IRS
Paperwork cloud lifts
Wednesday, April 27th, 2011 | consulting, tax | No Comments
A paperwork cloud has hung over business owners and landlords for much of the last year. A clause in the health care reform law (Patient Protection and Affordable Care Act) required businesses to report payments of more than $600 to corporations (not required under prior law) on Form 1099. It also added reporting of payments for goods. Then last summer, the Small Business Jobs Act extended the reporting requirements to landlords.
Together, these provisions threatened to dramatically increase the compliance workload of companies both issuing and receiving these documents. The extra load would have fallen disproportionately on small businesses, because they typically have less cushion to absorb such changes. Some suggested that the additional burden and its costs could stymie the economic recovery.
We brought you the news in posts here and here, but we did not post about the expansion in the Affordable Care Act because talk of repealing that provision had begun shortly after the act was signed into law. We had anticipated that the expansion of the requirements to landlords would stick, but we learned long ago that we stand a fairly high chance of being proven wrong when we try to predict the actions of Congress.
Late in tax season (when we were too busy to post about it) came the news that Congress had agreed on language to repeal the new 1099 reporting requirements, reverting to the rules in effect before the two new laws. For landlords, the repeal is retroactive to January 1, 2011 (when the new rules for this group of taxpayers took effect). The expansion under the Affordable Care Act was to have taken effect after December 31, 2011.
1099 reporting in a nutshell: Code Sec. 6041 generally requires payments totaling at least $600 in a single calendar year to a single recipient to be reported to IRS. Reporting on Form 1099 is required only when the payor is considered to be engaged in a trade or business and has made the payment in connection with that trade or business. The type of payment that most commonly triggers the reporting requirement is payment for services. Payments to corporations are exempt, and a number of other exemptions apply. Contact us to make sure your 1099 reporting is compliant.
Complexity of the tax code
Thursday, April 7th, 2011 | tax | No Comments
We just received a printed copy of the tax code, otherwise known as the Internal Revenue Code, or just the code. Sometimes we prefer to go to a book rather than navigate through searches and database links to find information that will help our clients.
The book is 2.5 inches thick, printed on paper I can practically read through in a font so small that my reading glasses are barely strong enough. The index alone is 296 pages. The last page of the book is page 4,052.
This book does not contain the regulations, procedures, rulings, or court decisions. Not to mention form instructions, publications, and announcements.
Is it any wonder that people mess up their tax returns and miss deductions? Or that even people who work for the IRS get the rules wrong sometimes?
I’m done venting - I’ll get back to your tax returns now…
IRS abates penalties
Monday, April 4th, 2011 | tax | No Comments
In a payroll tax case we have been working on for over a year, the IRS has agreed to abate penalties, saving the taxpayer over $200,000. This is a very unusual decision for the IRS, which considers non-payment of payroll taxes to be an unauthorized loan of government funds.
Employers are required to withhold income tax, Social Security tax, and Medicare tax from their workers’ wages and deposit these funds regularly. At the same time, employers pay their share of Social Security and Medicare taxes. Penalties mount rapidly if an employer falls behind on these deposits.
The circumstances of this taxpayer’s case were unique. Their office manager/bookkeeper had let the company get behind on their payroll tax deposits, but she had told the owners that everything was fine. She had gained unauthorized access to the company’s post office box so she could intercept the IRS notices before the owners saw them. Her ruse unraveled when she was absent one day. The owners received one of the notices in the mail and called us.
Our investigation revealed how serious the situation was, with a delinquent tax liability in the mid-six figures, plus penalties and interest. The owners amassed enough funds to get the back taxes paid. We organized the documentation, interviewed the owners, and fashioned a compelling narrative describing the course of events that led to the late deposits. Through a series of letters, conversations, and meetings, we were able to persuade the IRS to abate the penalties. If the decision had gone the other way, the burden of paying the penalties on top of the back taxes probably would have put the company out of business.
We consider this a big win against the odds for our client. Not all of our engagements with the tax authorities end this well, but this is one example in which our willingness to stand toe-to-toe with the IRS on behalf of the taxpayer turned a potentially catastrophic situation into a more manageable one. As a result, the owners can now turn their focus back to managing their company through the recession.
Do you have an IRS story you’d like to share? How can we advocate for you?
