element” a serious concern and only 54% trained their employees on cybersecurity. Such views, however, cannot continue as cybercriminals use social engineering as their primary attack method, making unsafe cybersecurity habits a risk to both individuals and their employers.

 

As hackers attempt to circumvent more advanced security technology by increasing their focus on exploiting human flaws, companies need to respond in kind. They must invest in their employees by providing ongoing employee training to ensure individuals deploy data security measures properly throughout their organization. Such training will not only decrease the odds of a data breach, as well as the costs associated with one, but will also improve employees’ productivity as they — and the IT department — spend less time addressing data security issues.

Loan Guarantees to Self-Directed IRA Results in Deemed Distribution and Penalties to Owners

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Loan guarantees made by a couple in transactions involving their self-directed IRAs and a corporation owned by the IRAs were prohibited transactions, resulting in deemed distributions to the couple to which the 10 percent penalty tax under Code Sec. 72(t) applied. Because the transactions were not disclosed on the taxpayers' individual tax return for the year the guarantees were made, the six-year statute of limitations period under Code Sec. 6501(e) also applied. Thiessen v. Comm'r, 146 T.C. No. 7 (3/29/16)

 

Background

In 2002, a company that James Thiessen had been employed with for 30 years announced that it was moving to another state. Thiessen decided to leave the company and began searching for a new job in metal fabrication, an area in which he had a degree. His search included looking for a business that he and his wife could acquire. He subsequently learned that Ancona Job Shop (Ancona), an unincorporated business specializing in the design, fabrication, and installation of metal products, was for sale through the brokerage firm A.J. Hoyal & Co., Inc. (AJH).

 

Thiessen and his wife decided to acquire Ancona, and they and AJH began discussing the terms of the acquisition. Jay Hoyal, a broker at AJH, informed the Thiessens that they could use the funds in their retirement accounts to acquire Ancona. Specifically, he stated that the Thiessens could roll over their retirement funds into individual retirement accounts (IRAs), cause the IRAs to acquire the initial stock of a newly formed C corporation, and cause the C corporation to acquire Ancona.

 

Thiessen discussed the funding structure with a CPA and asked the CPA to help with implementing the acquisition of Ancona. Thiessen and his wife then hired an attorney to help them with the terms of the sale contract and with the terms of a financing arrangement in acquiring Ancona. The CPA helped the Thiessens establish the C corporation, Elsara Enterprises, Inc. (Elsara), that was eventually used to effect the IRA funding structure. On May 29, 2003, the CPA filed articles of incorporation for Elsara. The Thiessens were named as Elsara's officers and directors, and they (and no one else) have served in those positions ever since.

 

In June 2003, the Thiessens each established an IRA, with each retaining all discretionary authority and control concerning investments by his or her IRA (an arrangement referred to as a self-directed IRA). The Thiessens then rolled over their tax-deferred retirement funds of approximately $432,000 into the newly formed IRAs and caused the IRAs to acquire the initial stock of Elsara. Shortly thereafter, Elsara purchased the assets of Ancona for approximately $600,000. The purchase price included a promissory note to the seller of $200,000, guaranteed by the Theissens, and earnest money deposit of $60,000, which came from the Theissens' bank account. The rest came from the Theissens' IRAs.

 

On their 2003 joint tax return, the Theissens reported that they received IRA distributions of $432,000 which were the subject of a tax-free rollover. The 2003 joint return did not disclose the Theissens' guaranties of the loan or any other fact that would have put the IRS on notice of the nature and the amount of any deemed distribution resulting from the guaranties. The 2003 joint return also did not disclose or even mention Elsara or its 2003 corporate return.

 

In 2010, the IRS sent the Theissens a notice of deficiency as a result of their failure to report for 2003 a taxable distribution from their IRAs. The deficiency notice was sent after the expiration of the three-year statute of limitations. According to the IRS, the Theissens' guaranties were prohibited transactions under Code Sec. 4975(c)(1)(B), resulting in deemed distributions of the IRAs' assets under Code Sec. 408(e)(2) on January 1, 2003.

 

Source: Parker's Federal Tax Bulletin. Issue 112. April 8, 2016

 

Consolidate accounts and simplify your financial life

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If you’ve accumulated many banks, investment and other financial accounts over the years, you might consider consolidating some of them. Having multiple accounts requires you to spend more time tracking and reconciling financial activities and can make it harder to keep a handle on how much you have and whether your money is being invested advantageously.

Start by identifying the accounts that offer you the best combination of excellent customer service, convenience, lower fees and higher returns. Hold on to these and consider closing the rest, keeping in mind the bank account amounts you’ll be consolidating. The Federal Deposit Insurance Corporation generally insures $250,000 per depositor, per insured bank. So if consolidation means that your balance might exceed that amount, it’s better to keep multiple accounts. You should also keep accounts with different beneficiaries separate.

When closing accounts, make sure you stop automatic payments or deposits and destroy checks and cards associated with them. To prevent any future disputes, obtain letters from the financial institutions stating that your accounts have been closed. Closing an account generally takes several weeks.

© 2016

Why you might want to not claim your child as a dependent

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Understandably, many parents get in the habit of claiming their children as dependents on their federal tax returns. You generally may do so as long as your child is either under age 19 (nonstudents) or under age 24 (students). But there is a reason to not claim your child as a dependent — and it has everything to do with higher education.

Credits and phaseouts

The two primary college-funding tax credits available are the American Opportunity credit and the Lifetime Learning credit. Thanks to recently passed legislation, the American Opportunity credit now permanently allows eligible taxpayers to take an annual credit of up to $2,500 for the first four years of postsecondary education. Meanwhile, the Lifetime Learning credit provides up to $2,000 in relief to those eligible. (You can’t claim both credits in the same year for the same student.)

