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IRS Smartphone App Now Available

Posted by William Byrnes on February 18, 2014


Excerpt from the IRS Special Edition Tax Tip 2014-05 ….

The latest version of the innovative IRS2Go app is now available.  Here’s what you can do with the redesigned IRS Smartphone app IRS2Go, version 4.0, available in English and Spanish:

  • Check the status of your refund.  The new version of IRS2Go includes an easy-to-use refund status tracker so taxpayers can follow their tax return step-by-step throughout the IRS process. Just enter your Social Security number, filing status and your expected refund amount. You can start checking on the status of your refund 24 hours after the IRS confirms receipt of an e-filed return or four weeks after you mail a paper return. Since the IRS posts refund updates on a daily basis, there’s no need to check the status more than once each day.
  • Find free tax preparation.  You may qualify for free tax help through the IRS Volunteer Income Tax Assistance or Tax Counseling for the Elderly programs. A new tool on IRS2Go will help you find a VITA location. Just enter your ZIP code and select a mileage range to see a listing of VITA/TCE sites near you. Select one of the sites and your Smartphone will show an address and map to help you navigate.
  • Get tax records.  You can request a copy of your tax bill or a transcript of your tax return using IRS2Go. The post office will deliver to your address on record.
  • Stay connected.  You can interact with the IRS by following the IRS on Twitter @IRSnews, @IRStaxpros and @IRSenEspanol. You can also watch IRS videos on YouTube, register for email updates or contact the IRS using the “Contact Us” feature.

Information on IRS2Go and other > IRS social media products <

For more than half a century, Tax Facts has been an essential resource designed to meet the real-world tax-guidance needs of professionals in both the insurance and investment industries.

2014_tf_on_individuals_small_businesses-m_1Due to a number of recent changes in the law, taxpayers are currently facing many questions connected to important issues such as healthcare, home office use, capital gains, investments, and whether an individual is considered an employee or a contractor. Financial advisors are continually looking for updated tax information that can help them provide the right answers to the right people at the right time. This brand-new resource provides fast, clear, and authoritative answers to pressing questions, and it does so in the convenient, timesaving, Q&A format for which Tax Facts is famous.

“Our brand-new Tax Facts title is exciting in many ways,” says Rick Kravitz, Vice President & Managing Director of Summit Professional Network’s Professional Publishing Division. “First of all, it fills a huge gap in the resources available to today’s advisors. Small business is a big market, and this book enables advisors to get up-and-running right away, with proven guidance that will help them serve their clients’ needs. Secondly, it addresses the biggest questions facing all taxpayers and provides absolutely reliable answers that help advisors solve today’s biggest problems with confidence.”

The company also points out that the expert authors—Robert Bloink, Esq., LL.M., and William H. Byrnes, Esq., LL.M., CWM®—are delivering real-life guidance based on decades of experience.

tax-facts-online_medium

“The authors’ knowledge and experience in tax law and practice provides the expert guidance for National Underwriter to once again deliver a valuable resource for the financial advising community,” added Kravitz.

Anyone interested can try Tax Facts on Individuals & Small Business, risk-free for 30 days, with a 100% guarantee of complete satisfaction.  For more information, please go to www.nationalunderwriter.com/TaxFactsIndividuals or call 1-800-543-0874.

Posted in Taxation | Tagged: , , | Leave a Comment »

Earned Income Tax Credit (EITC): The IRS Inappropriately Bans Many Taxpayers but a 22.7% Improper Payment Persists Regardless

Posted by William Byrnes on February 11, 2014


The National Taxpayer Advocate provides the following  > report information < on the Earned Income Tax Credit (EITC).

Earned Income Tax Credit and Family Credits

The Earned Income Tax Credit (EITC) is a refundable federal income tax credit for low to moderate income-earning individuals and families. If you qualify, the credit could be a maximum amount of up to $6,044 in 2013. This means you could pay less or no federal tax or even get a refund.

The EITC is based on your earned income and whether or not there are qualifying children in your household. You must file a tax return to claim the EITC and if you have children, they must meet the relationship, age and residency requirements.

What is the EITC?

