Tax Tips

This Page Contains Various Tax Tips and Scroll Down for Articles

Employee Retention Credit – Beware of fraud. Posted 3-20-23

The following notice from IRS came in a few minutes ago. In over 40 years of public practice (which includes the years with the notorious wind farm abusive tax shelters), I have never seen so much IRS communication on any single topic. IRS is aggressively pursuing taxpayers and promoters who make fraudulent Employee Retention Credit claims. If you have any question at all regarding your qualification for that credit, contact your CPA or attorney immediately. This is truly a serious matter.

From IRS, IR-2023-49, March 20,2023:

IRS opens 2023 Dirty Dozen with warning about Employee Retention Credit claims; increased scrutiny follows aggressive promoters making offers too good to be true.

WASHINGTON – In a further warning to people and businesses, the Internal Revenue Service added widely circulating promoter claims involving Employee Retention Credits as a new entry in the annual Dirty Dozen list of tax scams.

For the start of the annual Dirty Dozen list of tax scams, the IRS spotlighted Employee Retention Credits following blatant attempts by promoters to con ineligible people to claim the credit. Renewing several earlier alerts, the IRS highlighted schemes from promoters who have been blasting ads on radio and the internet touting refunds involving Employee Retention Credits, also known as ERCs. These promotions can be based on inaccurate information related to eligibility for and computation of the credit.

“The aggressive marketing of these credits is deeply troubling and a major concern for the IRS,” said IRS Commissioner Danny Werfel. “Businesses need to think twice before filing a claim for these credits. While the credit has provided a financial lifeline to millions of businesses, there are promoters misleading people and businesses into thinking they can claim these credits. There are very specific guidelines around these pandemic-era credits; they are not available to just anyone. People should remember the IRS is actively auditing and conducting criminal investigations related to these false claims. We urge honest taxpayers not to be caught up in these schemes.”

The IRS is stepping up enforcement action involving these ERC claims, and people considering filing for these claims – only valid during the pandemic for a limited group of businesses – should be aware they are ultimately responsible for the accuracy of the information on their tax return. The IRS Small Business/Self-Employed division has trained auditors examining these types of claims, and the IRS Criminal Investigation Division is on the lookout for promoters of fraudulent claims for credits.

Abusive ERC promotions highlight day one of the IRS annual Dirty Dozen campaign – a list of 12 scams and schemes that put taxpayers and the tax professional community at risk of losing money, personal information, data and more.

This annual list of schemes and scams is aimed at helping raise awareness to protect honest taxpayers from aggressive promoters and con artists. These schemes put people at financial risk and increase the chances people could become victims of identity theft.

Some items on the Dirty Dozen list are new and some make a return visit. While the list is not a legal document or a formal listing of agency enforcement priorities, it is intended to alert taxpayers and the tax professional community about various scams and schemes at large.

“Businesses should be wary of advertised schemes and direct solicitations promising tax savings that are too good to be true,” Werfel said. “They should listen to the advice of their trusted tax professional. Taxpayers should remember that they are always responsible for the information reported on their tax returns. Improperly claiming this credit could result in taxpayers having to repay the credit along with potential penalties and interest.”

When properly claimed, the ERC is a refundable tax credit designed for businesses that continued paying employees while shut down due to the COVID-19 pandemic or that had a significant decline in gross receipts during the eligibility periods. The credit is not available to individuals.

Beware of ERC promotions
While many eligible employers claimed and have already received the ERC, some third parties continue to widely advertise their services targeting taxpayers who may not be eligible for the ERC. Unfortunately, these advertisements, along with the increased prevalence of websites touting how easy it is to qualify for the ERC, lend an air of legitimacy to abusive claims for refund.

Tax professionals have reported receiving undue pressure from clients to participate and claim the ERC, even when the tax professional believes the client is not entitled to the credit. The IRS encourages the tax professional community to continue to advise clients not to file ERC claims when the tax professional believes they do not qualify.

The IRS has been warning about this scheme since last fall, but there continue to be attempts to claim the ERC during the 2023 tax filing season.

The IRS Office of Professional Responsibility sent a special bulletin to tax professionals on March 7 outlining core responsibilities for ERC claims under Circular 230.

Third party promoters of the ERC often don’t accurately explain eligibility for and computation of the credit. They may make broad arguments suggesting that all employers are eligible without evaluating an employer’s individual circumstances. For example, only recovery startup businesses are eligible for the ERC in the fourth quarter of 2021, but these third-party promoters fail to explain this limitation. In addition, some third parties do not inform employers that they cannot claim the ERC on wages that were reported as payroll costs in obtaining Paycheck Protection Program loan forgiveness.

Additionally, some of these advertisements exist solely to collect the taxpayer’s personally identifiable information in exchange for false promises. The scammers then use the information to conduct identity theft.

The IRS reminds all taxpayers that the willful filing of false information and fraudulent tax forms can lead to serious civil and criminal penalties.

Properly claiming the ERC
Eligible taxpayers can claim the ERC on an original or amended employment tax return for qualified wages paid between March 13, 2020, and Dec. 31, 2021. However, to be eligible, employers must have:

• Sustained a full or partial suspension of operations due to orders from an appropriate governmental authority limiting commerce, travel or group meetings because of COVID-19 during 2020 or the first three quarters of 2021,
• Experienced a significant decline in gross receipts during 2020 or a decline in gross receipts during the first three quarters of 2021, or
• Qualified as a recovery startup business for the third or fourth quarters of 2021.

Reporting tax-related fraud and scams
Employers should report instances of fraud and IRS-related phishing attempts to the IRS at phishing@irs.gov and to the Treasury Inspector General for Tax Administrationat 800-366-4484.

Besides the promotion of ERC claims to employers who are not eligible for the credit, there are many other scams and schemes the IRS is warning individuals, businesses and tax professionals about in this year’s annual Dirty Dozen campaign.

As part of the Dirty Dozen awareness effort, the IRS encourages people to report tax-related, illegal activities relating to ERC claims, as well as individuals who promote improper and abusive tax schemes and tax return preparers who deliberately prepare improper returns.

To report an abusive tax scheme or a tax return preparer, people should mail or fax a completed Form 14242, Report Suspected Abusive Tax Promotions or Preparers and any supporting materials to the IRS Lead Development Center in the Office of Promoter Investigations.

Mail:

Internal Revenue Service Lead Development Center
Stop MS5040
24000 Avila Road
Laguna Niguel, California 92677-3405
Fax: 877-477-9135

Alternatively, taxpayers and tax practitioners may send the information to the IRS Whistleblower Office for possible monetary reward.

For more information, see Abusive Tax Schemes and Abusive Tax Return Preparers.

The Dirty Dozen is a collaboration with the Security Summit initiative. Working together as the Security Summit, the IRS, state tax agencies and the nation’s tax industry have taken numerous steps over the last seven years to warn people to watch out for common scams and schemes during tax season.

Partnership & S-Corporation IRS Forms K-2 & K-3 Relief for 2022 – Finally! REVISED POSTING 1-5-23

Today we received our copy of the IRS Final Instructions for preparing 2022 forms K-2 and K-3. These instructions still include the notice requirement to partners of a partnership, members on an LLC filing as a partnership (Form 1065), or stockholders in S Corporations but the notice dates and requirements have been changed.

To avoid filing Schedules K-2 & K-3, the first two requirements of my 1-4-23 posting (repeated in today’s posting) still apply but requirements 3 and 4 have been updated.

Requirements:

1. Entity’s foreign activity, if any, must be limited as described in the form instructions. For example, a very small amount of foreign dividends passed through from investments in mutual funds held by a third-party broker such as Edward Jones, will not disqualify the exception.
2. If the entity is a partnership, all direct partners must be U.S. citizens or resident alien partners (domestic estates and trusts with solely U.S. citizens and/or resident alien beneficiaries are included).
3. Partner notification (updated). With respect to a partnership that satisfies criteria 1 and 2, partners receive a notification from the partnership at the latest when the partnership furnishes the Schedule K-1 to the partner. The notice can be provided as an attachment to the Schedule K-1. The notification must state that partners will not receive Schedule K-3 from the partnership unless the partners request the schedule.
4. No 2022 Schedule K-3 requests by the 1-month date (updated). The partnership does not receive a request from any partner for Schedule K-3 information on or before the 1-month date. The “1-month date” is 1 month before the date the partnership files the Form 1065. For tax year 2022 calendar year partnerships, the latest 1-month date is August 15, 2023, if the partnership files an extension.

Please call us if you have questions. US Tax laws are constantly changing and, although we do our best to keep this page current, it is intended for informational purposes only and not support for any tax filings. Before filing any tax returns be sure to contact your own tax preparer.

Partnership & S-Corporation IRS Forms K-2 & K-3 Relief for 2022 – Finally! (Posted 1-4-23)

See 1-5-23 Revision. Like many areas of tax law, it is constantly changing. On 1-5-23, we received a copy of the IRS Final Instructions for Forms K-2 & K-3. This posting has been revised by the posting on 1-5-23.

For the 2021 tax year, IRS issued a new filing requirement and forms for Partnership (including LLC) and S-Corporation returns. These forms were intended to capture and report any foreign activity conducted by the entity and report that activity to the owners. The forms are extremely long and complex (with one form being up to 20 pages long per partner.) When originally issued, all partnerships and S-Corporations needed to file the forms whether they had foreign activity or not. It is important to note that the vast number of partnerships and S-Corporations are small businesses with few partners or stockholders and no foreign activity at all. The cost of compliance would significantly increase the cost of preparing and filing the tax returns.

Due to the complexity of the compliance and the related forms, the filing requirement was delayed one year to 2022.

As the 2022 filing season approached, the tax preparation profession geared up for this onerous filing task while, at the same time, hoping that common sense would prevail in Washington and relief would be granted. Finally, some relief was granted but there are strings attached to that relief.

If the partnership and/or S-Corporation meets all the following requirements, forms K-2 and K-3 need not be filed for 2022. At this time, there is no guidance about 2023 filing requirements so this may just be another one-year delay. Time will tell.

For the Domestic Filing Exception to apply ALL these requirements must be met:

1. Entity’s foreign activity, if any, must be limited as described in the form instructions. For example, a very small amount of foreign dividends passed through from investments in mutual funds held by a third-party broker such as Edward Jones, will not disqualify the exception.
2. If the entity is a partnership, all direct partners must be U.S. citizens or resident alien partners (domestic estates and trusts with solely U.S. citizens and/or resident alien beneficiaries are included).
3. Partners/shareholders must be timely notified that the entity will not be issuing Schedule K-3 unless specifically requested. The partner/shareholder notification must be made no later than two months before its filing deadline, without extensions. For calendar-year partnerships, the date for such required notification would be January 15, 2023. (Revised – see 1-5-23 posting.)
4. The entity does not receive any specific requests from a partner/shareholder for a Schedule K-3 from the partnership/LLC prior to one month before the entity’s filing deadline, without extensions. For calendar-year partnerships, the date for the timely notice would be February 15, 2023. If a partner/shareholder requests a Schedule K-3 from the entity after the February 15, 2023 deadline, then the entity must provide the information to the requesting partner/shareholder only and does not have to file the Schedules K-2 and K-3 with the IRS. (Revised – see 1-5-23 posting.)

Action must be taken immediately. As soon as possible, and no later than January 15, 2023:

• Notify, electronically or by regular mail, all partners/shareholders of your entity’s intention to not provide Schedule K-3 unless specifically requested (refer to Item 3 above); and
• Track and comply with specific requests from partners/shareholders for a Schedule K-3 (refer to Item 4 above).

For the communications to qualify as timely notice, the partner/shareholder notification must be made by your entity no later than two months before its filing deadline, without extensions. For calendar year partnerships and S-Corporations, the date for such required notification would be January 15, 2023 and the date for the timely notice back from the partner/shareholder would be February 15, 2023. It is important to track both the date that the notice is sent and the date that any reply from partners/shareholders are received (see #4 above). Please also note that you must be able to support the mailing of the notice which will require using certified mail (or equivalent) and read notifications for emails are recommended.

Note that if a partner/shareholder requests a Schedule K-3 from your entity after the specified deadline, you still have an obligation to provide the Schedule K-3, but you will only need to provide the information to the requesting partner/shareholder only and you do not have to file the K-2 and K-3 with the IRS.

Please call us with any questions about how these provisions may apply to your business.

Employee Retention Credit (ERC) Fraud (Posted 11-17-22)

This Tax Letter came in this morning from Bob Jennings of Taxspeaker. He is a nationally renowned and well respected tax educator that provides continuing education  to CPAs and attorneys.  I have trusted his fully documented and supported tax advice for 40 years.

Recently one of our business clients was contacted by one of these fraudsters. Their advertising is slick and their claims too good to be true. I’m sharing this information with my clients and all visitors to the website in an attempt to protect them against the fraud.

From Bob Jennings at Taxspeaker:

We are finding nationwide a demand for a strongly worded warning letter to our clients about this exploding ERC fraud. In Des Moines this week, the demand reached the point that I promised an immediate client letter protecting us against client liability and warning clients about this issue. It is an incredibly strongly worded letter that you may wish to modify, but after one of my clients claiming he qualified for a $600,000+ refund and that the 3rd party would stand behind it, I had enough.

Find the letter below, please modify as needed, but I personally want those strong words in the letter.

Dear Client

Many business owners have been contacted about having a third party calculate an “Employee Retention Credit” amounting to tens and even hundreds of thousands of dollars. We are finding that fraud in that industry is rampant, the scam artists are preying on your gullibility over a complex tax matter, and that the 3rd party providers are not telling you important facts such as:

• Owner and owner family wages do not qualify
• Tax returns must be amended to reduce wage deductions
• When returns are amended to reduce deductions you will owe additional tax and penalties for late payment
• The supposed “supply chain” issues do not exist unless (IRS Notice 2021-20) there has been at least a 10% reduction in hours or revenues, and the disruption results in decreased profits
• The claims “Your accountant didn’t know about this” are classic indicators of a scam perpetrated upon the uninformed business owner
• Ask yourself how long this “expert” company has really been in business
• And, most importantly, when the IRS audit comes, and it will, are you prepared to lose your company over this?

Audits are already occurring on the ERC claims prepared by third parties, with disastrous results for the business owner. We want to warn you that the IRS has specific rules about tax preparation when the preparer knows the return is incorrect. IRS Circular 230 requires us to inform you that if you take this credit against our advice that:

1. Your return is incorrect
2. Your return should be amended
3. Significant penalties will apply for underpayment and various other violations

Additionally, taking this credit against our advice indicates that you trust an unknown 3rd party’s “advice” more than our guidance. We will not risk our own company in this situation and will not sign any amended 941’s based on this 3rd party information, and our ability to prepare any further returns for you is being reconsidered.

Frankly, we are sending this letter to protect ourselves if you follow this 3rd party, probable fraud situation. We do not believe you qualify for the ERC, we recommend herein that you do not take it, and we will in no way be responsible for any audits, penalties, representation or correspondence regarding a 3rd party ERC claim. If you still believe you qualify for the ERC against our advice, we will need you to obtain an opinion letter regarding this credit from a legal tax firm that your business qualifies before we will be able to proceed with any further income tax relationship.

In all of our years of practice we have never had to write a letter such as this. The fraud is rampant, the penalties are so severe as to lose your business, and the risks are too great to go without our warning to you.

Changes at IRS (Posted 11-3-22)

With all the mis-information and dis-information we get everyday from the news media, I’m sharing an article I received this morning from my professional income tax research service, Research Institute of America.  The article was written by Tim Shaw. Hopefully it will serve to clear the fog about IRS and where it is going.

From Tim: The newly named acting commissioner of the IRS, along with two former holders of the position, outlined the agency’s immediate goals following the authorization of $80 billion in additional funding, as well as guiding principles it should maintain moving forward.

Just days after the interim replacement for outgoing IRS Commissioner Chuck Rettig was announced, now acting Commissioner Douglas O’Donnell addressed an audience of tax practitioners and government officials. Speaking November 1 at a hybrid tax conference co-hosted by the American Institute of Certified Public Accountants (AICPA) and the Chartered Institute of Management Accountants (CIMA) in Washington, D.C., O’Donnell provided the first major update on how the IRS has been acting on its 10-year appropriation from the Inflation Reduction Act (PL 117-169).

“Simply put, the approximately $80 billion will enable us to broaden our horizons in terms of what we are and what we can do to enhance the experience for taxpayers, tax pros, [and], frankly, everyone that interacts with the system,” he said in his opening remarks. “We will use these resources wisely and efficiently to achieve the improvements that we all know that we need.”

To help facilitate what O’Donnell described as broad “transformation efforts,” a new central office within the IRS has been established. According to the new interim commissioner, this office will coordinate the implementation of the inflation bill’s myriad provisions with various divisions, information technology staff, and the Human Capital Office. Such cross-departmental collaboration has already been instrumental in the beginning months since the legislation’s enactment. According to O’Donnell, the IRS aims to have prepared a strategic operating plan, as required by Treasury Secretary Janet Yellen.

O’Donnell said that right now, hiring is a major priority, especially ahead of the upcoming tax filing season. New hires will consist of IT experts, data scientists, and compliance enforcement agents. He made a point to specifically refute the notion that the agency will double its roster of auditors overnight.

“It is not possible to double the workforce in any component of our organization that has any size. It’s just not going to happen,” said O’Donnell. He later rebuffed “wild inaccuracies” surrounding messaging from some lawmakers that the funding will be used to unleash “an army of armed agents to audit and harass taxpayers.” O’Donnell, echoing his predecessor, emphasized that low-and middle-income families and small businesses will not be the subject of heightened scrutiny, citing Yellen’s directive that audit rates will not rise above historic norms for taxpayers making under $400,000 per year.

According to O’Donnell, the IRS currently employees 38,000 fewer workers than in 1992 when the population of the U.S. was 30% smaller. He noted that the modern tax code is substantially more complex, especially surrounding cross-boarder activity. Alongside bringing on new staff, a simultaneous goal should also be to retain the existing workforce, he continued, as the agency has an annual attrition rate of 8,000 people, largely due to retirement.

Speaking to the outstanding backlog of unprocessed paper returns, O’Donnell reaffirmed that the goal is still to clear the current inventory by the end of this calendar year. To prevent future delays, he said the IRS is prioritizing a shift toward digital. This includes scannable returns to expedite processing, more forms that can be filed electronically, and online taxpayer correspondence.

“We have a great deal of work ahead of us, but I know that the IRS employees and leaders are up to the task,” O’Donnell closed. “We have already begun to set our sights super high. We got the $80 billion. There is an expectation that we deliver and it is a heavy responsibility, one that we are taking very seriously.

However, former IRS Commissioner Charles Rossotti, who served in the role from 1997-2002 under presidents Bill Clinton and George W. Bush, said that in the grand scheme of things, $80 billion over a decade is not a substantial amount.

“I’ve calculated that after 10 years of this money, rebuilding the IRS in terms of sheer size, it will only be about three fourths of the size in relation to the economy that it was when I was [at the IRS] and we were not really adequately funded at that time,” said Rossotti at the October 31 kickoff of the same AICPA/CIMA conference.

According to the former commissioner, who is now a senior advisor at global investment firm Carlyle, more money alone will not be a cure-all for the IRS’ operational and technological woes. He said that “doing more of everything” that the agency has been doing up to this point is not enough. “Instead, the IRS is going to have to be better, not just bigger.”

To do so, Rossotti laid out several keys to long-term success at the IRS once a permanent commissioner is confirmed. The common denominator across all of them is the advancement of technologies to uplift the agency into the 21^st century. Investing in new digital capabilities, especially data analytic models, will streamline and make more efficient customer service and compliance.

“And with respect to compliance, the critical point is that the goal is compliance,” he said. “Enforcement is a tool to achieve compliance. Enforcement by itself is not a goal.”

Exemplifying this, Rossotti explained that simply boosting audit numbers would do little to reduce the so-called tax gap. Instead, audit performance should be measured in “meaningful ways,” he said. “When you get to measuring it’s necessary to be sure that you’re looking at the results, not just the inputs. Just doing more auditing … is not a meaningful goal.”

Another previous head of the IRS, Fred Goldberg, agreed that the tax gap cannot be bludgeoned down using just more audits alone. Goldberg, who was commissioner from 1989 until 1992, stressed that “the proper metrics should focus on quality, efficiency, and improved compliance through a combination of training and improved return selection driven by technology-based data, [and] research and analytics.”

Appealing to practitioners directly, Goldberg urged the tax community to hold the IRS and lawmakers accountable, calling now a “unique time in the history of our tax system.” He said that the funding comes at a time when the resource strain at the IRS has hit a boiling point, a chance the agency must not squander.

“Failure is not an option,” said Goldberg. “This is the last shot.”

Employee or Subcontractor (Posted 8-2-22)

IRS just issued the folowing Tax Tip. Misclassification of employees as independent contractors continues to be a problem that we  see all too  frequently. Simply, the misclassification means that employers incorrectly treat employees as subcontractors with the intention of avoiding payroll reporting and the related employer payroll taxes.

Treating employees incorrectly as subcontractors is a disservice to both the employee and the business (or non-profit) entity. This last tax season, we saw several instances where small local non-profit entities hired part time summer employees (typically high-school or college students) to perform menial tasks. Rather than giving these employees a W-2 form as the law requires, they gave them form 1099-NEC (non-employee compensation). The students were required to report this income as self-employment income and to pay self-employment tax on that income.  They were employees under the standard test of employer/employee relationships and should have been treated as such. The students were the losers in this situation.

As more fully explained in the following IRS tax tip, a subcontractor is a person or company who offers their services to the general public. Anyone working for a single entity where that entity controls the timing and nature of the work done is an employee. Period.

Issue Number: Tax Tip 2022-117

Worker Classification 101: employee or independent contractor

A business might pay an independent contractor and an employee for the same or similar work, but there are key legal differences between the two. It is critical for business owners to correctly determine whether the people providing services are employees or independent contractors.

Here’s some information to help business owners avoid problems that can result from misclassifying workers.

An employee is generally considered anyone who performs services, if the business can control what will be done and how it will be done. What matters is that the business has the right to control the details of how the worker’s services are performed. Independent contractors are normally people in an independent trade, business or profession in which they offer their services to the public.

Independent contractor vs. employee
Whether a worker is an independent contractor, or an employee depends on the relationship between the worker and the business. Generally, there are three categories to consider.

• Behavioral control − Does the company control or have the right to control what the worker does and how the worker does the job?
• Financial control − Does the business direct or control the financial and business aspects of the worker’s job. Are the business aspects of the worker’s job controlled by the payer? Things like how the worker is paid, are expenses reimbursed, who provides tools/supplies, etc.
• Relationship of the parties − Are there written contracts or employee type benefits such as pension plan, insurance, vacation pay? Will the relationship continue and is the work performed a key aspect of the business?

Misclassified worker
Misclassifying workers as independent contractors adversely affects employees because the employer’s share of taxes is not paid, and the employee’s share is not withheld. If a business misclassified an employee, the business can be held liable for employment taxes for that worker. Generally, an employer must withhold and pay income taxes, Social Security and Medicare taxes, as well as unemployment taxes. Workers who believe they have been improperly classified as independent contractors generally must receive a determination of worker status from the IRS. Then they can use Form 8919, Uncollected Social Security and Medicare Tax on Wages to figure and report their share of uncollected social security and Medicare taxes due on their compensation.

Voluntary Classification Settlement Program
The Voluntary Classification Settlement Program is an optional program that provides businesses with an opportunity to reclassify their workers as employees for future employment tax purposes. This program offers partial relief from federal employment taxes for eligible businesses who agree to prospectively treat their workers as employees. Businesses must meet certain eligibility requirements and apply by filing Form 8952, Application for Voluntary Classification Settlement Program, and enter into a closing agreement with the IRS

Who is self-employed?
Generally, someone is self-employed if any of the following apply to them.

• They carry on a trade or business as a sole proprietor or an independent contractor.
• They are a member of a partnership that carries on a trade or business.
• They are otherwise in business for themselves, including a part-time business.

Self-employed individuals, including those who earn money from gig economy work, are generally required to file an tax return and make estimated quarterly tax payments. They also generally must pay self-employment tax which is social security and Medicare tax as well as income tax. These taxpayers may qualify for the home office deduction if they use part of a home for business.

Standard Mileage Rate Increase (Posted 6-13-22)

As inflation rages, IRS offers a little help with in increase in the standard mileage rate.

The IRS announced an increase in the standard mileage rates for the rest of the year.  Beginning July 1, 2022, the rates are 62.5 cents per mile for business use of an automobile and 22 cents per mile for costs of using an automobile as a medical or moving expense. (IR 2022-124, 6/9/2022; Ann 2022-13, 2022-26 IRB)

Social Security – Best Deal in Town (Posted 6-7-22)

This posting is reprinted with permission from TaxSpeaker.com. Tax Speaker is owned by Bob Jennings who is one of the premier professional tax educators in the country and has been so for the last 40 years. His seminars are the best of the best.

In this article Bob, explains Social Security benefits relative to their cost. In my own 40+ years of practice, I echo and support Bob’s comments.

From Bob: In over forty years of practice as a CPA, IRS Enrolled Agent and former CFP® I have discussed income tax, social security, and retirement with literally tens of thousands of clients. When addressing social security issues with clients, particularly those under forty, I am often told, “It will Never Be There for me.” This statement has always bothered me because it illustrates a basic lack of understanding by the American consumer (and often their financial adviser) about the benefits provided by the Social Security System.

Example: During 2022 if Average Joe earned $6,040 or more, he received the maximum four credits in the Social Security system for the year 2022. This cost him $462.06 if he was a W-2 employee (his employer matched his share) or $924.12 if he was self-employed. If Joe repeats this for nine more years during his life, he has earned complete, minimum coverage under the system. In other words, for a minimum of $4,620 (ten years at $462 per year) Average Joe has received total retirement and medical coverage under the Social Security system.

But what does Joe really get for this $4,620? Our system provides the following benefits to this average Joe for his ten years (forty quarters) of minimum entry-level coverage:

1. A retirement income for Joe starting as early as age sixty-two.

2. A retirement income for Joe’s wife, as early as age sixty-two, even if she has never had earned income (age 60 if Joe is dead).

3. A full Medical system at age sixty-five (Medicare) for the remainder of his life.

4. A full Medical system for his wife at age sixty-five, even if she has never had earned income.

5. Disability benefits for Joe in the event of injury today.

6. Disability benefits as early as age fifty for Joe’s widow even if she was never covered.

7. Dependent benefits for his disabled, minor, or dependent children, even after Joe’s death.

8. Dependent benefits for his dependent parents.

9. Dependent benefit for Joe’s wife to care for any children at home underage dependent in the event of Joe’s death, disability, or drawing of his retirement benefit (called child-in-care benefit).

10. Death benefit for Joe’s widow.

Joe gets all of this for $4,620. Yes—possibly the greatest financial investment available to every American, the Social Security system has been misunderstood, maligned, and ignored by nearly everyone. Clearly the system is not meant to be just a retirement plan, it is more precisely a safety net for all Americans, providing rudimentary retirement, disability, and medical coverage at all ages to nearly all Americans. Benefits are not based on need but rather on your payments into the system. And, guess what-if you don’t pay in, you are correct-it will never be there for you.

For my clients that don’t want to pay a dime in social security tax I ask them do they have life insurance, retirement, disability and a death benefit for themselves, their spouse, and their kids? I have never had anyone say yes-they always say they can’t afford that stuff. I explain the 10 benefits and the incredibly cheap cost, and if they still want to argue, I don’t argue with ignorance-they go to someone else because I will not do their tax return.

And, for those who think ‘It will never be there for me’, I have heard that ridiculously incorrect statement from fools for forty years and A) Politicians want to get re-elected and will never commit political suicide by stopping it, and 2) Read the annual Trustee’s Report (as I do) instead of Facebook. The system, even if the fools in Washington don’t change anything, is solvent through the mid 2030’s and even in a worst case situation, has enough to keep paying 80% of everything for as long as can be predicted actuarially.

Employee or Sub-Contractor – Be Careful (Posted 4-27-22)

The IRS is continuing to pursue taxpayers who misclassify employees as sub-contractors to avoid paying employer taxes on those employees. In the 2021 tax season, we saw several instances where students had part-time jobs and were given form 1099-NEC which treated them as a sub-contractor rather than the W-2 that they should have received as an employee. These kids were clearly employees under the IRS tests (see following) and should not have been treated as sub-contractors and given forms 1099-NEC.

Notice that the court looked at (1) degree of control over the workers tasks, (2) the workers investment in their business, and (3) that the employer could fire the worker at will. IF you apply these tests to students with summer jobs, they are clearly employees.

The bottom line is that IRS is looking for employers who cheat and will impose significant penalties. In this case, this CPA agrees with IRS. To all employers: treat your employees as employees and your sub-contractors as sub-contractors. Please call our office if you would like to discuss theses issues.

Today the Parker Federal Tax Bulletin reported yet another case where the taxpayer miscalssified employees as sub-contractors.

Company Liable for Back Taxes and Penalties for Misclassifying Nurses as Independent Contractors

The Tax Court held that a corporation engaged in the business of providing at-home private duty nursing services to children with special needs misclassified as independent contractors the nurses it hired to perform such services and was thus liable for employment taxes on the nurses’ wages as well as various penalties relating to the underpayment of taxes and tax deposits. In determining that the nurses were employees, the court cited several factors, including the degree of control exercised by the corporation, the lack of investments made by the workers in the business, and the fact that the corporation could fire a worker at will while the worker had to give two weeks’ notice before leaving. Pediatric Impressions Home Health, Inc. v. Comm’r, T.C. Memo. 2022-35.

IRS Notice – Third Economic Impact Payment  (Posted 4-1-22)

New Mexico Tax Rebates (Posted 3-18-22)

New Mexico Taxpayers to Receive Rebates in July

by Peter G. Pupke, Esq.

The New Mexico Taxation and Revenue Department has announced that taxpayers who are eligible for the 2021 income tax rebates that Governor Michelle Lujan Grisham signed into law earlier this month will begin receiving them soon after July 1, 2022. (News release, N.M. Tax. and Rev. Dept., 03/14/2022.)

Income tax rebate authorized. The income tax rebate was authorized by L. 2022, H163 (c. 47) (see State Tax Update, 03/10/2022). Although taxpayers will not see anything about the rebate on their tax forms, the Taxation and Revenue Department will have all the information necessary to determine eligibility from their returns. When the rebate section of the law becomes effective on July 1, 2022, the Department will automatically begin issuing rebates to all taxpayers who are eligible based on their 2021 returns.

Rebate amount. The one-time, refundable rebates will be $500 for married couples filing joint returns with incomes under $150,000, and $250 for single filers with income under $75,000. Rebate payments will be made by ACH deposit or check to the most recent bank account or address the taxpayer has provided to the Department.

Other tax benefits do not take effect until 2022 tax year. Other income tax provisions of the omnibus tax bill do not take effect until the 2022 tax year or later. Those include:

• A one-time $1,000 income tax credit for hospital nurses for the 2022 tax year.
• An income tax exemption for armed forces retirees, starting at $10,000 of military retirement income in 2022 and gradually rising to $30,000 of retirement income in tax years 2024 through 2026.
• A new refundable child tax credit ranging from $25 to $175 per child, depending on income, beginning in the 2023 tax year and continuing through the 2031 tax year.

(from RIA Checkpoint – 3-18-22)

New Mexico Tax Law Chnges (Posted 3-11-22)

Here is a summary of current New Mexico tax law changes:

IRS – New forms K-2 & K-3 Relief (Posted 2-16-22)

As a follow up to the article below, from the updates section of the IRS website:

February 14 update

IRS suspends more than a dozen automated notices, including collection issues: As part of ongoing efforts to provide additional help for people during this period, the IRS has suspended automated collection notices normally issued when a taxpayer owes additional tax or has no record of filing a tax return. Note that many other IRS notices are statutorily required to be issued within a certain timeframe to be legally valid. The IRS encourages those who have a filing requirement and have yet to file a prior year tax return or to pay any tax due to promptly do so as interest and penalties will continue to accrue. Visit IRS.gov for payment options. For more information on suspended notices, see IR-2022-31, IRS continues work to help taxpayers; suspends mailing of additional letters.

IRS Updates their Website (Posted 2-16-22)

IRS is continuing its efforts to catch up and communicate with all of us. Kudos to them!

IR 2022-32, 2/14/2022

By Joseph Boris

The IRS has added a page to its website for updates on the 2022 tax filing season as well as efforts by the agency to clear a backlog of unprocessed returns from past years, according to a February 14 news release.

The page on IRS.gov, Special Tax Season Alerts, will be promoted on social media and other online channels to assist taxpayers during the current filing season, which began January 24.

“The IRS is taking numerous steps to keep this tax season going smoothly while also taking additional action to address the inventory of tax returns filed last year,” IRS Commissioner Chuck Rettig said in the release.

As updated on the new web page, the IRS’s inventory-clearing steps include ending the mailing of more than a dozen automated letters that are commonly sent to taxpayers when they owe additional tax or have no record of filing a tax return, the release stated. Other updates will be focused on IRS operations and the number of unprocessed tax returns in hand.

“We want people to have an easy way to see the latest information,” Rettig added. “This new page provides a one-stop shop for the latest key information people and the tax community may need.”

The commissioner said the IRS was “off to a good start” processing tax returns and issuing refunds. During the first two weeks of filing season—through February 6—the agency issued more than 4 million tax refunds worth almost $10 billon, according to the release.

IRS – Relief from Letters (Posted 2-11-22)

As we all know, IRS staff is backed up several months. Tax returns are not being processed and letters to them are not being read. However, at the same time, their computer system continues to send collection letters. Today, we will start getting some much needed relief.

As I posted yesterday, IRS is doing the best they can and stopping notices will help us all.

IRS temporarily stops mailing some automated collection notices

IR 2022-31, 02/10/2022 

In a news release issued February 10, the IRS announced it will temporarily stop mailing some automated collection notices.

Which automated collection notices are suspended? The IRS will temporarily stop mailing the following individual and business automated collection notices:

• CP80, Unfiled return notice
• CP59 and CP759 (Spanish), Unfiled tax return(s) 1st notice
• CP516 and CP616 (Spanish), Unfiled tax return(s) 2nd notice
• CP518 and CP618 (Spanish), Final notice, return delinquency
• CP501, Balance due 1st notice
• CP503, Balance due 2nd notice
• CP504, Final balance due 3rd notice, Notice of Intent to Levy
• 2802C, Withholding compliance letter
• CP259 and CP959 (Spanish) Business return delinquency
• CP518 and CP 618 (Spanish) Final notice – business return delinquency

Why suspend mailing automated collection notices? The IRS has several million original and amended returns filed by individuals and businesses that have not been processed. According to the News Release, the IRS is suspending some automatic notice mailings to help avoid confusion for taxpayers and tax professionals.

“IRS employees are committed to doing everything possible with our limited resources to help people during this period,” said IRS Commissioner Chuck Rettig. “We are working hard, long hours pushing creative paths forward in an effort to be part of the solution, rather than the problem.”

IRS’s Continuing Woes (Posted 2-10-22)

I have to say that, over the last 40+ years, I have had multiple dealings with IRS at many levels. Their staff has always been professional, helpful, and friendly.  They go the extra mile.  With their current increased workload and severe underfunding, they are in a lose-lose position.  It’s time for all of us to give them a break and to give them the tools they need to give us the professional service they are trying to give with the resources that they have.