But these credits are subject to “phaseouts” that limit eligibility for higher-income taxpayers. For example, for 2015, eligibility for the American Opportunity credit begins to phase out for taxpayers with modified adjusted gross incomes (MAGIs) beyond $80,000 (single filers) or $160,000 (married couples filing jointly). Similarly, eligibility for the Lifetime Learning Credit begins to phase out for taxpayers with MAGIs beyond $55,000 (singles) or $110,000 (joint filers).

Good reasons

If your income disqualifies you from claiming these credits, your child’s income probably doesn’t disqualify him or her. Therefore, your child may be able to report payment of education expenses for tax purposes and then claim one of the credits — but only if you don’t claim him or her as a dependent.

Under this scenario, the child’s tax benefit typically outweighs the value of the dependency exemption to the parents. Why? First, a credit reduces taxes dollar-for-dollar, while an exemption reduces only the amount of taxable income. Second, an income-based phaseout may reduce or eliminate the benefit of the exemption even if you did claim your child as a dependent. For 2015, the phaseout starting points for the exemption are adjusted gross incomes of $258,250 (singles) and $309,900 (joint filers).

The right call

If your dependency exemption is phased out, it will probably make sense not to claim your child as a dependent so he or she can grab a tax credit. But if your exemption isn’t phased out or is only partially phased out, the decision becomes trickier. We can help you make the right call.

© 2016

Owe Back Taxes? Lose your passport

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New York (March 30, 2016)

By Ben Steverman - Bloomberg

 

The roughly 8 million Americans who live abroad automatically get a couple additional months each year to file their taxes. Don’t expect them to be grateful.

 

Filing to the Internal Revenue Service from overseas is more confusing, complicated and expensive than it is for Americans at home (and that's saying something). Unlike almost every other country in the world, the U.S. demands its citizens pay taxes on all foreign income. They must file even if they have lived and worked abroad for decades, and even if they’re already paying hefty taxes to the countries where they reside.

 

Now it's getting worse. In an effort to fight tax evasion, the IRS recently began forcing expatriates to report not just their income, but additional information on savings and investments—rules that have made it harder to open bank and brokerage accounts overseas. More ominously, the IRS and the State Department are also implementing a provision approved by Congress in December that could revoke the passports of Americans who owe too much–raising the prospect of being stranded abroad on account of poor arithmetic.

 

“A lot of people are very, very angry about the whole situation,” said David McKeegan, co-founder of Greenback Expat Tax Services, which specializes in U.S. international tax preparation. For Americans abroad, he said, “It’s very easy to feel like you’re a criminal [for] doing normal things.”

 

Here are several of the biggest problems U.S. citizens face:

 

Unnecessary Hassle

Lynn Milburn spends months worrying about her U.S. taxes each year, even though she never owes anything in the end. To be fair, the IRS often excludes the first $100,000 in foreign earnings, along with some housing expenses. It also lets Americans deduct some of the taxes they pay to local governments, which usually levy at higher rates than the U.S. does, especially in such places as Western Europe, where most expatriate Americans live. After that, however, it's open season.

 

Milburn, 57, has lived overseas most of her adult life. Originally from Seattle, she recently moved from Australia to France. “Every time my situation changes, I’m not sure where I stand,” she said. Milburn said she is “petrified” of being fined; although she keeps her financial life very simple, filling out the forms correctly can be a challenge. For example, while the IRS asks about income from January to December, Australia’s tax year runs from July to June. Let the migraine begin.

 

A typical U.S. tax return for Americans living in the U.K. is 40 to 50 pages long, even though they often end up owing nothing, according to Robyn Limmer, head of tax at Frank Hitch, an accounting firm based in New York and London that specializes in cross-Atlantic tax issues.

 

And before you can say H&R Block, it bears noting that hiring a tax preparer who understands how to file from abroad isn’t cheap. “Many people have to pay thousands of dollars just to show they owe no money to the IRS,” said Keith Redmond, 51, an American who has lived in Paris for 16 years.

 

Lost in Translation

How do you say “tax-deferred retirement account” in Turkish or Thai?

 

Every country has its own way of taxing income, savings, investments and pensions, sometimes making it impossible to explain to the IRS what’s going on. Tax treaties can help specialists navigate some of these issues, but these agreements can be enormously complicated and maddeningly vague. Limmer said that even in the U.K.—where “at least we share a common language”—accountants can disagree with each other on how to sort things out, especially in the “particularly tricky” area of pensions.

 

Milburn isn't an accountant or lawyer, but she has noticed the same thing: “I actually don’t think that the IRS or tax professionals necessarily know 100 percent what to do. I think it’s always a bit of a gray area. Because how can you convert something in another country to a U.S. equivalent?”

 

IRS agents stationed at U.S. embassies used to be able to help, but budget cuts forced the agency to close the last of those offices (in London, Paris, and Frankfurt) last year.

 

Double Taxation

Because the rules are so confusing, some say they often end up being taxed unfairly, paying the IRS and their home country on the same income. Brian Krahmer, 40, a Minnesota native who moved to Germany in 2014, must pay U.S. self-employment tax on his freelance income–even though the work, mostly software development, is for German companies. “If I’m already filing a German income tax return on the money earned, I don’t see any fairness from also having to file in the U.S.,” he said.

 

The rules can feel unfair, even when they don’t technically result in double taxation. For example, the IRS demands that Americans pay capital gains taxes on sales of homes in the U.K.—gains that can be greatly inflated by currency swings. The U.K. doesn’t have the same tax, but it does impose a tax on home purchases. An American in London who wants to move has the pleasure of paying both.