A taxpayer may qualify for the EITC if you worked any part of last year and made less than $51,000 in 2013.  Read more about the EITC, how to file for it, and how to receive a refund:

IRS Incorrectly Bans Many Taxpayers from Claiming EITC

The National Taxpayer Advocate reported that the IRS Incorrectly Bans Many Taxpayers from Claiming EITC (see > Taxpayer Advocate Report on EITC < )  Excerpted from the National Taxpayer Advocate report…

Section 32(k) of the Internal Revenue Code (IRC) authorizes the IRS to ban taxpayers from claiming the earned income tax credit (EITC) for two years if the IRS determines they claimed the credit improperly due to reckless or intentional disregard of rules and regulations.  This standard requires more than mere negligence on the part of the taxpayer.

According to IRS Chief Counsel guidance, a taxpayer’s failure to participate in an EITC audit does not justify imposing the ban.  Once the IRS imposes the ban, any EITC claimed in the next two years will be disallowed even if the taxpayer is otherwise eligible for the credit.

IRS data shows:

  • The IRS imposed the ban improperly almost 40 percent of the time in 2011;
  • Taxpayers who were (but for the 2011 ban) eligible for the credit in the following two years were deprived of a tax benefit that averaged more than $4,600 for the two years combined.

In a representative sample of two-year ban cases, the Taxpayer Advocate Service (TAS) found:

  • In 19 percent of the cases, the IRS imposed the ban solely because EITC had been disallowed in a previous year;
  • In only 10 percent of the cases did a taxpayer’s response to the audit raise the possibility that he or she had the requisite state of mind to justify the two-year ban;
  • In 69 percent of the cases, the ban was imposed without required managerial approval;
  • In almost 90 percent of the cases, neither IRS work papers nor communications to the taxpayer contained the required explanation of why the ban was imposed; and
  • Taxpayers’ average income was about $15,500.

Low income taxpayers face unique obstacles in learning EITC rules and substantiating their entitlement to the credit, but IRS procedures do not take this into account. Instead, the IRS applies the two-year ban on the basis of unexamined assumptions about the taxpayer’s state of mind or even presupposes reckless or intentional disregard of the rules and regulations, potentially causing significant harm to taxpayers who may be entitled to EITC in a subsequent year.

Treasury > reports < that the other benefit programs results in high administrative costs and low error because of the necessity of the pre-qualification for benefits by a caseworker, whereas the EITC’s program’s administrative costs are less than 1% of the program benefits.  The Treasury report continues that “the IRS screens EITC claims against certain criteria and also conducts approximately 500,000 audits of claims annually.”

Almost a Quarter of EITC Payments are in Error

Yet, considering that the IRS improperly bans taxpayers from the EITC program and performs 500,000 audits of EITC claims annually, 22.7% of the EITC is improperly paid.  A challenging problem to be addressed.  Low administrative cost but high rate of improper denial of eligibility and high rate of improper payment.  Send me (or use comments below) suggestions of how these problems may be mitigated.

2012: $55.4B Total Payments (Outlays) with $12.6B Improper Payments = 22.7% Improper Payment Rate

FISCAL REPORTING YEAR IMPROPER AMOUNT (IN BILLIONS) IMPROPER RATE
2010 $16.9 26.3%
2011 $15.2 23.5%
2012 $12.6 22.7%
2013 $13.2 22.8%
2014 $11.8 22.8%

Treasury’s EITC Program Comments

A number of factors unique to the EITC program trigger errors.  The complexity of the law contributes to confusion around eligibility requirements, mainly qualifying child relationship and residency rules.  Other factors include high program turnover of one-third annually, return preparer errors, and fraud.

The IRS will continue to address EITC noncompliance through its aggressive compliance program which includes examinations, reviews of income misreporting, systemic corrections during tax return processing, and an enhanced focus on paid return preparers.  Because tax return preparers handle two-thirds of returns claiming the EITC, the Department of the Treasury expects the implementation of new preparer requirements for registration, competency testing, continuing education, and compliance checks will improve EITC compliance, decrease fraud, and reduce overall program noncompliance.

Additional information on the program is also provided annually in the department’s Performance and Accountability Report

For more than half a century, Tax Facts has been an essential resource designed to meet the real-world tax-guidance needs of professionals in both the insurance and investment industries.