Minimize capital gains tax
Thursday, March 31st, 2011 | consulting, tax | No Comments
When you sell an asset for more than your investment in it, the IRS says you must pay tax on the difference, called capital gain. For some years, the tax rate on such gains has been lower than regular rates if the asset is held for a long term (currently, more than one year). Hence the nickname, capital gains tax. The asset may be stocks, bonds, mutual funds, other assets such as equipment and real estate, or an entire company.
On the tax return, short-term and long-term capital gains and losses are accumulated in a specific manner to arrive at net short-term and long-term capital gain or loss from which the tax is calculated.
With good planning, there are several methods that you might use to minimize capital gains, and thereby minimize the tax you must pay on them. Here are six tips (with nods to Alan Haft, CPA Insider):
- When selling stock, specify which shares to sell. By choosing, you can decide the amount of gain or loss on the sale. This method can be used in conjunction with other sales to exercise some control over the net capital gain or loss amount reported on the tax return.
- Make all gains long-term. In 2010, short term capital gains are taxed at your ordinary income tax rate, which can be as high as 35% depending upon your income level. Long-term capital gains are taxed at a maximum of 15%, with additional breaks for lower-income taxpayers. So by holding onto your assets at least one year before selling, you take advantage of the lower tax rate on long-term gains.
- Use capital losses to offset capital gains. Short-term and long-term capital losses reduce their respective gains dollar-for-dollar. If you have more capital losses than gains, the net loss can reduce other income. This loss utilization is limited to $3,000 per year, but the excess loss can be carried forward to future years.
- Replace losing investments. If a stock or fund investment is depressed, you may sell it to lock in a tax loss. If you still believe it’s a good investment, wait 30 days before buying into it again to avoid the “wash-sale” rule. If you buy an identical stock within a period 30 days before or after the sale, the wash-sale rule prevents you from claiming a loss on the sale.
- Replace winners. The wash-sale rule does not apply when you sell an investment to lock in a gain. You may sell it and then buy it back immediately. You might do this if you have a loss to offset the gain, reducing the tax bill on the sale. When you buy the stock back at the higher price, you will pay less tax on future gains because your basis (the cost of the investment) is higher.
- Check mutual fund’s tax efficiency. If you invest in mutual funds, check a fund’s tax-efficiency ratio before investing. This is the percentage of total return you keep after taxes.
Another mutual fund idiosyncrasy is capital gains distributions. Funds may realize capital gains when they sell their underlying investments. During the financial meltdown, we saw large taxable capital gain distributions on 1099s even as mutual funds were losing value. Fund managers were forced to sell appreciated investments in order to redeem shares as investors pulled out of the funds. The resulting capital gains were distributed to all investors, who faced potential tax liability even though they remained fully invested and received no cash from the funds.
Tax impact is not the only criterion behind investment decisions, but it can play a part. By consulting with your CPA or an investment advisor familiar with tax implications, you can balance all factors to make the best decisions. Minimizing capital gains tax can be complicated, but with good planning, it can help you keep your money in your pocket and out of Uncle Sam’s.
Next IRS target - generous relatives
Wednesday, March 30th, 2011 | tax | No Comments
Generous relatives may be the next targets of IRS hunting expeditions. The IRS has asked a federal judge for a “John Doe” summons on the California Board of Equalization to force the board to turn over records of property transfers for little or no consideration. They are looking for people who have not paid gift tax on transfers of property to relatives between 2005 and 2010.
The Tax Code allows the transfer of up to $13,000 annually from one family member to another. Husband and wife can combine to give up to $26,000 a year. For each gift larger than that, the giver must file a Form 709 gift tax return. The giver, not the recipient, is liable for gift tax. Each taxpayer enjoys a lifetime gift tax exemption of a million dollars, making gifts up to that amount free of federal tax. But cumulative gifts over a lifetime must be accounted for in the estate tax calculation of the giver. If gift tax is owed but not paid by the giver, then the liability shifts to the recipient.
Property tax records and registered deeds are public records available for viewing by anyone. The IRS has been quietly gathering compliance information for some time, assisted by many states and counties who have voluntarily disclosed their property transfer data. The summons in California is one of the boldest attempts yet in the IRS effort to ferret out non-compliant taxpayers. Over the years, gift tax audits have been few and far between, but that could change as the IRS begins matching property transfer records with taxpayers.
If you are worried about the implications this may have for your family, please contact us. We can shed light on your situation and help keep the IRS gift tax target off of you.