 

Treated Like a Criminal

The IRS’s fight against tax evasion has had its successes. Many hidden Swiss bank accounts are no longer so secret, for example. But provisions that catch millionaires hiding money overseas can also ensnare middle-income Americans working and living abroad. As a result, banks and investment companies, forced by the IRS to keep close track of their American clients, are becoming reluctant to take them on.

 

“We, as Americans overseas, cannot live normal lives,” said Redmond, originally from Washington, D.C. “We’re seriously limited in being able to save like stateside Americans.”

 

Most living outside the U.S. simply want to know how much they owe the IRS vs. the local tax collector. “These are not people who are hiding money,” Limmer said. Nine times out of 10, she estimated, an American living in London is paying more tax than a comparably compensated British citizen.

 

Passport Threat

The new passport-revocation rule, slipped into a transportation funding bill signed by President Barack Obama, raises the stakes. It allows the U.S. to revoke the passport of any American whose tax debt exceeds $50,000.

 

It’s not hard to see how expatriate taxpayers could get to this level, especially if they’re late in realizing they needed to file in the first place. The fines for failing to report bank accounts are high; the IRS can impose a penalty of $10,000 for each violation of the rules. “If the government enforces this in the most stringent way possible, this could be hugely horrible for people who live overseas,” McKeegan said.

 

Last month, members of Congress urged the State Department to “consider the unique circumstances of overseas Americans” before revoking anyone’s passport. An IRS spokesperson declined to comment on the passport rule or other specific taxpayer concerns. In October, the agency said its “offshore voluntary disclosure program,” a process for taxpayers to catch up on filing obligations, had collected more than $8 billion since 2009.

 

Accidental Americans

Many Americans who live abroad simply don’t know they need to file, and the IRS lacks an efficient way to notify them. “Nobody sends you a memo when you go overseas,” McKeegan said.

 

An unknown number of Americans don't even realize they’re U.S. citizens. Because the U.S. grants citizenship for, among other things, being born in the States, babies delivered in the U.S. to non-American parents are sometimes brought back home in diapers and learn only decades later that they need to file to the IRS every year.

 

Increasingly, these “accidental Americans” are discovering their citizenship the hard way, as the IRS tightens tax evasion rules regarding banks. “’Am I going to get arrested at the airport?’” McKeegan said they often ask him. “You spend the first 10 minutes talking them off the ledge.”

 

London Mayor Boris Johnson, who was born in the U.S., had to pay the IRS last year for capital gains on his sale of a house in north London. “I think it’s absolutely outrageous,” he said when he learned of the debt in 2014. “Why should I? I haven’t lived in the U.S. since I was five years old.”

 

Johnson has previously said he would like to renounce his U.S. citizenship, and he's not the only one. According to Treasury Department data, the number of Americans renouncing their citizenship last year jumped 25 percent, to a record 4,279. How much of this is the fault of the IRS and its get tough campaign may remain as mysterious as the tax code?.

IRS Holds $950 Million for 2012 Non-Filers

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Washington, D.C. (March 10, 2016)

By Jeff Stimpson

 

Federal income tax refunds totaling $950,349,000 are waiting for an estimated 1 million taxpayers who did not file a federal income tax return for 2012.

 

To collect, these taxpayers must file a 2012 federal return no later than this year’s April deadline.

 

“We especially encourage students and others who didn’t earn much money to look into this situation because they may still be entitled to a refund,” said IRS Commissioner John Koskinen.

 

The IRS estimates that the median refund is $718. If no return is filed to claim a refund within three years, the money becomes the property of the U.S. Treasury. The window closes on April 18 (April 19 for taxpayers in Maine and Massachusetts). A 2012 refund check may be held if the taxpayer hasn’t filed tax returns for 2013 and 2014.

 

The states with the most taxpayers potentially due 2012 refunds are Texas (96,400 non-filers due a potential median refund of $771), California, (94,900 non-filers, median refund $656), Florida (64,700 non-filers, $721) and New York (57,600 non-filers, $796).

AICPA Recommends Changes in IRS Offshore Voluntary Disclosure Program

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Washington, D.C. (March 9, 2016)

By Michael Cohn

 

The American Institute of CPAs recommended the Treasury Department and the Internal Revenue Service make a number of changes to improve the Offshore Voluntary Disclosure Program and the Streamlined Filing Compliance Procedures that allow U.S. taxpayers to voluntarily disclose previously unreported offshore assets and comply with U.S. tax laws.

 

“The remarkable success of these programs is greatly attributable to their fairness and the absence of unnecessarily punitive penalties on those taxpayers eligible to participate,” AICPA Tax Executive Committee chair Troy L. Lewis wrote in a letter Wednesday to top Treasury and IRS officials. “The AICPA believes that making certain minor revisions to the terms of the 2014 Offshore Voluntary Disclosure Program and the Streamlined Filing Compliance Procedures would both increase the number of taxpayers participating and improve the fairness and equity of the programs.”

 

For the OVDP, the AICPA recommended that the IRS restore the previous practice of not requiring an upfront payment of the miscellaneous offshore penalty by taxpayers. The IRS should also apply the 50 percent miscellaneous “super” penalty only to accounts held at institutions listed on the Foreign Financial Facilitators List, the AICPA suggested, and it should permit the waiver of the passive foreign investment company computations for small account cases.

 

For the Streamlined Filing Compliance Procedures, the AICPA recommended the IRS modify the penalty base to include only those assets associated with tax non-compliance, and expand the Streamlined Filing Compliance Procedures to include certain classes of non-willful individuals who are currently ineligible for either the Streamlined Foreign Offshore Procedures (SFOP) or the Streamlined Domestic Offshore Procedures (SDOP), as well as provide additional guidance in the SFOP and SDOP filing instructions for taxpayers on the specific factors the IRS will consider in judging whether their non-compliance was willful.