2014_tf_on_individuals_small_businesses-m_1Due to a number of recent changes in the law, taxpayers are currently facing many questions connected to important issues such as healthcare, home office use, capital gains, investments, and whether an individual is considered an employee or a contractor. Financial advisors are continually looking for updated tax information that can help them provide the right answers to the right people at the right time. This brand-new resource provides fast, clear, and authoritative answers to pressing questions, and it does so in the convenient, timesaving, Q&A format for which Tax Facts is famous.

“Our brand-new Tax Facts title is exciting in many ways,” says Rick Kravitz, Vice President & Managing Director of Summit Professional Network’s Professional Publishing Division. “First of all, it fills a huge gap in the resources available to today’s advisors. Small business is a big market, and this book enables advisors to get up-and-running right away, with proven guidance that will help them serve their clients’ needs. Secondly, it addresses the biggest questions facing all taxpayers and provides absolutely reliable answers that help advisors solve today’s biggest problems with confidence.”

The company also points out that the expert authors—Robert Bloink, Esq., LL.M., and William H. Byrnes, Esq., LL.M., CWM®—are delivering real-life guidance based on decades of experience.

tax-facts-online_medium

“The authors’ knowledge and experience in tax law and practice provides the expert guidance for National Underwriter to once again deliver a valuable resource for the financial advising community,” added Kravitz.

Anyone interested can try Tax Facts on Individuals & Small Business, risk-free for 30 days, with a 100% guarantee of complete satisfaction.  For more information, please go to www.nationalunderwriter.com/TaxFactsIndividuals or call 1-800-543-0874.

Posted in Tax Policy, Taxation | Tagged: , , , | Leave a Comment »

Earned Income Tax Credit (EITC) for Low- and Moderate-Income Workers: a Significant Tax Benefit

Posted by William Byrnes on February 10, 2014


Last Friday (January 31, 2014) the IRS opened the tax filing season for 2013 taxes.  In Newswire (IR-2014-9 and -10), also released January 31, the IRS seeks to reach out to low and moderate income workers to alert them to take advantage of the Earned Income Tax Credit, known as the “EITC”.  The IRS stated that the EITC is often overlooked by the low and moderate workers, many whom do their own tax filing.

This year, taxpayers have until Tuesday, April 15, 2014 to file their 2013 tax returns and pay any tax due.  The IRS expects to receive more than 148 million individual tax returns this year, and more than 80% of tax returns are now filed electronically.

Approximately 75% of tax filers typically receive refunds, 90% of these refunds issued in less than 21 days.  Last year, taxpayers received an average refund of $2,744.  The IRS stated that “E-file” when combined with a direct deposit is the fastest way to receive a refund.  75% of refund recipients now choose direct deposit.

The Earned Income Tax Credit (EITC)

The IRS estimates that 20% of eligible low and moderate income workers miss out on taking advantage of the the EITC, and thus lose any potential refund generated by it.  Either the taxpayer does not claim the EITC when filing or does not file a tax return at all because their income is below the filing threshold.   The IRS further stated that one-third of the taxpayers eligible for EITC changes each year as their personal circumstances, such as work status or family situation, changes, affecting eligibility. 

The EITC varies depending on income, family size and filing status.  Last year, over 27 million eligible workers and families received more than $63 billion total in EITC, with an average EITC amount of $2,300.

Workers, self-employed people and farmers who earned $51,567 or less last year could receive larger refunds if they qualify for the EITC.  That could mean up to $487 in EITC for people without children, and a maximum credit of up to $6,044 for those with three or more qualifying children. Unlike most deductions and credits, the EITC is refundable. In other words, those eligible may get a refund even if they owe no tax. 

Common EITC Mistakes

Taxpayers are responsible for the accuracy of their tax return regardless of who prepares it.  The rules for EITC are complicated.  The IRS urges taxpayers to seek help if they are unsure of their eligibility (read about Taxpayer Clinics below).