This is from today’s RIA tax news service:

NATIONAL TAXPAYER ADVOCATE TESTIFIES ON IRS BACKLOG AT CONGRESSIONAL HEARING

By Tim Shaw

To address its backlog of unprocessed previous-year tax returns and weak customer support, the IRS should offer higher pay to attract new employees and rely on short-term help from outside consultants, according to testimony from National Taxpayer Advocate Erin Collins to the House Ways and Means oversight subcommittee on February 8.

Collins was the sole witness at a subcommittee hearing convened to discuss findings of the NTA’s 2021 annual report to Congress as well as issues facing taxpayers this tax filing season.

The NTA report described 2021 as the “most challenging year ever for taxpayers,” whose phone calls to IRS support lines were answered only about 11% of the time. The IRS’s Where’s My Refund tool—accessed 632 million times last year—lacks information on unprocessed returns and provides no context on status delays, the report found. The IRS’s shrunken workforce lacked the resources, manpower, and time to meet demand, leading to millions of refunds that have yet to reach taxpayers. For the full report, see National Taxpayer Advocate delivers annual report to Congress.

“[T]axpayer service must improve,” Collins said in her opening remarks. “And for that to happen, the IRS needs to eliminate the backlog, pay out those delayed refunds, and get current on its work.”

Asked by Rep. Bill Pascrell, D-NJ, chair of the oversight subcommittee, how the IRS can boost staffing now given its “budget woes,” Collins admitted that it is a “challenge in the market” to bring in new workers.

The IRS has filled only 179 of the 5,000 positions opened to add to the roster of return processers. Collins noted that submission-processing employees are typically hired at or around the federal government’s GS-3 level, at which the base salary is $24,749. Even if new hires were offered better pay and incentives, Collins said it was unlikely “we are going to be able to hire enough people to get us out of this hole.”

Collins suggested that outside vendors could be brought in to chip away at the “manual” work, since paper returns are the most delayed because they need to be reviewed line by line. Simultaneously, the IRS should “leverage” other employees to immediately tackle such clerical tasks.

Increasing automation of IRS processes is another way to reduce the backlog and improve taxpayer service, but the IRS would need “sustained, multiyear” funding to modernize its systems, Collins said.

“The fact that we’re still on 1980s technology is absurd,” the subcommittee’s ranking member, Tom Rice, R-SC, said at the hearing. “We have got to do better than this. We are doing a disservice to our taxpayers.” Collins said that IRS IT experts would be “happy” to work with Congress in developing a budget that would bring the agency into the 21st century.

Had the Build Back Better Act as passed by the House survived debate in the Senate, the IRS would have received additional funding of $80 billion over 10 years. Collins is still advocating for the package. “I think infusing capital into the IRS is very important,” she answered in response to Rep. Judy Chu, D-CA, on how the investment would improve IRS operations.

Emphasizing taxpayer support alongside technological upgrades would promote the”tax administration that we think the country deserves and, in my opinion, it does deserve,” Collins said.

Click here for a recording of the hearing.

IRS’s Online Face Recognition Going Away (2-7-22)

If any of you have experienced the frustrating and unusable ID.me website, we have good news. It is going away.

IR 2022-27 (02/07/2022)

In a February 7, 2022, news release, the IRS announced that it will “transition away” from using facial recognition verification through a third-party service. The move comes after members of Congress questioned the IRS’s use of ID.me to verify taxpayers’ online accounts.

GOP senators query IRS regarding its collaboration with ID.me. Republicans on the Senate Finance Committee wrote to IRS Commissioner Charles Rettig on February 3 voicing their displeasure with the agency’s collaboration with ID.me that will require taxpayers to have an ID.me account to access key IRS online resources.

“While we understand the IRS’s use of ID.me is intended to protect data and reduce fraud, we have serious concerns about how ID.me may affect confidential taxpayer information and fundamental civil liberties,” the letter said.

According to the senators, as part of the registration, ID.me requires a trove of personal information, which may include one or more of the following: government-issued photo ID; passport; birth certificate; Form W-2; Social Security card; veteran health ID card; DHS trusted traveler card; video “selfie;” utility bill; insurance bill; telephone bill; and a recorded video interview with an ID.me employee.

“The most intrusive verification item is the required ‘selfie,’ which is much more than simply uploading a picture; it is submitting one’s face to be digitally analyzed by ID.me into a ‘faceprint,'” the senators wrote. “Additionally, using ID.me appears to subject taxpayers to the terms of three separate agreements filled with dense legal fine print.”

The IRS’s unilateral decision “[allowing] an outside contractor to stand as the gatekeeper between citizens and necessary government services” is problematic, the letter said, as is the fact that ID.me “is not, to our knowledge, subject to the same oversight rules as a government agency, such as the Freedom of Information Act.” The senator’s letter contained a lengthy series of questions and requests they want IRS to respond to by February 27. They also want a subsequent briefing to review the IRS’s written responses.

News release announces IRS’s retreat. The news release said the IRS would “transition away from using a third-party service for facial recognition to help authenticate people creating new online accounts” over the coming weeks.

The release also announced that the IRS would develop and bring online an authentication process that doesn’t involve facial recognition.

“The IRS takes taxpayer privacy and security seriously, and we understand the concerns that have been raised,” IRS Commissioner Chuck Rettig said. “Everyone should feel comfortable with how their personal information is secured, and we are quickly pursuing short-term options that do not involve facial recognition.”

According to the news release, the transition doesn’t interfere with a taxpayer’s ability to file a return or pay taxes owed. People should continue to file their taxes as they normally would, the release said.

Reference: For more information about IRS online accounts for individuals, see FTC 2d/FIN ¶ S-6408

 

President Biden’s Proposed Tax Increase (Updated 9-23-21)

This post is taken from a letter written by Bob Jennings of TaxSpeaker.com. He is one of the leading professional income tax researchers and speakers and he has been following this proposed legislation. He is one of the best sources for emerging tax legislation. If this law passes as proposed, taxes are going up for everyone and small S-Corporations will be particularly hard hit. These taxpayers will see their taxes increase several thousand dollars.

From Bob:  Congress is currently debating President Biden’s American Families Plan of tax and benefit changes. The Plan would make sweeping changes to our individual tax system and a limited window of time is available to plan for some of the changes. Although we do not know specifics about many of the changes, we do know, in general, what the changes will be should this Plan become law. In this letter we wish to make some general tax recommendations regarding upcoming changes. Because changes are coming and continuing to evolve rapidly over the next few weeks, before you take any substantive tax actions, please call us to confirm that it makes tax-sense for you.

As a general premise of the Plan, tax rates will increase for higher income Americans. The latest proposal includes an increase in the tax rate, a possible addition of an additional surtax, and a huge lowering of tax brackets. As a general rule, this means that higher income Americans who have the opportunity to do so should accelerate income into 2021 and defer expenses until 2022. This is even more important for business owners who may be adversely affected by incredible increases in self-employment tax, the net investment income tax surcharge, and in rare cases, a reduction of the 20% QBI  deduction. Because the marriage penalty is so severe, we seriously would want to speak with you about the adverse tax effects of marriage if you are two unmarried, high-income folks. [Tim: Now, more than ever, a year end tax plan is needed.]

Capital gains rates will also see big 2022 changes. Some suggestions have been made to make these changes retroactive, but assuming they do not go into effect in 2022, a prudent tax move would be to go ahead and recognize gains on investments and real estate in 2021 in order to minimize the income tax burden. The rate change is still fluctuating, but the bottom line is that the rate will increase. [Tim: one proposal is to make these changes retroactive to 9/21/21.]

The existing high credit amounts for children and child-care would continue under this plan, so no action is required to benefit from these changes.

Of particular concern are the massive changes proposed for small business owners, with large increases for self-employment tax at all income levels not just high-income levels. [Tim: The proposed act will treat all pass through income from an S-Corporation as self-employment income. This is a structural change in tax law and the overall theory of taxation that can cost small business owners several thousands of increased tax for 2022 and all later years.]

Because of potential increases in capital gains rates, homeowners and property owners that are considering the sale of their home, building, land or farm at a large profit need to contact us immediately so you can understand how a sale in 2021 may be of paramount importance. With potential changes in line for tax-free exchanges in 2022, this is another reason that property owners should contact us sooner rather than later, while there is time to act.

We do not know exactly what will change here, but changes are coming for taxes due at death. These changes could affect everyone, not just wealthy Americans. The good news is that some simple actions in 2021 could save thousands in future estate tax payable.

It appears that 2022 will bring big increases to credits for buying electric vehicles, and for installing solar power and energy improving features in your home or office. These proposals lead us to advise, at least right now, that you postpone any of these plans until 2022.

Taxes will be going up in 2022 for wealthier Americans and for small business owners. We can help you to reduce some of the effects, but only if you speak with us before the end of the year. The cost of 2021 planning actions will be more than offset with 2022 and future savings.

Home Office Deduction Act of 2021 (H.R. 3058) (Updated 7-12-21)

Due to the pandemic and related shut downs, millions of taxpayers were required to work from home. Under current tax laws, employees who work from home do not get to deduct their home office expenses.  On May 7, 2021, H.R. 3058 was introduced and is scheduled to be considered this month (July 2021).

The bill will grant qualified employees a home office deduction even if they don’t itemize deductions. It will cover the period from March 13, 2020 through December 31, 2021.

Although I rarely request clients to write their congressmen, this is a bill that really needs to be passed. It is grossly unfair to deprive employees of a deserved tax deduction under the current circumstances.

Please call our office if you want more information about the proposed bill.

NM Gross Receipts Tax and Reporting Changes Effective 7/1/21

Effective July 1, 2021, the rules for New Mexico business and for businesses selling into New Mexico have changed.  The principal changes are:

• New Mexico is switching from an “origin based sourcing” to “destination based sourcing”. This generally means that the Gross Receipts Tax (GRT) rate is based on where the goods or services are provided or delivered rather than the location of the seller of the goods and services, and
• The TAP (Taxpayer Access Point) is being redesigned to separate the tax types (gross receipts tax, withholding, etc.), and
• Your old CRS number will not change but it will be renamed to Business Tax Identification Number (BTIN).

For our clients with a retail store or office, the tax rates will still be at your location but the online reporting will be different. For our clients that provide goods and services at their customer’s location, you will now use tax rate based on your customer’s location. From what we can tell so far, their online portal should be less confusing.

The following is taken from an email from TRD to New Mexico taxpayers sent around May 15, 2021:

Destination-Based Sourcing of GRT and Compensating Tax

Statutory changes taking effect July 1, 2021 will also impact GRT and Compensating Tax reporting locations. Currently, New Mexico uses origin-based sourcing, in which most GRT is reported at the seller’s place of business. For sales occurring on or after July 1, 2021, the reporting location for goods and general services is the buyer’s delivery location. The reporting location for in-person services is the place the service is performed. The GRT rate for professional services (excluding in-person services) is the seller’s place of business (origin-based sourcing), except construction services and real estate commissions, which will continue to use the construction site/property location.

CRS Redesign

As of July 6, 2021, the Department is redesigning its Combined Reporting System (CRS) to separate tax returns for specific business tax programs, including gross receipts, compensating tax, wage withholding, non-wage withholding and a handful of other small tax programs. In the past, these taxes were filed on one return. Over 95% of CRS taxpayers currently only file gross receipts and/or wage withholding. There will now be separate returns tailored to the needs of different taxpayers to streamline filing and give taxpayers more control over their accounts. The changes will also expedite the Department’s processing of refunds.

Taxpayers will automatically be registered for most of the separated tax programs. Non-wage withholding filers will need to register separately in July or August to ensure that their non-wage withholding account is ready to be used for the return due by August 25, 2021. Assistance with the registration process is available by emailing business.reg@state.nm.us or calling 1-866-285-2996.

The “CRS number” that businesses use to report their taxes will stay the same but will simply be renamed the Business Tax Identification Number (BTIN).

The Taxpayer Access Point (TAP) e-filing portal, including electronic payments, will be unavailable from 5pm MST on June 30 through July 5, 2021 as we upgrade the system. Please ensure that any returns or payments due during this time period are submitted on or before June 30th, 2021.

Child Tax Credit Eligibility Assistant – IRS Online Tools (6/23/21)

In a News Release (IR 2021-130, 6/22/21), IRS has announced two new online tools designed to help taxpayers manage and monitor advance payments of the Child Tax Credit (CTC). IRS has also provided additional new information about those advance payments.

Background—child tax credit. Taxpayers are allowed a CTC—temporarily expanded and made refundable for 2021 by the American Rescue Plan Act (ARPA, PL 117-2)—for each qualifying child. (Code Sec. 24)

Background—advance payments of CTC. IRS is required to establish a program to make periodic advance payments which in total equal 50% of IRS’s estimate of the eligible taxpayer’s 2021 CTCs, during the period July 2021 through December 2021. (Code Sec. 7527A)

In IR 2021-113, IRS provided information about the advance payments including that they will begin on July 15, 2021. Thereafter, they will be made on the 15th of each month unless the 15th falls on a weekend or holiday. See Advance child tax credit payments to begin on July 15.

In IR 2021-124, IRS announced that, throughout the summer, it will be adding additional tools and online resources to help with the advance CTC. See IRS provides updated information on advance Child Tax Credit payments.

In IR 2021-129, IRS announced the Non-filer Sign-up Tool, for people who did not file an income tax return for 2019 or 2020 and did not use the IRS Non-filers tool last year to register for EIPs. See IRS creates Child Tax Credit Non-filer Sign-up Tool.

IRS announces online eligibility tool. IRS has unveiled the Child Tax Credit Eligibility Assistant which allows families to answer a series of questions to determine whether they qualify for the advance payments.

IRS emphasized that because the Child Tax Credit Eligibility Assistant requests no personalized information, it is not a registration tool, but merely an eligibility tool. Nevertheless, it can still be used to determine whether taxpayers should take the next step and either file an income tax return or register using the Non-filer Sign-up Tool.

IRS also announces a portal with a variety of functions. IRS has also unveiled the Child Tax Credit Update Portal which allows families to verify their eligibility for the payments and if they choose to, unenroll, or opt out from receiving the monthly payments.

Using the portal to unenroll. Instead of receiving these advance payments, some families may prefer to wait until the end of the year and receive the entire credit as a refund when they file their 2021 return. The Child Tax Credit Update Portal now enables these families to unenroll from receiving monthly payments.

The unenroll feature can also be helpful to any family that no longer qualifies for the Child Tax Credit or believes they will not qualify when they file their 2021 return. This could happen if, for example:

• Their income in 2021 is too high to qualify them for the credit.
• Someone else (an ex-spouse or another family member, for example) qualifies to claim their child or children as dependents in 2021.

Anyone who lacks internet access or otherwise cannot use the online tool may unenroll by contacting IRS at the phone number included in the outreach letter they received from IRS.

Accessing the portal. To access the Child Tax Credit Update Portal, a person must first verify their identity. If a person has an existing IRS username or an ID.me account with a verified identity, they can use those accounts to sign in. People without an existing account will be asked to verify their identity with a form of photo identification using ID.me, a trusted third party for IRS.

Planned future enhancements of the portal. Future versions of the tool planned in the summer and fall will allow people to:

• View their payment history;
• Check the status of their payments;
• In late June, update their bank account information for payments starting in August;
• In early August, update their mailing address;
• In future updates planned for this summer and fall, do things like updating family status and changes in income.

A Spanish version is also planned.

IRS provides other new information. IRS cautions that tax returns must be processed by June 28 to be reflected in the first batch of monthly payments scheduled for July 15, so eligible families filing now will likely receive payments in the following months. Even if monthly payments begin after July, IRS will adjust the monthly amounts upward to ensure that people still receive half of their total eligible Child Tax Credit benefit by the end of the year.

IRS and its partners are helping families register for the payments using the Non-filer Sign-up Tool. During late June and early July, free events will take place in Atlanta, Brooklyn, Detroit, Houston, Las Vegas, Los Angeles, Miami, Milwaukee, Philadelphia, Phoenix, St. Louis and Washington, D.C. More details will be available soon on IRS.gov.

How IRS Processes Tax Returns (6-9-21)

This article came in this morning from Research Institute of America, my professional income tax research service. It gives a good overview of what happens when IRS receives a tax return. It explains why some returns take so long to get processed. Our firm, like most CPAs, uses a professional tax preparation software that checks all returns for correctness and completeness before the return is electronically filed. However, and contrary to popular opinion, electronically filed returns can become “corrupted” during the electronic filing process. When that happens, additional steps are needed to complete the filing process. I have included our notes and comments below in [ ] brackets beginning with TLD:

IRS processes when it receives a return . According to the NTA [National Taxpayer Advocate], once a return is received by the IRS, but before it posts to the IRS’s systems (i.e., before it is officially accepted), it goes through a series of pre-posting reviews to ensure the information on the return is correct.

The IRS uses automated processes for some of these pre-posting reviews. If the IRS’s automated pre-posting reviews don’t identify any errors on the return, generally the return is processed.

However, if one of the IRS’s automated pre-posting reviews identifies an error on a return, then the return must be reviewed. [TLD: This review is manual and can take months in this continuing Covid, work from home, environment.] There are four main reasons why a return may need to be reviewed:

• Error resolution;
• Rejected returns;
• Unpostable returns; and
• Suspected identity theft.

Error resolution. Once errors on a return are identified, the IRS can:

1. Reject the error and manually release the taxpayer’s refund; or
2. Confirm the error and notify the taxpayer that the IRS has used its “math error authority” to correct the error.

Under its “math error authority” the IRS can summarily assess and collect tax without following the deficiency procedures (i.e., without first providing the taxpayer with a notice of deficiency), when correcting “mathematical and clerical” errors. (Code Sec. 6213(b)(1)) The definition of “mathematical and clerical” errors can be found in Code Sec. 6213(g)(2). [TLD: Often the return and the related refund are “corrected” by the IRS computer and the related refund or balance due is changed. The taxpayer may (but not always) receive a letter explaining the changes.  All too often, that explanation is received very late which puts the taxpayer and CPA in the position of having to guess what IRS changed. It is all but impossible to contest the proposed change without adequate and timely information from IRS.]

Rejected returns. If the identified error on a return isn’t an error that the IRS can use its math error authority to correct, then the return may be rejected. Rejected returns are usually missing some required part of a return, such as a schedule or a form, which the IRS needs to properly process the return. In this case, the IRS will typically send the taxpayer Letter 12C, Individual Return Incomplete for Processing. This letter gives the taxpayer 20 days to supply the IRS with the missing schedule or form. If the taxpayer doesn’t respond within 20 days, the IRS will adjust the return (which usually results in a reduced refund or increased tax liability). [TLD: In today’s environment, it can take up to 8 months (or longer)  for IRS to read our response to their letters.  During that time, the taxpayer continues to receive computer generated notices from IRS. Attempting to call IRS on the phone is all but impossible.]

Unpostable returns. Unpostable returns are usually paper returns that have errors so severe that the IRS can’t process them.

The most common cause of unpostable tax returns is a mismatch between the taxpayer’s identification number and name (i.e., the taxpayer’s social security number doesn’t match the name on file with the Social Security Administration (SSA)). In this case, the IRS will send the taxpayer a letter informing them of the problem and instructing them to correct their name with the SSA. [TLD: Getting an incorrect SSN changed is another difficult and time consuming process. We suggest that all clients assure that their SSN is correctly recorded by all government agencies and reported property on all tax documents (W-2s, 1099s, etc) received.]

Suspected identity theft. Before they are posted to the IRS’s systems, returns are screened by the IRS’s identity theft/fraud detection filters. If the IRS’s identity theft/fraud detection filters select a return, then the return is sent to the Taxpayer Protection Program (TPP) for further scrutiny. The TPP will send the taxpayer a letter asking them to authenticate their identity either over the phone, online, or by visiting a Taxpayer Assistance Center. [We have had several clients receive ID theft letters from both IRS and various state tax authorities. The taxpayers need to submit information supporting their identity and items on the tax returns. Sometimes the information can be submitted online and other times it needs to be mailed. Be sure to respond timely.  We are available to help with the process.]

President Biden’s Proposed Tax Changes as of 6-3-21

This information is taken from the Department of the Treasury Green Book as reported by Research Institute of America. If enacted, these changes will substantially change the taxation for capital gains and for transfers of property.  The proposed effective date is the "date of announcement" which could be April 2021. Please call our office with any questions.

DETAILS OF PRESIDENT BIDEN’S PROPOSED REFORMATION OF CAPITAL GAINS AND TRANSFER AT DEATH RULES - RIA 6-3-21

Department of the Treasury Green Book

President Biden, in the recently-released Green Book, has proposed far-reaching changes to the taxation of capital gains and the treatment of property that is gifted or is transferred at death, including taxing capital gains at ordinary income rates and treating the receipt of assets because of death as a realization event. Details of the proposals are below.

Current Law. Long-term capital gains and qualified dividends are taxed at graduated rates under the individual income tax, with 20% generally being the highest rate (23.8% including the net investment income tax, if applicable, based on the taxpayer's modified adjusted gross income).

Moreover, capital gains are taxable only upon realization, such as the sale or other disposition of an appreciated asset. When a donor gives an appreciated asset to a donee during the donor's life, the donee's basis in the asset is the basis of the donor; in effect, the basis is "carried over" from the donor to the donee. There is no realization of capital gain by the donor at the time of the gift, and there is no recognition of capital gain (or loss) by the donee until the donee later disposes of that asset.

When an appreciated asset is held by a decedent at death, the basis of the asset for the decedent's heir is adjusted (usually "stepped up") to the fair market value of the asset at the date of the decedent's death. As a result, any appreciation accruing during the decedent's life on assets that are still held by the decedent at death avoids federal income tax.

Reasons for change. The Green Book says that preferential tax rates on long-term capital gains and qualified dividends disproportionately benefit high-income taxpayers and provide many high-income taxpayers with a lower tax rate than many low- and middle-income taxpayers. The rate disparity between ordinary income taxes and capital gains and dividends taxes also encourages economically wasteful efforts to convert labor income into capital income as a tax avoidance strategy.

The Green Book continues that, under current law, a person who inherits an appreciated asset receives a basis in that asset equal to the asset's fair market value at the time of the decedent's death; thus, appreciation that accrued during the decedent's life is never subjected to income tax. In contrast, less-wealthy individuals who must spend down their assets during retirement pay income tax on their realized capital gains. This increases the inequity in the tax treatment of capital gains. In addition, the preferential treatment for assets held until death produces an incentive for taxpayers to inefficiently lock in portfolios of assets and hold them primarily for the purpose of avoiding capital gains tax on the appreciation, rather than reinvesting the capital in more economically productive investments.

Moreover, the distribution of wealth among Americans has grown increasingly unequal, concentrating economic resources among a steadily shrinking percentage of individuals, the Green Book says. Coinciding with this period of growing inequality, the long-term fiscal shortfall of the U.S. has significantly increased. Reforms to the taxation of capital gains and qualified dividends will reduce economic disparities among Americans and raise needed revenue.

Proposal. The Green Book contains the following proposals:

Tax capital income for high-income earners at ordinary rates. "Long-term capital gains and qualified dividends of taxpayers with adjusted gross income of more than $1 million would be taxed at ordinary income tax rates, with 37% generally being the highest rate (40.8% including the net investment income tax), but only to the extent that the taxpayer's income exceeds $1 million ($500,000 for married filing separately), indexed for inflation after 2022."

This proposal would be effective for gains required to be recognized after "the date of announcement."

Observation. Presumably, the date of announcement refers to late April when Biden first discussed his proposals.

Treat transfers of appreciated property by gift or on death as realization events. Under the proposal, the donor or deceased owner of an appreciated asset would realize a capital gain at the time of the transfer.

For a donor, the amount of the gain realized would be the excess of the asset's fair market value on the date of the gift over the donor's basis in that asset. For a decedent, the amount of gain would be the excess of the asset's fair market value on the decedent's date of death over the decedent's basis in that asset. That gain would be taxable income to the decedent on "the Federal gift or estate tax return or on a separate capital gains return."

A transfer would be defined under the gift and estate tax provisions and would be valued using the methodologies used for gift or estate tax purposes. However, for purposes of the imposition of this tax on appreciated assets, the following would apply:

First, a transferred partial interest would be its proportional share of the fair market value of the entire property.

Second, transfers of property into, and distributions in kind from, a trust, partnership, or other non-corporate entity, other than a grantor trust that is deemed to be wholly owned and revocable by the donor, would be recognition events.

The deemed owner of a revocable grantor trust would recognize gain on the unrealized appreciation in any asset distributed from the trust to any person other than the deemed owner or the U.S. spouse of the deemed owner, other than a distribution made in discharge of an obligation of the deemed owner. All of the unrealized appreciation on assets of such a revocable grantor trust would be realized at the deemed owner's death or at any other time when the trust becomes irrevocable.

90-year rule. Gain on unrealized appreciation also would be recognized by a trust, partnership, or other noncorporate entity that is the owner of property if that property has not been the subject of a recognition event within the prior 90 years, with such testing period beginning on January 1, 1940. The first possible recognition event for any taxpayer under this provision would thus be December 31, 2030.

Certain exclusions would apply. 

• Transfers to charity. Transfers by a decedent to a U.S. spouse or to charity would carry over the basis of the decedent. Capital gain would not be recognized until the surviving spouse disposes of the asset or dies, and appreciated property transferred to charity would not generate a taxable capital gain. The transfer of appreciated assets to a split-interest trust would generate a taxable capital gain, with an exclusion allowed for the charity's share of the gain based on the charity's share of the value transferred as determined for gift or estate tax purposes.

• Tangible property and principal residence. The proposal would exclude from recognition any gain on tangible personal property such as household furnishings and personal effects (excluding collectibles). The $250,000 per-person exclusion under current law for capital gain on a principal residence would apply to all residences and would be portable to the decedent's surviving spouse, making the exclusion effectively $500,000 per couple.

• Small business stock. The exclusion under current law for capital gain on certain small business stock under Code Sec. 1202 would also apply.

• New $1 million exclusion. In addition to the above exclusions, the proposal would allow a $1 million per-person exclusion from recognition of other unrealized capital gains on property transferred by gift or held at death.

• The per-person exclusion would be indexed for inflation after 2022 and would be portable to the decedent's surviving spouse under the same rules that apply to portability for estate and gift tax purposes (making the exclusion effectively $2 million per married couple). 
  
  The recipient's basis in property received by reason of the decedent's death would be the property's fair market value at the decedent's death. The same basis rule would apply to the donee of gifted property to the extent the unrealized gain on that property at the time of the gift was not shielded from being a recognition event by the donor's $1 million exclusion. However, the donee's basis in property received by gift during the donor's life would be the donor's basis in that property at the time of the gift to the extent that the unrealized gain on that property counted against the donor's $1 million exclusion from recognition. 

• Family owned and operated businesses. Payment of tax on the appreciation of certain family-owned and operated businesses would not be due until the interest in the business is sold or the business ceases to be family-owned and operated.

• 15-year payment plan. The proposal would allow a 15-year fixed-rate payment plan for the tax on appreciated assets transferred at death, other than liquid assets such as publicly traded financial assets and other than businesses for which the deferral election is made. The IRS would be authorized to require security at any time when there is a reasonable need for security to continue this deferral. That security may be provided from any person, and in any form, deemed acceptable by the IRS.

To facilitate the transition to taxing gains at gift, death and periodically under this proposal, the IRS would be granted authority to issue any regs necessary or appropriate to implement the proposal, including rules and safe harbors for determining the basis of assets in cases where complete records are unavailable, and reporting requirements for all transfers of appreciated property including value and basis information.

Proposed effective date. The proposal would be effective for gains on property transferred by gift, and on property owned at death by decedents dying, after December 31, 2021, and on certain property owned by trusts, partnerships, and other non-corporate entities on January 1, 2022.

References: For capital gain taxation, in general, see FTC 2d/FIN ¶I-1000 et seq. For basis of property acquired from a decedent, see FTC 2d/FIN ¶P-4000.

Tax Season 2020 – Thanks!

We want to thank all of our clients for continuing with us for 2020. It was the most “interesting” tax season in 40 years. It was the first time that the tax laws were changed during tax season and the changes were extensive.

Here is a Federal legislation summary for 1/1/2020 to March 31, 2021:

Coronavirus Preparedness & Response Act (3/6/2020) 13 pages

Families First Coronavirus Relief Act (3/18/2020) 44 pages

CARES Act (3/27/2020) 335 pages

Paycheck Protection Program Act (04/24/2020) 12 pages

Consolidated Appropriations Act (12/27/2020) 2124 pages

American Rescue Plan Act (3/11/2021) 242 pages

Let’s see then, 6 laws, thousands of pages, multiple retroactive changes and multiple wide-ranging changes occurring during the middle of filing season. 

No wonder why CPAs had headaches!

Unemployment Benefits Taxable – Guidance from IRS – Update 10-26-20

IR-2020-185, August 18, 2020

WASHINGTON — With millions of Americans now receiving taxable unemployment compensation, many of them for the first time, the Internal Revenue Service today reminded people receiving unemployment compensation that they can have tax withheld from their benefits now to help avoid owing taxes on this income when they file their federal income tax return next year.

By law, unemployment compensation is taxable and must be reported on a 2020 federal income tax return. Taxable benefits include any of the special unemployment compensation authorized under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, enacted this spring.

Withholding is voluntary. Federal law allows any recipient to choose to have a flat 10% withheld from their benefits to cover part or all of their tax liability. To do that, fill out Form W-4V, Voluntary Withholding Request PDF, and give it to the agency paying the benefits. Don’t send it to the IRS. If the payor has its own withholding request form, use it instead.

If a recipient doesn’t choose withholding, or if withholding is not enough, they can make quarterly estimated tax payments instead. The payment for the first two quarters of 2020 was due on July 15. Third and fourth quarter payments are due on September 15, 2020, and January 15, 2021, respectively. For more information, including some helpful worksheets, see Form 1040-ES and Publication 505, available on IRS.gov.

Small Business Assistance – Guidance from Treasury Dept. – Update 4-3-20

For more information on the Paycheck Protection Program follow this link to the Department of the Treasury website. Click Here

No “Simple Return” Required – Update 4-2-20

From an IRS news release today:

“We want to ensure that our senior citizens, individuals with disabilities, and low-income Americans receive Economic Impact Payments quickly and without undue burden,” said Secretary Steven T. Mnuchin. “Social Security recipients who are not typically required to file a tax return need to take no action.

Coronavirus Economic Impact Payments – Update 4-1-20

This is from the IRS website, 4/1/20. We do not yet have any guidance on what a “simple return” looks like how it will be filed. This site will be updated as soon as information becomes available.

Check IRS.gov for the latest information: No action needed by most people at this time
IR-2020-61, March 30, 2020

WASHINGTON — The Treasury Department and the Internal Revenue Service today announced that distribution of economic impact payments will begin in the next three weeks and will be distributed automatically, with no action required for most people. However, some seniors and others who typically do not file returns will need to submit a simple tax return to receive the stimulus payment.

Who is eligible for the economic impact payment?

Tax filers with adjusted gross income up to $75,000 for individuals and up to $150,000 for married couples filing joint returns will receive the full payment. For filers with income above those amounts, the payment amount is reduced by $5 for each $100 above the $75,000/$150,000 thresholds. Single filers with income exceeding $99,000 and $198,000 for joint filers with no children are not eligible.

Eligible taxpayers who filed tax returns for either 2019 or 2018 will automatically receive an economic impact payment of up to $1,200 for individuals or $2,400 for married couples. Parents also receive $500 for each qualifying child.

How will the IRS know where to send my payment?

The vast majority of people do not need to take any action. The IRS will calculate and automatically send the economic impact payment to those eligible.

For people who have already filed their 2019 tax returns, the IRS will use this information to calculate the payment amount. For those who have not yet filed their return for 2019, the IRS will use information from their 2018 tax filing to calculate the payment. The economic impact payment will be deposited directly into the same banking account reflected on the return filed.

The IRS does not have my direct deposit information. What can I do?

In the coming weeks, Treasury plans to develop a web-based portal for individuals to provide their banking information to the IRS online, so that individuals can receive payments immediately as opposed to checks in the mail.

I am not typically required to file a tax return. Can I still receive my payment?

Yes. People who typically do not file a tax return will need to file a simple tax return to receive an economic impact payment. Low-income taxpayers, senior citizens, Social Security recipients, some veterans and individuals with disabilities who are otherwise not required to file a tax return will not owe tax.

How can I file the tax return needed to receive my economic impact payment?

IRS.gov/coronavirus will soon provide information instructing people in these groups on how to file a 2019 tax return with simple, but necessary, information including their filing status, number of dependents and direct deposit bank account information.

I have not filed my tax return for 2018 or 2019. Can I still receive an economic impact payment?

Yes. The IRS urges anyone with a tax filing obligation who has not yet filed a tax return for 2018 or 2019 to file as soon as they can to receive an economic impact payment. Taxpayers should include direct deposit banking information on the return.

I need to file a tax return. How long are the economic impact payments available?

For those concerned about visiting a tax professional or local community organization in person to get help with a tax return, these economic impact payments will be available throughout the rest of 2020.

Where can I get more information?

The IRS will post all key information on IRS.gov/coronavirus as soon as it becomes available.

The IRS has a reduced staff in many of its offices but remains committed to helping eligible individuals receive their payments expeditiously. Check for updated information on IRS.gov/coronavirus rather than calling IRS assistors who are helping process 2019 returns.

 

Coronavirus Update – March 27, 2020

This update is current as of today, 3/27/2020. New Mexico has published three news releases to give taxpayers guidance regarding their response to the coronavirus. As of today, many states have issued news releases. We prepare tax returns for states. Call our office if you have state specific questions.

New Mexico’s filing extensions do not apply to gross receipts tax.

The New Mexico Taxation and Revenue Department (TRD) recently announced extension due dates for personal, fiduciary and corporate tax returns, return payments and estimated payments, with a filing or payment due date of April 15, 2020 being postponed to July 15, 2020. The TRD has now issued further guidance to let taxpayers know that the extensions do not apply to gross receipts tax, governmental gross receipts tax, compensating tax, leasehold vehicle gross receipts, and leased vehicle surcharge (reporting using CRS). Affected taxpayers do not have to call or write in to the TRD as it is working on making system changes to reflect the extensions. (New Mexico Bulletin 100.35, 03/25/2020.)

New Mexico income tax extensions will not trigger interest charges.

The Taxation and Revenue Department announced on March 25 that due to recent IRS action, it will not have to impose interest charges on taxpayers who take advantage of the 90-day extensions announced last week for filing and paying New Mexico personal and corporate income taxes. However, interest will need to accrue on withholding tax extensions. The Department also clarified that the extensions apply to the quarterly personal income tax estimated payments required of some taxpayers on April 15, which includes many self-employed New Mexicans, as well as to trusts, estates, and fiduciaries. All of these will now be due no later than July 15, 2020. No penalties or interest will be assessed on income tax payments normally due on April 15 as long as payment is received by July 15. Payments normally due on later dates will incur interest charges but not penalties. The state also extended deadlines to remit withholding taxes. Withholding filings that would normally be due March 25, April 25, May 25, and June 25 will instead be due on July 25. No penalties will be assessed on businesses that take advantage of the withholding extension. However, under New Mexico law, interest will accrue from the original due date. (News release, 03/25/2020.)

New Mexico extends income and payroll tax deadlines.