 

Lewis provided a detailed description in the letter of each of the Institute’s six recommendations, along with the AICPA’s rationale for supporting them.

Tips on the tax effects of divorce or separation

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Income tax may be the last thing on your mind after a divorce or separation. However, these events can have a big impact on your taxes. Here are some key tax tips to keep in mind if you get divorced or separated.

·         Child support. If you pay child support, you can’t deduct it on your tax return. If you receive child support, the amount you receive is not taxable.

·         Alimony. If you make payments under a divorce or separate maintenance decree or written separation agreement, you may be able to deduct them as alimony. This applies only if the payments qualify as alimony for federal tax purposes. If the decree or agreement does not require the payments, they do not qualify as alimony. If you get payments that qualify as alimony, they are taxable in the year you receive them. You may need to increase the tax you pay during the year to avoid a penalty by making estimated tax payments or increasing taxes withheld from your wages.

·         Spousal IRA. If you get a final decree of divorce or separate maintenance by the end of your tax year, you can’t deduct contributions you make to your former spouse’s traditional IRA. You may be able to deduct contributions you make to your own traditional IRA.

·         Name changes. If you change your name after your divorce, notify the Social Security Administration (SSA) of the change. File Form SS-5, “Application for a Social Security Card.” You can get the form at www.SSA.gov or call (800) 772-1213 to order it. The name on your tax return must match the SSA records. A name mismatch can delay your refund or cause other correspondence from the IRS.

© 2015

To climb or to cruise. America's economy

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Where next for interest rates? When the Federal Reserve raised them by a quarter-point in December, it predicted that inflation, which then languished beneath 1%, would gradually pick up in 2016. That prediction is beginning to come true. Core inflation, which excludes energy and food prices, is at 1.7%—its highest since June 2014. Today’s monthly jobs report will reveal whether the labour market continues to boil. If consensus forecasts are right, the economy added 190,000 jobs in February. Such gains would, by themselves, make more rate rises this year look certain. But inflation expectations are in the dumps. That, combined with the stockmarket’s tumble, makes the Fed’s other forecast in December—that rates would go up four times in 2016—look optimistic. The smart money is on a slow, but not a stalled, lift-off; expect another rise or two by Christmas.

Source: The Economist

IRS Warns of New Phishing Scheme Involving W-2s

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Washington, D.C. (March 1, 2016)

By Michael Cohn

 

The Internal Revenue Service issued an alert Tuesday to payroll and human resources professionals to beware of an emerging phishing email scheme that purports to come from company executives and requests personal information on employees.

 

The IRS said it has learned this scheme—part of the surge in phishing emails seen this year—already has claimed several victims as payroll and human resources offices mistakenly email payroll data, including Forms W-2 that contain Social Security numbers and other personally identifiable information, to cybercriminals posing as company executives.

 

“This is a new twist on an old scheme using the cover of the tax season and W-2 filings to try tricking people into sharing personal data,” said IRS Commissioner John Koskinen in a statement. “Now the criminals are focusing their schemes on company payroll departments. If your CEO appears to be emailing you for a list of company employees, check it out before you respond. Everyone has a responsibility to remain diligent about confirming the identity of people requesting personal information about employees.”

 

IRS Criminal Investigation already is reviewing several cases in which people have been tricked into sharing SSNs with what turned out to be cybercriminals. Criminals using personal information stolen elsewhere seek to monetize data, including by filing fraudulent tax returns for refunds.

 

This phishing variation is known as a “spoofing” email. It will contain, for example, the actual name of the company chief executive officer. In this variation, the “CEO” sends an email to a company payroll office employee and requests a list of employees and information including SSNs.

 

The following are some of the details contained in the e-mails:

 

• Kindly send me the individual 2015 W-2 (PDF) and earnings summary of all W-2 of our company staff for a quick review

 

• Can you send me the updated list of employees with full details (Name, Social Security Number, Date of Birth, Home Address, Salary) as at 2/2/2016.

 

• I want you to send me the list of W-2 copy of employees wage and tax statement for 2015, I need them in PDF file type, you can send it as an attachment. Kindly prepare the lists and email them to me asap.

 

Among the companies that were scammed was the social media mobile app developer Snapchat. “We’re a company that takes privacy and security seriously,” the company said in an apology to its employees Friday. “So it’s with real remorse–and embarrassment–that one of our employees fell for a phishing scam and revealed some payroll information about our employees. The good news is that our servers were not breached, and our users’ data was totally unaffected by this. The bad news is that a number of our employees have now had their identity compromised. And for that, we’re just impossibly sorry.”

 

Snapchat said that last Friday its payroll department was targeted by an email phishing scam in which a scammer impersonated the company’s CEO and asked for employee payroll information.

 

“Unfortunately, the phishing email wasn’t recognized for what it was–a scam–and payroll information about some current and former employees was disclosed externally,” said the company. “To be perfectly clear though: None of our internal systems were breached, and no user information was accessed.”

 

The IRS noted that it recently renewed a wider consumer alert for e-mail schemes after seeing an approximate 400 percent surge in phishing and malware incidents so far this tax season and other reports of scams targeting others in a wider tax community.

 

The emails are designed to trick taxpayers into thinking these are official communications from the IRS or others in the tax industry, including tax software companies. The phishing schemes can ask taxpayers about a wide range of topics. E-mails can seek information related to refunds, filing status, confirming personal information, ordering transcripts and verifying PIN information.