There are several requirements to consider:

  • Your filing status can’t be Married Filing Separately.
  • You must have a valid Social Security number for yourself, your spouse if married, and any qualifying child listed on your tax return.
  • You must have earned income. Earned income includes earnings such as wages, self-employment and farm income.
  • You may be married or single, with or without children to qualify. If you don’t have children, you must also meet age, residency and dependency rules.
  • If you are a member of the U.S. Armed Forces serving in a combat zone, special rules apply.

Some common EITC errors are:

  • Claiming a child who does not meet the relationship, age or residency tests
  • Filing as “single” or “head of household” when married
  • Over or under reporting of income and or expenses to qualify for or maximize EITC
  • Missing Social Security numbers or Social Security Number and last name mismatches for both taxpayers and the children

Online Tools at IRS.gov Available to Help

People can find out if they qualify for the EITC by answering a few questions about income, family size and filing status, among other things using the EITC Assistant, a special online tool.  The EITC Assistant will help determine eligibility and will figure an estimated EITC refund.  A taxpayer can even get a printout explaining why he or she qualifies or has been denied.

Free Taxpayer Clinics Help Taxpayers File – Located Around the USA

Eligible taxpayers can also use another helpful online resource, the VITA Site Locator tool to locate one of nearly 13,000 community-based volunteer tax sites consisting of over 90,000 volunteers that can help them file their return for free.  (In San Diego, Thomas Jefferson School of Law has an active VITA program).

Tele-Tax, for example, help taxpayers see if they qualify for various tax benefits, such as the Child Tax Credit and Additional Child Tax Credit for eligible families, the American Opportunity Tax Credit for parents and college students, the saver’s credit for low-and moderate-income workers saving for retirement and energy credits for homeowners making qualifying energy-saving home improvements. The automated IRS services can also help home-based businesses check out the new simplified option for claiming the home office deduction, a straightforward computation that allows eligible taxpayers to claim $5 per square foot, up to a maximum of $1,500, instead of filling out a 43-line form (Form 8829) with often complex calculations.

Free Online Tax Software for Filing

When taxpayers are ready to fill out and file their returns, another online option enables anyone to e-file their returns for free. Free File offers two free electronic filing options: brand-name tax software or online Fillable Forms. Taxpayers who make $58,000 or less can choose free options from 14 commercial software providers. There’s no income limit for the second option, Free File Fillable Forms, the electronic version of IRS paper forms, which is best suited to people who are comfortable preparing their own tax return.

Online Refund Tool

Even after taxpayers file, there are more online tools that can provide them with valuable assistance long after tax season ends. One of the most popular is Where’s My Refund? a tool available on IRS.gov that enables taxpayers to track the status of their refund. Initial information will normally be available within 24 hours after the IRS receives the taxpayer’s e-filed return or four weeks after the taxpayer mails a paper return to the IRS. The system updates every 24 hours, usually overnight, so there’s no need to check more often.

Can’t Afford to Pay the Tax Bill by April 15th?  Use the Online Payment Agreement Tool 

For taxpayers whose concern isn’t a refund, but rather, a tax bill they can’t pay, the Online Payment Agreement tool can help them determine whether they qualify for an installment agreement with the IRS. And those whose tax obligation is even more serious, the Offer in Compromise Pre-Qualifier can help them determine if they qualify for an offer in compromise, an agreement with the IRS that settles their tax liability for less than the full amount owed.

Are You Withholding Enough or Too Much Tax During the Year?

Another useful year-round tool, the IRS Withholding Calculator, helps employees make sure the amount of income tax taken out of their pay is neither too high nor too low. This tool can be particularly useful to taxpayers who, after filling out their tax returns, find that the refund or balance due was higher than expected.

Beware of EITC Scams and Frauds

Scams that create fictitious qualifying children or inflate income levels to get the maximum EITC could leave taxpayers with a penalty.  If an EITC claim was reduced or denied after tax year 1996 for any reason other than a mathematical or clerical error, taxpayers must file Form 8862, Information To Claim Earned Income Credit After Disallowance, with the next tax return to claim the EITC.