Bad tax preparer leads to audit trouble
Thursday, March 24th, 2011 | tax | No Comments
We recently met with a new client who had been invited to the IRS local office for an examination of two years of her tax returns. She called the tax preparer, who told her she would not need the preparer at the meeting (red flag number one). After the meeting, she called the preparer back for help, but the preparer was not available (red flag number two). She has not been able to reach the tax preparer since then (red flag number three).
At the IRS meeting, she was shocked to learn for the first time that several items on her tax return were incorrect, mostly improper deductions. She came to us, and we opened her eyes to many ways that her tax preparer had misled her. We will be able to help her minimize the damage, but she was very unhappy to learn that her tax preparer had botched her return, and that she would owe a big chunk of money as a result.
Here’s the catch-22: The tax laws are so complex, the average taxpayer cannot possibly keep up, but you bear the burden of the accuracy of your tax return. Whether or not you rely on a professional to prepare your return, you are personally responsible for everything on the return. You must have documentation to back it up. “That’s how the tax software did it” is no defense. So finding a reputable, credentialed professional who will talk honestly with you is a good investment. No one can guarantee that the IRS won’t have questions about your return, but the process goes much better if your return is properly and accurately prepared based on good records.
Until this year, there has been no federal-level program to ensure at least a minimum level of competency for tax return preparers. There still is no way to get feedback about a tax preparer’s competency or quality of work, other than word of mouth. There is no authority given to the IRS or any other agency that can be used to force bad preparers out of business, other than harassing their clients. Watch for those red flag warnings before trouble comes. A reputable CPA firm (us, for example) or enrolled agent is your best choice.
Most-overlooked tax deductions
Wednesday, March 23rd, 2011 | tax | No Comments
Here is a list of some of the most-overlooked tax deductions each year. Overlooking these deductions may cost you money by raising your tax bill, and the IRS seldom complains when you overpay your taxes. Check this list, and then call us to see how you might claim these deductions.
- State sales taxes. If you itemize deductions, you have a choice of deducting state income tax or sales tax, whichever is greater. Unless you have quite a bit of investment income taxable in Tennessee, you’ll want to claim sales taxes. In addition to the amount the IRS calculates for you, you can add sales tax for a vehicle and construction materials you bought yourself.
- Reinvested dividends. If your mutual fund or stock dividends are used to buy additional shares, each reinvestment increases your basis in the investment. This can make a big difference when you sell it in a taxable account because it reduces the taxable gain or increases the tax-saving loss.
- Out-of-pocket charitable contributions. Keep those receipts if you buy supplies for your favorite charity. If you drive your vehicle for charity, keep a mileage log so you can deduct 14 cents per mile.
- Student-loan interest. A child who is not claimed as a dependent can qualify to deduct interest paid by the parents on his or her return. The IRS deems the payments to have been given to the student, and the student to have paid the interest.
- Job-hunting costs. If you are looking for a new job in the same line of work, you may deduct away-from-home travel costs, ground transportation, employment agency fees, costs of printing resumes and business cards, postage, and other expenses related to the job search. But if it is your first job or the new position is in an unrelated field, the hunt is not deductible. This is an itemized deduction.
- Moving expenses. If your new job is at least 50 miles from home, costs of moving yourself and your household are deductible, including mileage if you drive your vehicle. Unlike the job-hunting deduction, you can claim this one for your first job, and even if you do not itemize.
- Overnight travel for military reservists. If you travel more than 100 miles and stay overnight for drills or meetings, you may deduct travel costs even if you do not itemize.
- Health insurance deduction. If you are self-employed, your health insurance premiums reduce self-employment tax for 2010 only, in addition to income tax.
- Child-care credit. If you take a payroll deduction for dependent care, that part is not available for the credit. But if you pay more than your payroll deduction, the excess may generate a tax credit, which reduces your tax dollar-for-dollar.
- Estate tax on income in respect of a decedent. If you inherited an asset such as an IRA from an estate that paid federal estate tax, you can reduce the tax you owe by the amount of estate tax that was paid on that asset.
- Refinancing points. Points you pay when buying a house are deductible in the year you pay them. When you refinance a mortgage, though, you may only deduct a proportional amount based on the life of the loan. It’s not much each year, but it counts. The remaining amount can be deducted in the year you pay off the loan.