 

The IRS, state tax agencies and tax industry have joined together in a public awareness campaign – Taxes. Security. Together. – to encourage taxpayers and tax professionals to do more to protect personal, financial and tax data. See IRS.gov/taxessecuritytogether or Publication 4524 for additional steps.

Providing tax-free fringe benefits to employees

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One way you can find and keep valuable employees is to offer the best compensation package possible. An important part of any compensation package is fringe benefits, especially tax-free ones. From an employee’s perspective, one of the most important fringe benefits you can provide is medical coverage. Disability, life, and long-term care insurance benefits are also significant to many employees. Fortunately, these types of benefits can generally be provided on a tax-free basis to your employees. Let’s look at these and other common fringe benefits.

 

·         Medical coverage. If you maintain a health care plan for your employees, coverage under that plan isn’t taxable to them. Employee contributions are excluded from income if pretax coverage is elected under a cafeteria plan; otherwise, such amounts are included in their wages, but are deductible on a limited basis as itemized deductions.

Caution: Employers must meet a number of new requirements when providing health insurance coverage to employees. For instance, benefits must be provided through a group health plan (either fully insured or self-insured). Reimbursing an employee for individual policy premium payments can subject the employer to substantial penalties.

 

·         Disability insurance. Your disability insurance premium payments aren’t included in your employee’s income, nor are your contributions to a trust providing disability benefits. The employees’ premium payments (or any other contribution to the plan) generally are not deductible by them or excludable from their income. However, they can make pretax contributions to a cafeteria plan for their disability benefits; such contributions are excludable from their income.

 

·         Long-term care insurance. Plans providing coverage under qualified long-term care insurance contracts are treated as health plans. Accordingly, your premium payments under such plans aren’t taxable to your employees. However, long-term care insurance can’t be provided through a cafeteria plan.

 

·         Life insurance. Your employees generally can exclude from gross income premiums you pay on up to $50,000 of qualified group term life insurance coverage. Premiums you pay for qualified coverage exceeding $50,000 is taxable to the extent it exceeds the employee’s contributions toward coverage.

 

·         Retirement plans. Qualified retirement plans that comply with a host of requirements receive favorable income tax treatment, including (1) current deduction by you, the employer, for contributions to the plan; (2) deferral of the employee’s tax until benefits are paid; (3) deferral of taxes on plan earnings; and (4) in the case of 401(k) plans and SIMPLE plans, the employee’s ability to make pretax contributions.

 

·         Dependent care assistance. You can provide your employees with up to $5,000 ($2,500 for married employees filing separately) of tax-free dependent care assistance during the year. The dependent care services must be necessary for the employee’s gainful employment.

 

·         Adoption assistance. Generally, in 2015, employees can exclude from income qualified adoption expenses of up to $13,400 for each eligible child paid or reimbursed by you under an adoption assistance program.

 

·         Educational assistance. You can help your employees with their educational pursuits on a tax-free basis through educational assistance plans (up to $5,250 per year), job-related educational assistance, and qualified scholarships.

 

Benefits provided to self-employed individuals. Generally, different and less favorable tax rules apply to certain fringe benefits provided to self-employed individuals, including sole proprietors (including farmers), partners, members of limited liability companies (LLCs) electing to be treated as partnerships, and more-than-2% S corporation shareholders. However, except in the case of a more-than-2% S corporation shareholder, if the owner’s spouse is a bona fide employee of the business, but not an owner, the business may be able to provide tax-free benefits to the spouse just like any other employee.

© 2016

Determine if the Net Investment Income Tax applies to you

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

 

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

·          

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

 

Filing Status  / Threshold Amount

Single or Head of household / $200,000

Married filing jointly / $250,000           

Married filing separately / $125,000 

Qualifying widow(er) with a child / $250,000

 

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

o    Interest,

o    Dividends,

o    Capital gains,

o    Rental and royalty income, and

o    Non-qualified annuities.

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

 

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

 

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

Each and every taxpayer has a set of fundamental rights they should be aware of when dealing with the IRS. These are your Taxpayer Bill of Rights. Explore your rights and our obligations to protect them on IRS.gov.

 

Source:  IRS.gov

 

IRS Issues 'Dirty Dozen' List Of Tax Schemes & Scams For 2016

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By Kelly Phillips Erb, Forbes Staff

 

Each year, the Internal Revenue Service (IRS) issues a list of common tax schemes they call the “Dirty Dozen.” Taxpayers may encounter the “Dirty Dozen” schemes and scams at any time but they tend to peak during filing season as taxpayers prepare their returns or hire someone to help with their taxes.

 

For 2016, the IRS has identified these “Dirty Dozen” tax schemes as the ones to watch:

 

1.  Identity Theft. Identity theft which results in tax fraud tops the IRS Dirty Dozen list again. Identity theft, when someone uses your personal information such as your name, Social Security number (SSN) or other identifying information, without your permission, is often used by scammers to fraudulently file a tax return and claim a refund. The IRS considers combating identity theft and refund fraud a top priority and has been taking steps to boost fraud prevention, early detection, and victim assistance, including establishing a new awareness campaign: Taxes. Security. Together. If you believe you are at risk of identity theft due to lost or stolen personal information, contact the IRS Identity Protection Specialized Unit at 1.800.908.4490 or visit the IRS’ special identity protection page.