Tax Help Through YouTube, Twitter, Tumblr

The IRS also offers more than 100 short instructional videos, tax tips and other useful resources year-round through a variety of social media platforms. They include:

2014_tf_on_individuals_small_businesses-m_1The newest addition to the Tax Facts Library, Tax Facts on Individuals & Small Business focuses exclusively on what individuals and small businesses need to know to maximize opportunities under today’s often complex tax rules.  It is the essential tax reference for financial advisors, & planners; insurance professionals; CPAs; attorneys; and other practitioners advising small businesses and individuals.  See http://www.nationalunderwriter.com/tax-facts-on-individuals-small-business.html

Organized in a convenient Q&A format to speed you to the information you need, Tax Facts on Individuals & Small Business delivers the latest guidance on:
» Healthcare
» Home Office
» Contractor vs. Employee — clarified!
» Business Deductions and Losses
» Business Life Insurance
» Small Business Valuation
» Small Business Entity Choices
» Accounting — including guidance on how standards change as the business grows
» Capital Gains
» Investor Losses
» New Medicare Tax and Net Investment Income tax
» Individual Income Taxation

Posted in Reporting, Taxation | Tagged: , , , , , | Leave a Comment »

Five Great Reasons to E-file Your Tax Return

Posted by William Byrnes on February 3, 2014


The IRS has published IRS Tax Tip 2014-04 addressing “E-Filing”.

The IRS reports that 122 million taxpayers e-filed in 2013 for the 2012 tax year: IRS e-file.  The IRS provides five reasons why a taxpayer should e-file your tax return:

1. Accurate and complete.  E-file is the best way to file an accurate and complete tax return. The tax software does the math for you, and it helps you avoid mistakes.

2. Safe and secure.  IRS e-file meets strict guidelines and uses the best encryption technology. The IRS has safely and securely processed more than 1.2 billion e-filed individual tax returns since the program began.

3. Faster refunds.  E-filing usually brings a faster refund because there is nothing to mail and your return is less likely to have errors, which take longer to process. The IRS issues most refunds in less than 21 days. The fastest way to get your refund is to combine e-file with direct deposit into your bank account.

4. Payment options.  If you owe taxes, you can e-file early and set an automatic payment date anytime on or before the April 15 due date. You can pay by check or money order, or by debit or credit card. You can also transfer funds electronically from your bank account.

5. E-file’s easy.  You can e-file your federal return through IRS Free File, the free tax preparation program available only at IRS.gov. You can also use commercial tax software or ask your tax preparer to e-file your return. If you qualify, IRS Volunteer Income Tax Assistance and Tax Counseling for the Elderly will e-file your return for free.

IRS YouTube Videos:

2014_tf_on_individuals_small_businesses-m_1The newest addition to the Tax Facts Library, Tax Facts on Individuals & Small Business focuses exclusively on what individuals and small businesses need to know to maximize opportunities under today’s often complex tax rules.  It is the essential tax reference for financial advisors, & planners; insurance professionals; CPAs; attorneys; and other practitioners advising small businesses and individuals.  See http://www.nationalunderwriter.com/tax-facts-on-individuals-small-business.html

Organized in a convenient Q&A format to speed you to the information you need, Tax Facts on Individuals & Small Business delivers the latest guidance on:
» Healthcare
» Home Office
» Contractor vs. Employee — clarified!
» Business Deductions and Losses
» Business Life Insurance
» Small Business Valuation
» Small Business Entity Choices
» Accounting — including guidance on how standards change as the business grows
» Capital Gains
» Investor Losses
» New Medicare Tax and Net Investment Income tax
» Individual Income Taxation

Posted in Taxation | Tagged: , , , , | Leave a Comment »

Why Should You File a 2013 Tax Return?

Posted by William Byrnes on February 2, 2014


The IRS released its first Tax Tip of the calendar year (IRS Tax Tip 2014-01).  I have excerpted it below for your convenience:

Even if you don’t have to file a tax return, there are times when you should. Here are five good reasons why you should file a return, even if you’re not required to do so:

1. Tax Withheld or Paid.  Did your employer withhold federal income tax from your pay? Did you make estimated tax payments? Did you overpay last year and have it applied to this year’s tax? If you answered “yes” to any of these questions, you could be due a refund. But you have to file a tax return to get it.