New Mexico’s Governor has announced that New Mexicans will have an extra 90 days to file and pay their 2019 personal income taxes in recognition of the economic hardships caused by the coronavirus (COVID-19) pandemic. Taxpayers will have until July 15 to file and pay any taxes due. The deadline for corporate income taxes also will be extended until July 15. In addition, New Mexico is extending deadlines for employers to remit withholding taxes. Taxpayers who elect to take advantage of the income tax extensions will not be assessed penalties as long as payment is received by July 15, 2020. Under New Mexico law, however, interest will accrue on any unpaid balances from April 15 forward. (News release, 03/20/2020.)

Coronavirus Update – March 20, 2020

This update is current as of today, 3/25/2020. This area of tax law continues to change. It is also important to note that, as of now, no official notices from IRS or states have been received.
Today, 3/20/20, Treasury Secretary Mnuchin announced that the tax filing deadline for 2019 returns has been extended to July 15, 2020.

We do not know which states will conform to these changes. We continue to monitor professional sources of tax information and will update this website as authoritative information becomes available.

Since many taxpayers expect refunds, it is recommended that they file as soon as they can. Even for those taxpayers that expect to owe tax, early preparation of their returns gives them time to plan for payment of the tax.

Please call our office with questions.

Coronavirus Update – March 18, 2020

This update is current as of today, 3/18/2020. Needless to say, this area of tax law is continually evolving. It is also important to note that, as of now, no official notices from IRS or states have been received.

We understand Secretary Mnuchin’s announcement to mean:
• The individual filing deadline continues to be April 15, 2020
• Those who cannot file by April 15th need to get an extension.
• Individual and Corporate taxpayers can defer tax due payments interest and penalty free for 90 days after April 15th.

At this time, there is no official guidance regarding 2020 estimated tax payment due dates.

It is unclear which states will follow the federal guidelines. As of now:
California has announced an extension to file and pay individual returns until June 15, 2020 and the April quarterly estimates will also be due June 15th.
Connecticut, Indiana, Maryland, Massachusetts, and Oregon have agreed to followed federal guidelines for individuals.

Again, these guidelines are constantly evolving. We will update this Tax Note as more information becomes available.

New Mexico Sales Tax Changes – effective July 1, 2019

Tax Type(s): Cigarette, Alcohol & Miscellaneous Taxes, Sales and Use Tax
Several Changes to New Mexico Tax Law Effective July 1, 2019
Starting July 1, taxpayers will see some important changes to New Mexico tax laws intended to level certain playing fields and raise revenue for critical needs such as road repairs.
Most of the changes were included in House Bill 6, which was sponsored by Reps. Jim Trujillo, Sheryl Williams Stapleton, Javier Martinez, Susan K. Herrera, and Antonio “Moe” Maestas and signed into law by Gov. Michelle Lujan Grisham.

Perhaps the largest change will be for businesses outside of the state that sell to New Mexicans over the internet. Businesses with $100,000 in sales or more in the preceding calendar year to New Mexico buy-ers will now be required to pay gross receipts taxes. Collecting GRT from out-of-state internet sellers will raise about $43 million for the state General Fund in the coming fiscal year. New Mexico is one of many states rolling out taxes on internet-based sales in the wake of a 2018 Supreme Court decision making clear that they are legal.

“Extending gross receipts taxes to e-commerce businesses that don’t have a physical presence here eliminates an unfair competitive advantage those companies enjoyed at the expense of homegrown, New Mexico-based businesses,” said Taxation and Revenue Secretary Stephanie Schardin Clarke. “It is an im-portant move that will also ensure the State’s revenues will grow along with the economy and the need for public services into the future.”

Starting July 1, 2019, businesses subject to the new collections will pay only the statewide GRT rate of 5.125 percent. Starting July 1, 2021, those businesses will also be required to collect city and county GRT in-crements based on sale destinations. In the two-year interim before city and county taxes are collected, those local governments will share a $24 million annual appropriation from the General Fund, apportioned to each entity by population.

Other changes taking effect July 1 include:

An increase in the Motor Vehicle Excise Tax from 3% to 4%. The increase is effective for any motor vehicles purchased on July 1, 2019 or later. Vehicles purchased before that date, even if titled and registered afterward, will be subject to the 3% tax. Revenue from this increase will make $52 million annually available for roads and bridges, including improvements to address emergency road conditions present in southeast-ern New Mexico’s Permian basin.

Non-profit and governmental hospitals will now collect tax on sales and services, bringing them in line with similar for-profit hospitals. All hospitals will be eligible to deduct an additional 60% of receipts after all other eligible exemptions and deductions have been taken. The move will raise a total of $93 million per year for the General Fund.

Taxes on cigarettes will increase from $1.66 per pack to $2 per pack. Cigars will be taxed at 50 cents each or 25 percent of wholesale/manufacturer value, whichever is lower.
E-cigarette liquid will now be subject to a 12.5% tax on the wholesale/manufacturer value. So-called “closed system” cartridges, such as Juul pods, will be taxed at 50 cents each.

Taken from RIA Checkpoint©2019 Thomson Reuters/Tax & Accounting. All Rights Reserved. Retrieved from checkpoint.riag.com on 7-10-19

Government Shutdown – IRS Plan – Update January 16, 2019

As our congressmen and senators continue to squabble rather than govern, IRS has issued an updated version of its government shutdown contingency plan for the 2019 tax season. It includes the call back to service of 46,052 of IRS’s 80,265 employees.
IRS contingency plans, generally. IRS has a contingency plan that it updates annually. The plan, called the IRS Lapse in Appropriations Contingency Plan, describes actions and activities for the first five business days following a lapse in appropriations. It also provides that, in the event the lapse extends beyond five business days, as is the current case, the Deputy Commissioner for Operations Support will direct the IRS Human Capital Officer to reassess ongoing activities and identify necessary adjustments of excepted positions and personnel.
Employees needed. Of the 46,052 employees, the plan contemplates that there will be:
• 346 employees in the Chief Counsel’s office. Chief Counsel’s primary responsibility during a lapse is to manage pending litigation, the time-sensitive filing of motions, briefs, answers and other pleadings related to the protection of the government’s material interests.
• 9 employees in the Return Preparers office.
• 163 employees in the Large Business and International (LB&I) division. With limited exceptions, these employees will be on “on call”.
• 2,938 employees in the Small Business/Self-Employed (SBSE) division, of which 2,614 will be in Collection and 264 will be in Examination.
Tax Cuts and Jobs Act funding. IRS’s plan notes that, in enacting the Tax Cuts and Jobs Act (P.L. 115-97, 2017), Congress provided the Treasury Department with funds that will remain available until September 30, 2019. Thus, some implementation activities would not be affected by a lapse in appropriations in Fiscal Year 2019.
Effecting the plan. This plan will become effective after IRS receives official notification from the Department of the Treasury. (From RIA Checkpoint – Newsstand 1-16-19)

Tax Cuts & Jobs Act – Qualified Business Income Deduction – Update January 15, 2019

One of the largest benefits to small business owners is the qualified Business Income Deduction (QBID). This significant new tax deduction takes effect in 2018 and provides a substantial tax benefit to individuals with “qualified business income” from a partnership, S corporation, LLC, or sole proprietorship. This income is sometimes referred to as “pass-through” income. The QBID replaces the Domestic Production Activities Deduction and offers significantly greater benefits to taxpayers.
The deduction is generally equal to 20% of your “qualified business income” (QBI) from a partnership, S corporation, or sole proprietorship, defined as the net amount of items of income, gain, deduction, and loss with respect to your trade or business. The business must be conducted within the U.S. to qualify, and specified investment-related items are not included, e.g., capital gains or losses, dividends, and interest income (unless the interest is properly allocable to the business). The trade or business of being an employee does not qualify. Also, QBI does not include reasonable compensation received from an S corporation, or a guaranteed payment received from a partnership for services provided to a partnership’s business.
The deduction is taken “below the line,” i.e., it reduces your taxable income but not your adjusted gross income. But it is available regardless of whether you itemize deductions or take the standard deduction. In general, the deduction cannot exceed 20% of the excess of your taxable income over net capital gain. If QBI is less than zero it is treated as a loss from a qualified business in the following year.
Rules are in place (discussed below) to deter high-income taxpayers from attempting to convert wages or other compensation for personal services into income eligible for the deduction.
These rules involve “thresholds,” i.e. taxable income of over $157,500 ($315,000 for joint filers). If your taxable income is at least $50,000 above the threshold, i.e., it is at least $207,500 ($157,500 + $50,000), all of the net income from a specified service trade or business is excluded from QBI. (Joint filers would use an amount $100,000 above the $315,000 threshold, viz., $415,000.) For taxable incomes that are between the threshold amounts and the $207,500/$415,000 amounts, the exclusion from QBI of income from specified service trades or businesses is phased in. Specified service trades or businesses are trades or businesses involving the performance of services in the fields of health, law, consulting, athletics, financial or brokerage services, or where the principal asset is the reputation or skill of one or more employees or owners.
Additionally, for taxpayers with taxable income more than the above thresholds, there is a limitation on the amount of the deduction that is based either on wages paid or wages paid plus a capital element. Here’s how it works: If your taxable income is at least $207,500 ($415,000 for joint filers), your deduction for QBI cannot exceed the greater of (1) 50% of your allocable share of the W-2 wages paid with respect to the qualified trade or business, or (2) the sum of 25% of such wages plus 2.5% of the unadjusted basis immediately after acquisition of tangible depreciable property used in the business (including real estate). For taxable incomes that are between the threshold amounts and the $207,500/$415,000 amounts, a phase-in of the limitation applies.
Other limitations may apply in certain circumstances, e.g., for taxpayers with qualified cooperative dividends, qualified real estate investment trust (REIT) dividends, or income from publicly traded partnerships.
Obviously, the complexities surrounding this substantial new deduction can be formidable, especially if your taxable income exceeds the thresholds discussed above. If you wish to work through the mechanics of the deduction with me, with particular attention to the impact it can have on your specific situation, please give me a call.

Tax Cuts & Jobs Act – Qualified Business Income Deduction – Update January 30, 2018

The Tax Cuts and Jobs Act includes a significant new tax deduction taking effect in 2018. It should provide a substantial tax benefit to individuals with “qualified business income” from a partnership, S corporation, LLC, or sole proprietorship. This income is sometimes referred to as “pass-through” income.
The deduction is generally equal to 20% of your “qualified business income” (QBI) from a partnership, S corporation, or sole proprietorship, defined as the net amount of items of income, gain, deduction, and loss with respect to your trade or business. The business must be conducted within the U. S. to qualify, and specified investment-related items are not included, e.g., capital gains or losses, dividends, and interest income (unless the interest is properly allocable to the business). The trade or business of being an employee does not qualify. Also, QBI does not include reasonable compensation received from an S corporation, or a guaranteed payment received from a partnership for services provided to a partnership’s business.
The deduction is taken “below the line,” i.e., it reduces your taxable income but not your adjusted gross income. But it is available regardless of whether you itemize deductions or take the standard deduction. In general, the deduction cannot exceed 20% of the excess of your taxable income over net capital gain. If QBI is less than zero it is treated as a loss from a qualified business in the following year.
Rules are in place (discussed below) to deter high-income taxpayers from attempting to convert wages or other compensation for personal services into income eligible for the deduction.
These rules involve “thresholds,” i.e. taxable income of over $157,500 ($315,000 for joint filers). If your taxable income is at least $50,000 above the threshold, i.e., it is at least $207,500 ($157,500 + $50,000), all of the net income from a specified service trade or business is excluded from QBI. (Joint filers would use an amount $100,000 above the $315,000 threshold, viz., $415,000.) For taxable incomes that are between the threshold amounts and the $207,500/$415,000 amounts, the exclusion from QBI of income from specified service trades or businesses is phased in. Specified service trades or businesses are trades or businesses involving the performance of services in the fields of health, law, consulting, athletics, financial or brokerage services, or where the principal asset is the reputation or skill of one or more employees or owners.
Additionally, for taxpayers with taxable income more than the above thresholds, there is a limitation on the amount of the deduction that is based either on wages paid or wages paid plus a capital element. Here’s how it works: If your taxable income is at least $207,500 ($415,000 for joint filers), your deduction for QBI cannot exceed the greater of (1) 50% of your allocable share of the W-2 wages paid with respect to the qualified trade or business, or (2) the sum of 25% of such wages plus 2.5% of the unadjusted basis immediately after acquisition of tangible depreciable property used in the business (including real estate). For taxable incomes that are between the threshold amounts and the $207,500/$415,000 amounts, a phase-in of the limitation applies.
Other limitations may apply in certain circumstances, e.g., for taxpayers with qualified cooperative dividends, qualified real estate investment trust (REIT) dividends, or income from publicly traded partnerships.
Obviously, the complexities surrounding this substantial new deduction can be formidable, especially if your taxable income exceeds the thresholds discussed above. If you wish to work through the mechanics of the deduction with me, with particular attention to the impact it can have on your specific situation, please give me a call.

Tax Cuts & Jobs Act – Update January 4, 2018

On December 22, 2017, President Trump signed the Tax Cut and Jobs Act (the Act). It is the most comprehensive tax “reform” since the 1986 Tax Act.

The Act makes significant changes to both individual and business taxation and the provisions are complex, confusing, and inter-connected. At this early date (January 4, 2018), the accounting profession is just starting to come to grips with the ramifications of the law and how it will affect clients in 2017, 2018, and later years.

During my professional career, I remember the 1976, 1981, and 1986 tax acts in addition to this one. None of the previous acts had as much wide-spread media mis-information as this one. Virtually every one of the scare tactic predictions are NOT included in the actual act. One colleague (a nationally known tax educator and speaker) sampled 20 of his clients and found that, in all cases, the taxpayers paid less tax under the new act than the existing 2017 tax laws.

That being said, one of the certainties of the Act is that it is complex. That complexity makes generalizations impossible. Each individual must apply the new law to their unique circumstances to determine how it will affect them. The good news is that it is early in 2018 and we all have time to understand the changes to the laws and how to legally apply those changes to benefit our clients.

Unless you have simplest return, seeking the advice of a tax professional is needed. The Act is so complex that the simple “online interview” and “check the box” preparation method used by various off-the-shelf tax preparation softwares is likely to lead to an unexpected result. In one interesting 2017 tax court case (Bulakites TC Memo 2017-79), the taxpayer argued that he followed the Turbo Tax instructions to prepare his return and, therefore, he used due diligence and should have the penalties caused by his errors abated. The judge had no patience for this argument and the taxpayer ended up paying both the penalties and court costs.

This is the first of several updates that will explain the various provisions of the Act. It gives an overview of the Act as it applies to individuals. Each of these topics will be expanded as time goes on.

Tax Rates & Brackets
The tax rates are effective starting in 2018 (tax returns filed by April 15, 2019 have been lowered and the brackets expanded. The net effect is that a larger proportion of taxable income will be taxed at lower rates.

Standard Deductions
The standard deductions for 2018 have been almost doubled over the amount in 2017 ($12K for single and $24K for married couples filing joint returns). Based on this a larger proportion of taxpayers will be able to use the standard deduction. Except for those taxpayers with significant itemized deductions, this change will lower taxable income.

Itemized Deductions & Charitable Contributions
Many itemized deductions have been repealed and others changed. Since charitable contributions have been subject to so much media mis-information, I will talk about them first. Under current law (2017), taxpayers cannot (generally) deduct charitable contributions in excess of 50% of their adjusted gross income. Starting in 2018, that limit is increased to 60%. That is an increase of the allowed deduction.
The confusion is caused by the increased standard deduction. Taxpayers who make moderate charitable contributions AND who used itemized deductions in 2017 may find that the increased standard deduction in 2018 is more advantageous. They will not deduct their contributions as part of their itemized deductions because using the standard deduction will reduce their taxes overall. Taxpayers that continue to itemize will still be able to deduct charitable contributions.

Medical Deductions
The floor (that amount that medical deductions needs to exceed to lower taxable income) has been reduced back to 7.5%. This will increase the medical deduction for all taxpayers who itemize.

Mortgage Interest
Mortgage interest is still deductible for first mortgages of $750,000 or less but the $100,000 home equity loan deduction has been repealed. This is a planning opportunity for 2018.

State and Local Income and Property Taxes
The income and property tax deduction is limited to $10,000. The effects of this provision on taxable income, too, must be considered in light of the increased standard deduction. Each individual needs to see how this change will affect their tax return.

Miscellaneous Itemized Deductions
This deduction, which very few of our clients could use anyway, has been repealed for 2018 and later years.

Personal Exemptions
The personal exemption has been repealed. It would appear that this repeal hurts young families with many children. As with all of this Act, that is too simple an answer. Both the increased standard deduction (above) and the increased Child Credit (below) will offset the loss of personal exemptions.

Child Credit
For 2017, the child credit (not a deduction but a reduction in the amount of tax) was $1,000. For 2018, that amount is doubled to $2,000. To see how this will work (using estimated amounts and round numbers), presume we have a married couple with 2 children for both 2017 & 2018. For both years, they use the standard deduction.

For 2018, they will lose their personal exemptions (4K x 4) for a $16K increase in taxable income. However, at the same time, their standard deduction increased by $12K. At this point, their taxable income has increased $4K.

If they were in the 25% tax bracket in 2017, that increased taxable income would result in an increase in tax of $1,000 (25% of $4K). However, for 2018, they would have an increased child credit of $2,000 ($1,000 for each child). When all the dust settles, their tax is reduced in 2018 by $1,000.

Education Credits
Contrary to many media reports the HOPE and Lifetime learning Credits were not repealed.

Alimony
Starting in 2018 alimony paid is no longer deductible and, at the same time, alimony received is no longer taxable. Since both the payer and recipient are treated equally, this provision seems fair to us.

New Qualified Business Income Deduction (QBID)
Starting in 2018, individual taxpayers who receive “pass-through income” will be able to take a 20% of pass-through income deduction.
This deduction will be the subject of a future update. It is complicated and limited by the amount of income, wages paid, and equipment used. In spite of the complication, it will benefit many small business owners particularly those who operate family businesses.

Summary
This short update covers many of the provisions of the Act that have received the most attention. As weeks go by, we will focus more deeply on these and other provisions.

Tax Reform – President’s Tax Plan – Update – 5-25-17

We are beginning to get some information about President Trump’s proposed tax changes.  These changes have a long way to go before they become law and no one, at this point, knows what the new law will look like.

However, these few notes will give you an idea of the direction the President is taking.

Tax rates for regular C corporations will be reduced from 35% to 15% and a new 15% tax will be added for certain S Corporation and Limited Liability Company income.  The idea here is to make American business more competitive.  Although many pundits don’t report this, remember that you really cannot tax a business.  The funds businesses use to pay taxes come from increased prices to us – the consumer. In the end, we end up paying the business’ taxes and our personal taxes too. So, in this accountant’s opinion, reducing corporate taxation is likely to make our American corporations more competitive and increase employment in the US – both desirable results.

For individuals, the standard deduction will be increased to $24,000 for married individuals filing joint returns, the alternative minimum tax will be repealed (more below), the credit for child care expenses will  be increased (about time), and the 3.8% investment income tax will (finally) be eliminated.

The Alternative minimum Tax (AMT) has been one of the most unfair taxes I have encountered in my entire career. It was originally enacted to assure that everyone paid ‘some’ tax and to keep certain targeted taxpayers from taking advantage of items called “tax preferences”.  Over the years, the AMT has ended up targeting middle income taxpayers (typically two earner married couples).  To compute the AMT, you compute your regular taxable income and then your alternative minimum taxable income (the regular income with many deductions added back in) and pay tax  on the HIGHER of regular or alternative minimum taxable income. The AMT has turned out to be a penalty tax for those skilled workers who are the backbone of the American economy and should be repealed once and for all.

We’ll continue posting updates as more information become available.

Tax Reform – “A Better Way” – Update – 5-23-17

Tax reform is on the horizon and it will affect all taxpayers from those who file simple short-form returns to those who operate large multi-location businesses.  We have been experiencing the effects of the budget cuts on the Internal Revenue Service’s ability to provide services in a timely manner.  The National Taxpayer Advocate is your voice to the IRS.  Here is a statement from  Nina Olson, National Taxpayer Advocate.

Statement of Nina E. Olson, National Taxpayer Advocate, before the Subcommittee on Oversight (May 19, 2017)

On May 19, National Taxpayer Advocate Nina Olson testified before the Ways and Means Oversight Subcommittee on proposals to reform IRS operations in “A Better Way”, the House Republican tax reform blueprint (the Blueprint).

Ms. Olson began her testimony by commending the subcommittee for its plans to “take a hard look at IRS priorities and operations”, noting that it has been almost 20 years since the enactment of significant legislation to improve tax administration and strengthen taxpayer rights—and that a lot has changed in that time.

She noted that the Blueprint is a “general document” that doesn’t clearly state what changes are contemplated or their reach. She further cautioned that, given the size and complexity of IRS, “well-intentioned proposals can often have unintended consequences” and stressed the importance of thoroughly vetting potential changes prior to implementation.

The Blueprint identified problems at IRS, which Ms. Olson addressed as follows:

• Poor customer service levels. Ms. Olson encouraged the subcommittee to focus not just on the percentage of calls that IRS answers but also “the range of services we want the tax administrator to provide”. She noted that IRS “today answers only “basic” tax-law questions during the filing season, and it does not answer any tax-law questions at all during the other 8 1/2 months of the year”. She opined that answering most tax-law questions would reduce taxpayer burden and improve compliance, stating that it “is a central function of a tax administration agency to help taxpayers understand what the law requires of them”. She also said that, instead of centralizing its operations and closing taxpayer assistance centers, IRS should “maintain a more robust presence in local communities”.

• Civil asset forfeiture policies. Ms. Olson agreed that IRS’s Criminal Investigation function (CI) should generally pursue only illegal-source structuring violations and applauded IRS for deciding generally to no longer pursue legal-source structuring cases. Structuring involves manipulating cash transactions in order to avoid certain reporting requirements; and legal-source structuring means that the funds themselves come from a legal activity. She also shared the concern of subcommittee members that CI shouldn’t threaten taxpayers with the possibility of criminal prosecution as a way to get them to agree to excessive civil penalties, noting that such practice goes beyond structuring cases (e.g., in the offshore voluntary disclosure program, where certain taxpayers felt the penalties were excessive and wanted to opt out of the program but feared criminal charges). Finally, she noted that CI has taken the position that it is subject to the Taxpayer Bill of Rights only when it investigates cases under the Code, explained why she considers that position problematic, and encouraged Congress to clarify that, except in “explicitly-stated extraordinary circumstances”, all IRS employees must act in accord with taxpayer rights.

• Excessive improper EITC payments. Ms. Olson acknowledged the “relatively high improper payments rate” for Earned Income Tax Credits (EITCs), but observed that, taking into account the administrative costs of the program—notably, the lack of pre-payment eligibility verification costs—the “overall costs” of the program fall “in the middle of the pack of social benefits programs”. She also advocated bifurcating the existing credit into a Worker Credit and a Family Credit, stating that such would simplify compliance burdens and substantially reduce the improper payment rate.

• Outdated IT systems. Ms. Olson agreed that IRS’s outdated information technology (IT) systems “substantially limit” IRS’s efficiency and its ability to meet taxpayers’ needs. She said that IRS’s IT systems are “a top priority and will continue to be so for the foreseeable future”.
The Blueprint, after identifying these problems, proposes to restructure IRS by creating three major units:
1. Families and individuals;
2. Businesses; and
3. Dispute resolution through an independent “small claims court” that “will allow routine disputes to be resolved more quickly, so that small businesses no longer spend more in legal fees to resolve a dispute with the IRS than the amount of tax that was at stake”.
Ms. Olson noted that an independent dispute resolution mechanism is central to effective tax administration. She opined that IRS’s Office of Appeals was intended to provide that function but has unfortunately fallen short, in that it is viewed as not truly independent and not user-friendly. She noted that, while it’s important for small businesses to be able to access independent dispute resolution, it’s important for individual taxpayers to have similar access—something that the Blueprint doesn’t clearly provide. She advised Congress to instead “assess the strengths and weakness” of Appeals and make changes to improve it.

New Overtime Rules – Breaking News – 11-30-16

The new overtime rules that affect millions of workers and that were scheduled to take affect tomorrow, December 1, 2016, have been blocked by a preliminary injunction issued by U.S District Court Judge Amos Mazzant in Texas. That means that employers are NOT required to make any changes in their payroll at this time. This rule applies to all states. We can expect the injunction to be lifted when the existing litigation brought by 21 states and the US Chamber of Commerce is resolved.

IRA Rollover – 60 Day Rule – No Exception – 6-29-16

You can take funds from IRA and use them for whatever you want BUT to avoid tax and penalties on those funds, they must be rolled over into another IRA or Qualified Plan within 60 days. From IRS Private Letter Ruling 201625022:

Background. There is no immediate tax if distributions from an IRA are rolled over to an IRA or other eligible retirement plan (i.e., qualified trust, governmental Code Sec. 457 plan, Code Sec. 403(a) annuity and Code Sec. 403(b) tax-shelter annuity). For the rollover to be tax-free, the amount distributed from the IRA generally must be recontributed to the IRA or other eligible retirement plan no later than 60 days after the date that the taxpayer received the withdrawal from the IRA. (Code Sec. 408(d)(3)) A distribution rolled over after the 60-day period generally will be taxed (and also may be subject to a 10% premature withdrawal penalty tax). (Code Sec. 72(t)) Only one tax-free IRA-to-IRA rollover per IRA account can be made within a one-year period. (Code Sec. 408(d)(3)(B))
IRS may waive the 60-day rule if an individual suffers a casualty, disaster, or other event beyond his reasonable control, and not waiving the 60-day rule would be against equity or good conscience (i.e., hardship waiver). (Code Sec. 408(d)(3)(I))

IRS will consider several factors in determining whether to waive the 60-day rollover requirement, including time elapsed since the distribution and inability to complete the rollover due to death, disability, hospitalization, incarceration, restrictions imposed by a foreign country, postal error, errors committed by a financial institution, etc. (Rev Proc 2003-16, 2003-1 CB 359)

Facts. Early in 2015, Taxpayer’s daughter’s home was in foreclosure. On Apr. 8, 2015, Taxpayer and her spouse put their vacation home up for sale in order to raise funds to purchase their daughter’s home. Prior to the sale of their vacation home, in order to avert foreclosure, Taxpayer took a distribution from her IRA on Apr. 24, 2015. The distribution was used to purchase her daughter’s home on Apr. 27, 2015.
Taxpayer intended to redeposit the distributed amount into her IRA within the 60-day rollover period which ended on June 23, 2015. However, the sale of the vacation home was not completed until July 1, 2015, and Taxpayer didn’t have sufficient funds available during the 60-day period to complete the rollover. Taxpayer indicated that her spouse was willing to take a distribution from his IRA within the 60-day period to complete the rollover but that her medical condition prevented this from occurring. She attempted to complete the rollover once she received the funds from selling the vacation home, but the 60-day period had expired.

Taxpayer requested that IRS waive the 60-day requirement in Code Sec. 408(d)(3) with respect to the distribution.
Relief denied. IRS found that the documentation and materials submitted by Taxpayer did not demonstrate that her failure to complete a timely rollover was due to any of the factors enumerated in Rev Proc 2003-16. Although Taxpayer represented that her inability to complete a timely rollover was caused by her medical condition during the 60-day period, IRS was “not convinced” given her “continued work and travels”. IRS found that her failure to complete a timely rollover was instead due to her use of the funds as a short-term loan to purchase her daughter’s home, which left her unable to recontribute the amount to her IRA until after the sale of her vacation home was completed.

Foreign Bank Account Reporting Reminder – 6-24-16

IR-2016-90, June 17, 2016

WASHINGTON — The Internal Revenue Service today reminded taxpayers who have one or more bank or financial accounts located outside the United States, or signature authority over such accounts that they may need to file an FBAR by Thursday, June 30.

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

“Robust growth in FBAR filings in recent years shows we are getting the word out regarding the importance of offshore tax compliance,” said IRS Commissioner John Koskinen. “Taxpayers here and abroad should take their foreign account reporting obligations very seriously.”

In general, the filing requirement applies to anyone who had an interest in, or signature or other authority over foreign financial accounts whose aggregate value exceeded $10,000 at any time during 2015. Because of this threshold, the IRS encourages taxpayers with foreign assets, even relatively small ones, to check if this filing requirement applies to them. The form is only available through the BSA E-Filing System website.

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

The IRS is implementing the Foreign Account Tax Compliance Act (FATCA), which mandates third-party reporting of foreign accounts to foster offshore tax compliance. FATCA created a new filing requirement: IRS Form 8938, Statement of Specified Foreign Financial Assets, which is filed with individual tax returns. The filing thresholds are much higher for this form than for the FBAR.

The International Taxpayers page on IRS.gov provides the best starting place to get answers to important questions. The website has a directory that includes overseas tax preparers. International taxpayers will find the online IRS Tax Map and the International Tax Topic Index to be valuable resources.

Another Tax Scam – The Student Tax – 6-1-16

The scammers are continuing to call taxpayers with threats so that they can get immediate payment of made up tax bills. Do NOT fall for these scams. IRS will NOT call you with demands for immediate credit card information over the phone. This is from IRS notice 2016-81. Please read this one carefully and don’t get scammed! At the bottom of this notice is information on how to report suspected scammers.  If you are contacted by IRS, call us – we can help.

IRS Warns of Latest Scam Variation Involving Bogus “Federal Student Tax”

IR-2016-81, May 27, 2016

WASHINGTON — The Internal Revenue Service today issued a warning to taxpayers about bogus phone calls from IRS impersonators demanding payment for a non-existent tax, the “Federal Student Tax.”

Even though the tax deadline has come and gone, scammers continue to use varied strategies to trick people, in this case students. In this newest twist, they try to convince people to wire money immediately to the scammer. If the victim does not fall quickly enough for this fake “federal student tax”, the scammer threatens to report the student to the police.

“These scams and schemes continue to evolve nationwide, and now they’re trying to trick students,” said IRS Commissioner John Koskinen. “Taxpayers should remain vigilant and not fall prey to these aggressive calls demanding immediate payment of a tax supposedly owed.”

Scam artists frequently masquerade as being from the IRS, a tax company and sometimes even a state revenue department. Many scammers use threats to intimidate and bully people into paying a tax bill. They may even threaten to arrest, deport or revoke the driver’s license of their victim if they don’t get the money.

Some examples of the varied tactics seen this year are:
•Demanding immediate tax payment for taxes owed on an iTunes gift card.
•Soliciting W-2 information from payroll and human resources professionals (IR-2016-34)
•“Verifying” tax return information over the phone (IR-2016-40)
•Pretending to be from the tax preparation industry (IR-2016-28)

The IRS urges taxpayers to stay vigilant against these calls and to know the telltale signs of a scam demanding payment.

The IRS Will Never:
•Call to demand immediate payment over the phone, nor will the agency call about taxes owed without first having mailed you a bill.
•Threaten to immediately bring in local police or other law-enforcement groups to have you arrested for not paying.
•Demand that you pay taxes without giving you the opportunity to question or appeal the amount they say you owe.
•Require you to use a specific payment method for your taxes, such as a prepaid debit card.
•Ask for credit or debit card numbers over the phone.

If you get a phone call from someone claiming to be from the IRS and asking for money and you don’t owe taxes, here’s what you should do:
•Do not give out any information. Hang up immediately.
•Contact TIGTA to report the call. Use their IRS Impersonation Scam Reporting web page or call 800-366-4484.
•Report it to the Federal Trade Commission by visiting FTC.gov and clicking on “File a Consumer Complaint.” Please add “IRS Telephone Scam” in the notes.
•If you think you might owe taxes, call the IRS directly at 1-800-829-1040.

More information on how to report phishing or phone scams is available on IRS.gov.

Good News for Small Charities – 5/31/16

For a small charity to become tax exempt under Internal Revenue Code Section 501(c)(3) and, thereby, be able to accept tax deductible donations, they need to file a form 1023 and include a user fee of $400. Effective July 1, 2016, that fee has been reduced to $275.
To learn more see Revenue Procedure 2016-32 in Internal Revenue Bulletin 2016-22 IRB 1019.

Trust Fund Recovery Penalty – Update – 5/20/16

Companies that withhold payroll taxes from employees and then do not pay those taxes to the government, are subject to the Trust Fund Recovery Penalty (called the “100% Penalty”).  IRS just released more guidance on that penalty.  This information is based on IRS Notice 784(https://www.irs.gov/pub/irs-pdf/n784.pdf), Could You be Personally Liable for Certain Unpaid Federal Taxes?

If you are in a situation where payroll taxes are not paid, call us. We can  help.

Notice 784, Could You be Personally Liable for Certain Unpaid Federal Taxes?

IRS has updated its webpage guidance on the trust fund recovery penalty and who IRS can reach to pay it. The guidance is a reminder for all potential “responsible persons” to make sure that timely payment of employment taxes is given the highest priority at any profit or nonprofit enterprise.

Background on trust fund recovery penalty. Code Sec. 6672 imposes the trust fund recovery penalty (also known as the 100% penalty) on any person who: (1) is responsible for collecting, accounting for, and paying over payroll taxes; and (2) willfully fails to perform this responsibility. It’s called the trust fund recovery penalty because responsible persons are treated as holding the withheld tax in trust until there’s a federal tax deposit of the amount. The amount of the penalty is equal to the amount of the tax that was not collected and paid.

What does “willfully” mean? According to IRS (as well as the courts), “willfully” means voluntarily, consciously, and intentionally. A responsible person acts willfully if he knows that the required actions are not taking place. Paying other business expenses, including paying net payroll, instead of paying trust fund taxes, is considered willful behavior.

IRS also says that for willfulness to exist, the responsible person:

• Must have been, or should have been, aware of the outstanding taxes; and
• Either intentionally disregarded the law or was plainly indifferent to its requirements (no evil intent or bad motive is required).

Who is a responsible person? A responsible person is a person or group of people who has the duty to perform and the power to direct the collecting, accounting, and paying of trust fund taxes.

According to IRS, this person may be:

• An officer or an employee of a corporation.
• A member or employee of a partnership.
• RIA observation: In Rev Rul 2004-41, 2004-18 IRB, IRS concluded that LLC members may be liable for the unpaid employment taxes under the Code Sec. 6672 trust fund recovery penalty rules.
• A corporate director or shareholder.
• A member of a board of trustees of a nonprofit organization.
• RIA observation: Code Sec. 6672(e) may provide taxpayers relief in certain cases. It provides that unpaid volunteer board members of tax-exempt organizations who are solely serving in an honorary capacity, aren’t involved in day-to-day financial activities, and don’t know about the penalized failure are exempt from the penalty, unless that results in no one being liable for it.
• Another person with authority and control over funds to direct their disbursement. This may include accountants, trustees in bankruptcy, banks, insurance companies, or sureties. It even may include another corporation.
• RIA observation: For example, in Erwin v. U.S., (DC NC 02/05/2013) 111 AFTR 2d 2013-748111 AFTR 2d 2013-748, a district court held that two outside accountants were each liable for over $325,000 in trust fund recovery penalties due to their failure to remit a financially troubled client’s unpaid withholding taxes to IRS. Even though the accountants were not officers or directors of the client, it was clear that they had substantial control over the client’s payroll operations.
• Another corporation or third party payer.
• Payroll Service Providers (PSPs) or responsible parties within a PSP.
• Professional Employer Organizations (PEOs) or responsible parties within a PEO.
• Responsible parties within the common law employer (client of PSP/PEO).