- Jury pay turned over to your employer. If your employer continues paying your salary while you serve jury duty, you may be asked to turn over your jury pay to the company. You still must report jury fees as taxable income, so by deducting the amount paid to your employer, the tax hit is a wash.
- American Opportunity Credit. This modified version of the Hope credit covers all four years of college, is partially refundable, and is phased out at higher income levels than the old credit. The Lifetime Learning credit is also still available.
- Making Work Pay credit. Although this credit reduced your withholding throughout 2010, you must claim it on your tax return.
- Credit for energy-saving home improvements. The cost of certain energy-saving items installed in 2009 and 2010 is subject to a 30% credit up to $1500 for both years combined. Another credit is available for devices that use alternative energy sources.
- Sale of demutualized stock. If you received stock from an insurance company that switched from being policyholder-owned to stockholder-owned, a recent court decision affects you. When you sell that stock, you may reduce the tax you pay on the gain by reporting your basis in the stock.
- Home-buyer credit. This credit was expanded to long-time homeowners before it ended. If you closed on, or entered a binding contract on, a home before April 30 2010, you may qualify.
Remember to talk with your tax adviser to learn how these deductions may apply to your unique situation. It often pays to have an experienced professional like us to prepare your tax return. If you offer full disclosure of events over the past year to your tax preparer, you may trigger questions that can lead to tax savings. As we prepare your return, we also watch out for items that may be more likely to trigger questions from the IRS, and we’ll discuss them with you. You’ll rest better knowing that your tax return was prepared by an experienced team of experts.
What’s taxable? Prizes
Wednesday, March 16th, 2011 | tax | No Comments
What’s taxable? According to the IRS, all receipts from all sources in any form, unless specifically excluded from taxation. Did you win the lottery? Taxable, although you can deduct the cost of the lottery tickets you bought (you saved them as proof, right?) Did you win a TV in a giveaway? Taxable. ‘Tax-exempt’ interest income? Might be taxable, depending on your income and other factors.
A Houston man won coupons for a year’s supply of donuts and coffee at the Astros Fan Appreciation Day last year. Great, right? That sweetness took on a bitter aftertaste when he received a Form 1099 for the fair market value of the coupons, $927.61. He must report that as income and pay taxes on it, whether he uses the coupons or not.
One way to make the tax pill easier to swallow might be for him to donate some of the coupons to charity or use them to promote his business, brewing up tax deductions in the process. Thinking like that is how we help our clients make the best of their tax situations. How can we help solve your tax problem?
Business tax form update
Monday, March 14th, 2011 | tax | No Comments
Due to extender provisions in the Tax Relief Act enacted on December 17, 2010, the IRS delayed accepting some business tax forms, as we posted previously. The IRS has recently announced updated information for these tax forms on irs.gov.
Form 941 for first quarter 2011 now may be filed. The due date is May 2, but early filing is necessary in some cases. Form 1120-PC and Form 8849 (Schedule 3) may also be filed. A date of April 16 was also announced for accepting Forms 706, 706-NA, and 709.
Making Work Pay Credit
Thursday, March 10th, 2011 | tax | No Comments
The Making Work Pay Credit is an income tax credit available to most taxpayers with earned income. We’ve talked to several folks who were unfamiliar with the Making Work Pay Credit, which is available only on your 2010 individual tax return. One of them was surprised when her refund was $400 more than she calculated, and she wanted to make sure the IRS was not mistaken before she cashed the check!
The credit is calculated as 6.2% of earned income, which for most taxpayers is W-2 wages. Self-employment income (or loss) also is factored into the earned income total. The maximum credit is $400 per person; married couples filing joint returns may be eligible for up to $800. If your earned income is more than $95,000 for single filers or $190,000 for joint filers, the credit is phased out. You are not eligible for the credit if you can be claimed as a dependent on someone else’s return.
The Making Work Pay Credit is claimed in the Payments section of the tax return, rather than the Taxes and Credits section. This may be why some filers miss claiming the credit. Form 1040 (long-form) filers also must submit Schedule M to calculate the credit. Make sure you claim it if you are eligible.
One friend who filed her own 1040-EZ return overlooked the Making Work Pay Credit, and she was surprised when her refund was greater by $400. The IRS had recalculated her overpayment to include the credit. It’s nice to know that the IRS computer adjusted her return, but will it catch them all?
As always, there are details that we cannot cover here, so check with your tax adviser to find out how the Making Work Pay Credit applies in your particular situation.