2. Earned Income Tax Credit.  Did you work and earn less than $51,567 last year? You could receive EITC as a tax refund if you qualify. Families with qualifying children may be eligible for up to $6,044. Use the EITC Assistant tool on IRS.gov to find out if you qualify. If you do, file a tax return and claim it.

3. Additional Child Tax Credit.  Do you have at least one child that qualifies for the Child Tax Credit? If you don’t get the full credit amount, you may qualify for the Additional Child Tax Credit. To claim it, you need to file Schedule 8812, Child Tax Credit, with your tax return.

4. American Opportunity Credit.  Are you a student or do you support a student? If so, you may be eligible for this credit. Students in their first four years of higher education may qualify for as much as $2,500. Even those who owe no tax may get up to $1,000 of the credit refunded per eligible student. You must file Form 8863, Education Credits, with your tax return to claim this credit.

5. Health Coverage Tax Credit.  Did you receive Trade Adjustment Assistance, Reemployment Trade Adjustment Assistance, Alternative Trade Adjustment Assistance or pension benefit payments from the Pension Benefit Guaranty Corporation? If so, you may qualify for the Health Coverage Tax Credit. The HCTC helps make health insurance more affordable for you and your family. This credit pays 72.5 percent of qualified health insurance premiums. Visit IRS.gov for more on this credit.

To sum it all up, check to see if you would benefit from filing a federal tax return. You may qualify for a tax refund even if you don’t have to file. And remember, if you do qualify for a refund, you must file a return to claim it.

IRS YouTube Videos:

Do You Need to File a Federal Income Tax Return?

You can also use the Interactive Tax Assistant tool on IRS.gov to see if you need to file.

Many people will file a 2013 Federal income tax return even though the income on the return was below the filing requirement. The questions below will help you determine if you need to file a Federal Income Tax return or if you need to stop your withholding so you will not have to file an unnecessary return in the future.

The Internal Revenue Service is providing this information as a part of our customer service and outreach efforts to Reduce Taxpayer Burden and Processing Costs. Changing your withholding and/or not filing Unnecessary Returns will save both you and the government time and money.

Even if you do not have to file a return, you should file one to get a refund of any Federal Income Tax withheld.

To determine if you need to file a Federal Income Tax return for 2013 answer the following questions:

Occasionally, individuals have one-time or infrequent financial transactions that may require them to file a Federal Income Tax return. Do any of the following examples apply to you?

  • Did you have Federal taxes withheld from your pension and wages for this tax year and wish to get a refund back?
  • Are you entitled to the Earned Income Tax Credit or did you receive Advance Earned Income Credit for this tax year?
  • Were you self-employed with earnings of more than $400.00?
  • Did you sell your home?
  • Will you owe any special tax on a qualified retirement plan (including an individual retirement account (IRA) or medical savings account (MSA)? You may owe tax if you:
    • Received an early distribution from a qualified plan
    • Made excess contributions to your IRA or MSA
    • Were born before July 1, 1942, and you did not take the minimum required distribution from your qualified retirement plan.
    • Received a distribution in the excess of $160,000 from a qualified retirement plan.
  • Will you owe social security and Medicare tax on tips you did not report to your employer?
  • Will you owe uncollected social security and Medicare or Railroad retirement (RRTA) tax on tips you reported to your employer?
  • Will you be subject to Alternative Minimum Tax (AMT)? (The tax law gives special treatment to some kinds of income and allows special deductions and credit for some kinds of expenses.)
  • Will you owe recapture tax?
  • Are you a church employee with income in wages of $108.28 or more from a church or qualified church-controlled organization that is exempt from employer social security or Medicare taxes?

2014_tf_on_individuals_small_businesses-m_1The newest addition to the Tax Facts Library, Tax Facts on Individuals & Small Business focuses exclusively on what individuals and small businesses need to know to maximize opportunities under today’s often complex tax rules.  It is the essential tax reference for financial advisors, & planners; insurance professionals; CPAs; attorneys; and other practitioners advising small businesses and individuals.  See http://www.nationalunderwriter.com/tax-facts-on-individuals-small-business.html

Organized in a convenient Q&A format to speed you to the information you need, Tax Facts on Individuals & Small Business delivers the latest guidance on:
» Healthcare
» Home Office
» Contractor vs. Employee — clarified!
» Business Deductions and Losses
» Business Life Insurance
» Small Business Valuation
» Small Business Entity Choices
» Accounting — including guidance on how standards change as the business grows
» Capital Gains
» Investor Losses
» New Medicare Tax and Net Investment Income tax
» Individual Income Taxation

Authors Professor William Byrnes and Robert Bloink

Posted in Taxation | Tagged: , , , | 1 Comment »

Which Tax Form Should You File?