New rules in place for PEOs. Small businesses often contract with PEOs, also known as employee leasing companies, to ensure compliance with workplace laws and regs. In the typical contract, the PEO computes the FICA, withholding tax, worker’s compensation, and 401(k) contributions of each employee and bills the client for the amount. The contract requires the PEO to pay the employees and make the clients’ tax deposits. Some PEOs file their client companies’ employment tax returns under the PEO’s name and list the PEO as the employer of the client companies’ employees. Under the law that existed before the Tax Increase Prevention Act of 2014 (TIPA), when a business contracted with a PEO to administer its payroll functions, the business customer remained responsible for all withholding taxes with respect to its employees. Thus, even though the PEO paid the employees, the customer remained liable if the PEO failed to withhold or remit the taxes or otherwise comply with related reporting requirements.

However, effective for wages for services performed on or after Jan. 1, 2016, Code Sec. 3511, as added by TIPA, allows a “certified PEO” (CPEO) to, in certain circumstances, be treated as the sole employer of the employees. Earlier this month, IRS issued proposed reliance regs that define terms and provide details as to the operations and responsibilities of CPEOs. (T.D. 9768, Weekly Alert ¶ 28 05/12/2016) IRS also issued proposed reliance regs that set out the Federal employment tax liabilities and other obligations of persons certified by the IRS as CPEOs. (Preamble to Prop Reg05/04/2016, Weekly Alert ¶ 31 05/12/2016)

Assessing the trust fund recovery penalty. If IRS determines that a person is a responsible person, it will inform him of its plan to assess the trust fund recovery penalty. The person then has 60 days (75 days if this letter is addressed to a person outside the U. S.) from the date of this letter to appeal. A nonresponse will result in the assessment of the penalty and trigger an IRS Notice and Demand for Payment. Once IRS asserts the penalty, it can take collection action against the taxpayer’s personal assets. For instance, it can file a federal tax lien or take levy or seizure action.

References: For trust fund recovery (100%) penalty for responsible person’s failure to collect, account for, and pay over tax, see FTC 2d/FIN ¶ V-1700 ; United States Tax Reporter ¶ 66,724 ; TaxDesk ¶ 864,001 ; TG ¶ 71655 .

2015 Returns Due April 18, 2016 – 4/10/16

If you have not yet filed your 2015 income tax returns, the returns are due on Monday, April 18, 2015. You can get an extension to file the returns but the extension is an extension for filing the return not for paying any tax that may be due.

Should you file the extension, end up with a tax due when the return is filed, and make no payment with extension, IRS may disallow the extension and charge late filing interest and penalties. In order to be sure the extension is valid, you need to make a good faith payment with the extension.

Since the final return is not completed, the exact amount of the tax is not yet known. We can help you determine a reasonable amount to pay with the extension and file it electronically for you. If you have questions, give us a call.

IRS Hacking Update – 2/25/16

From the Internal Revenue Service:

IRS has announced that the “Get Transcript” hacking incident discovered last May was more widespread than initially thought and that approximately 390,000 additional taxpayer accounts were potentially accessed during the period from January 2014 through May 2015. The Treasury Inspector General for Tax Administration (TIGTA) conducted a 9-month long investigation looking back to the launch of the application in January of 2014 and discovered additional suspicious attempts to access taxpayer accounts using sensitive information already in the hands of criminals.

Background. In January of 2014, IRS launched the “Get Transcript” program on its website. This application allowed taxpayers to have the option of immediately viewing and downloading their tax transcript or having it mailed to their address. Taxpayers could view or order multiple years of transcript information. For the 2015 filing season, approximately 23 million transcripts were ordered. Since its launch in 2014, around 47 million transcripts have been ordered through the “Get Transcript” tool.

In May of 2015, IRS announced it had discovered that criminals, using taxpayer information stolen elsewhere, had been able to pass procedures to access the “Get Transcript” application. At that time, IRS identified approximately 114,000 taxpayers whose transcripts had been accessed and about another 111,000 taxpayers whose transcripts were targeted but not accessed.

In August of 2015, IRS announced it had identified another 220,000 taxpayers whose transcripts may have been accessed and an approximately 170,000 taxpayers whose transcripts were targeted but not accessed.

After IRS made its announcement, TIGTA investigators began their own review, covering from 2014 through May 2015. TIGTA investigators identified suspicious email addresses that made multiple attempts to access accounts. IRS noted that it was possible that some of those identified may be family members, tax return preparers or financial institutions using a single email address to attempt to access more than one account. However, in an abundance of caution, IRS will notify all taxpayers impacted.

The online viewing and download feature of “Get Transcript” has been unavailable since May 2015, and IRS is working to restore that part of the service in the near future with enhanced taxpayer-identity authentication protocols. Other transcript options remain available via IRS’ website, with online requests being taken for mailed copies of transcripts. IRS reminds taxpayers to plan ahead if they need transcripts — it can typically take five to 10 days before the transcripts arrive in the mail.

IRS response. IRS is moving immediately to notify and help protect these additional taxpayers from tax-related identity theft, including through free identity theft protection services as well as Identity Protection PINs. Steps include:

• Notifying by mail those taxpayers whose transcripts were accessed and those taxpayers whose transcripts were targeted but not accessed;
• Informing taxpayers whose transcripts were accessed that they can request an Identity Protect PIN, which provides an additional layer of protection for the taxpayer’s Social Security Number (SSN) on federal tax returns, by completing a Form 14039, Identity Theft Affidavit;
• Offering taxpayers whose returns were accessed a free Equifax identity theft protection product for one year, and encouraging taxpayers to place a “fraud alert” on their credit accounts;
• Placing extra scrutiny on tax returns that contain taxpayer SSNs; and
• Placing special markers on these taxpayer accounts to advise IRS assistors that the caller is part of this event.

Other attacks on taxpayer information. In addition, only a week before this latest hacking announcement, IRS warned in IR 2016-28, of a new surge in IRS email schemes during the 2016 tax season. Taxpayers are receiving fraudulent emails designed to look like official communications from IRS or others in the tax industry, including tax software companies. The phishing schemes asked taxpayers about a wide range of topics, including information related to refunds, filing status, confirming personal information, ordering transcripts and verifying PIN information. This personal tax information could be used to help file false tax returns.

When people clicked on these email links, they were taken to sites designed to imitate an official-looking website, such as IRS’s website. The sites asked for SSNs and other personal information. In addition, the sites might carry malware, which could infect people’s computers and allow criminals to access taxpayers’ files or track their keystrokes to gain information.

In IR 2016-28, IRS noted an increase in such phishing and malware schemes, including:

• There were 1,026 incidents reported in January, up from 254 from a year earlier.
• The trend continued in February, nearly doubling the reported number of incidents compared to a year ago. In all, 363 incidents were reported from Feb. 1-16, compared to the 201 incidents reported for the entire month of February 2015.
• This year’s 1,389 incidents have already topped the 2014 yearly total of 1,361, and they are halfway to matching the 2015 total of 2,748.

The 100% Penalty – 2/25/16

All companies that have payroll are required to withhold federal income and social security taxes from employee paychecks and to pay these withheld taxes to IRS.  These taxes are called “Trust Fund Taxes” because the withheld taxes are the employee’s money held in trust by the employer.

Under IRC Section 6672, the IRS can impose a penalty of 100% of the amount of Trust Fund Taxes withheld if the employer fails to pay these taxes to IRS.  This penalty is commonly called the 100% penalty.

The penalty is imposed on individuals and operating as a corporation does not protect owners from the penalty. It can be imposed on anyone who is a “responsible party”.

Code Section 6672 reads (in part): Code Sec. 6672 imposes the trust fund recovery penalty on any person who: (1) is responsible for collecting, accounting for, and paying over payroll taxes; and (2) willfully fails to perform this responsibility. The amount of the penalty is equal to the amount of the tax that was not collected and paid. Responsible parties is interpreted broadly and can include stockholders, bookkeepers, CPAs, and anyone who has the power in the organization to determine which bills are paid.

In a recent court case (Schiffmann v. U.S. (CA 1 1/26/16 117 AFTR 2d 2016-386), the court listed several factors to be considered when determining who is a responsible party.  From the case:

In determining whether an individual is a responsible person, courts consider factors including whether the individual: (1) is an officer or member of the board of directors, (2) owns shares or possesses an entrepreneurial stake in the company, (3) is active in the management of day-to-day affairs of the company, (4) has the ability to hire and fire employees, (5) makes decisions regarding which, when and in what order outstanding debts or taxes will be paid, (6) exercises control over daily bank accounts and disbursement records, and (7) has check-signing authority. (Vinick v. Comm., (CA 1 1997) 79 AFTR 2d 97-190579 AFTR 2d 97-1905) Responsibility is generally a matter of status and authority, and it is determined on a quarter-to-quarter basis. In determining whether there is willfulness, the courts have focused on whether a taxpayer had knowledge about the nonpayment of the payroll taxes, or showed reckless disregard with respect to whether the payments were being made.

IRS is aggressive in assessing this penalty.  If your company has delinquent payroll taxes, contact our office. We can help you work out an agreement with IRS before this penalty is imposed.

Ordinary & Necessary – 2/18/16

Business owners can deduct all “ordinary and necessary” expenses of carrying on a trade or business under Section 162 of the Internal Revenue Code. While most expenses easily pass these tests, it is important to remember that both tests apply.  A common example applies to MLMs (for example Amway). Operators of the MLM often spend an excessive amount of training seminars and materials provided my the MLM.  They deduct these costs as business expenses and then get a surprise when audited by IRS.  The Service will assert that, although these expenses may by ordinary for the business, they are not necessary in the amount incurred for the expenses (i.e. not reasonable in an amount that would be spent by a prudent business owner.)

In a court case decided on 1/6/16 (Elick v. Comm. (CA 9 1/6/16) 116 AFTR 2d 2016-345), a dentist was denied a deduction for management fees paid to a related entity. The court held that these fees were not ordinary and necessary within the meaning of IRC Code Section 162.

Although there are many other issues in this case, it reminds that we need to keep the “ordinary and necessary” rule in mind when deducting business expenses.

Solar Energy Credits – 2/15/16

Both IRS and New Mexico offer tax credits for the installation of qualified solar energy producing equipment. The federal credit is 30% of the cost of qualified property and it is “non-refundable” which means it is limited to a taxpayers income tax less other credits. It can be carried over to future years.

New Mexico offers the Solar market Development Tax Credit which is a credit offered to purchasers of solar equipment. The credit is 10% of the cost up to $9,000 and each taxpayer must be qualified. The amount to total credits issued for the entire state is limited, so those making application early in the year are more likely to be able to claim the credit. For more information go here.

IRS Reducing Taxpayer Services – 2/1/16

In her 2015 annual report to Congress, National Taxpayer Advocate (NTA) Nina Olson expresses concern that IRS may be on the verge of dramatically scaling back telephone and face-to-face service that it has historically provided to assist the nation’s 150 million individual taxpayers and 11 million business entities comply with their tax obligations. In particular, she calls for IRS to release its “Future State” plan documents, provide additional detail about its anticipated impact on taxpayer service operations, and solicit public comments, and recommends that Congress conduct oversight hearings on IRS’s plan.

Background. The NTA is required by statute to submit two annual reports to the House Committee on Ways and Means and the Senate Committee on Finance. The first of these reports, submitted mid-year, identifies the objectives of the Office of the Taxpayer Advocate for the fiscal year beginning in that calendar year. The TAS is an independent organization within IRS whose employees assist taxpayers who are experiencing economic harm, who are seeking help in resolving tax problems that have not been resolved through normal channels, or who believe that an IRS system or procedure is not working as it should.

The second of these reports is submitted at the end of the year and is required to identify at least 20 of the “most serious problems” encountered by taxpayers and to make administrative and legislative recommendations to mitigate those problems.

The NTA’s annual report to Congress creates a dialogue within IRS and the highest levels of government to address taxpayers’ problems, protect taxpayers’ rights, and ease taxpayers’ burden. The NTA delivers its report directly to the tax-writing committees in Congress (the House Committee on Ways and Means and the Senate Committee on Finance), with no prior review by the IRS Commissioner, the Secretary of the Treasury, or the Office of Management and Budget.

NTA’s concerns. Since 2014, IRS has invested substantial resources to develop a Future State plan, which has involved significant participation by virtually all IRS business units and the engagement of management consultants. The NTA reports says that implicit in the plan—and explicit in internal discussion—is IRS’s intention to substantially reduce telephone and face-to-face interaction with taxpayers. Ms. Olson notes that while these reductions are a central assumption in the Future State planning process, it is impossible to describe the scope of the contemplated reductions with specificity because little about service reductions has been committed to writing. The Future State plan also calls for expanding the role of tax return preparers and tax software companies in providing taxpayer assistance, which would likely increase compliance costs for millions of taxpayers who now obtain free IRS assistance.

IRS has historically maintained a robust customer service telephone operation that, in every year since Fiscal Year 2008, has received more than 100 million taxpayer telephone calls, as well as a network of nearly 400 walk-in sites that, in every year for over a decade, has provided face-to-face assistance to more than five million taxpayers.

IRS now appears to presume taxpayer interactions with IRS through online accounts will address a high percentage of taxpayer needs, enabling it to curtail existing taxpayer services without significantly impacting taxpayers. The NTA stated that technology improvements often do not reduce demand for personal service to the extent expected.

In recent years, IRS has already begun to reduce taxpayer services by declaring that all but simple tax-law questions “out of scope” for IRS to answer during the filing season; by declaring that it will not answer any tax-law questions after the filing season (including questions from millions of taxpayers with proper extensions of time to file); by eliminating an online program that allowed taxpayers to submit questions electronically; and by eliminating the preparation of tax returns in its walk-in sites.

Ms. Olson characterized the combination of reductions in personal service and IRS’s plans to direct taxpayers with questions to preparers and other third parties (along with the expansion of IRS user fees) as creating a “pay to play” tax system, where only taxpayers who can afford to pay for tax advice will receive personal service, while others will be left struggling for themselves. Further, expressing concerns about data security, she warned about the consequences of giving unregulated tax return preparers more access to taxpayer accounts.

The NTA report says that it’s critical that IRS share its plans in detail with Congress and outside stakeholders and then engage in a dialogue about the extent to which it intends to curtail or eliminate various categories of telephone service and face-to-face service, and how it will provide sufficient support for taxpayers. The NTA report recommends that IRS immediately publish its plan and seek public comments.
Other issues. In addition to IRS’s Future State planning, the NTA report says that the “most serious problems” include problems that undermine taxpayer rights and impose taxpayer burden; problems that waste IRS’s resources and impose taxpayer burden; and problems that contribute to earned income tax credit noncompliance. Other issues addressed in the NTA report include the adequacy of taxpayer service for taxpayers living abroad, the whistleblower program, IRS’s administration of the Patient Protection and Affordable Care Act, victim assistance in tax-related identity theft cases, and several issues relating to EITC compliance, including the need for better taxpayer education and assistance in the pre-filing environment, more effective use of audits, and greater emphasis on the role tax return preparers can play to promote compliance.

The report says that, as IRS has struggled with reduced funding, it has sometimes made short-sighted decisions that have had the effect of creating rework for itself as well as increasing taxpayer burden. In particular:

Between FY 2010 and FY 2015, when IRS’s appropriation was reduced by about 10%, its user fee revenue rose by 34%. The NTA report suggests that cuts to IRS’s budget have prompted it to consider fees that will impede its mission to help taxpayers voluntarily comply and pay their taxes. The NTA report recommends that IRS estimate the effect of proposed fee increases on demand for services, make its analysis public before adopting the increases, and refrain from charging fees that will have a significant negative impact on its service-oriented mission, voluntary compliance, or taxpayer rights.

Since July 2014, IRS has addressed backlogs in its inventory of applications for tax-exempt status by allowing certain organizations to use Form 1023-EZ (Streamlined Application for Recognition of Exemption Under Section 501(c)(3)), which adopts a “checkbox approach” that requires applicants to merely attest to, rather than demonstrate, qualification for exempt status. IRS approves about 95% of applications submitted on Form 1023-EZ, while it approves only about 77% of applications when it requests documentation. The NTA report recommends that IRS revise Form 1023-EZ to require applicants to submit their organizing documents, a description of actual or planned activities, and past or projected financial information, and that IRS review this information before deciding whether to approve exemption applications.

IRS operates several programs that filter tax returns to ferret out improper refund claims, including returns showing bogus wage or withholding amounts and returns suspicious for identity theft. These filters have high “false positive” rates (in some cases 36%), causing substantial refund delays for hundreds of thousands of legitimate taxpayers. The NTA report recommends that IRS begin tracking the false positive rate of all screening programs, monitor and adjust filters and rules quickly if they are not effectively zeroing in on fraud, and establish maximum false positive rates for each process and filter.

Small Businesses Expensing (Section 179) Made Permanent – 12/15/15

One of the most significant tax saving benefits for small business has been (finally) made permanent by the 2015 Protecting Americans from Tax Hikes (PATH) Bill – commonly call the ‘tax extender bill’ because it either extends or makes permanent tax code provisions that have expired. Two of the provisions that benefit small businesses the most are the Section 179 Election and Bonus Depreciation.

The Section 179 Election permits a taxpayer to expense (rather than depreciate) personal property in the year that it is placed in service. The cap for purchases is $500,000 and there is a deduction phase out for purchases over $2 million. Special rules apply for qualified real property.
Bonus Depreciation permits a taxpayer to take first year bonus depreciation of 50% of the cost of asset in the year placed in service. For bonus depreciation, they taxpayer must be the “original user” of the property (i.e. it must be new property.)

Small Businesses Can Now Deduct $2,500 in Repairs – 12/15/15

Under the ‘New’ Repair Regulations (effective for 2014 and later years), the rules used to determine whether an payment qualifies as a repair (which can be deducted currently) or a capital expense (which  has to be depreciated) were significantly tightened and the necessary record keeping increased.  In its IRS Newsroom for Small Businesses, IR-2015-133, IRS raised the safe harbor for expenditures form $500 to $2,500 for items substantiated by an invoice.  This is a significant benefit for small businesses.

Call us for more information and to see how this change will help your business.

More 2015 Last Minute Tax Planning Ideas – 12/15/15

As the end of 2015 approaches, here are some more strategies to minimize your 2015 tax bite:

1. Make contributions to your HSA account. The maximum deduction is $3,300 for an individual and $6,550 for a family (persons 55 and older can contribute a $1,000 catch-up amount.) If you employer made some contributions, you can increase the total contributed up to these limits.
2. Sell stocks – see General Tax Planning Notes below for more details
3. Accelerate tax deductible charitable contributions
4. If you itemize deductions, pay your state income taxes that may be owed in April 2016 before the end of 2015 to get a deduction on Schedule A.
5. If you are required to take minimum required distributions from an IRA or 401(k) plan, take the distribution before the end of the year. If you are 70 1/2 in 2015, you can delay the distribution to 2016. Failure to take the distribution can result in a penalty of 50% of the required distribution.
6. Make year end gifts up to $14,000 per recipient.  A donor can gift-spilt with their spouse which increases the annual exclusion to $28,000 for each recipient of the gift.

Call us if you have questions or need additional information

General Tax Planning Notes – 12/10/15

There is no longer any “magic bullet” to save taxes. The ‘glory days’ of the 1980s when tax shelters offered write-offs that were many times the amount spent or invested are gone forever. Tax planning today requires a comprehensive approach to review each taxpayer’s entire return to save taxes. There are many interrelated items that, when taken together, can save taxes while offering good cash management at the same time. This article reviews many of those strategies.

While every effort has been made to be sure that this information is correct, it is based on income tax laws and regulations in effect at the time it was written (December 2015) and each person’s tax situation is different. These notes are intended to be an overview of tax planning ideas and are only to be used as a starting point for discussions with us (or other tax professionals).

Flexible Spending Accounts

o Take Advantage of Flexible Spending Accounts (FSA)
 Your employer may have a FSA – typically a §125 Plan – under this plan certain services can be paid with pre-tax rather than after tax dollars. Expenses include medical and dependent care.
 Most plans are ‘use it or lose it”. Some plans (at option of employer) permit 2 ½ month grace period.

Investment Decisions – “Harvesting Capital Gains/Losses”
o Low Capital Gain Rates
Long Term Capital Gain rates are the lowest in 70 years and these rates are good through 12/31/15. One thing is certain: capital gains rates will not be lower in the future!

Special Long Term Capital Gain Rates:
• Collectibles = 28%
• Gain on Small Business Stock (§1202) = 28%
• Un-recaptured §1250 Gain = 25%

For 2015, the Long Term Capital Gains tax rate is 0% for married taxpayers filing joint returns with taxable income of $74,900 or less. That works out to gross income of $95,500 using a standard deduction and two personal exemptions – see following notes.

Long Term Capital Gain are taxed at 20% for taxpayers in the 39.6% bracket (married taxpayers filing joint returns with over $464,851 taxable income) and 15% for taxpayers in the 25% to 35% brackets (married taxpayers filing joint returns with taxable income between $74,900 and $464,850). See IRS Publication 17 for complete list of tax brackets.

If a taxpayer has a low income year and has a stock with a large unrecognized gain –and – they want to keep the stock. They can sell the stock, recognize the gain, and pay little or no tax. They can then buy the stock back at current market value which increases their basis in the stock. Many taxpayers think that this transaction is prohibited by the wash sale rules. However, the wash sale rules only apply to stocks sold at a loss not stocks sold at a gain. This strategy can significantly save future taxes with little or no current cash cost to the taxpayer.

Also, for tax year 2015, a married couple with gross income of $95,500 will pay no tax on capital gains. So, they should consider stock sales before the end of 2015 – See preceding note.

Make Itemized Deductions Count
o Maximizing the Value – if possible, bunch deductions to avoid phase outs. In some (rare) cases, taxpayers may claim standard deduction one year and itemize the next. Note: deductible items paid with credit cards (VISA. MC, etc.) are claimed in the year charged even though the card is paid in the following year.
o Certain High Income taxpayers have their ability to claim itemized deductions phased out. The phase outs as of 2015 are:

o Itemized Deduction Phase Out:
 Phase outs of 3% reduction in itemized deductions (reduction limited to 80% of deductions):
 Single = $258,250
 Married – Joint = $309,900
 Head of Household = $285,350
 Married – Separate = $154,950

o Personal Exemptions also phase out:
 Single = $258,250
 Married – Joint = $309,900
 Head of Household = $284,050
 Married – Separate = $154,950

o Avoiding the 2% Miscellaneous Itemized Deductions Trap
Many employers offer an “Accountable Plan” for expense reimbursement. Under this plan, business expenses are reimbursed by the employer directly with no tax effects to employee.
If you qualify, become Statutory Employee and deduct business expenses on Schedule C. Statutory employees include full time traveling salesmen, full time life insurance salesmen, agent or commission drivers, and certain home workers using employer furnished materials. Box 13 of your W-2 will be checked. See IRS instructions for form Sch C, page 5, “Statutory Employees”

Minimizing the effect of the 10% Medical floor
Bunch deductions for medical items such as child delivery or braces (or other expensive medical procedures) by pre-paying in one tax year.

Use §125 Plan (also called Flexible Spending Arrangement)
Set up Health Savings Arrangement (HSA) if you qualify.

Multi-Year Planning for AMT (Alternative Minimum Tax)

What is The Alternative Minimum Tax: When this tax was first enacted, it was intended to be a tax on the wealthy “to ensure that no taxpayer with substantial income can avoid significant tax liability by using exclusions, deductions, and credits” (Tax reform Act of 1986). According to the Tax Policy Center (http://www.taxpolicycenter.org/ taxtopics/quick_amt.cfm), from 2013 to 2023 (projected) the number of Americans paying the AMT will rise from 3.9 million to 6 million. Clearly, the AMT is not a tax on the “rich”. It has become a tax on the working middle class – particularly two earner families – and is burdensome to say the least.

There is no easy way to avoid this tax but many strategies can minimize it

The idea is to look at the components of the tax and then to plan the timing of income and deductions to avoid being trapped by the tax.

Alternative Minimum Taxable Income (AMTI) does NOT allow Schedule A deductions for State & Local Income Taxes, Real Property Taxes, Miscellaneous Itemized Deductions. Bunching of deductions, although a good strategy for regular income tax, may end up trading regular tax for AMT.

Comprehensive multi-year tax plan is necessary to plan for AMT.

AMTI (Alternative Minimum Taxable Income) for 2015 is computed by:
• Starting Regular Taxable Income
• Adding back personal exemptions
• Adding back state and local taxes, home equity interest (non-qualified), and miscellaneous itemized deductions
• Subtracting state refunds
• Subtracting the AMT Exemption of
o Married filing joint return = $83,400
o Unmarried Individuals = $53,600
• Computing the AMTI and applying the tax rate
o 26% for first $184,500 of AMTI ($183,600 for 2016)
o 28% for AMTI over the amount above.
• Taxpayer pays the LARGER of the regular or AMT tax

Make Gifts Within the Annual Exclusion
The tax code imposes a tax on donor when gifts are made.
However, a taxpayer can give $14,000 per taxpayer, per donee, per year with no gift tax liability and can elect to ‘gift split’. Gifts below this amount are not reported and do not reduce the unified lifetime exclusion.
So a married couple with two children could give their children $56,000 with no gift tax liability:
• Mom could give $14,000 to each child ($28,000 total), and
• Dad could five $14,000 to each child *$28,000 total).

Pay State Taxes before End of year:
Income taxes paid to state and local governments are deductible on your federal return (if you itemize deductions.) If you pay the state tax before the end of the year by making an estimated state tax payment, the deduction can be claimed on this year’s federal return rather than next year’s return. If you are in the 28% federal tax bracket, you will reduce your current year’s federal tax by 28% of the state tax paid and receive the benefit this April – one year sooner – a significant return on investment.

Protect Business Deductions
Avoid the §183 Hobby Loss trap – run your business as a business and keep records.
All “Ordinary & Necessary” expenses can be deducted under §162 but the expenses must meet BOTH tests – ordinary AND necessary. If either test is failed, no deduction.
The Ordinary & Necessary test is often used by IRS to disallow deductions for various Multi Level Marketing businesses. Call us for more information on how to protect these deductions.

Retirement Planning
Maximize IRA contributions
 For 2015 limit is $5,500 per person (up to earned income)
 The $5,500 includes contributions to a Roth IRA account
 If taxpayer is member of qualified plan, the deduction phases out when for Adjusted Gross Income (AGI) exceeds certain levels. For married taxpayers filing joint returns, the deduction phases our starting at $96,000 ($60,000 for single taxpayers and $10,000 for married taxpayers filing separate returns).
 IRA can be set up until April 15th. Contribution must be made by the due date of the return without extensions (April 15th).
 See IRS Publication 590-A for more information.

Set Up SEP IRA
 Funded entirely by employee – 100% vested at time of contribution
 Must cover all employees that at (1) 21 or over, (2) worked for the taxpayer in 3 of the last 5 years, and (3) received in compensation in 2015.
 Annual 5500s not required
 Can be setup by the due date of the return including extensions (this can be up to October 15th)
 Limited (for 2015) to 25% of compensation or $53,000 whichever is less.

Catch up contributions may be available if you are 50 or over – the catch up contribution is $1,000 (both traditional and Roth)

Saver’s Credit
 Certain taxpayers with lower income may ay receive a tax credit for contributions to an IRA account or employer sponsored retirement plan.  See Retirement Saver’s Credit under separate heading.

o SIMPLE (Savings Incentive Match Plan for Employees)
 Funded by tax-deferred employee contributions and employer matches
 Plan must be written but 5500s not needed
 Maximum deferral of lesser of compensation or $11,500 (plus “catch up” deferral). For 2016, the amount is $12,500.
 Form 5304 or 5305 SIMPLE is used to set up – must be set up by October 1st of current year (too late for 2015)
 Employer must match 2% or 3%
 See https://www.irs.gov/Retirement-Plans/SIMPLE-IRA-Plan-FAQs-Establishing-a-SIMPLE-IRA-Plan for more information.

Family Strategies

Protect Dependency Deductions
$4,000 per person claimed on return for 2015. The taxpayer and spouse each get a deduction and dependency deductions are also available for children or other relative for which the taxpayer provided more than 50% of their support in the tax year.
For a Child or Grandchild:
• Must be under age 19 or under age 24 and full time student
• Must live with taxpayer for more than half the year
• Must not provide more than half their support
 For a relative that is not a child (aka dependent parent)
• Must receive more than half of support from taxpayer
• Must have gross income of less than $4,000 which generally does not include social security benefits.
• Must be related to taxpayer or share taxpayer’s home.Child Tax Credit
 $1,000 per qualifying child
 Child must be under 17 at end of year
 Child must be US Citizen or Resident
 Credit phases out when AGI exceeds $110,000 Married Filing Jointly (MFJ)

Child and Dependent Care Credit
 Credit available to permit taxpayer or spouse to work,
 Qualifying child must be under age 13 or a disabled person not able to care for himself or herself,
 Maximum expenses are $3,000 for one child and $6,000 for two or more,
 Credit ranges from 35% to 20% based on AGI – see form 2441

Student Loan Deduction
 Up to $2,500 may be deducted “above the line” to compute Adjusted Gross Income,
 The deduction is lost when your modified adjusted gross income reaches $160,000 for married persons filing joint returns and $80,000 for other filers.
 The interest can be deducted over the remaining life of the student loan.

Education Credits:
 The Internal Revenue Code provides income tax credits to provide an incentive for taxpayers, spouses and their children to pursue higher education.
 The American Opportunity and Lifetime Learning Credits are available.

Comparison of the Credits:
American Opportunity Credit	Lifetime Learning Credit
Up to $2,500 credit per student	Up to $2,000 per tax return
Available only for the first 4 years of post-secondary education	Available for any post-secondary education and courses to acquire or improve job skills
Available for only 4 years per student	Available for an unlimited number of years
Student must be enrolled in degree or credential program	Degree or credential program not required
Student must be enrolled at least half-time for at least one semester beginning during the year	Available for one or more courses
NO felony drug conviction on student’s record	Drug conviction rule does not apply

Estimated Tax
Who Pays Estimated Tax?
 If you have income that is not subject to withholding and your tax liability is expected to be $1,000 or more, you are required to make estimated tax payments.
 It is usually easier on your cash flow to “pay as you go” rather than to go hit with a large tax bill in April.
 For households where one spouse works for wages and the other is self-employed, a good strategy is to have the spouse who works for wages adjust their withholding to cover the estimated tax requirements. This smooths cash flow and avoids tax penalties.

Safe Harbors for 2016
 Pay 90% of current year’s (2016) tax or
 100% of prior year’s (2015) tax

High Income Taxpayers
 If you are a high income taxpayer (AGI over $150,000 MFJ or $75,000 single), you must pay 110% of prior year’s tax to avoid the penalty.

Avoiding the Penalties
 If your income was uneven during the year, annualizing income may avoid the penalty.

Business Planning

Shifting Income – Defer Income – Accelerate Expenses
 Typically applies to cash basis taxpayer – Taxpayers need to examine financials for hidden deductions (AR write offs – obsolete inventory – §179 Deduction – Expense repair items, etc.

 Can give only one year benefit – but if lower tax bracket is expected in future, the benefit may be significant. Be careful to not hurt next year’s cash flow by using cash at the end of this year.

 Ways to Postpone Income
 Be careful of Constructive Receipt Rules – call us for more information
 Delay collections (if that does not jeopardize collectability)
 If you work for accrual basis corporation, have bonus accrued at year end and paid next year – within 2 ½ month of the end of the year.
 Interest Income on T-Bills is not taxable until received at maturity

 Installment Sales – Gross Profit from sale of non-inventory property by non-dealers is taxed when received. Installment sale rules are mandatory unless elected out. Note: ALL depreciation recapture is reported in the year of sale – even if no cash received.

Like Kind Exchange – Gain is recognized only to the extent of “boot” received but remember debt relief is boot.

Start Up Costs
 Rather than amortizing start up costs over 180 months, expenses incurred after October 22, 2004 may be deducted in the year incurred.
 Deduction is limited to $5,000

Section 179 Election
 For 2015, taxpayers may expense $25,000 of tangible personal property placed in service on or before 12/31/15
 Limits apply to passenger automobiles and other listed assets.
 The Section 179 election is limited to net income from business.

Capitalization v. Expense
 There are always questions about what costs can be expensed in the current year and what costs need to be capitalized and depreciated. For those costs that can be expensed currently, the tax payer gets a benefit in the current year while those that are capitalized benefit future years and following the depreciation rules.
 For years beginning January 1, 2014, new rules apply to the decision of whether to expense or to capitalize cost to repair or improve equipment.
 These regulations largely replace the tests used to expense repairs for years before 2014.
 These new rules are complex and depend on whether the expenditure was a “betterment”, “restoration”, or “adaptation”.
 Several de minimis and safe harbor rules exist
 For more information call us or go to https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Tangible-Property-Final-Regulations

Retirement Planning as Business Owner
 See SEPs and SIMPLEs under Retirement Planning

Employing Family Members
 Family members must be paid fair market wages for their services.
 Employment taxes must be paid
• Payments paid by parents to children under 18 are not subject to FICA or Medicate taxes (does not apply to children employed by corporations owned by parents)
• Workers Compensation Insurance may also apply

Cost Segregation System – Depreciation Recovery
 For buildings with significant improvements, cost segregation may result in significant tax savings
 Cost Segregation Studies help to mitigate the effects of the new Repair Regulations – see Capitalization v. Expense section earlier.
 Clients have successfully used Cost Segregation Services Inc. (www.costsegserve.com) and Bedford Cost Segregations (www.bedfordcap.com). You can contact these companies for more information.
 For buildings not placed in service in current year, the cost segregation method can be used and the catch up depreciation is a deduction in the current year. See Rev Proc 2002-09, 2002-19, and Hospital Corporation of America v. Commissioner (109 TC 21 – CCH Dec. 52,163)

Strategies for the Self-Employed
Medical Expenses
 100% of a self-employed person’s medical insurance is “above the line” deduction. That is that this deduction reduced Adjusted Gross Income (AGI)which increases the availability of other medic al deductions and Miscellaneous Schedule A Deductions subject to the 2% AGI limitation.
 Medical Insurance can cover the taxpayer, spouse, dependents, and any child under 27 years old.
 Deduction is limited to net income from self-employment

Business Use of Listed Property & Automobiles
 Deductions (including Section 179 discussed above) are limited for automobiles and other “listed property”. Listed property includes property that is normally used for both business and personal purposes.
 Listed property includes passenger automobiles with Gross Vehicle Weight (GVW) of 6,000 pounds or more and that cost $15,800 or more, computers and related peripherals, and cell phones.
 Deductions for these items are limited to documented business use and logs are needed to support that use.
 Depreciation and Section 179 deductions for Luxury Passenger Automobiles is limited to $3,160 for first year, $5,100 for second year, $3,050 for third year, and $1,875 for each succeeding year. (See IRS Rev. Proc 2015-19 for more information).

Standard Mileage v. Actual Costs
 Standard mileage rate for 2015 = 57.5 cents per mile (business)
 Charitable Use = 14 cents per mile
 Medical and Moving – 23 cents per mile (IR-2014-114, Dec. 10, 2014)
 Tax payer can use greater of standard or actual but records need to be kept for both methods.