 

2.  Phone Scams. It’s no surprise to see phone scams near the top of the list. Phone scams have been making the rounds with callers pretending to be from the agents or other IRS representatives in hopes of stealing money or identities from victims. Over the past two years, nearly 4,550 victims have collectively paid over $23 million to scammers posing as IRS officials. Typically, in the scheme, callers posing as IRS representatives say the victims owe money and then threaten arrest if the amount is not paid immediately. Callers may be targeting immigrants or calling after hours or during times when it might be inconvenient to contact the IRS for verification. The IRS has noted a few patterns in these calls such as:

·         Scammers use fake names and IRS badge numbers. They generally use common names and surnames to identify themselves.

·         Scammers may be able to recite the last four digits of a victim’s Social Security Number.

·         Scammers “spoof” or imitate the IRS toll-free number on caller ID to make it appear that it’s the IRS calling.

·         Scammers sometimes send bogus IRS emails to some victims to support their bogus calls.

·         Victims hear background noise of other calls being conducted to mimic a call site.

·         After threatening victims with jail time or a driver’s license revocation, scammers hang up and others soon call back pretending to be from the local police or DMV, and the caller ID supports their claim.

If you get a phone call from someone claiming to be from the IRS and you’re not sure and you have a legitimate tax issue outstanding, call the IRS at 1.800.829.1040. If you get a phone call from someone claiming to be from the IRS and you know you don’t owe taxes, report the incident to the Treasury Inspector General for Tax Administration (TIGTA) at 1.800.366.4484.

 

3. Phishing. Phishing is a scam where criminals attempt to steal your financial information through the use of email or a fake website. In many cases, the bogus emails ask for specific personal information or entice you to click on a link in order to install spyware or other malware on your computer for the purpose of stealing your financial and personal information. Remember that the IRS doesn’t initiate contact with taxpayers by email to request personal or financial information, so don’t click on or respond to these kinds of emails. If you receive an unsolicited email that appears to be from either the IRS or an organization closely linked to the IRS, such as the Electronic Federal Tax Payment System (EFTPS), you can report it by forwarding it to phishing@irs.gov. Also be careful with emails purporting to be from companies like TurboTax, where a bogus email or a fake website poses as a legitimate site in order to get you to disclose your personal or financial information. When in doubt, assume it’s a scam.

 

4. Return Preparer Fraud. Nearly two-thirds of taxpayers rely on professional tax preparers to assist them with their returns. Most tax preparers are good people but some unscrupulous preparers may try to encourage taxpayers to claim improper credits, deductions or exemptions in hopes of boosting refunds. Use care when choosing a preparer and remember that taxpayers should use only preparers who sign the returns they prepare and enter their IRS Preparer Tax Identification Numbers (PTINs). Remember that you are responsible for the information on your tax return even if it is prepared by a professional: you cannot hide behind a tax professional’s signature if you took an inappropriate position on your tax return.

 

5. Hiding Money or Income Offshore. It is not illegal to have cash, brokerage accounts or other investments in foreign countries. It is, however, illegal to use those accounts to evade U.S. taxes by hiding that income. There are significant reporting requirements for offshore assets, including FBAR (Report of Foreign Bank and Financial Accounts) filings. Taxpayers who do not properly report and disclose those accounts are breaking the law and could face civil and criminal penalties and fines. Pay attention to reporting requirements and if you need to make a disclosure because you failed to report in the past, you may want to consider the Offshore Voluntary Disclosure Program (OVDP). Qualifying taxpayers who come in through the program can catch up on filing and payment requirements and avoid heavy fines and criminal prosecution.

 

6. Inflated Refund Claims. With more than 50% of taxpayers expected to receive a tax refund, it’s no surprise that everyone wants their share – and some, even more than their share. This makes it appealing for scam artists to promise free money in the form of inflated refunds. There are a number of variations on these refund scams but tops of the list are refunds based on fictitious Social Security benefits and false claims for education credits, the Earned Income Tax Credit (EITC), and the American Opportunity Tax Credit. In addition to the trouble it may cause you to sort out the errors – and large fees paid to the scammers – you could be penalized for filing false claims or receiving fraudulent refunds. Intentional mistakes of this kind can result in a $5,000 penalty. Also a risk? The IRS has received complaints of scam victims who lost their federal benefits, such as Social Security benefits, certain veteran’s benefits or low-income housing benefits after filing tax returns with the IRS that provided false income amounts.

 

7. Fake Charities. Bona fide charitable organizations have, as their mission, to benefit the public. Fake charities take advantage of taxpayers’ good nature in order to steal your money and potentially, your identity. Fake charities often pop up after disasters like the 2015 South Carolina floods. To avoid being taken advantage of, donate to recognized charities using check or credit card where possible. Remember that you don’t need to give out personal information, like your Social Security number, for the purpose of obtaining a receipt for your charitable donation. The best documentation on your end is a canceled check or credit card receipt so donate using those means on secure sites whenever possible.

 

8. Falsely Padding Deductions. Taxpayers are entitled to claim legitimate deductions on their tax returns including those for education, mortgage interest and charity. Taxpayers are often tempted or enticed to claim “just a little bit more” for charitable deductions or business miles that they did not travel. However, overstating deductions – even just a little –  is improper and can lead to significant civil penalties and criminal prosecution.

 

9. Excessive Claims for Business Credits. There’s no law that says you have to pay more in tax than you have to – but you do have to follow the rules. Claiming excessive business credits in order to illegally reduce your taxes is improper. Two schemes, in particular, have attracted the attention of the IRS: fraud involving the fuel tax credit and the research credit. Unsupported claims for tax credits may subject taxpayers to penalties and interest.