Posted by William Byrnes on January 30, 2014


The IRS released Tax Tip 2014-03 today: Which Tax Form Should You File?

The IRS is promoting its free tax software or Fillable Forms option that allows you to fill in your tax forms using a computer. You can e-file the completed forms for free!

The IRS offers the following tips for choosing the correct tax form:

You can generally use the 1040EZ if:

  • Your taxable income is below $100,000;
  • Your filing status is single or married filing jointly;
  • You are not claiming any dependents; and
  • Your interest income is $1,500 or less.

The 1040A may be best for you if:

  • Your taxable income is below $100,000;
  • You have capital gain distributions;
  • You claim certain tax credits; and
  • You claim adjustments to income for IRA contributions and student loan interest.

However, reasons you must use the 1040 include:

  • Your taxable income is $100,000 or more;
  • You claim itemized deductions;
  • You are reporting self-employment income; or
  • You are reporting income from sale of a property.

IRS YouTube Videos:

2014_tf_on_individuals_small_businesses-m_1The newest addition to the Tax Facts Library, Tax Facts on Individuals & Small Business focuses exclusively on what individuals and small businesses need to know to maximize opportunities under today’s often complex tax rules.  It is the essential tax reference for financial advisors, & planners; insurance professionals; CPAs; attorneys; and other practitioners advising small businesses and individuals.  See http://www.nationalunderwriter.com/tax-facts-on-individuals-small-business.html

Organized in a convenient Q&A format to speed you to the information you need, Tax Facts on Individuals & Small Business delivers the latest guidance on:
» Healthcare
» Home Office
» Contractor vs. Employee — clarified!
» Business Deductions and Losses
» Business Life Insurance
» Small Business Valuation
» Small Business Entity Choices
» Accounting — including guidance on how standards change as the business grows
» Capital Gains
» Investor Losses
» New Medicare Tax and Net Investment Income tax
» Individual Income Taxation

Authors Professor William Byrnes and Robert Bloink

Posted in Taxation | Tagged: , , , | Leave a Comment »

$135 billion of reported gifts for 2012 nearly tripling 2011 levels

Posted by William Byrnes on January 28, 2014


Yesterday, the IRS Tax Stats Dispatch (#2014-2) included the link for the summation of data from all 2012 Gift Tax Returns.   (see http://www.irs.gov/uac/SOI-Tax-Stats—Total-Gifts-of-Donor,-Total-Gifts,-Deductions,-Credits,-and-Net-Gift-Tax)

Interestingly, the total reported gifts of 2012 of approximately $135 billion was substantially more than double the 2011 year of approximately $51 billion, and previous years before that.  The significant pickup in reported gift giving over the last several years compared to 2012 is in the category $1 million and larger gifts.

Will be interested to read your comments as to why this may be ?  By example, is this the result of the now settled Estate and Gift tax rates ?  Is it a result of the timing of retiring baby boomers wealth transfer to the next generation of their progeny?  Is it charitably driven ?

Were financial planners prepared for the planning of this more than doubling of gifts to future generations and for charitable / legacy purposes?

Use Comments below.