Substantiation
 Deductions for automobiles and listed property are required to be supported by adequate substantiation – keep receipts and a log.
 We can help you set up a record keeping system that meets IRS requirements.

Travel & Entertainment
 Meals and Incidental Expenses are limited to 50% of actual expenditures.
 Exceptions are provided for meals provided by the employer on company premises for employer convenience.
 Meals while traveling are also subject to the 50% limit.

Deduction for Office in the Home
 Self-employed individuals that work from their homes can save taxes by deducting the part of their home that is used for business. To claim the deduction, the taxpayer must meet two tests: First, the part of the home to be deducted must be used exclusively and regularly for the conduct of a trade or business, and, second, that part of the home must be the principal place of business, a place used to meet patients, customers, or clients, or a separate structure not attached to the home. When both of these tests are met, the taxpayer may deduct the business percentage of mortgage interest, taxes, insurance, utilities, and other operating expenses.
 In addition to these deductions, the taxpayer receives two other benefits: First, your home becomes your “tax home” for purposes of claiming business use of automobile deductions. Normally, the distance from a person’s home to their tax home (principal place of business or employment) is non-deductible commuting mileage. In addition, the business use percentage of mortgage interest and other home expenses reduces the net income from business and both the regular tax and the self-employment (social security) tax paid on business income. The value of these deductions can approach 50% (federal tax 28%, self-employment tax rate 15.3%, and state income tax approximately 5%-9%).
 Starting in 2013, instead of reporting the detailed costs (as described above), the taxpayer can elect to deduct $5 per square foot of their home used for business up to 300 square feet. The maximum deduction is $1,500 if 300 square feet are used solely and exclusively for business.

Retirement Saver’s Credit – 12/5/15

Many taxpayers feel that they cannot afford to make a contribution to an IRA or employer sponsored retirement plan. IRS offers an incentive to these taxpayers to save for retirement in the form of a Savers’ Credit (the Retirement Savings Contribution Credit). This article gives a brief description of the credit.

Certain taxpayers within income limits may receive a tax credit for contributions to an IRA account or employer sponsored retirement plan.

• • To qualify for the credit you must be:
    • Age 18 or older
    • Not a full time student
    • Not claimed as a dependent on another person’s return.
  • The amount of the credit varies from 50% to 10% of the amount contributed to the retirement plan based on your adjusted gross income per the following tables.
  • Go to https://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Savings-Contributions-Savers-Credit or call us for additional information.

2015 Saver’s Credit
Credit Rate	Married Filing Jointly	Head of Household	All Other Filers*
50% of your contribution	AGI not more than $36,500	AGI not more than $27,375	AGI not more than $18,250
20% of your contribution	$36,501 – $39,500	$27,376 – $29,625	$18,251 – $19,750
10% of your contribution	$39,501 – $61,000	$29,626 – $45,750	$19,751 – $30,500
0% of your contribution	more than $61,000	more than $45,750	more than $30,500

2016 Saver’s Credit
Credit Rate	Married Filing Jointly	Head of Household	All Other Filers*
50% of your contribution	AGI not more than $37,000	AGI not more than $27,750	AGI not more than $18,500
20% of your contribution	$37,001 – $40,000	$27,751 – $30,000	$18,501 – $20,000
10% of your contribution	$40,001 – $61,500	$30,001 – $46,125	$20,001 – $30,750
0% of your contribution	more than $61,500	more than $46,125	more than $30,750

Seven Ways to Save Business Taxes – 12/1/15

These guidelines are a list of some common strategies for minimizing the income taxes for small businesses. The list is not exhaustive and does not constitute income tax advice for any specific client or situation.

1 – Defer Income & Accelerate Expenses

This ‘tried and true’ planning method is alive and well. Most effective tax planning is accomplished through a many well planned small steps rather than a few magic large ones. Defer Income. Taxpayers can save taxes in one year by deferring income to a future year. This can be done through various contractual arrangements and controlling the completion dates and/or ship dates of contracts (“defer shipments”).

Accelerate Expenses: To the extent that operating expenses can be accelerated, that can lower taxable income in the current year. Be careful with this technique because it will reverse in the following year.

2 – Purchase Equipment

Section 179 Election. This election permits a taxpayer to deduct in the year placed in service up to $25,000 of property (equipment) that would normally be depreciated.

Bonus Depreciation – Bonus Depreciation is available for property not elected under section 179 or for the remaining basis in that property after the 179 Election. The deduction is generally 50% of allowable basis.

Accelerated Depreciation – Depreciation using the Modified Accelerated Cost Recovery System is available for the basis of assets placed in service not claimed in a or b above.

3 – Domestic Production Activities Deduction.  A Corporate taxpayer is eligible for a credit of up to 9% of qualified production activities income.

Domestic Production Gross Receipts Include

The lease, rental, license, sale, exchange, or other disposition of

1 -Tangible personal property, computer software, and sound recordings manufactured, produced, grown, or extracted in whole or in significant part within the United States

2 -Any qualified film produced in the United States, and

3 – Engineering or architectural services performed in the United States for construction located in the United States

The Credit is claimed on form 8903 and is subject to complex rules.  Go to https://www.irs.gov/pub/irs-pdf/i8903.pdf for more information.

4 – New Repair Regulations

1. New repair regulations include safe harbors that may permit taxpayers to deduct certain repairs that may have been capitalized. Detailed review is required.

5 – Expense Start Up Costs

1. A C Corporation may deduct up to $5,000 in qualified startup expenses with the remainder to be amortized over 180 months
2. The deduction is phased- out when the startup expenses exceed $60,000.

6 – Set Up Retirement Plans

1. Retirement plans can generate deductions for a corporation even though they may not be funded until after year end.
2. They include profit sharing, money purchase pension, various defined benefit plans.
3. Rules are complex and the plan must be in place before the end of the tax year.
4. See the Tax Planning Section  on this page for discussion of retirement plans.

7 – Review of Assets and Liabilities

1. This often overlooked step can result in significant tax savings. These procedures consist of detailed review of all assets and liabilities to assure that any assets that have lost value (e.g. uncollectible ARs, overvalued inventory, expired prepaid expenses, abandoned equipment) are written off for tax purposes
2. Similarly, careful review should be made of all liabilities to assure that no accrued expenses are missed. (This step interfaces with , above.)

 

This Page Contains Various Tax Tips and Notes – Scroll Down for Articles

 

 

Employee Retention Credit (ERC) Fraud (Posted 11-17-22)

This Tax Letter came in this morning from Bob Jennings of Taxspeaker. He is a nationally renowned and well respected tax educator that provides continuing education  to CPAs and attorneys.  I have trusted his fully documented and supported tax advice for 40 years.

Recently one of our business clients was contacted by one of these fraudsters. Their advertising is slick and their claims too good to be true. I’m sharing this information with my clients and all visitors to the website in an attempt to protect them against the fraud.

From Bob Jennings at Taxspeaker:

We are finding nationwide a demand for a strongly worded warning letter to our clients about this exploding ERC fraud. In Des Moines this week, the demand reached the point that I promised an immediate client letter protecting us against client liability and warning clients about this issue. It is an incredibly strongly worded letter that you may wish to modify, but after one of my clients claiming he qualified for a $600,000+ refund and that the 3rd party would stand behind it, I had enough.

Find the letter below, please modify as needed, but I personally want those strong words in the letter.

Dear Client

Many business owners have been contacted about having a third party calculate an “Employee Retention Credit” amounting to tens and even hundreds of thousands of dollars. We are finding that fraud in that industry is rampant, the scam artists are preying on your gullibility over a complex tax matter, and that the 3rd party providers are not telling you important facts such as:

• Owner and owner family wages do not qualify
• Tax returns must be amended to reduce wage deductions
• When returns are amended to reduce deductions you will owe additional tax and penalties for late payment
• The supposed “supply chain” issues do not exist unless (IRS Notice 2021-20) there has been at least a 10% reduction in hours or revenues, and the disruption results in decreased profits
• The claims “Your accountant didn’t know about this” are classic indicators of a scam perpetrated upon the uninformed business owner
• Ask yourself how long this “expert” company has really been in business
• And, most importantly, when the IRS audit comes, and it will, are you prepared to lose your company over this?

Audits are already occurring on the ERC claims prepared by third parties, with disastrous results for the business owner. We want to warn you that the IRS has specific rules about tax preparation when the preparer knows the return is incorrect. IRS Circular 230 requires us to inform you that if you take this credit against our advice that:

1. Your return is incorrect
2. Your return should be amended
3. Significant penalties will apply for underpayment and various other violations

Additionally, taking this credit against our advice indicates that you trust an unknown 3rd party’s “advice” more than our guidance. We will not risk our own company in this situation and will not sign any amended 941’s based on this 3rd party information, and our ability to prepare any further returns for you is being reconsidered.

Frankly, we are sending this letter to protect ourselves if you follow this 3rd party, probable fraud situation. We do not believe you qualify for the ERC, we recommend herein that you do not take it, and we will in no way be responsible for any audits, penalties, representation or correspondence regarding a 3rd party ERC claim. If you still believe you qualify for the ERC against our advice, we will need you to obtain an opinion letter regarding this credit from a legal tax firm that your business qualifies before we will be able to proceed with any further income tax relationship.

In all of our years of practice we have never had to write a letter such as this. The fraud is rampant, the penalties are so severe as to lose your business, and the risks are too great to go without our warning to you.

Changes at IRS (Posted 11-3-22)

With all the mis-information and dis-information we get everyday from the news media, I’m sharing an article I received this morning from my professional income tax research service, Research Institute of America.  The article was written by Tim Shaw. Hopefully it will serve to clear the fog about IRS and where it is going.

From Tim: The newly named acting commissioner of the IRS, along with two former holders of the position, outlined the agency’s immediate goals following the authorization of $80 billion in additional funding, as well as guiding principles it should maintain moving forward.

Just days after the interim replacement for outgoing IRS Commissioner Chuck Rettig was announced, now acting Commissioner Douglas O’Donnell addressed an audience of tax practitioners and government officials. Speaking November 1 at a hybrid tax conference co-hosted by the American Institute of Certified Public Accountants (AICPA) and the Chartered Institute of Management Accountants (CIMA) in Washington, D.C., O’Donnell provided the first major update on how the IRS has been acting on its 10-year appropriation from the Inflation Reduction Act (PL 117-169).

“Simply put, the approximately $80 billion will enable us to broaden our horizons in terms of what we are and what we can do to enhance the experience for taxpayers, tax pros, [and], frankly, everyone that interacts with the system,” he said in his opening remarks. “We will use these resources wisely and efficiently to achieve the improvements that we all know that we need.”

To help facilitate what O’Donnell described as broad “transformation efforts,” a new central office within the IRS has been established. According to the new interim commissioner, this office will coordinate the implementation of the inflation bill’s myriad provisions with various divisions, information technology staff, and the Human Capital Office. Such cross-departmental collaboration has already been instrumental in the beginning months since the legislation’s enactment. According to O’Donnell, the IRS aims to have prepared a strategic operating plan, as required by Treasury Secretary Janet Yellen.

O’Donnell said that right now, hiring is a major priority, especially ahead of the upcoming tax filing season. New hires will consist of IT experts, data scientists, and compliance enforcement agents. He made a point to specifically refute the notion that the agency will double its roster of auditors overnight.

“It is not possible to double the workforce in any component of our organization that has any size. It’s just not going to happen,” said O’Donnell. He later rebuffed “wild inaccuracies” surrounding messaging from some lawmakers that the funding will be used to unleash “an army of armed agents to audit and harass taxpayers.” O’Donnell, echoing his predecessor, emphasized that low-and middle-income families and small businesses will not be the subject of heightened scrutiny, citing Yellen’s directive that audit rates will not rise above historic norms for taxpayers making under $400,000 per year.

According to O’Donnell, the IRS currently employees 38,000 fewer workers than in 1992 when the population of the U.S. was 30% smaller. He noted that the modern tax code is substantially more complex, especially surrounding cross-boarder activity. Alongside bringing on new staff, a simultaneous goal should also be to retain the existing workforce, he continued, as the agency has an annual attrition rate of 8,000 people, largely due to retirement.

Speaking to the outstanding backlog of unprocessed paper returns, O’Donnell reaffirmed that the goal is still to clear the current inventory by the end of this calendar year. To prevent future delays, he said the IRS is prioritizing a shift toward digital. This includes scannable returns to expedite processing, more forms that can be filed electronically, and online taxpayer correspondence.

“We have a great deal of work ahead of us, but I know that the IRS employees and leaders are up to the task,” O’Donnell closed. “We have already begun to set our sights super high. We got the $80 billion. There is an expectation that we deliver and it is a heavy responsibility, one that we are taking very seriously.

However, former IRS Commissioner Charles Rossotti, who served in the role from 1997-2002 under presidents Bill Clinton and George W. Bush, said that in the grand scheme of things, $80 billion over a decade is not a substantial amount.

“I’ve calculated that after 10 years of this money, rebuilding the IRS in terms of sheer size, it will only be about three fourths of the size in relation to the economy that it was when I was [at the IRS] and we were not really adequately funded at that time,” said Rossotti at the October 31 kickoff of the same AICPA/CIMA conference.

According to the former commissioner, who is now a senior advisor at global investment firm Carlyle, more money alone will not be a cure-all for the IRS’ operational and technological woes. He said that “doing more of everything” that the agency has been doing up to this point is not enough. “Instead, the IRS is going to have to be better, not just bigger.”

To do so, Rossotti laid out several keys to long-term success at the IRS once a permanent commissioner is confirmed. The common denominator across all of them is the advancement of technologies to uplift the agency into the 21^st century. Investing in new digital capabilities, especially data analytic models, will streamline and make more efficient customer service and compliance.

“And with respect to compliance, the critical point is that the goal is compliance,” he said. “Enforcement is a tool to achieve compliance. Enforcement by itself is not a goal.”

Exemplifying this, Rossotti explained that simply boosting audit numbers would do little to reduce the so-called tax gap. Instead, audit performance should be measured in “meaningful ways,” he said. “When you get to measuring it’s necessary to be sure that you’re looking at the results, not just the inputs. Just doing more auditing … is not a meaningful goal.”

Another previous head of the IRS, Fred Goldberg, agreed that the tax gap cannot be bludgeoned down using just more audits alone. Goldberg, who was commissioner from 1989 until 1992, stressed that “the proper metrics should focus on quality, efficiency, and improved compliance through a combination of training and improved return selection driven by technology-based data, [and] research and analytics.”

Appealing to practitioners directly, Goldberg urged the tax community to hold the IRS and lawmakers accountable, calling now a “unique time in the history of our tax system.” He said that the funding comes at a time when the resource strain at the IRS has hit a boiling point, a chance the agency must not squander.

“Failure is not an option,” said Goldberg. “This is the last shot.”

Employee or Subcontractor (Posted 8-2-22)

IRS just issued the folowing Tax Tip. Misclassification of employees as independent contractors continues to be a problem that we  see all too  frequently. Simply, the misclassification means that employers incorrectly treat employees as subcontractors with the intention of avoiding payroll reporting and the related employer payroll taxes.

Treating employees incorrectly as subcontractors is a disservice to both the employee and the business (or non-profit) entity. This last tax season, we saw several instances where small local non-profit entities hired part time summer employees (typically high-school or college students) to perform menial tasks. Rather than giving these employees a W-2 form as the law requires, they gave them form 1099-NEC (non-employee compensation). The students were required to report this income as self-employment income and to pay self-employment tax on that income.  They were employees under the standard test of employer/employee relationships and should have been treated as such. The students were the losers in this situation.

As more fully explained in the following IRS tax tip, a subcontractor is a person or company who offers their services to the general public. Anyone working for a single entity where that entity controls the timing and nature of the work done is an employee. Period.

Issue Number: Tax Tip 2022-117

Worker Classification 101: employee or independent contractor

A business might pay an independent contractor and an employee for the same or similar work, but there are key legal differences between the two. It is critical for business owners to correctly determine whether the people providing services are employees or independent contractors.

Here’s some information to help business owners avoid problems that can result from misclassifying workers.

An employee is generally considered anyone who performs services, if the business can control what will be done and how it will be done. What matters is that the business has the right to control the details of how the worker’s services are performed. Independent contractors are normally people in an independent trade, business or profession in which they offer their services to the public.

Independent contractor vs. employee
Whether a worker is an independent contractor, or an employee depends on the relationship between the worker and the business. Generally, there are three categories to consider.

• Behavioral control − Does the company control or have the right to control what the worker does and how the worker does the job?
• Financial control − Does the business direct or control the financial and business aspects of the worker’s job. Are the business aspects of the worker’s job controlled by the payer? Things like how the worker is paid, are expenses reimbursed, who provides tools/supplies, etc.
• Relationship of the parties − Are there written contracts or employee type benefits such as pension plan, insurance, vacation pay? Will the relationship continue and is the work performed a key aspect of the business?

Misclassified worker
Misclassifying workers as independent contractors adversely affects employees because the employer’s share of taxes is not paid, and the employee’s share is not withheld. If a business misclassified an employee, the business can be held liable for employment taxes for that worker. Generally, an employer must withhold and pay income taxes, Social Security and Medicare taxes, as well as unemployment taxes. Workers who believe they have been improperly classified as independent contractors generally must receive a determination of worker status from the IRS. Then they can use Form 8919, Uncollected Social Security and Medicare Tax on Wages to figure and report their share of uncollected social security and Medicare taxes due on their compensation.

Voluntary Classification Settlement Program
The Voluntary Classification Settlement Program is an optional program that provides businesses with an opportunity to reclassify their workers as employees for future employment tax purposes. This program offers partial relief from federal employment taxes for eligible businesses who agree to prospectively treat their workers as employees. Businesses must meet certain eligibility requirements and apply by filing Form 8952, Application for Voluntary Classification Settlement Program, and enter into a closing agreement with the IRS

Who is self-employed?
Generally, someone is self-employed if any of the following apply to them.

• They carry on a trade or business as a sole proprietor or an independent contractor.
• They are a member of a partnership that carries on a trade or business.
• They are otherwise in business for themselves, including a part-time business.

Self-employed individuals, including those who earn money from gig economy work, are generally required to file an tax return and make estimated quarterly tax payments. They also generally must pay self-employment tax which is social security and Medicare tax as well as income tax. These taxpayers may qualify for the home office deduction if they use part of a home for business.

Standard Mileage Rate Increase (Posted 6-13-22)

As inflation rages, IRS offers a little help with in increase in the standard mileage rate.

The IRS announced an increase in the standard mileage rates for the rest of the year.  Beginning July 1, 2022, the rates are 62.5 cents per mile for business use of an automobile and 22 cents per mile for costs of using an automobile as a medical or moving expense. (IR 2022-124, 6/9/2022; Ann 2022-13, 2022-26 IRB)

Social Security – Best Deal in Town (Posted 6-7-22)

This posting is reprinted with permission from TaxSpeaker.com. Tax Speaker is owned by Bob Jennings who is one of the premier professional tax educators in the country and has been so for the last 40 years. His seminars are the best of the best.

In this article Bob, explains Social Security benefits relative to their cost. In my own 40+ years of practice, I echo and support Bob’s comments.

From Bob: In over forty years of practice as a CPA, IRS Enrolled Agent and former CFP® I have discussed income tax, social security, and retirement with literally tens of thousands of clients. When addressing social security issues with clients, particularly those under forty, I am often told, “It will Never Be There for me.” This statement has always bothered me because it illustrates a basic lack of understanding by the American consumer (and often their financial adviser) about the benefits provided by the Social Security System.

Example: During 2022 if Average Joe earned $6,040 or more, he received the maximum four credits in the Social Security system for the year 2022. This cost him $462.06 if he was a W-2 employee (his employer matched his share) or $924.12 if he was self-employed. If Joe repeats this for nine more years during his life, he has earned complete, minimum coverage under the system. In other words, for a minimum of $4,620 (ten years at $462 per year) Average Joe has received total retirement and medical coverage under the Social Security system.

But what does Joe really get for this $4,620? Our system provides the following benefits to this average Joe for his ten years (forty quarters) of minimum entry-level coverage:

1. A retirement income for Joe starting as early as age sixty-two.

2. A retirement income for Joe’s wife, as early as age sixty-two, even if she has never had earned income (age 60 if Joe is dead).

3. A full Medical system at age sixty-five (Medicare) for the remainder of his life.

4. A full Medical system for his wife at age sixty-five, even if she has never had earned income.

5. Disability benefits for Joe in the event of injury today.

6. Disability benefits as early as age fifty for Joe’s widow even if she was never covered.

7. Dependent benefits for his disabled, minor, or dependent children, even after Joe’s death.

8. Dependent benefits for his dependent parents.

9. Dependent benefit for Joe’s wife to care for any children at home underage dependent in the event of Joe’s death, disability, or drawing of his retirement benefit (called child-in-care benefit).

10. Death benefit for Joe’s widow.

Joe gets all of this for $4,620. Yes—possibly the greatest financial investment available to every American, the Social Security system has been misunderstood, maligned, and ignored by nearly everyone. Clearly the system is not meant to be just a retirement plan, it is more precisely a safety net for all Americans, providing rudimentary retirement, disability, and medical coverage at all ages to nearly all Americans. Benefits are not based on need but rather on your payments into the system. And, guess what-if you don’t pay in, you are correct-it will never be there for you.

For my clients that don’t want to pay a dime in social security tax I ask them do they have life insurance, retirement, disability and a death benefit for themselves, their spouse, and their kids? I have never had anyone say yes-they always say they can’t afford that stuff. I explain the 10 benefits and the incredibly cheap cost, and if they still want to argue, I don’t argue with ignorance-they go to someone else because I will not do their tax return.

And, for those who think ‘It will never be there for me’, I have heard that ridiculously incorrect statement from fools for forty years and A) Politicians want to get re-elected and will never commit political suicide by stopping it, and 2) Read the annual Trustee’s Report (as I do) instead of Facebook. The system, even if the fools in Washington don’t change anything, is solvent through the mid 2030’s and even in a worst case situation, has enough to keep paying 80% of everything for as long as can be predicted actuarially.

Employee or Sub-Contractor – Be Careful (Posted 4-27-22)

The IRS is continuing to pursue taxpayers who misclassify employees as sub-contractors to avoid paying employer taxes on those employees. In the 2021 tax season, we saw several instances where students had part-time jobs and were given form 1099-NEC which treated them as a sub-contractor rather than the W-2 that they should have received as an employee. These kids were clearly employees under the IRS tests (see following) and should not have been treated as sub-contractors and given forms 1099-NEC.

Notice that the court looked at (1) degree of control over the workers tasks, (2) the workers investment in their business, and (3) that the employer could fire the worker at will. IF you apply these tests to students with summer jobs, they are clearly employees.

The bottom line is that IRS is looking for employers who cheat and will impose significant penalties. In this case, this CPA agrees with IRS. To all employers: treat your employees as employees and your sub-contractors as sub-contractors. Please call our office if you would like to discuss theses issues.

Today the Parker Federal Tax Bulletin reported yet another case where the taxpayer miscalssified employees as sub-contractors.

Company Liable for Back Taxes and Penalties for Misclassifying Nurses as Independent Contractors

The Tax Court held that a corporation engaged in the business of providing at-home private duty nursing services to children with special needs misclassified as independent contractors the nurses it hired to perform such services and was thus liable for employment taxes on the nurses’ wages as well as various penalties relating to the underpayment of taxes and tax deposits. In determining that the nurses were employees, the court cited several factors, including the degree of control exercised by the corporation, the lack of investments made by the workers in the business, and the fact that the corporation could fire a worker at will while the worker had to give two weeks’ notice before leaving. Pediatric Impressions Home Health, Inc. v. Comm’r, T.C. Memo. 2022-35.

IRS Notice – Third Economic Impact Payment  (Posted 4-1-22)

New Mexico Tax Rebates (Posted 3-18-22)

New Mexico Taxpayers to Receive Rebates in July

by Peter G. Pupke, Esq.

The New Mexico Taxation and Revenue Department has announced that taxpayers who are eligible for the 2021 income tax rebates that Governor Michelle Lujan Grisham signed into law earlier this month will begin receiving them soon after July 1, 2022. (News release, N.M. Tax. and Rev. Dept., 03/14/2022.)

Income tax rebate authorized. The income tax rebate was authorized by L. 2022, H163 (c. 47) (see State Tax Update, 03/10/2022). Although taxpayers will not see anything about the rebate on their tax forms, the Taxation and Revenue Department will have all the information necessary to determine eligibility from their returns. When the rebate section of the law becomes effective on July 1, 2022, the Department will automatically begin issuing rebates to all taxpayers who are eligible based on their 2021 returns.

Rebate amount. The one-time, refundable rebates will be $500 for married couples filing joint returns with incomes under $150,000, and $250 for single filers with income under $75,000. Rebate payments will be made by ACH deposit or check to the most recent bank account or address the taxpayer has provided to the Department.

Other tax benefits do not take effect until 2022 tax year. Other income tax provisions of the omnibus tax bill do not take effect until the 2022 tax year or later. Those include:

• A one-time $1,000 income tax credit for hospital nurses for the 2022 tax year.
• An income tax exemption for armed forces retirees, starting at $10,000 of military retirement income in 2022 and gradually rising to $30,000 of retirement income in tax years 2024 through 2026.
• A new refundable child tax credit ranging from $25 to $175 per child, depending on income, beginning in the 2023 tax year and continuing through the 2031 tax year.

(from RIA Checkpoint – 3-18-22)

New Mexico Tax Law Chnges (Posted 3-11-22)

Here is a summary of current New Mexico tax law changes:

IRS – New forms K-2 & K-3 Relief (Posted 2-16-22)

As a follow up to the article below, from the updates section of the IRS website:

February 14 update

IRS suspends more than a dozen automated notices, including collection issues: As part of ongoing efforts to provide additional help for people during this period, the IRS has suspended automated collection notices normally issued when a taxpayer owes additional tax or has no record of filing a tax return. Note that many other IRS notices are statutorily required to be issued within a certain timeframe to be legally valid. The IRS encourages those who have a filing requirement and have yet to file a prior year tax return or to pay any tax due to promptly do so as interest and penalties will continue to accrue. Visit IRS.gov for payment options. For more information on suspended notices, see IR-2022-31, IRS continues work to help taxpayers; suspends mailing of additional letters.

IRS Updates their Website (Posted 2-16-22)

IRS is continuing its efforts to catch up and communicate with all of us. Kudos to them!

IR 2022-32, 2/14/2022

By Joseph Boris

The IRS has added a page to its website for updates on the 2022 tax filing season as well as efforts by the agency to clear a backlog of unprocessed returns from past years, according to a February 14 news release.

The page on IRS.gov, Special Tax Season Alerts, will be promoted on social media and other online channels to assist taxpayers during the current filing season, which began January 24.

“The IRS is taking numerous steps to keep this tax season going smoothly while also taking additional action to address the inventory of tax returns filed last year,” IRS Commissioner Chuck Rettig said in the release.

As updated on the new web page, the IRS’s inventory-clearing steps include ending the mailing of more than a dozen automated letters that are commonly sent to taxpayers when they owe additional tax or have no record of filing a tax return, the release stated. Other updates will be focused on IRS operations and the number of unprocessed tax returns in hand.

“We want people to have an easy way to see the latest information,” Rettig added. “This new page provides a one-stop shop for the latest key information people and the tax community may need.”

The commissioner said the IRS was “off to a good start” processing tax returns and issuing refunds. During the first two weeks of filing season—through February 6—the agency issued more than 4 million tax refunds worth almost $10 billon, according to the release.

IRS – Relief from Letters (Posted 2-11-22)

As we all know, IRS staff is backed up several months. Tax returns are not being processed and letters to them are not being read. However, at the same time, their computer system continues to send collection letters. Today, we will start getting some much needed relief.

As I posted yesterday, IRS is doing the best they can and stopping notices will help us all.

IRS temporarily stops mailing some automated collection notices

IR 2022-31, 02/10/2022 

In a news release issued February 10, the IRS announced it will temporarily stop mailing some automated collection notices.

Which automated collection notices are suspended? The IRS will temporarily stop mailing the following individual and business automated collection notices:

• CP80, Unfiled return notice
• CP59 and CP759 (Spanish), Unfiled tax return(s) 1st notice
• CP516 and CP616 (Spanish), Unfiled tax return(s) 2nd notice
• CP518 and CP618 (Spanish), Final notice, return delinquency
• CP501, Balance due 1st notice
• CP503, Balance due 2nd notice
• CP504, Final balance due 3rd notice, Notice of Intent to Levy
• 2802C, Withholding compliance letter
• CP259 and CP959 (Spanish) Business return delinquency
• CP518 and CP 618 (Spanish) Final notice – business return delinquency

Why suspend mailing automated collection notices? The IRS has several million original and amended returns filed by individuals and businesses that have not been processed. According to the News Release, the IRS is suspending some automatic notice mailings to help avoid confusion for taxpayers and tax professionals.

“IRS employees are committed to doing everything possible with our limited resources to help people during this period,” said IRS Commissioner Chuck Rettig. “We are working hard, long hours pushing creative paths forward in an effort to be part of the solution, rather than the problem.”

IRS’s Continuing Woes (Posted 2-10-22)

I have to say that, over the last 40+ years, I have had multiple dealings with IRS at many levels. Their staff has always been professional, helpful, and friendly.  They go the extra mile.  With their current increased workload and severe underfunding, they are in a lose-lose position.  It’s time for all of us to give them a break and to give them the tools they need to give us the professional service they are trying to give with the resources that they have.

This is from today’s RIA tax news service:

NATIONAL TAXPAYER ADVOCATE TESTIFIES ON IRS BACKLOG AT CONGRESSIONAL HEARING

By Tim Shaw

To address its backlog of unprocessed previous-year tax returns and weak customer support, the IRS should offer higher pay to attract new employees and rely on short-term help from outside consultants, according to testimony from National Taxpayer Advocate Erin Collins to the House Ways and Means oversight subcommittee on February 8.

Collins was the sole witness at a subcommittee hearing convened to discuss findings of the NTA’s 2021 annual report to Congress as well as issues facing taxpayers this tax filing season.

The NTA report described 2021 as the “most challenging year ever for taxpayers,” whose phone calls to IRS support lines were answered only about 11% of the time. The IRS’s Where’s My Refund tool—accessed 632 million times last year—lacks information on unprocessed returns and provides no context on status delays, the report found. The IRS’s shrunken workforce lacked the resources, manpower, and time to meet demand, leading to millions of refunds that have yet to reach taxpayers. For the full report, see National Taxpayer Advocate delivers annual report to Congress.

“[T]axpayer service must improve,” Collins said in her opening remarks. “And for that to happen, the IRS needs to eliminate the backlog, pay out those delayed refunds, and get current on its work.”

Asked by Rep. Bill Pascrell, D-NJ, chair of the oversight subcommittee, how the IRS can boost staffing now given its “budget woes,” Collins admitted that it is a “challenge in the market” to bring in new workers.

The IRS has filled only 179 of the 5,000 positions opened to add to the roster of return processers. Collins noted that submission-processing employees are typically hired at or around the federal government’s GS-3 level, at which the base salary is $24,749. Even if new hires were offered better pay and incentives, Collins said it was unlikely “we are going to be able to hire enough people to get us out of this hole.”

Collins suggested that outside vendors could be brought in to chip away at the “manual” work, since paper returns are the most delayed because they need to be reviewed line by line. Simultaneously, the IRS should “leverage” other employees to immediately tackle such clerical tasks.

Increasing automation of IRS processes is another way to reduce the backlog and improve taxpayer service, but the IRS would need “sustained, multiyear” funding to modernize its systems, Collins said.

“The fact that we’re still on 1980s technology is absurd,” the subcommittee’s ranking member, Tom Rice, R-SC, said at the hearing. “We have got to do better than this. We are doing a disservice to our taxpayers.” Collins said that IRS IT experts would be “happy” to work with Congress in developing a budget that would bring the agency into the 21st century.

Had the Build Back Better Act as passed by the House survived debate in the Senate, the IRS would have received additional funding of $80 billion over 10 years. Collins is still advocating for the package. “I think infusing capital into the IRS is very important,” she answered in response to Rep. Judy Chu, D-CA, on how the investment would improve IRS operations.

Emphasizing taxpayer support alongside technological upgrades would promote the”tax administration that we think the country deserves and, in my opinion, it does deserve,” Collins said.

Click here for a recording of the hearing.

IRS’s Online Face Recognition Going Away (2-7-22)

If any of you have experienced the frustrating and unusable ID.me website, we have good news. It is going away.

IR 2022-27 (02/07/2022)

In a February 7, 2022, news release, the IRS announced that it will “transition away” from using facial recognition verification through a third-party service. The move comes after members of Congress questioned the IRS’s use of ID.me to verify taxpayers’ online accounts.

GOP senators query IRS regarding its collaboration with ID.me. Republicans on the Senate Finance Committee wrote to IRS Commissioner Charles Rettig on February 3 voicing their displeasure with the agency’s collaboration with ID.me that will require taxpayers to have an ID.me account to access key IRS online resources.

“While we understand the IRS’s use of ID.me is intended to protect data and reduce fraud, we have serious concerns about how ID.me may affect confidential taxpayer information and fundamental civil liberties,” the letter said.

According to the senators, as part of the registration, ID.me requires a trove of personal information, which may include one or more of the following: government-issued photo ID; passport; birth certificate; Form W-2; Social Security card; veteran health ID card; DHS trusted traveler card; video “selfie;” utility bill; insurance bill; telephone bill; and a recorded video interview with an ID.me employee.

“The most intrusive verification item is the required ‘selfie,’ which is much more than simply uploading a picture; it is submitting one’s face to be digitally analyzed by ID.me into a ‘faceprint,'” the senators wrote. “Additionally, using ID.me appears to subject taxpayers to the terms of three separate agreements filled with dense legal fine print.”

The IRS’s unilateral decision “[allowing] an outside contractor to stand as the gatekeeper between citizens and necessary government services” is problematic, the letter said, as is the fact that ID.me “is not, to our knowledge, subject to the same oversight rules as a government agency, such as the Freedom of Information Act.” The senator’s letter contained a lengthy series of questions and requests they want IRS to respond to by February 27. They also want a subsequent briefing to review the IRS’s written responses.

News release announces IRS’s retreat. The news release said the IRS would “transition away from using a third-party service for facial recognition to help authenticate people creating new online accounts” over the coming weeks.

The release also announced that the IRS would develop and bring online an authentication process that doesn’t involve facial recognition.

“The IRS takes taxpayer privacy and security seriously, and we understand the concerns that have been raised,” IRS Commissioner Chuck Rettig said. “Everyone should feel comfortable with how their personal information is secured, and we are quickly pursuing short-term options that do not involve facial recognition.”

According to the news release, the transition doesn’t interfere with a taxpayer’s ability to file a return or pay taxes owed. People should continue to file their taxes as they normally would, the release said.

Reference: For more information about IRS online accounts for individuals, see FTC 2d/FIN ¶ S-6408

 

President Biden’s Proposed Tax Increase (Updated 9-23-21)

This post is taken from a letter written by Bob Jennings of TaxSpeaker.com. He is one of the leading professional income tax researchers and speakers and he has been following this proposed legislation. He is one of the best sources for emerging tax legislation. If this law passes as proposed, taxes are going up for everyone and small S-Corporations will be particularly hard hit. These taxpayers will see their taxes increase several thousand dollars.