 

10. Falsifying Income To Claim Tax Credits. It’s usual to think of taxpayers hiding income in order to avoid taxation but there’s another scheme involving misrepresenting income: inflating or including income on a tax return that was never earned, either as wages or as self-employment income, in order to maximize credits, especially refundable credits. Refundable tax credits are those like the Earned Income Tax Credit and the Additional Child Tax which require earned income in order to qualify. With a refundable credit, you can receive a refund even if you do not owe any tax. This provides some taxpayers (and unscrupulous preparers) with an incentive to lie about income in order to claim the credit. Taxpayers who engage in this behavior not only have to pay back the erroneous refunds, including interest and penalties but may face criminal prosecution.

 

11. Abusive Tax Shelters. Abusive tax shelters don’t have to be enormous multi-million dollar tax schemes: they can involve simple trust arrangements, offshore tax schemes, and the use of multiple pass-through companies (like Limited Liability Companies (LLCs) and Limited Liability Partnerships (LLPs)) to hide ownership of the taxable income and/or assets. Remember that when something feels “too good to be true,” it probably is: you generally can’t legally avoid taxation by creating multiple layers of companies or trusts or by manipulating the ownership of assets. Legitimate tax planning is not the same as tax evasion. Don’t get sucked into schemes promoted by advisors who promise you that you can permanently avoid taxation by buying their shelters and/products.

 

12. Frivolous Tax Arguments. The IRS warns against using common frivolous tax arguments made by those who oppose compliance with federal tax laws. Examples of frivolous tax arguments include contentions that taxpayers can refuse to pay taxes on religious or moral grounds by invoking the First Amendment; that the only “employees” subject to federal income tax are employees of the federal government; and that only foreign-source income is taxable. The penalty for taking one of these positions on a tax return is $5,000; additional penalties may also apply, including criminal prosecution. You can read more at the IRS’ 2016 version of “The Truth about Frivolous Tax Arguments.”

 

Source: www.forbes.com

LA UNIDAD TRIBUTARIA: CORRECCION MONETARIA O CONFISCACION TRIBUTARIA

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LA UNIDAD TRIBUTARIA: CORRECCION MONETARIA O CONFISCACION TRIBUTARIA

Por Lic. Gustavo Serrano Bauza @gserrano94

Contador Público-Espec. Derecho Financiero y Tributario

Experto en Fiscalidad Internacional

 

Venezuela sufrió a finales de la década de los 80, del siglo XX, niveles de inflación que superaban un dígito, entrando así en los estándares internacionales de países que debían medir y considerar sus niveles de inflación, a través de una corrección monetaria en la determinación de sus cifras financieras. Este mismo efecto incidía la situación tributaria de los contribuyentes, viendo sus capacidad económica y contributiva afectada por el fantasma de la inflación, que cada año iba tomando más forma y presencia, a través de su cada vez más alto índice.

 

La inflación más alta sufrida en esa década, fue de un ochenta y un por ciento (81%) alcanzada en el año 1986, motivo por el cual, en el año 1991, bajo el segundo período presidencial de Carlos Andrés Pérez, se realiza una reforma de la Ley de Impuesto sobre la Renta, creando el Título IX de la Ley, denominado “De los Ajustes por Inflación”, con el objetivo de incidir la determinación del Enriquecimiento Neto Gravable del contribuyente, con la inflación acumulada que se originaba en su ejercicio gravable, estableciéndose un nuevo enriquecimiento neto, conformado por Ingresos, menos Costos, Gastos, más o menos el resultado del Ajuste por Inflación.

 

Este fenómeno distorsionante, fue afectando cada vez más la situación económica y financiera del país y, por ende, de los contribuyentes, originando como consecuencia que el 27 de mayo de 1994, bajo el segundo período presidencial de Rafael Caldera, se realizara una reforma al Código Orgánico Tributario (COT) y se creara un mecanismo de corrección, de las distintas bases monetarias establecidas en las Leyes Tributarias.

 

Es así, como el artículo 229 del aquel entonces COT de 1994, creaba la llamada Unidad Tributaria (UT), como una medida de valor expresada en moneda de curso legal, cuyo objetivo principal es equiparar y actualizar a la realidad inflacionaria, los montos de las bases de imposición, exenciones y sanciones, entre otros, establecidos en la Leyes Tributarias. Específicamente, el texto de este artículo señalaba lo siguiente:

 

“Artículo 229. A los efectos tributarios se crea la unidad tributaria que se fija en el monto de un mil bolívares (Bs. 1.000,00). Esta cantidad se reajustará a comienzos de cada año por resolución de la Administración Tributaria, previa opinión favorable de las Comisiones Permanentes de Finanzas del Senado y de la Cámara de Diputados del Congreso de la República, sobre la base de la variación producida en el Índice de Precios al Consumidor (IPC) en el área metropolitana de Caracas, del año inmediatamente anterior, que publicará el Banco Central de Venezuela antes del día 15 de enero de cada año.

 

En consecuencia, se convierten en unidades tributarias o fracciones de las mismas, los montos establecidos en las diferentes leyes y reglamentos tributarios, con inclusión de este Código.” (Resaltado del Autor).

 

Esta medida de corrección monetaria, se ha mantenido vigente durante las posteriores reformas al COT de 1994, específicamente en las reformas de los años 2001 y 2014, siendo en estas últimas contemplada en los artículos 121 y 131, numeral 15, respectivamente.

En ambos Códigos se establece la facultad de la Administración Tributaria, de Reajustar la unidad tributaria (U.T.) dentro de los quince (15) primeros días del mes de febrero de cada año, previa opinión favorable de la Comisión Permanente de Finanzas de la Asamblea Nacional, sobre la base de la variación producida en el Índice de Precios al Consumidor (IPC), hasta el 2014 y el Índice Nacional de Precios al Consumidor (INPC), a partir del 2015, del Área Metropolitana de Caracas, del año inmediatamente anterior, publicado por el Banco Central de Venezuela. La opinión de la Comisión Permanente de Finanzas de la Asamblea Nacional, deberá ser emitida dentro de los quince (15) días continuos siguientes de solicitada.

 

Esta medida de corrección monetaria ha sido de tanta importancia, en una economía que ha estado inmersa en niveles de inflación que desde el año 1994, ha superado las cifras de un dígito; que otras Leyes en las cuales no se crean y exigen tributos, se ha adoptado como mecanismo de corrección de sus aspectos materiales monetarios, tal y como ha sido la antigua Ley de Alimentación, hoy día Ley del Cesta Ticket Socialista, la Ley de Tránsito y Transporte Terrestre, entre otras.

 

Con la UT, anualmente se ajustan las bases de inclusión, exclusión, gravamen, beneficios y sanciones establecidos en las Leyes Tributarias. Ejemplo de ello, lo evidenciamos en el propio COT, la Ley de Impuesto sobre la Renta (LISLR), Ley del Impuesto al Valor Agregado (LIVA), Ley Orgánica de Aduanas (LOA), Ordenanzas Municipales del Impuesto sobre Actividades Económicas.

 

El artículo 316 de la Constitución Nacional, establece que “El sistema tributario procurará la justa distribución de las cargas públicas según la capacidad económica del o de la contribuyente, atendiendo al principio de progresividad, así como la protección de la economía nacional y la elevación del nivel de vida de la población, y se sustentará para ello en un sistema eficiente para la recaudación de los tributos”.

 

La capacidad económica y progresividad del sistema tributario, son desarrolladas mediante la incorporación, observación y cumplimiento, del principio de Realidad Económica. Este principio ha sido incorporado en nuestro COT en su artículo 5 e investigado y analizado, por la doctrina y la jurisprudencia patria; permitiéndonos concluir que las normas que integran el denominado derecho tributario material en el caso de los impuestos- hechos imponibles, exenciones o exoneraciones u otros beneficios – poseen una esencia económica, representada por las manifestaciones de riqueza valoradas por el legislador al establecer los presupuestos, que evidencian o hacen presumir la capacidad de los contribuyentes.

 

Es por lo antes expuesto, que la UT debe ser determinada con base a la realidad de la inflación que incide a la economía del país en un ejercicio determinado; la determinación incorrecta o manipulación de su valor, mediante una sub estimación de la misma, ocasiona que sujetos que no poseen la capacidad contributiva necesaria, sean incididos por el tributo, originando una disminución ilegitima de su patrimonio, so pena de incurrir el Estado en una posible confiscación.

 

A pesar de que el COT del año 1999 y sub siguientes, establecen de una manera muy clara el mecanismo de ajuste del valor de la UT, desde el año 2007 hasta el año 2016, la Administración Tributaria y la Asamblea Nacional, aprobaron valores de UT por debajo de los niveles de inflación obtenidos en cada uno de esos años.

 

En la tabla "Evolución de la UT 2007 - 2016" publicada al inicio de este artículo, podemos evidenciar que la UT debería estar en un valor mínimo de Bs. 994,20, una vez considerado los niveles de inflación generados desde el año 2006 hasta el año 2015. Esto demuestra que, durante este período, la Administración Tributaria y la Asamblea Nacional han generado una sub estimación del valor de la UT y, por ende, han perfeccionado la incorporación de sujetos como contribuyentes de distintos tributos, cuando no han debido serlo, distorsionando así su capacidad contributiva.

 

A finales del mes de enero de 2016, el SENIAT presento ante la Comisión Permanente de Finanzas de la Asamblea Nacional, la propuesta de ajuste de la UT a Bs. 177, realizando un ajuste de solo el 18% en comparación con el año 2015, desconociendo así el contenido y mandato del artículo 131 del COT, el cual obliga a realizar el ajuste por una proporción no menor a la inflación acumulada del año anterior. Este ajuste fue contrario a la inflación acumulada reportada hasta el mes de septiembre de 2015, por el Banco Central de Venezuela (BCV), la cual es del 141,5%, en cuyo caso, de tomarse esta base mínima de ajuste, la UT debió haber sido ajustada por lo menos a Bs. 362,30; claro está sin considerar el rezago acumulado del 2007 al 2015 que tiene su valor.

 

La Asamblea Nacional, en ejercicio de la facultad concebida en el artículo 131, numeral 15 del COT, emitió su opinión desfavorable a este valor y devolvió al SENIAT su propuesta de ajuste, debidamente motivada, siendo el motivo principal, que el BCV no ha cumplido con su obligación de publicar la inflación acumulada real hasta el mes de diciembre de 2015 y, por lo tanto, no puede aprobarse el ajuste de la UT por un valor que es contrario a lo establecido por el COT.

 

Por su parte, el día 11 de febrero de 2016, el SENIAT en flagrante violación al COT, publico en la Gaceta Oficial de la República Bolivariana de Venezuela N° 40.846, la providencia N° SNAT/2016/011, mediante la cual ajusta la UT de Bs. 150 a Bs. 177. Este ajuste, tal y como he señalado previamente, es una violación al COT y automáticamente sería una violación a los principios de legalidad, certeza tributaria y capacidad contributiva, establecidos en la Constitución Nacional, generando que todos los actos de determinación de tributos que realice la Administración Tributaria, basados en este ajuste a la UT, sean de nulidad absoluta, de conformidad con lo establecido en el artículo 250 del COT del 2014.

 

La Asamblea Nacional y el Tribunal Supremo de Justicia, están en la obligación de revertir este acto ilegitimo del Ejecutivo Nacional y restituir los derechos constitucionales de los contribuyentes.

Tax advantages of small business stock

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