From Bob:  Congress is currently debating President Biden’s American Families Plan of tax and benefit changes. The Plan would make sweeping changes to our individual tax system and a limited window of time is available to plan for some of the changes. Although we do not know specifics about many of the changes, we do know, in general, what the changes will be should this Plan become law. In this letter we wish to make some general tax recommendations regarding upcoming changes. Because changes are coming and continuing to evolve rapidly over the next few weeks, before you take any substantive tax actions, please call us to confirm that it makes tax-sense for you.

As a general premise of the Plan, tax rates will increase for higher income Americans. The latest proposal includes an increase in the tax rate, a possible addition of an additional surtax, and a huge lowering of tax brackets. As a general rule, this means that higher income Americans who have the opportunity to do so should accelerate income into 2021 and defer expenses until 2022. This is even more important for business owners who may be adversely affected by incredible increases in self-employment tax, the net investment income tax surcharge, and in rare cases, a reduction of the 20% QBI  deduction. Because the marriage penalty is so severe, we seriously would want to speak with you about the adverse tax effects of marriage if you are two unmarried, high-income folks. [Tim: Now, more than ever, a year end tax plan is needed.]

Capital gains rates will also see big 2022 changes. Some suggestions have been made to make these changes retroactive, but assuming they do not go into effect in 2022, a prudent tax move would be to go ahead and recognize gains on investments and real estate in 2021 in order to minimize the income tax burden. The rate change is still fluctuating, but the bottom line is that the rate will increase. [Tim: one proposal is to make these changes retroactive to 9/21/21.]

The existing high credit amounts for children and child-care would continue under this plan, so no action is required to benefit from these changes.

Of particular concern are the massive changes proposed for small business owners, with large increases for self-employment tax at all income levels not just high-income levels. [Tim: The proposed act will treat all pass through income from an S-Corporation as self-employment income. This is a structural change in tax law and the overall theory of taxation that can cost small business owners several thousands of increased tax for 2022 and all later years.]

Because of potential increases in capital gains rates, homeowners and property owners that are considering the sale of their home, building, land or farm at a large profit need to contact us immediately so you can understand how a sale in 2021 may be of paramount importance. With potential changes in line for tax-free exchanges in 2022, this is another reason that property owners should contact us sooner rather than later, while there is time to act.

We do not know exactly what will change here, but changes are coming for taxes due at death. These changes could affect everyone, not just wealthy Americans. The good news is that some simple actions in 2021 could save thousands in future estate tax payable.

It appears that 2022 will bring big increases to credits for buying electric vehicles, and for installing solar power and energy improving features in your home or office. These proposals lead us to advise, at least right now, that you postpone any of these plans until 2022.

Taxes will be going up in 2022 for wealthier Americans and for small business owners. We can help you to reduce some of the effects, but only if you speak with us before the end of the year. The cost of 2021 planning actions will be more than offset with 2022 and future savings.

Home Office Deduction Act of 2021 (H.R. 3058) (Updated 7-12-21)

Due to the pandemic and related shut downs, millions of taxpayers were required to work from home. Under current tax laws, employees who work from home do not get to deduct their home office expenses.  On May 7, 2021, H.R. 3058 was introduced and is scheduled to be considered this month (July 2021).

The bill will grant qualified employees a home office deduction even if they don’t itemize deductions. It will cover the period from March 13, 2020 through December 31, 2021.

Although I rarely request clients to write their congressmen, this is a bill that really needs to be passed. It is grossly unfair to deprive employees of a deserved tax deduction under the current circumstances.

Please call our office if you want more information about the proposed bill.

NM Gross Receipts Tax and Reporting Changes Effective 7/1/21

Effective July 1, 2021, the rules for New Mexico business and for businesses selling into New Mexico have changed.  The principal changes are:

• New Mexico is switching from an “origin based sourcing” to “destination based sourcing”. This generally means that the Gross Receipts Tax (GRT) rate is based on where the goods or services are provided or delivered rather than the location of the seller of the goods and services, and
• The TAP (Taxpayer Access Point) is being redesigned to separate the tax types (gross receipts tax, withholding, etc.), and
• Your old CRS number will not change but it will be renamed to Business Tax Identification Number (BTIN).

For our clients with a retail store or office, the tax rates will still be at your location but the online reporting will be different. For our clients that provide goods and services at their customer’s location, you will now use tax rate based on your customer’s location. From what we can tell so far, their online portal should be less confusing.

The following is taken from an email from TRD to New Mexico taxpayers sent around May 15, 2021:

Destination-Based Sourcing of GRT and Compensating Tax

Statutory changes taking effect July 1, 2021 will also impact GRT and Compensating Tax reporting locations. Currently, New Mexico uses origin-based sourcing, in which most GRT is reported at the seller’s place of business. For sales occurring on or after July 1, 2021, the reporting location for goods and general services is the buyer’s delivery location. The reporting location for in-person services is the place the service is performed. The GRT rate for professional services (excluding in-person services) is the seller’s place of business (origin-based sourcing), except construction services and real estate commissions, which will continue to use the construction site/property location.

CRS Redesign

As of July 6, 2021, the Department is redesigning its Combined Reporting System (CRS) to separate tax returns for specific business tax programs, including gross receipts, compensating tax, wage withholding, non-wage withholding and a handful of other small tax programs. In the past, these taxes were filed on one return. Over 95% of CRS taxpayers currently only file gross receipts and/or wage withholding. There will now be separate returns tailored to the needs of different taxpayers to streamline filing and give taxpayers more control over their accounts. The changes will also expedite the Department’s processing of refunds.

Taxpayers will automatically be registered for most of the separated tax programs. Non-wage withholding filers will need to register separately in July or August to ensure that their non-wage withholding account is ready to be used for the return due by August 25, 2021. Assistance with the registration process is available by emailing business.reg@state.nm.us or calling 1-866-285-2996.

The “CRS number” that businesses use to report their taxes will stay the same but will simply be renamed the Business Tax Identification Number (BTIN).

The Taxpayer Access Point (TAP) e-filing portal, including electronic payments, will be unavailable from 5pm MST on June 30 through July 5, 2021 as we upgrade the system. Please ensure that any returns or payments due during this time period are submitted on or before June 30th, 2021.

Child Tax Credit Eligibility Assistant – IRS Online Tools (6/23/21)

In a News Release (IR 2021-130, 6/22/21), IRS has announced two new online tools designed to help taxpayers manage and monitor advance payments of the Child Tax Credit (CTC). IRS has also provided additional new information about those advance payments.

Background—child tax credit. Taxpayers are allowed a CTC—temporarily expanded and made refundable for 2021 by the American Rescue Plan Act (ARPA, PL 117-2)—for each qualifying child. (Code Sec. 24)

Background—advance payments of CTC. IRS is required to establish a program to make periodic advance payments which in total equal 50% of IRS’s estimate of the eligible taxpayer’s 2021 CTCs, during the period July 2021 through December 2021. (Code Sec. 7527A)

In IR 2021-113, IRS provided information about the advance payments including that they will begin on July 15, 2021. Thereafter, they will be made on the 15th of each month unless the 15th falls on a weekend or holiday. See Advance child tax credit payments to begin on July 15.

In IR 2021-124, IRS announced that, throughout the summer, it will be adding additional tools and online resources to help with the advance CTC. See IRS provides updated information on advance Child Tax Credit payments.

In IR 2021-129, IRS announced the Non-filer Sign-up Tool, for people who did not file an income tax return for 2019 or 2020 and did not use the IRS Non-filers tool last year to register for EIPs. See IRS creates Child Tax Credit Non-filer Sign-up Tool.

IRS announces online eligibility tool. IRS has unveiled the Child Tax Credit Eligibility Assistant which allows families to answer a series of questions to determine whether they qualify for the advance payments.

IRS emphasized that because the Child Tax Credit Eligibility Assistant requests no personalized information, it is not a registration tool, but merely an eligibility tool. Nevertheless, it can still be used to determine whether taxpayers should take the next step and either file an income tax return or register using the Non-filer Sign-up Tool.

IRS also announces a portal with a variety of functions. IRS has also unveiled the Child Tax Credit Update Portal which allows families to verify their eligibility for the payments and if they choose to, unenroll, or opt out from receiving the monthly payments.

Using the portal to unenroll. Instead of receiving these advance payments, some families may prefer to wait until the end of the year and receive the entire credit as a refund when they file their 2021 return. The Child Tax Credit Update Portal now enables these families to unenroll from receiving monthly payments.

The unenroll feature can also be helpful to any family that no longer qualifies for the Child Tax Credit or believes they will not qualify when they file their 2021 return. This could happen if, for example:

• Their income in 2021 is too high to qualify them for the credit.
• Someone else (an ex-spouse or another family member, for example) qualifies to claim their child or children as dependents in 2021.

Anyone who lacks internet access or otherwise cannot use the online tool may unenroll by contacting IRS at the phone number included in the outreach letter they received from IRS.

Accessing the portal. To access the Child Tax Credit Update Portal, a person must first verify their identity. If a person has an existing IRS username or an ID.me account with a verified identity, they can use those accounts to sign in. People without an existing account will be asked to verify their identity with a form of photo identification using ID.me, a trusted third party for IRS.

Planned future enhancements of the portal. Future versions of the tool planned in the summer and fall will allow people to:

• View their payment history;
• Check the status of their payments;
• In late June, update their bank account information for payments starting in August;
• In early August, update their mailing address;
• In future updates planned for this summer and fall, do things like updating family status and changes in income.

A Spanish version is also planned.

IRS provides other new information. IRS cautions that tax returns must be processed by June 28 to be reflected in the first batch of monthly payments scheduled for July 15, so eligible families filing now will likely receive payments in the following months. Even if monthly payments begin after July, IRS will adjust the monthly amounts upward to ensure that people still receive half of their total eligible Child Tax Credit benefit by the end of the year.

IRS and its partners are helping families register for the payments using the Non-filer Sign-up Tool. During late June and early July, free events will take place in Atlanta, Brooklyn, Detroit, Houston, Las Vegas, Los Angeles, Miami, Milwaukee, Philadelphia, Phoenix, St. Louis and Washington, D.C. More details will be available soon on IRS.gov.

How IRS Processes Tax Returns (6-9-21)

This article came in this morning from Research Institute of America, my professional income tax research service. It gives a good overview of what happens when IRS receives a tax return. It explains why some returns take so long to get processed. Our firm, like most CPAs, uses a professional tax preparation software that checks all returns for correctness and completeness before the return is electronically filed. However, and contrary to popular opinion, electronically filed returns can become “corrupted” during the electronic filing process. When that happens, additional steps are needed to complete the filing process. I have included our notes and comments below in [ ] brackets beginning with TLD:

IRS processes when it receives a return . According to the NTA [National Taxpayer Advocate], once a return is received by the IRS, but before it posts to the IRS’s systems (i.e., before it is officially accepted), it goes through a series of pre-posting reviews to ensure the information on the return is correct.

The IRS uses automated processes for some of these pre-posting reviews. If the IRS’s automated pre-posting reviews don’t identify any errors on the return, generally the return is processed.

However, if one of the IRS’s automated pre-posting reviews identifies an error on a return, then the return must be reviewed. [TLD: This review is manual and can take months in this continuing Covid, work from home, environment.] There are four main reasons why a return may need to be reviewed:

• Error resolution;
• Rejected returns;
• Unpostable returns; and
• Suspected identity theft.

Error resolution. Once errors on a return are identified, the IRS can:

1. Reject the error and manually release the taxpayer’s refund; or
2. Confirm the error and notify the taxpayer that the IRS has used its “math error authority” to correct the error.

Under its “math error authority” the IRS can summarily assess and collect tax without following the deficiency procedures (i.e., without first providing the taxpayer with a notice of deficiency), when correcting “mathematical and clerical” errors. (Code Sec. 6213(b)(1)) The definition of “mathematical and clerical” errors can be found in Code Sec. 6213(g)(2). [TLD: Often the return and the related refund are “corrected” by the IRS computer and the related refund or balance due is changed. The taxpayer may (but not always) receive a letter explaining the changes.  All too often, that explanation is received very late which puts the taxpayer and CPA in the position of having to guess what IRS changed. It is all but impossible to contest the proposed change without adequate and timely information from IRS.]

Rejected returns. If the identified error on a return isn’t an error that the IRS can use its math error authority to correct, then the return may be rejected. Rejected returns are usually missing some required part of a return, such as a schedule or a form, which the IRS needs to properly process the return. In this case, the IRS will typically send the taxpayer Letter 12C, Individual Return Incomplete for Processing. This letter gives the taxpayer 20 days to supply the IRS with the missing schedule or form. If the taxpayer doesn’t respond within 20 days, the IRS will adjust the return (which usually results in a reduced refund or increased tax liability). [TLD: In today’s environment, it can take up to 8 months (or longer)  for IRS to read our response to their letters.  During that time, the taxpayer continues to receive computer generated notices from IRS. Attempting to call IRS on the phone is all but impossible.]

Unpostable returns. Unpostable returns are usually paper returns that have errors so severe that the IRS can’t process them.

The most common cause of unpostable tax returns is a mismatch between the taxpayer’s identification number and name (i.e., the taxpayer’s social security number doesn’t match the name on file with the Social Security Administration (SSA)). In this case, the IRS will send the taxpayer a letter informing them of the problem and instructing them to correct their name with the SSA. [TLD: Getting an incorrect SSN changed is another difficult and time consuming process. We suggest that all clients assure that their SSN is correctly recorded by all government agencies and reported property on all tax documents (W-2s, 1099s, etc) received.]

Suspected identity theft. Before they are posted to the IRS’s systems, returns are screened by the IRS’s identity theft/fraud detection filters. If the IRS’s identity theft/fraud detection filters select a return, then the return is sent to the Taxpayer Protection Program (TPP) for further scrutiny. The TPP will send the taxpayer a letter asking them to authenticate their identity either over the phone, online, or by visiting a Taxpayer Assistance Center. [We have had several clients receive ID theft letters from both IRS and various state tax authorities. The taxpayers need to submit information supporting their identity and items on the tax returns. Sometimes the information can be submitted online and other times it needs to be mailed. Be sure to respond timely.  We are available to help with the process.]

President Biden’s Proposed Tax Changes as of 6-3-21

This information is taken from the Department of the Treasury Green Book as reported by Research Institute of America. If enacted, these changes will substantially change the taxation for capital gains and for transfers of property.  The proposed effective date is the "date of announcement" which could be April 2021. Please call our office with any questions.

DETAILS OF PRESIDENT BIDEN’S PROPOSED REFORMATION OF CAPITAL GAINS AND TRANSFER AT DEATH RULES - RIA 6-3-21

Department of the Treasury Green Book

President Biden, in the recently-released Green Book, has proposed far-reaching changes to the taxation of capital gains and the treatment of property that is gifted or is transferred at death, including taxing capital gains at ordinary income rates and treating the receipt of assets because of death as a realization event. Details of the proposals are below.

Current Law. Long-term capital gains and qualified dividends are taxed at graduated rates under the individual income tax, with 20% generally being the highest rate (23.8% including the net investment income tax, if applicable, based on the taxpayer's modified adjusted gross income).

Moreover, capital gains are taxable only upon realization, such as the sale or other disposition of an appreciated asset. When a donor gives an appreciated asset to a donee during the donor's life, the donee's basis in the asset is the basis of the donor; in effect, the basis is "carried over" from the donor to the donee. There is no realization of capital gain by the donor at the time of the gift, and there is no recognition of capital gain (or loss) by the donee until the donee later disposes of that asset.

When an appreciated asset is held by a decedent at death, the basis of the asset for the decedent's heir is adjusted (usually "stepped up") to the fair market value of the asset at the date of the decedent's death. As a result, any appreciation accruing during the decedent's life on assets that are still held by the decedent at death avoids federal income tax.

Reasons for change. The Green Book says that preferential tax rates on long-term capital gains and qualified dividends disproportionately benefit high-income taxpayers and provide many high-income taxpayers with a lower tax rate than many low- and middle-income taxpayers. The rate disparity between ordinary income taxes and capital gains and dividends taxes also encourages economically wasteful efforts to convert labor income into capital income as a tax avoidance strategy.

The Green Book continues that, under current law, a person who inherits an appreciated asset receives a basis in that asset equal to the asset's fair market value at the time of the decedent's death; thus, appreciation that accrued during the decedent's life is never subjected to income tax. In contrast, less-wealthy individuals who must spend down their assets during retirement pay income tax on their realized capital gains. This increases the inequity in the tax treatment of capital gains. In addition, the preferential treatment for assets held until death produces an incentive for taxpayers to inefficiently lock in portfolios of assets and hold them primarily for the purpose of avoiding capital gains tax on the appreciation, rather than reinvesting the capital in more economically productive investments.

Moreover, the distribution of wealth among Americans has grown increasingly unequal, concentrating economic resources among a steadily shrinking percentage of individuals, the Green Book says. Coinciding with this period of growing inequality, the long-term fiscal shortfall of the U.S. has significantly increased. Reforms to the taxation of capital gains and qualified dividends will reduce economic disparities among Americans and raise needed revenue.

Proposal. The Green Book contains the following proposals:

Tax capital income for high-income earners at ordinary rates. "Long-term capital gains and qualified dividends of taxpayers with adjusted gross income of more than $1 million would be taxed at ordinary income tax rates, with 37% generally being the highest rate (40.8% including the net investment income tax), but only to the extent that the taxpayer's income exceeds $1 million ($500,000 for married filing separately), indexed for inflation after 2022."

This proposal would be effective for gains required to be recognized after "the date of announcement."

Observation. Presumably, the date of announcement refers to late April when Biden first discussed his proposals.

Treat transfers of appreciated property by gift or on death as realization events. Under the proposal, the donor or deceased owner of an appreciated asset would realize a capital gain at the time of the transfer.

For a donor, the amount of the gain realized would be the excess of the asset's fair market value on the date of the gift over the donor's basis in that asset. For a decedent, the amount of gain would be the excess of the asset's fair market value on the decedent's date of death over the decedent's basis in that asset. That gain would be taxable income to the decedent on "the Federal gift or estate tax return or on a separate capital gains return."

A transfer would be defined under the gift and estate tax provisions and would be valued using the methodologies used for gift or estate tax purposes. However, for purposes of the imposition of this tax on appreciated assets, the following would apply:

First, a transferred partial interest would be its proportional share of the fair market value of the entire property.

Second, transfers of property into, and distributions in kind from, a trust, partnership, or other non-corporate entity, other than a grantor trust that is deemed to be wholly owned and revocable by the donor, would be recognition events.

The deemed owner of a revocable grantor trust would recognize gain on the unrealized appreciation in any asset distributed from the trust to any person other than the deemed owner or the U.S. spouse of the deemed owner, other than a distribution made in discharge of an obligation of the deemed owner. All of the unrealized appreciation on assets of such a revocable grantor trust would be realized at the deemed owner's death or at any other time when the trust becomes irrevocable.

90-year rule. Gain on unrealized appreciation also would be recognized by a trust, partnership, or other noncorporate entity that is the owner of property if that property has not been the subject of a recognition event within the prior 90 years, with such testing period beginning on January 1, 1940. The first possible recognition event for any taxpayer under this provision would thus be December 31, 2030.

Certain exclusions would apply. 

• Transfers to charity. Transfers by a decedent to a U.S. spouse or to charity would carry over the basis of the decedent. Capital gain would not be recognized until the surviving spouse disposes of the asset or dies, and appreciated property transferred to charity would not generate a taxable capital gain. The transfer of appreciated assets to a split-interest trust would generate a taxable capital gain, with an exclusion allowed for the charity's share of the gain based on the charity's share of the value transferred as determined for gift or estate tax purposes.

• Tangible property and principal residence. The proposal would exclude from recognition any gain on tangible personal property such as household furnishings and personal effects (excluding collectibles). The $250,000 per-person exclusion under current law for capital gain on a principal residence would apply to all residences and would be portable to the decedent's surviving spouse, making the exclusion effectively $500,000 per couple.

• Small business stock. The exclusion under current law for capital gain on certain small business stock under Code Sec. 1202 would also apply.

• New $1 million exclusion. In addition to the above exclusions, the proposal would allow a $1 million per-person exclusion from recognition of other unrealized capital gains on property transferred by gift or held at death.

• The per-person exclusion would be indexed for inflation after 2022 and would be portable to the decedent's surviving spouse under the same rules that apply to portability for estate and gift tax purposes (making the exclusion effectively $2 million per married couple). 
  
  The recipient's basis in property received by reason of the decedent's death would be the property's fair market value at the decedent's death. The same basis rule would apply to the donee of gifted property to the extent the unrealized gain on that property at the time of the gift was not shielded from being a recognition event by the donor's $1 million exclusion. However, the donee's basis in property received by gift during the donor's life would be the donor's basis in that property at the time of the gift to the extent that the unrealized gain on that property counted against the donor's $1 million exclusion from recognition. 

• Family owned and operated businesses. Payment of tax on the appreciation of certain family-owned and operated businesses would not be due until the interest in the business is sold or the business ceases to be family-owned and operated.

• 15-year payment plan. The proposal would allow a 15-year fixed-rate payment plan for the tax on appreciated assets transferred at death, other than liquid assets such as publicly traded financial assets and other than businesses for which the deferral election is made. The IRS would be authorized to require security at any time when there is a reasonable need for security to continue this deferral. That security may be provided from any person, and in any form, deemed acceptable by the IRS.

To facilitate the transition to taxing gains at gift, death and periodically under this proposal, the IRS would be granted authority to issue any regs necessary or appropriate to implement the proposal, including rules and safe harbors for determining the basis of assets in cases where complete records are unavailable, and reporting requirements for all transfers of appreciated property including value and basis information.

Proposed effective date. The proposal would be effective for gains on property transferred by gift, and on property owned at death by decedents dying, after December 31, 2021, and on certain property owned by trusts, partnerships, and other non-corporate entities on January 1, 2022.

References: For capital gain taxation, in general, see FTC 2d/FIN ¶I-1000 et seq. For basis of property acquired from a decedent, see FTC 2d/FIN ¶P-4000.

Tax Season 2020 – Thanks!

We want to thank all of our clients for continuing with us for 2020. It was the most “interesting” tax season in 40 years. It was the first time that the tax laws were changed during tax season and the changes were extensive.

Here is a Federal legislation summary for 1/1/2020 to March 31, 2021:

Coronavirus Preparedness & Response Act (3/6/2020) 13 pages

Families First Coronavirus Relief Act (3/18/2020) 44 pages

CARES Act (3/27/2020) 335 pages

Paycheck Protection Program Act (04/24/2020) 12 pages

Consolidated Appropriations Act (12/27/2020) 2124 pages

American Rescue Plan Act (3/11/2021) 242 pages

Let’s see then, 6 laws, thousands of pages, multiple retroactive changes and multiple wide-ranging changes occurring during the middle of filing season. 

No wonder why CPAs had headaches!

Unemployment Benefits Taxable – Guidance from IRS – Update 10-26-20

IR-2020-185, August 18, 2020

WASHINGTON — With millions of Americans now receiving taxable unemployment compensation, many of them for the first time, the Internal Revenue Service today reminded people receiving unemployment compensation that they can have tax withheld from their benefits now to help avoid owing taxes on this income when they file their federal income tax return next year.

By law, unemployment compensation is taxable and must be reported on a 2020 federal income tax return. Taxable benefits include any of the special unemployment compensation authorized under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, enacted this spring.

Withholding is voluntary. Federal law allows any recipient to choose to have a flat 10% withheld from their benefits to cover part or all of their tax liability. To do that, fill out Form W-4V, Voluntary Withholding Request PDF, and give it to the agency paying the benefits. Don’t send it to the IRS. If the payor has its own withholding request form, use it instead.

If a recipient doesn’t choose withholding, or if withholding is not enough, they can make quarterly estimated tax payments instead. The payment for the first two quarters of 2020 was due on July 15. Third and fourth quarter payments are due on September 15, 2020, and January 15, 2021, respectively. For more information, including some helpful worksheets, see Form 1040-ES and Publication 505, available on IRS.gov.

Small Business Assistance – Guidance from Treasury Dept. – Update 4-3-20

For more information on the Paycheck Protection Program follow this link to the Department of the Treasury website. Click Here

No “Simple Return” Required – Update 4-2-20

From an IRS news release today:

“We want to ensure that our senior citizens, individuals with disabilities, and low-income Americans receive Economic Impact Payments quickly and without undue burden,” said Secretary Steven T. Mnuchin. “Social Security recipients who are not typically required to file a tax return need to take no action.

Coronavirus Economic Impact Payments – Update 4-1-20

This is from the IRS website, 4/1/20. We do not yet have any guidance on what a “simple return” looks like how it will be filed. This site will be updated as soon as information becomes available.

Check IRS.gov for the latest information: No action needed by most people at this time
IR-2020-61, March 30, 2020

WASHINGTON — The Treasury Department and the Internal Revenue Service today announced that distribution of economic impact payments will begin in the next three weeks and will be distributed automatically, with no action required for most people. However, some seniors and others who typically do not file returns will need to submit a simple tax return to receive the stimulus payment.

Who is eligible for the economic impact payment?

Tax filers with adjusted gross income up to $75,000 for individuals and up to $150,000 for married couples filing joint returns will receive the full payment. For filers with income above those amounts, the payment amount is reduced by $5 for each $100 above the $75,000/$150,000 thresholds. Single filers with income exceeding $99,000 and $198,000 for joint filers with no children are not eligible.

Eligible taxpayers who filed tax returns for either 2019 or 2018 will automatically receive an economic impact payment of up to $1,200 for individuals or $2,400 for married couples. Parents also receive $500 for each qualifying child.

How will the IRS know where to send my payment?

The vast majority of people do not need to take any action. The IRS will calculate and automatically send the economic impact payment to those eligible.

For people who have already filed their 2019 tax returns, the IRS will use this information to calculate the payment amount. For those who have not yet filed their return for 2019, the IRS will use information from their 2018 tax filing to calculate the payment. The economic impact payment will be deposited directly into the same banking account reflected on the return filed.

The IRS does not have my direct deposit information. What can I do?

In the coming weeks, Treasury plans to develop a web-based portal for individuals to provide their banking information to the IRS online, so that individuals can receive payments immediately as opposed to checks in the mail.

I am not typically required to file a tax return. Can I still receive my payment?

Yes. People who typically do not file a tax return will need to file a simple tax return to receive an economic impact payment. Low-income taxpayers, senior citizens, Social Security recipients, some veterans and individuals with disabilities who are otherwise not required to file a tax return will not owe tax.

How can I file the tax return needed to receive my economic impact payment?

IRS.gov/coronavirus will soon provide information instructing people in these groups on how to file a 2019 tax return with simple, but necessary, information including their filing status, number of dependents and direct deposit bank account information.

I have not filed my tax return for 2018 or 2019. Can I still receive an economic impact payment?

Yes. The IRS urges anyone with a tax filing obligation who has not yet filed a tax return for 2018 or 2019 to file as soon as they can to receive an economic impact payment. Taxpayers should include direct deposit banking information on the return.

I need to file a tax return. How long are the economic impact payments available?

For those concerned about visiting a tax professional or local community organization in person to get help with a tax return, these economic impact payments will be available throughout the rest of 2020.

Where can I get more information?

The IRS will post all key information on IRS.gov/coronavirus as soon as it becomes available.

The IRS has a reduced staff in many of its offices but remains committed to helping eligible individuals receive their payments expeditiously. Check for updated information on IRS.gov/coronavirus rather than calling IRS assistors who are helping process 2019 returns.

 

Coronavirus Update – March 27, 2020

This update is current as of today, 3/27/2020. New Mexico has published three news releases to give taxpayers guidance regarding their response to the coronavirus. As of today, many states have issued news releases. We prepare tax returns for states. Call our office if you have state specific questions.

New Mexico’s filing extensions do not apply to gross receipts tax.

The New Mexico Taxation and Revenue Department (TRD) recently announced extension due dates for personal, fiduciary and corporate tax returns, return payments and estimated payments, with a filing or payment due date of April 15, 2020 being postponed to July 15, 2020. The TRD has now issued further guidance to let taxpayers know that the extensions do not apply to gross receipts tax, governmental gross receipts tax, compensating tax, leasehold vehicle gross receipts, and leased vehicle surcharge (reporting using CRS). Affected taxpayers do not have to call or write in to the TRD as it is working on making system changes to reflect the extensions. (New Mexico Bulletin 100.35, 03/25/2020.)

New Mexico income tax extensions will not trigger interest charges.

The Taxation and Revenue Department announced on March 25 that due to recent IRS action, it will not have to impose interest charges on taxpayers who take advantage of the 90-day extensions announced last week for filing and paying New Mexico personal and corporate income taxes. However, interest will need to accrue on withholding tax extensions. The Department also clarified that the extensions apply to the quarterly personal income tax estimated payments required of some taxpayers on April 15, which includes many self-employed New Mexicans, as well as to trusts, estates, and fiduciaries. All of these will now be due no later than July 15, 2020. No penalties or interest will be assessed on income tax payments normally due on April 15 as long as payment is received by July 15. Payments normally due on later dates will incur interest charges but not penalties. The state also extended deadlines to remit withholding taxes. Withholding filings that would normally be due March 25, April 25, May 25, and June 25 will instead be due on July 25. No penalties will be assessed on businesses that take advantage of the withholding extension. However, under New Mexico law, interest will accrue from the original due date. (News release, 03/25/2020.)

New Mexico extends income and payroll tax deadlines.

New Mexico’s Governor has announced that New Mexicans will have an extra 90 days to file and pay their 2019 personal income taxes in recognition of the economic hardships caused by the coronavirus (COVID-19) pandemic. Taxpayers will have until July 15 to file and pay any taxes due. The deadline for corporate income taxes also will be extended until July 15. In addition, New Mexico is extending deadlines for employers to remit withholding taxes. Taxpayers who elect to take advantage of the income tax extensions will not be assessed penalties as long as payment is received by July 15, 2020. Under New Mexico law, however, interest will accrue on any unpaid balances from April 15 forward. (News release, 03/20/2020.)

Coronavirus Update – March 20, 2020

This update is current as of today, 3/25/2020. This area of tax law continues to change. It is also important to note that, as of now, no official notices from IRS or states have been received.
Today, 3/20/20, Treasury Secretary Mnuchin announced that the tax filing deadline for 2019 returns has been extended to July 15, 2020.

We do not know which states will conform to these changes. We continue to monitor professional sources of tax information and will update this website as authoritative information becomes available.

Since many taxpayers expect refunds, it is recommended that they file as soon as they can. Even for those taxpayers that expect to owe tax, early preparation of their returns gives them time to plan for payment of the tax.

Please call our office with questions.

Coronavirus Update – March 18, 2020

This update is current as of today, 3/18/2020. Needless to say, this area of tax law is continually evolving. It is also important to note that, as of now, no official notices from IRS or states have been received.

We understand Secretary Mnuchin’s announcement to mean:
• The individual filing deadline continues to be April 15, 2020
• Those who cannot file by April 15th need to get an extension.
• Individual and Corporate taxpayers can defer tax due payments interest and penalty free for 90 days after April 15th.

At this time, there is no official guidance regarding 2020 estimated tax payment due dates.

It is unclear which states will follow the federal guidelines. As of now:
California has announced an extension to file and pay individual returns until June 15, 2020 and the April quarterly estimates will also be due June 15th.
Connecticut, Indiana, Maryland, Massachusetts, and Oregon have agreed to followed federal guidelines for individuals.

Again, these guidelines are constantly evolving. We will update this Tax Note as more information becomes available.

New Mexico Sales Tax Changes – effective July 1, 2019

Tax Type(s): Cigarette, Alcohol & Miscellaneous Taxes, Sales and Use Tax
Several Changes to New Mexico Tax Law Effective July 1, 2019
Starting July 1, taxpayers will see some important changes to New Mexico tax laws intended to level certain playing fields and raise revenue for critical needs such as road repairs.
Most of the changes were included in House Bill 6, which was sponsored by Reps. Jim Trujillo, Sheryl Williams Stapleton, Javier Martinez, Susan K. Herrera, and Antonio “Moe” Maestas and signed into law by Gov. Michelle Lujan Grisham.

Perhaps the largest change will be for businesses outside of the state that sell to New Mexicans over the internet. Businesses with $100,000 in sales or more in the preceding calendar year to New Mexico buy-ers will now be required to pay gross receipts taxes. Collecting GRT from out-of-state internet sellers will raise about $43 million for the state General Fund in the coming fiscal year. New Mexico is one of many states rolling out taxes on internet-based sales in the wake of a 2018 Supreme Court decision making clear that they are legal.

“Extending gross receipts taxes to e-commerce businesses that don’t have a physical presence here eliminates an unfair competitive advantage those companies enjoyed at the expense of homegrown, New Mexico-based businesses,” said Taxation and Revenue Secretary Stephanie Schardin Clarke. “It is an im-portant move that will also ensure the State’s revenues will grow along with the economy and the need for public services into the future.”

Starting July 1, 2019, businesses subject to the new collections will pay only the statewide GRT rate of 5.125 percent. Starting July 1, 2021, those businesses will also be required to collect city and county GRT in-crements based on sale destinations. In the two-year interim before city and county taxes are collected, those local governments will share a $24 million annual appropriation from the General Fund, apportioned to each entity by population.

Other changes taking effect July 1 include:

An increase in the Motor Vehicle Excise Tax from 3% to 4%. The increase is effective for any motor vehicles purchased on July 1, 2019 or later. Vehicles purchased before that date, even if titled and registered afterward, will be subject to the 3% tax. Revenue from this increase will make $52 million annually available for roads and bridges, including improvements to address emergency road conditions present in southeast-ern New Mexico’s Permian basin.

Non-profit and governmental hospitals will now collect tax on sales and services, bringing them in line with similar for-profit hospitals. All hospitals will be eligible to deduct an additional 60% of receipts after all other eligible exemptions and deductions have been taken. The move will raise a total of $93 million per year for the General Fund.

Taxes on cigarettes will increase from $1.66 per pack to $2 per pack. Cigars will be taxed at 50 cents each or 25 percent of wholesale/manufacturer value, whichever is lower.
E-cigarette liquid will now be subject to a 12.5% tax on the wholesale/manufacturer value. So-called “closed system” cartridges, such as Juul pods, will be taxed at 50 cents each.

Taken from RIA Checkpoint©2019 Thomson Reuters/Tax & Accounting. All Rights Reserved. Retrieved from checkpoint.riag.com on 7-10-19

Government Shutdown – IRS Plan – Update January 16, 2019

As our congressmen and senators continue to squabble rather than govern, IRS has issued an updated version of its government shutdown contingency plan for the 2019 tax season. It includes the call back to service of 46,052 of IRS’s 80,265 employees.
IRS contingency plans, generally. IRS has a contingency plan that it updates annually. The plan, called the IRS Lapse in Appropriations Contingency Plan, describes actions and activities for the first five business days following a lapse in appropriations. It also provides that, in the event the lapse extends beyond five business days, as is the current case, the Deputy Commissioner for Operations Support will direct the IRS Human Capital Officer to reassess ongoing activities and identify necessary adjustments of excepted positions and personnel.
Employees needed. Of the 46,052 employees, the plan contemplates that there will be:
• 346 employees in the Chief Counsel’s office. Chief Counsel’s primary responsibility during a lapse is to manage pending litigation, the time-sensitive filing of motions, briefs, answers and other pleadings related to the protection of the government’s material interests.
• 9 employees in the Return Preparers office.
• 163 employees in the Large Business and International (LB&I) division. With limited exceptions, these employees will be on “on call”.
• 2,938 employees in the Small Business/Self-Employed (SBSE) division, of which 2,614 will be in Collection and 264 will be in Examination.
Tax Cuts and Jobs Act funding. IRS’s plan notes that, in enacting the Tax Cuts and Jobs Act (P.L. 115-97, 2017), Congress provided the Treasury Department with funds that will remain available until September 30, 2019. Thus, some implementation activities would not be affected by a lapse in appropriations in Fiscal Year 2019.
Effecting the plan. This plan will become effective after IRS receives official notification from the Department of the Treasury. (From RIA Checkpoint – Newsstand 1-16-19)

Tax Cuts & Jobs Act – Qualified Business Income Deduction – Update January 15, 2019

One of the largest benefits to small business owners is the qualified Business Income Deduction (QBID). This significant new tax deduction takes effect in 2018 and provides a substantial tax benefit to individuals with “qualified business income” from a partnership, S corporation, LLC, or sole proprietorship. This income is sometimes referred to as “pass-through” income. The QBID replaces the Domestic Production Activities Deduction and offers significantly greater benefits to taxpayers.
The deduction is generally equal to 20% of your “qualified business income” (QBI) from a partnership, S corporation, or sole proprietorship, defined as the net amount of items of income, gain, deduction, and loss with respect to your trade or business. The business must be conducted within the U.S. to qualify, and specified investment-related items are not included, e.g., capital gains or losses, dividends, and interest income (unless the interest is properly allocable to the business). The trade or business of being an employee does not qualify. Also, QBI does not include reasonable compensation received from an S corporation, or a guaranteed payment received from a partnership for services provided to a partnership’s business.
The deduction is taken “below the line,” i.e., it reduces your taxable income but not your adjusted gross income. But it is available regardless of whether you itemize deductions or take the standard deduction. In general, the deduction cannot exceed 20% of the excess of your taxable income over net capital gain. If QBI is less than zero it is treated as a loss from a qualified business in the following year.
Rules are in place (discussed below) to deter high-income taxpayers from attempting to convert wages or other compensation for personal services into income eligible for the deduction.
These rules involve “thresholds,” i.e. taxable income of over $157,500 ($315,000 for joint filers). If your taxable income is at least $50,000 above the threshold, i.e., it is at least $207,500 ($157,500 + $50,000), all of the net income from a specified service trade or business is excluded from QBI. (Joint filers would use an amount $100,000 above the $315,000 threshold, viz., $415,000.) For taxable incomes that are between the threshold amounts and the $207,500/$415,000 amounts, the exclusion from QBI of income from specified service trades or businesses is phased in. Specified service trades or businesses are trades or businesses involving the performance of services in the fields of health, law, consulting, athletics, financial or brokerage services, or where the principal asset is the reputation or skill of one or more employees or owners.
Additionally, for taxpayers with taxable income more than the above thresholds, there is a limitation on the amount of the deduction that is based either on wages paid or wages paid plus a capital element. Here’s how it works: If your taxable income is at least $207,500 ($415,000 for joint filers), your deduction for QBI cannot exceed the greater of (1) 50% of your allocable share of the W-2 wages paid with respect to the qualified trade or business, or (2) the sum of 25% of such wages plus 2.5% of the unadjusted basis immediately after acquisition of tangible depreciable property used in the business (including real estate). For taxable incomes that are between the threshold amounts and the $207,500/$415,000 amounts, a phase-in of the limitation applies.
Other limitations may apply in certain circumstances, e.g., for taxpayers with qualified cooperative dividends, qualified real estate investment trust (REIT) dividends, or income from publicly traded partnerships.
Obviously, the complexities surrounding this substantial new deduction can be formidable, especially if your taxable income exceeds the thresholds discussed above. If you wish to work through the mechanics of the deduction with me, with particular attention to the impact it can have on your specific situation, please give me a call.

Tax Cuts & Jobs Act – Qualified Business Income Deduction – Update January 30, 2018

The Tax Cuts and Jobs Act includes a significant new tax deduction taking effect in 2018. It should provide a substantial tax benefit to individuals with “qualified business income” from a partnership, S corporation, LLC, or sole proprietorship. This income is sometimes referred to as “pass-through” income.
The deduction is generally equal to 20% of your “qualified business income” (QBI) from a partnership, S corporation, or sole proprietorship, defined as the net amount of items of income, gain, deduction, and loss with respect to your trade or business. The business must be conducted within the U. S. to qualify, and specified investment-related items are not included, e.g., capital gains or losses, dividends, and interest income (unless the interest is properly allocable to the business). The trade or business of being an employee does not qualify. Also, QBI does not include reasonable compensation received from an S corporation, or a guaranteed payment received from a partnership for services provided to a partnership’s business.
The deduction is taken “below the line,” i.e., it reduces your taxable income but not your adjusted gross income. But it is available regardless of whether you itemize deductions or take the standard deduction. In general, the deduction cannot exceed 20% of the excess of your taxable income over net capital gain. If QBI is less than zero it is treated as a loss from a qualified business in the following year.
Rules are in place (discussed below) to deter high-income taxpayers from attempting to convert wages or other compensation for personal services into income eligible for the deduction.
These rules involve “thresholds,” i.e. taxable income of over $157,500 ($315,000 for joint filers). If your taxable income is at least $50,000 above the threshold, i.e., it is at least $207,500 ($157,500 + $50,000), all of the net income from a specified service trade or business is excluded from QBI. (Joint filers would use an amount $100,000 above the $315,000 threshold, viz., $415,000.) For taxable incomes that are between the threshold amounts and the $207,500/$415,000 amounts, the exclusion from QBI of income from specified service trades or businesses is phased in. Specified service trades or businesses are trades or businesses involving the performance of services in the fields of health, law, consulting, athletics, financial or brokerage services, or where the principal asset is the reputation or skill of one or more employees or owners.
Additionally, for taxpayers with taxable income more than the above thresholds, there is a limitation on the amount of the deduction that is based either on wages paid or wages paid plus a capital element. Here’s how it works: If your taxable income is at least $207,500 ($415,000 for joint filers), your deduction for QBI cannot exceed the greater of (1) 50% of your allocable share of the W-2 wages paid with respect to the qualified trade or business, or (2) the sum of 25% of such wages plus 2.5% of the unadjusted basis immediately after acquisition of tangible depreciable property used in the business (including real estate). For taxable incomes that are between the threshold amounts and the $207,500/$415,000 amounts, a phase-in of the limitation applies.
Other limitations may apply in certain circumstances, e.g., for taxpayers with qualified cooperative dividends, qualified real estate investment trust (REIT) dividends, or income from publicly traded partnerships.
Obviously, the complexities surrounding this substantial new deduction can be formidable, especially if your taxable income exceeds the thresholds discussed above. If you wish to work through the mechanics of the deduction with me, with particular attention to the impact it can have on your specific situation, please give me a call.

Tax Cuts & Jobs Act – Update January 4, 2018

On December 22, 2017, President Trump signed the Tax Cut and Jobs Act (the Act). It is the most comprehensive tax “reform” since the 1986 Tax Act.

The Act makes significant changes to both individual and business taxation and the provisions are complex, confusing, and inter-connected. At this early date (January 4, 2018), the accounting profession is just starting to come to grips with the ramifications of the law and how it will affect clients in 2017, 2018, and later years.

During my professional career, I remember the 1976, 1981, and 1986 tax acts in addition to this one. None of the previous acts had as much wide-spread media mis-information as this one. Virtually every one of the scare tactic predictions are NOT included in the actual act. One colleague (a nationally known tax educator and speaker) sampled 20 of his clients and found that, in all cases, the taxpayers paid less tax under the new act than the existing 2017 tax laws.

That being said, one of the certainties of the Act is that it is complex. That complexity makes generalizations impossible. Each individual must apply the new law to their unique circumstances to determine how it will affect them. The good news is that it is early in 2018 and we all have time to understand the changes to the laws and how to legally apply those changes to benefit our clients.

Unless you have simplest return, seeking the advice of a tax professional is needed. The Act is so complex that the simple “online interview” and “check the box” preparation method used by various off-the-shelf tax preparation softwares is likely to lead to an unexpected result. In one interesting 2017 tax court case (Bulakites TC Memo 2017-79), the taxpayer argued that he followed the Turbo Tax instructions to prepare his return and, therefore, he used due diligence and should have the penalties caused by his errors abated. The judge had no patience for this argument and the taxpayer ended up paying both the penalties and court costs.

This is the first of several updates that will explain the various provisions of the Act. It gives an overview of the Act as it applies to individuals. Each of these topics will be expanded as time goes on.

Tax Rates & Brackets
The tax rates are effective starting in 2018 (tax returns filed by April 15, 2019 have been lowered and the brackets expanded. The net effect is that a larger proportion of taxable income will be taxed at lower rates.

Standard Deductions
The standard deductions for 2018 have been almost doubled over the amount in 2017 ($12K for single and $24K for married couples filing joint returns). Based on this a larger proportion of taxpayers will be able to use the standard deduction. Except for those taxpayers with significant itemized deductions, this change will lower taxable income.

Itemized Deductions & Charitable Contributions
Many itemized deductions have been repealed and others changed. Since charitable contributions have been subject to so much media mis-information, I will talk about them first. Under current law (2017), taxpayers cannot (generally) deduct charitable contributions in excess of 50% of their adjusted gross income. Starting in 2018, that limit is increased to 60%. That is an increase of the allowed deduction.
The confusion is caused by the increased standard deduction. Taxpayers who make moderate charitable contributions AND who used itemized deductions in 2017 may find that the increased standard deduction in 2018 is more advantageous. They will not deduct their contributions as part of their itemized deductions because using the standard deduction will reduce their taxes overall. Taxpayers that continue to itemize will still be able to deduct charitable contributions.

Medical Deductions
The floor (that amount that medical deductions needs to exceed to lower taxable income) has been reduced back to 7.5%. This will increase the medical deduction for all taxpayers who itemize.

Mortgage Interest
Mortgage interest is still deductible for first mortgages of $750,000 or less but the $100,000 home equity loan deduction has been repealed. This is a planning opportunity for 2018.

State and Local Income and Property Taxes
The income and property tax deduction is limited to $10,000. The effects of this provision on taxable income, too, must be considered in light of the increased standard deduction. Each individual needs to see how this change will affect their tax return.

Miscellaneous Itemized Deductions
This deduction, which very few of our clients could use anyway, has been repealed for 2018 and later years.

Personal Exemptions
The personal exemption has been repealed. It would appear that this repeal hurts young families with many children. As with all of this Act, that is too simple an answer. Both the increased standard deduction (above) and the increased Child Credit (below) will offset the loss of personal exemptions.

Child Credit
For 2017, the child credit (not a deduction but a reduction in the amount of tax) was $1,000. For 2018, that amount is doubled to $2,000. To see how this will work (using estimated amounts and round numbers), presume we have a married couple with 2 children for both 2017 & 2018. For both years, they use the standard deduction.

For 2018, they will lose their personal exemptions (4K x 4) for a $16K increase in taxable income. However, at the same time, their standard deduction increased by $12K. At this point, their taxable income has increased $4K.

If they were in the 25% tax bracket in 2017, that increased taxable income would result in an increase in tax of $1,000 (25% of $4K). However, for 2018, they would have an increased child credit of $2,000 ($1,000 for each child). When all the dust settles, their tax is reduced in 2018 by $1,000.

Education Credits
Contrary to many media reports the HOPE and Lifetime learning Credits were not repealed.

Alimony
Starting in 2018 alimony paid is no longer deductible and, at the same time, alimony received is no longer taxable. Since both the payer and recipient are treated equally, this provision seems fair to us.

New Qualified Business Income Deduction (QBID)
Starting in 2018, individual taxpayers who receive “pass-through income” will be able to take a 20% of pass-through income deduction.
This deduction will be the subject of a future update. It is complicated and limited by the amount of income, wages paid, and equipment used. In spite of the complication, it will benefit many small business owners particularly those who operate family businesses.

Summary
This short update covers many of the provisions of the Act that have received the most attention. As weeks go by, we will focus more deeply on these and other provisions.

Tax Reform – President’s Tax Plan – Update – 5-25-17

We are beginning to get some information about President Trump’s proposed tax changes.  These changes have a long way to go before they become law and no one, at this point, knows what the new law will look like.

However, these few notes will give you an idea of the direction the President is taking.

Tax rates for regular C corporations will be reduced from 35% to 15% and a new 15% tax will be added for certain S Corporation and Limited Liability Company income.  The idea here is to make American business more competitive.  Although many pundits don’t report this, remember that you really cannot tax a business.  The funds businesses use to pay taxes come from increased prices to us – the consumer. In the end, we end up paying the business’ taxes and our personal taxes too. So, in this accountant’s opinion, reducing corporate taxation is likely to make our American corporations more competitive and increase employment in the US – both desirable results.

For individuals, the standard deduction will be increased to $24,000 for married individuals filing joint returns, the alternative minimum tax will be repealed (more below), the credit for child care expenses will  be increased (about time), and the 3.8% investment income tax will (finally) be eliminated.

The Alternative minimum Tax (AMT) has been one of the most unfair taxes I have encountered in my entire career. It was originally enacted to assure that everyone paid ‘some’ tax and to keep certain targeted taxpayers from taking advantage of items called “tax preferences”.  Over the years, the AMT has ended up targeting middle income taxpayers (typically two earner married couples).  To compute the AMT, you compute your regular taxable income and then your alternative minimum taxable income (the regular income with many deductions added back in) and pay tax  on the HIGHER of regular or alternative minimum taxable income. The AMT has turned out to be a penalty tax for those skilled workers who are the backbone of the American economy and should be repealed once and for all.

We’ll continue posting updates as more information become available.

Tax Reform – “A Better Way” – Update – 5-23-17

Tax reform is on the horizon and it will affect all taxpayers from those who file simple short-form returns to those who operate large multi-location businesses.  We have been experiencing the effects of the budget cuts on the Internal Revenue Service’s ability to provide services in a timely manner.  The National Taxpayer Advocate is your voice to the IRS.  Here is a statement from  Nina Olson, National Taxpayer Advocate.

Statement of Nina E. Olson, National Taxpayer Advocate, before the Subcommittee on Oversight (May 19, 2017)

On May 19, National Taxpayer Advocate Nina Olson testified before the Ways and Means Oversight Subcommittee on proposals to reform IRS operations in “A Better Way”, the House Republican tax reform blueprint (the Blueprint).

Ms. Olson began her testimony by commending the subcommittee for its plans to “take a hard look at IRS priorities and operations”, noting that it has been almost 20 years since the enactment of significant legislation to improve tax administration and strengthen taxpayer rights—and that a lot has changed in that time.

She noted that the Blueprint is a “general document” that doesn’t clearly state what changes are contemplated or their reach. She further cautioned that, given the size and complexity of IRS, “well-intentioned proposals can often have unintended consequences” and stressed the importance of thoroughly vetting potential changes prior to implementation.

The Blueprint identified problems at IRS, which Ms. Olson addressed as follows:

• Poor customer service levels. Ms. Olson encouraged the subcommittee to focus not just on the percentage of calls that IRS answers but also “the range of services we want the tax administrator to provide”. She noted that IRS “today answers only “basic” tax-law questions during the filing season, and it does not answer any tax-law questions at all during the other 8 1/2 months of the year”. She opined that answering most tax-law questions would reduce taxpayer burden and improve compliance, stating that it “is a central function of a tax administration agency to help taxpayers understand what the law requires of them”. She also said that, instead of centralizing its operations and closing taxpayer assistance centers, IRS should “maintain a more robust presence in local communities”.

• Civil asset forfeiture policies. Ms. Olson agreed that IRS’s Criminal Investigation function (CI) should generally pursue only illegal-source structuring violations and applauded IRS for deciding generally to no longer pursue legal-source structuring cases. Structuring involves manipulating cash transactions in order to avoid certain reporting requirements; and legal-source structuring means that the funds themselves come from a legal activity. She also shared the concern of subcommittee members that CI shouldn’t threaten taxpayers with the possibility of criminal prosecution as a way to get them to agree to excessive civil penalties, noting that such practice goes beyond structuring cases (e.g., in the offshore voluntary disclosure program, where certain taxpayers felt the penalties were excessive and wanted to opt out of the program but feared criminal charges). Finally, she noted that CI has taken the position that it is subject to the Taxpayer Bill of Rights only when it investigates cases under the Code, explained why she considers that position problematic, and encouraged Congress to clarify that, except in “explicitly-stated extraordinary circumstances”, all IRS employees must act in accord with taxpayer rights.

• Excessive improper EITC payments. Ms. Olson acknowledged the “relatively high improper payments rate” for Earned Income Tax Credits (EITCs), but observed that, taking into account the administrative costs of the program—notably, the lack of pre-payment eligibility verification costs—the “overall costs” of the program fall “in the middle of the pack of social benefits programs”. She also advocated bifurcating the existing credit into a Worker Credit and a Family Credit, stating that such would simplify compliance burdens and substantially reduce the improper payment rate.

• Outdated IT systems. Ms. Olson agreed that IRS’s outdated information technology (IT) systems “substantially limit” IRS’s efficiency and its ability to meet taxpayers’ needs. She said that IRS’s IT systems are “a top priority and will continue to be so for the foreseeable future”.
The Blueprint, after identifying these problems, proposes to restructure IRS by creating three major units:
1. Families and individuals;
2. Businesses; and
3. Dispute resolution through an independent “small claims court” that “will allow routine disputes to be resolved more quickly, so that small businesses no longer spend more in legal fees to resolve a dispute with the IRS than the amount of tax that was at stake”.
Ms. Olson noted that an independent dispute resolution mechanism is central to effective tax administration. She opined that IRS’s Office of Appeals was intended to provide that function but has unfortunately fallen short, in that it is viewed as not truly independent and not user-friendly. She noted that, while it’s important for small businesses to be able to access independent dispute resolution, it’s important for individual taxpayers to have similar access—something that the Blueprint doesn’t clearly provide. She advised Congress to instead “assess the strengths and weakness” of Appeals and make changes to improve it.

New Overtime Rules – Breaking News – 11-30-16

The new overtime rules that affect millions of workers and that were scheduled to take affect tomorrow, December 1, 2016, have been blocked by a preliminary injunction issued by U.S District Court Judge Amos Mazzant in Texas. That means that employers are NOT required to make any changes in their payroll at this time. This rule applies to all states. We can expect the injunction to be lifted when the existing litigation brought by 21 states and the US Chamber of Commerce is resolved.

IRA Rollover – 60 Day Rule – No Exception – 6-29-16

You can take funds from IRA and use them for whatever you want BUT to avoid tax and penalties on those funds, they must be rolled over into another IRA or Qualified Plan within 60 days. From IRS Private Letter Ruling 201625022:

Background. There is no immediate tax if distributions from an IRA are rolled over to an IRA or other eligible retirement plan (i.e., qualified trust, governmental Code Sec. 457 plan, Code Sec. 403(a) annuity and Code Sec. 403(b) tax-shelter annuity). For the rollover to be tax-free, the amount distributed from the IRA generally must be recontributed to the IRA or other eligible retirement plan no later than 60 days after the date that the taxpayer received the withdrawal from the IRA. (Code Sec. 408(d)(3)) A distribution rolled over after the 60-day period generally will be taxed (and also may be subject to a 10% premature withdrawal penalty tax). (Code Sec. 72(t)) Only one tax-free IRA-to-IRA rollover per IRA account can be made within a one-year period. (Code Sec. 408(d)(3)(B))
IRS may waive the 60-day rule if an individual suffers a casualty, disaster, or other event beyond his reasonable control, and not waiving the 60-day rule would be against equity or good conscience (i.e., hardship waiver). (Code Sec. 408(d)(3)(I))

IRS will consider several factors in determining whether to waive the 60-day rollover requirement, including time elapsed since the distribution and inability to complete the rollover due to death, disability, hospitalization, incarceration, restrictions imposed by a foreign country, postal error, errors committed by a financial institution, etc. (Rev Proc 2003-16, 2003-1 CB 359)

Facts. Early in 2015, Taxpayer’s daughter’s home was in foreclosure. On Apr. 8, 2015, Taxpayer and her spouse put their vacation home up for sale in order to raise funds to purchase their daughter’s home. Prior to the sale of their vacation home, in order to avert foreclosure, Taxpayer took a distribution from her IRA on Apr. 24, 2015. The distribution was used to purchase her daughter’s home on Apr. 27, 2015.
Taxpayer intended to redeposit the distributed amount into her IRA within the 60-day rollover period which ended on June 23, 2015. However, the sale of the vacation home was not completed until July 1, 2015, and Taxpayer didn’t have sufficient funds available during the 60-day period to complete the rollover. Taxpayer indicated that her spouse was willing to take a distribution from his IRA within the 60-day period to complete the rollover but that her medical condition prevented this from occurring. She attempted to complete the rollover once she received the funds from selling the vacation home, but the 60-day period had expired.

Taxpayer requested that IRS waive the 60-day requirement in Code Sec. 408(d)(3) with respect to the distribution.
Relief denied. IRS found that the documentation and materials submitted by Taxpayer did not demonstrate that her failure to complete a timely rollover was due to any of the factors enumerated in Rev Proc 2003-16. Although Taxpayer represented that her inability to complete a timely rollover was caused by her medical condition during the 60-day period, IRS was “not convinced” given her “continued work and travels”. IRS found that her failure to complete a timely rollover was instead due to her use of the funds as a short-term loan to purchase her daughter’s home, which left her unable to recontribute the amount to her IRA until after the sale of her vacation home was completed.

Foreign Bank Account Reporting Reminder – 6-24-16

IR-2016-90, June 17, 2016

WASHINGTON — The Internal Revenue Service today reminded taxpayers who have one or more bank or financial accounts located outside the United States, or signature authority over such accounts that they may need to file an FBAR by Thursday, June 30.

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

“Robust growth in FBAR filings in recent years shows we are getting the word out regarding the importance of offshore tax compliance,” said IRS Commissioner John Koskinen. “Taxpayers here and abroad should take their foreign account reporting obligations very seriously.”

In general, the filing requirement applies to anyone who had an interest in, or signature or other authority over foreign financial accounts whose aggregate value exceeded $10,000 at any time during 2015. Because of this threshold, the IRS encourages taxpayers with foreign assets, even relatively small ones, to check if this filing requirement applies to them. The form is only available through the BSA E-Filing System website.

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

The IRS is implementing the Foreign Account Tax Compliance Act (FATCA), which mandates third-party reporting of foreign accounts to foster offshore tax compliance. FATCA created a new filing requirement: IRS Form 8938, Statement of Specified Foreign Financial Assets, which is filed with individual tax returns. The filing thresholds are much higher for this form than for the FBAR.

The International Taxpayers page on IRS.gov provides the best starting place to get answers to important questions. The website has a directory that includes overseas tax preparers. International taxpayers will find the online IRS Tax Map and the International Tax Topic Index to be valuable resources.

Another Tax Scam – The Student Tax – 6-1-16

The scammers are continuing to call taxpayers with threats so that they can get immediate payment of made up tax bills. Do NOT fall for these scams. IRS will NOT call you with demands for immediate credit card information over the phone. This is from IRS notice 2016-81. Please read this one carefully and don’t get scammed! At the bottom of this notice is information on how to report suspected scammers.  If you are contacted by IRS, call us – we can help.

IRS Warns of Latest Scam Variation Involving Bogus “Federal Student Tax”

IR-2016-81, May 27, 2016

WASHINGTON — The Internal Revenue Service today issued a warning to taxpayers about bogus phone calls from IRS impersonators demanding payment for a non-existent tax, the “Federal Student Tax.”

Even though the tax deadline has come and gone, scammers continue to use varied strategies to trick people, in this case students. In this newest twist, they try to convince people to wire money immediately to the scammer. If the victim does not fall quickly enough for this fake “federal student tax”, the scammer threatens to report the student to the police.

“These scams and schemes continue to evolve nationwide, and now they’re trying to trick students,” said IRS Commissioner John Koskinen. “Taxpayers should remain vigilant and not fall prey to these aggressive calls demanding immediate payment of a tax supposedly owed.”

Scam artists frequently masquerade as being from the IRS, a tax company and sometimes even a state revenue department. Many scammers use threats to intimidate and bully people into paying a tax bill. They may even threaten to arrest, deport or revoke the driver’s license of their victim if they don’t get the money.

Some examples of the varied tactics seen this year are:
•Demanding immediate tax payment for taxes owed on an iTunes gift card.
•Soliciting W-2 information from payroll and human resources professionals (IR-2016-34)
•“Verifying” tax return information over the phone (IR-2016-40)
•Pretending to be from the tax preparation industry (IR-2016-28)

The IRS urges taxpayers to stay vigilant against these calls and to know the telltale signs of a scam demanding payment.

The IRS Will Never:
•Call to demand immediate payment over the phone, nor will the agency call about taxes owed without first having mailed you a bill.
•Threaten to immediately bring in local police or other law-enforcement groups to have you arrested for not paying.
•Demand that you pay taxes without giving you the opportunity to question or appeal the amount they say you owe.
•Require you to use a specific payment method for your taxes, such as a prepaid debit card.
•Ask for credit or debit card numbers over the phone.

If you get a phone call from someone claiming to be from the IRS and asking for money and you don’t owe taxes, here’s what you should do:
•Do not give out any information. Hang up immediately.
•Contact TIGTA to report the call. Use their IRS Impersonation Scam Reporting web page or call 800-366-4484.
•Report it to the Federal Trade Commission by visiting FTC.gov and clicking on “File a Consumer Complaint.” Please add “IRS Telephone Scam” in the notes.
•If you think you might owe taxes, call the IRS directly at 1-800-829-1040.

More information on how to report phishing or phone scams is available on IRS.gov.

Good News for Small Charities – 5/31/16

For a small charity to become tax exempt under Internal Revenue Code Section 501(c)(3) and, thereby, be able to accept tax deductible donations, they need to file a form 1023 and include a user fee of $400. Effective July 1, 2016, that fee has been reduced to $275.
To learn more see Revenue Procedure 2016-32 in Internal Revenue Bulletin 2016-22 IRB 1019.

Trust Fund Recovery Penalty – Update – 5/20/16

Companies that withhold payroll taxes from employees and then do not pay those taxes to the government, are subject to the Trust Fund Recovery Penalty (called the “100% Penalty”).  IRS just released more guidance on that penalty.  This information is based on IRS Notice 784(https://www.irs.gov/pub/irs-pdf/n784.pdf), Could You be Personally Liable for Certain Unpaid Federal Taxes?

If you are in a situation where payroll taxes are not paid, call us. We can  help.

Notice 784, Could You be Personally Liable for Certain Unpaid Federal Taxes?

IRS has updated its webpage guidance on the trust fund recovery penalty and who IRS can reach to pay it. The guidance is a reminder for all potential “responsible persons” to make sure that timely payment of employment taxes is given the highest priority at any profit or nonprofit enterprise.

Background on trust fund recovery penalty. Code Sec. 6672 imposes the trust fund recovery penalty (also known as the 100% penalty) on any person who: (1) is responsible for collecting, accounting for, and paying over payroll taxes; and (2) willfully fails to perform this responsibility. It’s called the trust fund recovery penalty because responsible persons are treated as holding the withheld tax in trust until there’s a federal tax deposit of the amount. The amount of the penalty is equal to the amount of the tax that was not collected and paid.

What does “willfully” mean? According to IRS (as well as the courts), “willfully” means voluntarily, consciously, and intentionally. A responsible person acts willfully if he knows that the required actions are not taking place. Paying other business expenses, including paying net payroll, instead of paying trust fund taxes, is considered willful behavior.

IRS also says that for willfulness to exist, the responsible person:

• Must have been, or should have been, aware of the outstanding taxes; and
• Either intentionally disregarded the law or was plainly indifferent to its requirements (no evil intent or bad motive is required).

Who is a responsible person? A responsible person is a person or group of people who has the duty to perform and the power to direct the collecting, accounting, and paying of trust fund taxes.

According to IRS, this person may be:

• An officer or an employee of a corporation.
• A member or employee of a partnership.
• RIA observation: In Rev Rul 2004-41, 2004-18 IRB, IRS concluded that LLC members may be liable for the unpaid employment taxes under the Code Sec. 6672 trust fund recovery penalty rules.
• A corporate director or shareholder.
• A member of a board of trustees of a nonprofit organization.
• RIA observation: Code Sec. 6672(e) may provide taxpayers relief in certain cases. It provides that unpaid volunteer board members of tax-exempt organizations who are solely serving in an honorary capacity, aren’t involved in day-to-day financial activities, and don’t know about the penalized failure are exempt from the penalty, unless that results in no one being liable for it.
• Another person with authority and control over funds to direct their disbursement. This may include accountants, trustees in bankruptcy, banks, insurance companies, or sureties. It even may include another corporation.
• RIA observation: For example, in Erwin v. U.S., (DC NC 02/05/2013) 111 AFTR 2d 2013-748111 AFTR 2d 2013-748, a district court held that two outside accountants were each liable for over $325,000 in trust fund recovery penalties due to their failure to remit a financially troubled client’s unpaid withholding taxes to IRS. Even though the accountants were not officers or directors of the client, it was clear that they had substantial control over the client’s payroll operations.
• Another corporation or third party payer.
• Payroll Service Providers (PSPs) or responsible parties within a PSP.
• Professional Employer Organizations (PEOs) or responsible parties within a PEO.
• Responsible parties within the common law employer (client of PSP/PEO).

New rules in place for PEOs. Small businesses often contract with PEOs, also known as employee leasing companies, to ensure compliance with workplace laws and regs. In the typical contract, the PEO computes the FICA, withholding tax, worker’s compensation, and 401(k) contributions of each employee and bills the client for the amount. The contract requires the PEO to pay the employees and make the clients’ tax deposits. Some PEOs file their client companies’ employment tax returns under the PEO’s name and list the PEO as the employer of the client companies’ employees. Under the law that existed before the Tax Increase Prevention Act of 2014 (TIPA), when a business contracted with a PEO to administer its payroll functions, the business customer remained responsible for all withholding taxes with respect to its employees. Thus, even though the PEO paid the employees, the customer remained liable if the PEO failed to withhold or remit the taxes or otherwise comply with related reporting requirements.

However, effective for wages for services performed on or after Jan. 1, 2016, Code Sec. 3511, as added by TIPA, allows a “certified PEO” (CPEO) to, in certain circumstances, be treated as the sole employer of the employees. Earlier this month, IRS issued proposed reliance regs that define terms and provide details as to the operations and responsibilities of CPEOs. (T.D. 9768, Weekly Alert ¶ 28 05/12/2016) IRS also issued proposed reliance regs that set out the Federal employment tax liabilities and other obligations of persons certified by the IRS as CPEOs. (Preamble to Prop Reg05/04/2016, Weekly Alert ¶ 31 05/12/2016)

Assessing the trust fund recovery penalty. If IRS determines that a person is a responsible person, it will inform him of its plan to assess the trust fund recovery penalty. The person then has 60 days (75 days if this letter is addressed to a person outside the U. S.) from the date of this letter to appeal. A nonresponse will result in the assessment of the penalty and trigger an IRS Notice and Demand for Payment. Once IRS asserts the penalty, it can take collection action against the taxpayer’s personal assets. For instance, it can file a federal tax lien or take levy or seizure action.

References: For trust fund recovery (100%) penalty for responsible person’s failure to collect, account for, and pay over tax, see FTC 2d/FIN ¶ V-1700 ; United States Tax Reporter ¶ 66,724 ; TaxDesk ¶ 864,001 ; TG ¶ 71655 .

2015 Returns Due April 18, 2016 – 4/10/16

If you have not yet filed your 2015 income tax returns, the returns are due on Monday, April 18, 2015. You can get an extension to file the returns but the extension is an extension for filing the return not for paying any tax that may be due.

Should you file the extension, end up with a tax due when the return is filed, and make no payment with extension, IRS may disallow the extension and charge late filing interest and penalties. In order to be sure the extension is valid, you need to make a good faith payment with the extension.

Since the final return is not completed, the exact amount of the tax is not yet known. We can help you determine a reasonable amount to pay with the extension and file it electronically for you. If you have questions, give us a call.

IRS Hacking Update – 2/25/16

From the Internal Revenue Service:

IRS has announced that the “Get Transcript” hacking incident discovered last May was more widespread than initially thought and that approximately 390,000 additional taxpayer accounts were potentially accessed during the period from January 2014 through May 2015. The Treasury Inspector General for Tax Administration (TIGTA) conducted a 9-month long investigation looking back to the launch of the application in January of 2014 and discovered additional suspicious attempts to access taxpayer accounts using sensitive information already in the hands of criminals.

Background. In January of 2014, IRS launched the “Get Transcript” program on its website. This application allowed taxpayers to have the option of immediately viewing and downloading their tax transcript or having it mailed to their address. Taxpayers could view or order multiple years of transcript information. For the 2015 filing season, approximately 23 million transcripts were ordered. Since its launch in 2014, around 47 million transcripts have been ordered through the “Get Transcript” tool.

In May of 2015, IRS announced it had discovered that criminals, using taxpayer information stolen elsewhere, had been able to pass procedures to access the “Get Transcript” application. At that time, IRS identified approximately 114,000 taxpayers whose transcripts had been accessed and about another 111,000 taxpayers whose transcripts were targeted but not accessed.

In August of 2015, IRS announced it had identified another 220,000 taxpayers whose transcripts may have been accessed and an approximately 170,000 taxpayers whose transcripts were targeted but not accessed.

After IRS made its announcement, TIGTA investigators began their own review, covering from 2014 through May 2015. TIGTA investigators identified suspicious email addresses that made multiple attempts to access accounts. IRS noted that it was possible that some of those identified may be family members, tax return preparers or financial institutions using a single email address to attempt to access more than one account. However, in an abundance of caution, IRS will notify all taxpayers impacted.

The online viewing and download feature of “Get Transcript” has been unavailable since May 2015, and IRS is working to restore that part of the service in the near future with enhanced taxpayer-identity authentication protocols. Other transcript options remain available via IRS’ website, with online requests being taken for mailed copies of transcripts. IRS reminds taxpayers to plan ahead if they need transcripts — it can typically take five to 10 days before the transcripts arrive in the mail.

IRS response. IRS is moving immediately to notify and help protect these additional taxpayers from tax-related identity theft, including through free identity theft protection services as well as Identity Protection PINs. Steps include:

• Notifying by mail those taxpayers whose transcripts were accessed and those taxpayers whose transcripts were targeted but not accessed;
• Informing taxpayers whose transcripts were accessed that they can request an Identity Protect PIN, which provides an additional layer of protection for the taxpayer’s Social Security Number (SSN) on federal tax returns, by completing a Form 14039, Identity Theft Affidavit;
• Offering taxpayers whose returns were accessed a free Equifax identity theft protection product for one year, and encouraging taxpayers to place a “fraud alert” on their credit accounts;
• Placing extra scrutiny on tax returns that contain taxpayer SSNs; and
• Placing special markers on these taxpayer accounts to advise IRS assistors that the caller is part of this event.

Other attacks on taxpayer information. In addition, only a week before this latest hacking announcement, IRS warned in IR 2016-28, of a new surge in IRS email schemes during the 2016 tax season. Taxpayers are receiving fraudulent emails designed to look like official communications from IRS or others in the tax industry, including tax software companies. The phishing schemes asked taxpayers about a wide range of topics, including information related to refunds, filing status, confirming personal information, ordering transcripts and verifying PIN information. This personal tax information could be used to help file false tax returns.

When people clicked on these email links, they were taken to sites designed to imitate an official-looking website, such as IRS’s website. The sites asked for SSNs and other personal information. In addition, the sites might carry malware, which could infect people’s computers and allow criminals to access taxpayers’ files or track their keystrokes to gain information.

In IR 2016-28, IRS noted an increase in such phishing and malware schemes, including:

• There were 1,026 incidents reported in January, up from 254 from a year earlier.
• The trend continued in February, nearly doubling the reported number of incidents compared to a year ago. In all, 363 incidents were reported from Feb. 1-16, compared to the 201 incidents reported for the entire month of February 2015.
• This year’s 1,389 incidents have already topped the 2014 yearly total of 1,361, and they are halfway to matching the 2015 total of 2,748.

The 100% Penalty – 2/25/16

All companies that have payroll are required to withhold federal income and social security taxes from employee paychecks and to pay these withheld taxes to IRS.  These taxes are called “Trust Fund Taxes” because the withheld taxes are the employee’s money held in trust by the employer.

Under IRC Section 6672, the IRS can impose a penalty of 100% of the amount of Trust Fund Taxes withheld if the employer fails to pay these taxes to IRS.  This penalty is commonly called the 100% penalty.

The penalty is imposed on individuals and operating as a corporation does not protect owners from the penalty. It can be imposed on anyone who is a “responsible party”.

Code Section 6672 reads (in part): Code Sec. 6672 imposes the trust fund recovery penalty on any person who: (1) is responsible for collecting, accounting for, and paying over payroll taxes; and (2) willfully fails to perform this responsibility. The amount of the penalty is equal to the amount of the tax that was not collected and paid. Responsible parties is interpreted broadly and can include stockholders, bookkeepers, CPAs, and anyone who has the power in the organization to determine which bills are paid.

In a recent court case (Schiffmann v. U.S. (CA 1 1/26/16 117 AFTR 2d 2016-386), the court listed several factors to be considered when determining who is a responsible party.  From the case:

In determining whether an individual is a responsible person, courts consider factors including whether the individual: (1) is an officer or member of the board of directors, (2) owns shares or possesses an entrepreneurial stake in the company, (3) is active in the management of day-to-day affairs of the company, (4) has the ability to hire and fire employees, (5) makes decisions regarding which, when and in what order outstanding debts or taxes will be paid, (6) exercises control over daily bank accounts and disbursement records, and (7) has check-signing authority. (Vinick v. Comm., (CA 1 1997) 79 AFTR 2d 97-190579 AFTR 2d 97-1905) Responsibility is generally a matter of status and authority, and it is determined on a quarter-to-quarter basis. In determining whether there is willfulness, the courts have focused on whether a taxpayer had knowledge about the nonpayment of the payroll taxes, or showed reckless disregard with respect to whether the payments were being made.

IRS is aggressive in assessing this penalty.  If your company has delinquent payroll taxes, contact our office. We can help you work out an agreement with IRS before this penalty is imposed.

Ordinary & Necessary – 2/18/16

Business owners can deduct all “ordinary and necessary” expenses of carrying on a trade or business under Section 162 of the Internal Revenue Code. While most expenses easily pass these tests, it is important to remember that both tests apply.  A common example applies to MLMs (for example Amway). Operators of the MLM often spend an excessive amount of training seminars and materials provided my the MLM.  They deduct these costs as business expenses and then get a surprise when audited by IRS.  The Service will assert that, although these expenses may by ordinary for the business, they are not necessary in the amount incurred for the expenses (i.e. not reasonable in an amount that would be spent by a prudent business owner.)

In a court case decided on 1/6/16 (Elick v. Comm. (CA 9 1/6/16) 116 AFTR 2d 2016-345), a dentist was denied a deduction for management fees paid to a related entity. The court held that these fees were not ordinary and necessary within the meaning of IRC Code Section 162.

Although there are many other issues in this case, it reminds that we need to keep the “ordinary and necessary” rule in mind when deducting business expenses.

Solar Energy Credits – 2/15/16

Both IRS and New Mexico offer tax credits for the installation of qualified solar energy producing equipment. The federal credit is 30% of the cost of qualified property and it is “non-refundable” which means it is limited to a taxpayers income tax less other credits. It can be carried over to future years.

New Mexico offers the Solar market Development Tax Credit which is a credit offered to purchasers of solar equipment. The credit is 10% of the cost up to $9,000 and each taxpayer must be qualified. The amount to total credits issued for the entire state is limited, so those making application early in the year are more likely to be able to claim the credit. For more information go here.

IRS Reducing Taxpayer Services – 2/1/16

In her 2015 annual report to Congress, National Taxpayer Advocate (NTA) Nina Olson expresses concern that IRS may be on the verge of dramatically scaling back telephone and face-to-face service that it has historically provided to assist the nation’s 150 million individual taxpayers and 11 million business entities comply with their tax obligations. In particular, she calls for IRS to release its “Future State” plan documents, provide additional detail about its anticipated impact on taxpayer service operations, and solicit public comments, and recommends that Congress conduct oversight hearings on IRS’s plan.

Background. The NTA is required by statute to submit two annual reports to the House Committee on Ways and Means and the Senate Committee on Finance. The first of these reports, submitted mid-year, identifies the objectives of the Office of the Taxpayer Advocate for the fiscal year beginning in that calendar year. The TAS is an independent organization within IRS whose employees assist taxpayers who are experiencing economic harm, who are seeking help in resolving tax problems that have not been resolved through normal channels, or who believe that an IRS system or procedure is not working as it should.

The second of these reports is submitted at the end of the year and is required to identify at least 20 of the “most serious problems” encountered by taxpayers and to make administrative and legislative recommendations to mitigate those problems.

The NTA’s annual report to Congress creates a dialogue within IRS and the highest levels of government to address taxpayers’ problems, protect taxpayers’ rights, and ease taxpayers’ burden. The NTA delivers its report directly to the tax-writing committees in Congress (the House Committee on Ways and Means and the Senate Committee on Finance), with no prior review by the IRS Commissioner, the Secretary of the Treasury, or the Office of Management and Budget.

NTA’s concerns. Since 2014, IRS has invested substantial resources to develop a Future State plan, which has involved significant participation by virtually all IRS business units and the engagement of management consultants. The NTA reports says that implicit in the plan—and explicit in internal discussion—is IRS’s intention to substantially reduce telephone and face-to-face interaction with taxpayers. Ms. Olson notes that while these reductions are a central assumption in the Future State planning process, it is impossible to describe the scope of the contemplated reductions with specificity because little about service reductions has been committed to writing. The Future State plan also calls for expanding the role of tax return preparers and tax software companies in providing taxpayer assistance, which would likely increase compliance costs for millions of taxpayers who now obtain free IRS assistance.

IRS has historically maintained a robust customer service telephone operation that, in every year since Fiscal Year 2008, has received more than 100 million taxpayer telephone calls, as well as a network of nearly 400 walk-in sites that, in every year for over a decade, has provided face-to-face assistance to more than five million taxpayers.

IRS now appears to presume taxpayer interactions with IRS through online accounts will address a high percentage of taxpayer needs, enabling it to curtail existing taxpayer services without significantly impacting taxpayers. The NTA stated that technology improvements often do not reduce demand for personal service to the extent expected.

In recent years, IRS has already begun to reduce taxpayer services by declaring that all but simple tax-law questions “out of scope” for IRS to answer during the filing season; by declaring that it will not answer any tax-law questions after the filing season (including questions from millions of taxpayers with proper extensions of time to file); by eliminating an online program that allowed taxpayers to submit questions electronically; and by eliminating the preparation of tax returns in its walk-in sites.

Ms. Olson characterized the combination of reductions in personal service and IRS’s plans to direct taxpayers with questions to preparers and other third parties (along with the expansion of IRS user fees) as creating a “pay to play” tax system, where only taxpayers who can afford to pay for tax advice will receive personal service, while others will be left struggling for themselves. Further, expressing concerns about data security, she warned about the consequences of giving unregulated tax return preparers more access to taxpayer accounts.

The NTA report says that it’s critical that IRS share its plans in detail with Congress and outside stakeholders and then engage in a dialogue about the extent to which it intends to curtail or eliminate various categories of telephone service and face-to-face service, and how it will provide sufficient support for taxpayers. The NTA report recommends that IRS immediately publish its plan and seek public comments.
Other issues. In addition to IRS’s Future State planning, the NTA report says that the “most serious problems” include problems that undermine taxpayer rights and impose taxpayer burden; problems that waste IRS’s resources and impose taxpayer burden; and problems that contribute to earned income tax credit noncompliance. Other issues addressed in the NTA report include the adequacy of taxpayer service for taxpayers living abroad, the whistleblower program, IRS’s administration of the Patient Protection and Affordable Care Act, victim assistance in tax-related identity theft cases, and several issues relating to EITC compliance, including the need for better taxpayer education and assistance in the pre-filing environment, more effective use of audits, and greater emphasis on the role tax return preparers can play to promote compliance.

The report says that, as IRS has struggled with reduced funding, it has sometimes made short-sighted decisions that have had the effect of creating rework for itself as well as increasing taxpayer burden. In particular:

Between FY 2010 and FY 2015, when IRS’s appropriation was reduced by about 10%, its user fee revenue rose by 34%. The NTA report suggests that cuts to IRS’s budget have prompted it to consider fees that will impede its mission to help taxpayers voluntarily comply and pay their taxes. The NTA report recommends that IRS estimate the effect of proposed fee increases on demand for services, make its analysis public before adopting the increases, and refrain from charging fees that will have a significant negative impact on its service-oriented mission, voluntary compliance, or taxpayer rights.

Since July 2014, IRS has addressed backlogs in its inventory of applications for tax-exempt status by allowing certain organizations to use Form 1023-EZ (Streamlined Application for Recognition of Exemption Under Section 501(c)(3)), which adopts a “checkbox approach” that requires applicants to merely attest to, rather than demonstrate, qualification for exempt status. IRS approves about 95% of applications submitted on Form 1023-EZ, while it approves only about 77% of applications when it requests documentation. The NTA report recommends that IRS revise Form 1023-EZ to require applicants to submit their organizing documents, a description of actual or planned activities, and past or projected financial information, and that IRS review this information before deciding whether to approve exemption applications.

IRS operates several programs that filter tax returns to ferret out improper refund claims, including returns showing bogus wage or withholding amounts and returns suspicious for identity theft. These filters have high “false positive” rates (in some cases 36%), causing substantial refund delays for hundreds of thousands of legitimate taxpayers. The NTA report recommends that IRS begin tracking the false positive rate of all screening programs, monitor and adjust filters and rules quickly if they are not effectively zeroing in on fraud, and establish maximum false positive rates for each process and filter.

Small Businesses Expensing (Section 179) Made Permanent – 12/15/15

One of the most significant tax saving benefits for small business has been (finally) made permanent by the 2015 Protecting Americans from Tax Hikes (PATH) Bill – commonly call the ‘tax extender bill’ because it either extends or makes permanent tax code provisions that have expired. Two of the provisions that benefit small businesses the most are the Section 179 Election and Bonus Depreciation.

The Section 179 Election permits a taxpayer to expense (rather than depreciate) personal property in the year that it is placed in service. The cap for purchases is $500,000 and there is a deduction phase out for purchases over $2 million. Special rules apply for qualified real property.
Bonus Depreciation permits a taxpayer to take first year bonus depreciation of 50% of the cost of asset in the year placed in service. For bonus depreciation, they taxpayer must be the “original user” of the property (i.e. it must be new property.)

Small Businesses Can Now Deduct $2,500 in Repairs – 12/15/15

Under the ‘New’ Repair Regulations (effective for 2014 and later years), the rules used to determine whether an payment qualifies as a repair (which can be deducted currently) or a capital expense (which  has to be depreciated) were significantly tightened and the necessary record keeping increased.  In its IRS Newsroom for Small Businesses, IR-2015-133, IRS raised the safe harbor for expenditures form $500 to $2,500 for items substantiated by an invoice.  This is a significant benefit for small businesses.

Call us for more information and to see how this change will help your business.

More 2015 Last Minute Tax Planning Ideas – 12/15/15

As the end of 2015 approaches, here are some more strategies to minimize your 2015 tax bite:

1. Make contributions to your HSA account. The maximum deduction is $3,300 for an individual and $6,550 for a family (persons 55 and older can contribute a $1,000 catch-up amount.) If you employer made some contributions, you can increase the total contributed up to these limits.
2. Sell stocks – see General Tax Planning Notes below for more details
3. Accelerate tax deductible charitable contributions
4. If you itemize deductions, pay your state income taxes that may be owed in April 2016 before the end of 2015 to get a deduction on Schedule A.
5. If you are required to take minimum required distributions from an IRA or 401(k) plan, take the distribution before the end of the year. If you are 70 1/2 in 2015, you can delay the distribution to 2016. Failure to take the distribution can result in a penalty of 50% of the required distribution.
6. Make year end gifts up to $14,000 per recipient.  A donor can gift-spilt with their spouse which increases the annual exclusion to $28,000 for each recipient of the gift.

Call us if you have questions or need additional information

General Tax Planning Notes – 12/10/15

There is no longer any “magic bullet” to save taxes. The ‘glory days’ of the 1980s when tax shelters offered write-offs that were many times the amount spent or invested are gone forever. Tax planning today requires a comprehensive approach to review each taxpayer’s entire return to save taxes. There are many interrelated items that, when taken together, can save taxes while offering good cash management at the same time. This article reviews many of those strategies.

While every effort has been made to be sure that this information is correct, it is based on income tax laws and regulations in effect at the time it was written (December 2015) and each person’s tax situation is different. These notes are intended to be an overview of tax planning ideas and are only to be used as a starting point for discussions with us (or other tax professionals).

Flexible Spending Accounts

o Take Advantage of Flexible Spending Accounts (FSA)
 Your employer may have a FSA – typically a §125 Plan – under this plan certain services can be paid with pre-tax rather than after tax dollars. Expenses include medical and dependent care.
 Most plans are ‘use it or lose it”. Some plans (at option of employer) permit 2 ½ month grace period.

Investment Decisions – “Harvesting Capital Gains/Losses”
o Low Capital Gain Rates
Long Term Capital Gain rates are the lowest in 70 years and these rates are good through 12/31/15. One thing is certain: capital gains rates will not be lower in the future!

Special Long Term Capital Gain Rates:
• Collectibles = 28%
• Gain on Small Business Stock (§1202) = 28%
• Un-recaptured §1250 Gain = 25%

For 2015, the Long Term Capital Gains tax rate is 0% for married taxpayers filing joint returns with taxable income of $74,900 or less. That works out to gross income of $95,500 using a standard deduction and two personal exemptions – see following notes.

Long Term Capital Gain are taxed at 20% for taxpayers in the 39.6% bracket (married taxpayers filing joint returns with over $464,851 taxable income) and 15% for taxpayers in the 25% to 35% brackets (married taxpayers filing joint returns with taxable income between $74,900 and $464,850). See IRS Publication 17 for complete list of tax brackets.

If a taxpayer has a low income year and has a stock with a large unrecognized gain –and – they want to keep the stock. They can sell the stock, recognize the gain, and pay little or no tax. They can then buy the stock back at current market value which increases their basis in the stock. Many taxpayers think that this transaction is prohibited by the wash sale rules. However, the wash sale rules only apply to stocks sold at a loss not stocks sold at a gain. This strategy can significantly save future taxes with little or no current cash cost to the taxpayer.

Also, for tax year 2015, a married couple with gross income of $95,500 will pay no tax on capital gains. So, they should consider stock sales before the end of 2015 – See preceding note.

Make Itemized Deductions Count
o Maximizing the Value – if possible, bunch deductions to avoid phase outs. In some (rare) cases, taxpayers may claim standard deduction one year and itemize the next. Note: deductible items paid with credit cards (VISA. MC, etc.) are claimed in the year charged even though the card is paid in the following year.
o Certain High Income taxpayers have their ability to claim itemized deductions phased out. The phase outs as of 2015 are:

o Itemized Deduction Phase Out:
 Phase outs of 3% reduction in itemized deductions (reduction limited to 80% of deductions):
 Single = $258,250
 Married – Joint = $309,900
 Head of Household = $285,350
 Married – Separate = $154,950

o Personal Exemptions also phase out:
 Single = $258,250
 Married – Joint = $309,900
 Head of Household = $284,050
 Married – Separate = $154,950

o Avoiding the 2% Miscellaneous Itemized Deductions Trap
Many employers offer an “Accountable Plan” for expense reimbursement. Under this plan, business expenses are reimbursed by the employer directly with no tax effects to employee.
If you qualify, become Statutory Employee and deduct business expenses on Schedule C. Statutory employees include full time traveling salesmen, full time life insurance salesmen, agent or commission drivers, and certain home workers using employer furnished materials. Box 13 of your W-2 will be checked. See IRS instructions for form Sch C, page 5, “Statutory Employees”

Minimizing the effect of the 10% Medical floor
Bunch deductions for medical items such as child delivery or braces (or other expensive medical procedures) by pre-paying in one tax year.

Use §125 Plan (also called Flexible Spending Arrangement)
Set up Health Savings Arrangement (HSA) if you qualify.

Multi-Year Planning for AMT (Alternative Minimum Tax)

What is The Alternative Minimum Tax: When this tax was first enacted, it was intended to be a tax on the wealthy “to ensure that no taxpayer with substantial income can avoid significant tax liability by using exclusions, deductions, and credits” (Tax reform Act of 1986). According to the Tax Policy Center (http://www.taxpolicycenter.org/ taxtopics/quick_amt.cfm), from 2013 to 2023 (projected) the number of Americans paying the AMT will rise from 3.9 million to 6 million. Clearly, the AMT is not a tax on the “rich”. It has become a tax on the working middle class – particularly two earner families – and is burdensome to say the least.

There is no easy way to avoid this tax but many strategies can minimize it

The idea is to look at the components of the tax and then to plan the timing of income and deductions to avoid being trapped by the tax.

Alternative Minimum Taxable Income (AMTI) does NOT allow Schedule A deductions for State & Local Income Taxes, Real Property Taxes, Miscellaneous Itemized Deductions. Bunching of deductions, although a good strategy for regular income tax, may end up trading regular tax for AMT.

Comprehensive multi-year tax plan is necessary to plan for AMT.

AMTI (Alternative Minimum Taxable Income) for 2015 is computed by:
• Starting Regular Taxable Income
• Adding back personal exemptions
• Adding back state and local taxes, home equity interest (non-qualified), and miscellaneous itemized deductions
• Subtracting state refunds
• Subtracting the AMT Exemption of
o Married filing joint return = $83,400
o Unmarried Individuals = $53,600
• Computing the AMTI and applying the tax rate
o 26% for first $184,500 of AMTI ($183,600 for 2016)
o 28% for AMTI over the amount above.
• Taxpayer pays the LARGER of the regular or AMT tax

Make Gifts Within the Annual Exclusion
The tax code imposes a tax on donor when gifts are made.
However, a taxpayer can give $14,000 per taxpayer, per donee, per year with no gift tax liability and can elect to ‘gift split’. Gifts below this amount are not reported and do not reduce the unified lifetime exclusion.
So a married couple with two children could give their children $56,000 with no gift tax liability:
• Mom could give $14,000 to each child ($28,000 total), and
• Dad could five $14,000 to each child *$28,000 total).

Pay State Taxes before End of year:
Income taxes paid to state and local governments are deductible on your federal return (if you itemize deductions.) If you pay the state tax before the end of the year by making an estimated state tax payment, the deduction can be claimed on this year’s federal return rather than next year’s return. If you are in the 28% federal tax bracket, you will reduce your current year’s federal tax by 28% of the state tax paid and receive the benefit this April – one year sooner – a significant return on investment.

Protect Business Deductions
Avoid the §183 Hobby Loss trap – run your business as a business and keep records.
All “Ordinary & Necessary” expenses can be deducted under §162 but the expenses must meet BOTH tests – ordinary AND necessary. If either test is failed, no deduction.
The Ordinary & Necessary test is often used by IRS to disallow deductions for various Multi Level Marketing businesses. Call us for more information on how to protect these deductions.

Retirement Planning
Maximize IRA contributions
 For 2015 limit is $5,500 per person (up to earned income)
 The $5,500 includes contributions to a Roth IRA account
 If taxpayer is member of qualified plan, the deduction phases out when for Adjusted Gross Income (AGI) exceeds certain levels. For married taxpayers filing joint returns, the deduction phases our starting at $96,000 ($60,000 for single taxpayers and $10,000 for married taxpayers filing separate returns).
 IRA can be set up until April 15th. Contribution must be made by the due date of the return without extensions (April 15th).
 See IRS Publication 590-A for more information.

Set Up SEP IRA
 Funded entirely by employee – 100% vested at time of contribution
 Must cover all employees that at (1) 21 or over, (2) worked for the taxpayer in 3 of the last 5 years, and (3) received in compensation in 2015.
 Annual 5500s not required
 Can be setup by the due date of the return including extensions (this can be up to October 15th)
 Limited (for 2015) to 25% of compensation or $53,000 whichever is less.

Catch up contributions may be available if you are 50 or over – the catch up contribution is $1,000 (both traditional and Roth)

Saver’s Credit
 Certain taxpayers with lower income may ay receive a tax credit for contributions to an IRA account or employer sponsored retirement plan.  See Retirement Saver’s Credit under separate heading.

o SIMPLE (Savings Incentive Match Plan for Employees)
 Funded by tax-deferred employee contributions and employer matches
 Plan must be written but 5500s not needed
 Maximum deferral of lesser of compensation or $11,500 (plus “catch up” deferral). For 2016, the amount is $12,500.
 Form 5304 or 5305 SIMPLE is used to set up – must be set up by October 1st of current year (too late for 2015)
 Employer must match 2% or 3%
 See https://www.irs.gov/Retirement-Plans/SIMPLE-IRA-Plan-FAQs-Establishing-a-SIMPLE-IRA-Plan for more information.

Family Strategies

Protect Dependency Deductions
$4,000 per person claimed on return for 2015. The taxpayer and spouse each get a deduction and dependency deductions are also available for children or other relative for which the taxpayer provided more than 50% of their support in the tax year.
For a Child or Grandchild:
• Must be under age 19 or under age 24 and full time student
• Must live with taxpayer for more than half the year
• Must not provide more than half their support
 For a relative that is not a child (aka dependent parent)
• Must receive more than half of support from taxpayer
• Must have gross income of less than $4,000 which generally does not include social security benefits.
• Must be related to taxpayer or share taxpayer’s home.Child Tax Credit
 $1,000 per qualifying child
 Child must be under 17 at end of year
 Child must be US Citizen or Resident
 Credit phases out when AGI exceeds $110,000 Married Filing Jointly (MFJ)

Child and Dependent Care Credit
 Credit available to permit taxpayer or spouse to work,
 Qualifying child must be under age 13 or a disabled person not able to care for himself or herself,
 Maximum expenses are $3,000 for one child and $6,000 for two or more,
 Credit ranges from 35% to 20% based on AGI – see form 2441

Student Loan Deduction
 Up to $2,500 may be deducted “above the line” to compute Adjusted Gross Income,
 The deduction is lost when your modified adjusted gross income reaches $160,000 for married persons filing joint returns and $80,000 for other filers.
 The interest can be deducted over the remaining life of the student loan.

Education Credits:
 The Internal Revenue Code provides income tax credits to provide an incentive for taxpayers, spouses and their children to pursue higher education.
 The American Opportunity and Lifetime Learning Credits are available.

Comparison of the Credits:
American Opportunity Credit	Lifetime Learning Credit
Up to $2,500 credit per student	Up to $2,000 per tax return
Available only for the first 4 years of post-secondary education	Available for any post-secondary education and courses to acquire or improve job skills
Available for only 4 years per student	Available for an unlimited number of years
Student must be enrolled in degree or credential program	Degree or credential program not required
Student must be enrolled at least half-time for at least one semester beginning during the year	Available for one or more courses
NO felony drug conviction on student’s record	Drug conviction rule does not apply

Estimated Tax
Who Pays Estimated Tax?
 If you have income that is not subject to withholding and your tax liability is expected to be $1,000 or more, you are required to make estimated tax payments.
 It is usually easier on your cash flow to “pay as you go” rather than to go hit with a large tax bill in April.
 For households where one spouse works for wages and the other is self-employed, a good strategy is to have the spouse who works for wages adjust their withholding to cover the estimated tax requirements. This smooths cash flow and avoids tax penalties.

Safe Harbors for 2016
 Pay 90% of current year’s (2016) tax or
 100% of prior year’s (2015) tax

High Income Taxpayers
 If you are a high income taxpayer (AGI over $150,000 MFJ or $75,000 single), you must pay 110% of prior year’s tax to avoid the penalty.

Avoiding the Penalties
 If your income was uneven during the year, annualizing income may avoid the penalty.

Business Planning

Shifting Income – Defer Income – Accelerate Expenses
 Typically applies to cash basis taxpayer – Taxpayers need to examine financials for hidden deductions (AR write offs – obsolete inventory – §179 Deduction – Expense repair items, etc.

 Can give only one year benefit – but if lower tax bracket is expected in future, the benefit may be significant. Be careful to not hurt next year’s cash flow by using cash at the end of this year.

 Ways to Postpone Income
 Be careful of Constructive Receipt Rules – call us for more information
 Delay collections (if that does not jeopardize collectability)
 If you work for accrual basis corporation, have bonus accrued at year end and paid next year – within 2 ½ month of the end of the year.
 Interest Income on T-Bills is not taxable until received at maturity

 Installment Sales – Gross Profit from sale of non-inventory property by non-dealers is taxed when received. Installment sale rules are mandatory unless elected out. Note: ALL depreciation recapture is reported in the year of sale – even if no cash received.

Like Kind Exchange – Gain is recognized only to the extent of “boot” received but remember debt relief is boot.

Start Up Costs
 Rather than amortizing start up costs over 180 months, expenses incurred after October 22, 2004 may be deducted in the year incurred.
 Deduction is limited to $5,000

Section 179 Election
 For 2015, taxpayers may expense $25,000 of tangible personal property placed in service on or before 12/31/15
 Limits apply to passenger automobiles and other listed assets.
 The Section 179 election is limited to net income from business.

Capitalization v. Expense
 There are always questions about what costs can be expensed in the current year and what costs need to be capitalized and depreciated. For those costs that can be expensed currently, the tax payer gets a benefit in the current year while those that are capitalized benefit future years and following the depreciation rules.
 For years beginning January 1, 2014, new rules apply to the decision of whether to expense or to capitalize cost to repair or improve equipment.
 These regulations largely replace the tests used to expense repairs for years before 2014.
 These new rules are complex and depend on whether the expenditure was a “betterment”, “restoration”, or “adaptation”.
 Several de minimis and safe harbor rules exist
 For more information call us or go to https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Tangible-Property-Final-Regulations

Retirement Planning as Business Owner
 See SEPs and SIMPLEs under Retirement Planning

Employing Family Members
 Family members must be paid fair market wages for their services.
 Employment taxes must be paid
• Payments paid by parents to children under 18 are not subject to FICA or Medicate taxes (does not apply to children employed by corporations owned by parents)
• Workers Compensation Insurance may also apply

Cost Segregation System – Depreciation Recovery
 For buildings with significant improvements, cost segregation may result in significant tax savings
 Cost Segregation Studies help to mitigate the effects of the new Repair Regulations – see Capitalization v. Expense section earlier.
 Clients have successfully used Cost Segregation Services Inc. (www.costsegserve.com) and Bedford Cost Segregations (www.bedfordcap.com). You can contact these companies for more information.
 For buildings not placed in service in current year, the cost segregation method can be used and the catch up depreciation is a deduction in the current year. See Rev Proc 2002-09, 2002-19, and Hospital Corporation of America v. Commissioner (109 TC 21 – CCH Dec. 52,163)

Strategies for the Self-Employed
Medical Expenses
 100% of a self-employed person’s medical insurance is “above the line” deduction. That is that this deduction reduced Adjusted Gross Income (AGI)which increases the availability of other medic al deductions and Miscellaneous Schedule A Deductions subject to the 2% AGI limitation.
 Medical Insurance can cover the taxpayer, spouse, dependents, and any child under 27 years old.
 Deduction is limited to net income from self-employment

Business Use of Listed Property & Automobiles
 Deductions (including Section 179 discussed above) are limited for automobiles and other “listed property”. Listed property includes property that is normally used for both business and personal purposes.
 Listed property includes passenger automobiles with Gross Vehicle Weight (GVW) of 6,000 pounds or more and that cost $15,800 or more, computers and related peripherals, and cell phones.
 Deductions for these items are limited to documented business use and logs are needed to support that use.
 Depreciation and Section 179 deductions for Luxury Passenger Automobiles is limited to $3,160 for first year, $5,100 for second year, $3,050 for third year, and $1,875 for each succeeding year. (See IRS Rev. Proc 2015-19 for more information).

Standard Mileage v. Actual Costs
 Standard mileage rate for 2015 = 57.5 cents per mile (business)
 Charitable Use = 14 cents per mile
 Medical and Moving – 23 cents per mile (IR-2014-114, Dec. 10, 2014)
 Tax payer can use greater of standard or actual but records need to be kept for both methods.

Substantiation
 Deductions for automobiles and listed property are required to be supported by adequate substantiation – keep receipts and a log.
 We can help you set up a record keeping system that meets IRS requirements.

Travel & Entertainment
 Meals and Incidental Expenses are limited to 50% of actual expenditures.
 Exceptions are provided for meals provided by the employer on company premises for employer convenience.
 Meals while traveling are also subject to the 50% limit.

Deduction for Office in the Home
 Self-employed individuals that work from their homes can save taxes by deducting the part of their home that is used for business. To claim the deduction, the taxpayer must meet two tests: First, the part of the home to be deducted must be used exclusively and regularly for the conduct of a trade or business, and, second, that part of the home must be the principal place of business, a place used to meet patients, customers, or clients, or a separate structure not attached to the home. When both of these tests are met, the taxpayer may deduct the business percentage of mortgage interest, taxes, insurance, utilities, and other operating expenses.
 In addition to these deductions, the taxpayer receives two other benefits: First, your home becomes your “tax home” for purposes of claiming business use of automobile deductions. Normally, the distance from a person’s home to their tax home (principal place of business or employment) is non-deductible commuting mileage. In addition, the business use percentage of mortgage interest and other home expenses reduces the net income from business and both the regular tax and the self-employment (social security) tax paid on business income. The value of these deductions can approach 50% (federal tax 28%, self-employment tax rate 15.3%, and state income tax approximately 5%-9%).
 Starting in 2013, instead of reporting the detailed costs (as described above), the taxpayer can elect to deduct $5 per square foot of their home used for business up to 300 square feet. The maximum deduction is $1,500 if 300 square feet are used solely and exclusively for business.

Retirement Saver’s Credit – 12/5/15

Many taxpayers feel that they cannot afford to make a contribution to an IRA or employer sponsored retirement plan. IRS offers an incentive to these taxpayers to save for retirement in the form of a Savers’ Credit (the Retirement Savings Contribution Credit). This article gives a brief description of the credit.

Certain taxpayers within income limits may receive a tax credit for contributions to an IRA account or employer sponsored retirement plan.

• • To qualify for the credit you must be:
    • Age 18 or older
    • Not a full time student
    • Not claimed as a dependent on another person’s return.
  • The amount of the credit varies from 50% to 10% of the amount contributed to the retirement plan based on your adjusted gross income per the following tables.
  • Go to https://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Savings-Contributions-Savers-Credit or call us for additional information.

2015 Saver’s Credit
Credit Rate	Married Filing Jointly	Head of Household	All Other Filers*
50% of your contribution	AGI not more than $36,500	AGI not more than $27,375	AGI not more than $18,250
20% of your contribution	$36,501 – $39,500	$27,376 – $29,625	$18,251 – $19,750
10% of your contribution	$39,501 – $61,000	$29,626 – $45,750	$19,751 – $30,500
0% of your contribution	more than $61,000	more than $45,750	more than $30,500

2016 Saver’s Credit
Credit Rate	Married Filing Jointly	Head of Household	All Other Filers*
50% of your contribution	AGI not more than $37,000	AGI not more than $27,750	AGI not more than $18,500
20% of your contribution	$37,001 – $40,000	$27,751 – $30,000	$18,501 – $20,000
10% of your contribution	$40,001 – $61,500	$30,001 – $46,125	$20,001 – $30,750
0% of your contribution	more than $61,500	more than $46,125	more than $30,750

Seven Ways to Save Business Taxes – 12/1/15

These guidelines are a list of some common strategies for minimizing the income taxes for small businesses. The list is not exhaustive and does not constitute income tax advice for any specific client or situation.

1 – Defer Income & Accelerate Expenses

This ‘tried and true’ planning method is alive and well. Most effective tax planning is accomplished through a many well planned small steps rather than a few magic large ones. Defer Income. Taxpayers can save taxes in one year by deferring income to a future year. This can be done through various contractual arrangements and controlling the completion dates and/or ship dates of contracts (“defer shipments”).

Accelerate Expenses: To the extent that operating expenses can be accelerated, that can lower taxable income in the current year. Be careful with this technique because it will reverse in the following year.

2 – Purchase Equipment

Section 179 Election. This election permits a taxpayer to deduct in the year placed in service up to $25,000 of property (equipment) that would normally be depreciated.

Bonus Depreciation – Bonus Depreciation is available for property not elected under section 179 or for the remaining basis in that property after the 179 Election. The deduction is generally 50% of allowable basis.

Accelerated Depreciation – Depreciation using the Modified Accelerated Cost Recovery System is available for the basis of assets placed in service not claimed in a or b above.

3 – Domestic Production Activities Deduction.  A Corporate taxpayer is eligible for a credit of up to 9% of qualified production activities income.

Domestic Production Gross Receipts Include

The lease, rental, license, sale, exchange, or other disposition of

1 -Tangible personal property, computer software, and sound recordings manufactured, produced, grown, or extracted in whole or in significant part within the United States

2 -Any qualified film produced in the United States, and

3 – Engineering or architectural services performed in the United States for construction located in the United States

The Credit is claimed on form 8903 and is subject to complex rules.  Go to https://www.irs.gov/pub/irs-pdf/i8903.pdf for more information.

4 – New Repair Regulations

1. New repair regulations include safe harbors that may permit taxpayers to deduct certain repairs that may have been capitalized. Detailed review is required.

5 – Expense Start Up Costs

1. A C Corporation may deduct up to $5,000 in qualified startup expenses with the remainder to be amortized over 180 months
2. The deduction is phased- out when the startup expenses exceed $60,000.

6 – Set Up Retirement Plans

1. Retirement plans can generate deductions for a corporation even though they may not be funded until after year end.
2. They include profit sharing, money purchase pension, various defined benefit plans.
3. Rules are complex and the plan must be in place before the end of the tax year.
4. See the Tax Planning Section  on this page for discussion of retirement plans.

7 – Review of Assets and Liabilities

1. This often overlooked step can result in significant tax savings. These procedures consist of detailed review of all assets and liabilities to assure that any assets that have lost value (e.g. uncollectible ARs, overvalued inventory, expired prepaid expenses, abandoned equipment) are written off for tax purposes
2. Similarly, careful review should be made of all liabilities to assure that no accrued expenses are missed. (This step interfaces with , above.)