Tax status and size of taxable gifts, current period [1]
 Total gifts [2] Total annual exclusions Total included amount of gifts Total deductions [3] Taxable gifts, current period [4]
Number Amount Number Amount Number Amount Number Amount Number Amount
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)
All returns, taxable and nontaxable 258,393 $134,846,285,766 244443 11794733033 191816 123051555062 5606 8120138820 190401 114968624890
$0 67992 5822167968 67680 4054653753 1415 1767514212 1415 1767514212 0 0
Less than $2,500 7612 362423498 6528 233021040 7612 129402627 24 119914708 7612 9487920
$2,500 under $5,000 7433 412615201 7075 262415929 7433 150200871 407 123,960,592 7433 26240997
$5,000 under $10,000 9294 563330627 8934 321839948 9294 241490859 264 172533814 9294 68957045
$10,000 under $25,000 26161 1366229180 25611 924979071 26161 441250106 217 17,630,195 26161 423619911
$25,000 under $50,000 23829 1731665895 22746 796632342 23829 935033551 397 84434152 23829 850599399
$50,000 under $75,000 13048 1239385141 12504 400229648 13048 839155682 17 38,557,818 13048 800621940
$75,000 under $100,000 8306 996198369 7583 183011743 8306 813186628 6 91,801,097 8306 721385532
$100,000 under $250,000 29570 6071771849 26863 961754449 29570 5110017617 311 338746401 29570 4771297431
$250,000 under $500,000 17,470 $7,519,686,206 16193 709363682 17470 6810322321 662 439160459 17470 6371161683
$500,000 under $1 million 16,149 $12,885,834,594 14609 773330454 16149 12112504390 390 346832003 16149 11765882467
$1 million or more 31,529 $95,874,977,236 28117 2173500974 31529 93701476195 1497 4579053368 31529 89159370564

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The IRS Median Offshore Penalty 580% of Tax Due For Those Who Make Honest Mistakes

Posted by William Byrnes on January 16, 2014


Published via the IRS Newswire (IR-2014-3) and on the Taxpayer Advocate website of the IRS on January 9, 2014, National Taxpayer Advocate Nina E. Olson released her 2013 annual report to Congress.  The Taxpayer Advocate, replying on State Department statistics,  cited that “7.6 million U.S. citizens reside abroad and many more U.S. residents have FBAR filing requirements, the IRS received only 807,040 FBAR submissions in 2012.”{1}  The Taxpayer Advocate noted that “more than one million U.S. citizens reside in Mexico and many Mexican citizens reside in the U.S.”  The Report pointed out that most persons that worked in Mexico had to pay into a government mandated retirement account (known as a AFORES), and that this retirement account may be reportable to the IRS as a foreign trust.

Regarding individual international tax compliance initiatives, the IRS Newswire reported that “Analyzing results from the IRS’s 2009 OVD program, the Advocate found the median offshore penalty was about 381% of the additional tax assessed for taxpayers with median-sized account balances, and 580% of the tax assessed for taxpayers with the smallest account balances (i.e., the bottom 10%, with an average $44,855 account balance).  Taxpayers who “opted out” of the OVD program and agreed to subject themselves to audits fared better but still faced penalties of nearly 70% of the tax and interest.”

The Report stated: “Since 2009, the IRS has generally required those who failed to report offshore income and file one or more related information returns (e.g., the Report of Foreign Bank and Financial Accounts (FBAR)) to enter into successively more punitive offshore voluntary disclosure (OVD) programs.  … The programs were punitive, charging average penalties of more than double the unpaid tax and interest associated with the unreported accounts. … On average, the IRS assessed penalties of nearly 70% of the unpaid tax and interest in the audits of those who opted out.”  The FBAR penalty of 50% of the account balance, for up to six years of non-compliance, equals a potential maximum FBAR penalty of 300% of the account itself, without regard to the actual tax due, interest thereupon, and tax penalties.

The finding that small account holding benign taxpayers paid penalties of nearly 600% of the actual tax due appears to be a miscarriage of the intent of policy makers.  This situation has also led the Taxpayer Advocate to conclude that benign actors, in particular those with small non-reported accounts, made either soft disclosures or prospectively began to comply “… without subjecting themselves to the lengthy and seemingly-unfair OVD process.”

Regarding the 2012 IRS Streamlined OVD program, the taxpayer Advocate found that as of September 2013 2,990 taxpayers had submitted returns reporting an additional $3.8 million in taxes.

{1} Report Volume 1, Page 229.

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Taxpayer Bill of Rights

Posted by William Byrnes on January 9, 2014


Published via the IRS Newswire (IR-2014-3) and on the Taxpayer Advocate website of the IRS,  National Taxpayer Advocate Nina E. Olson today released her 2013 annual report to Congress, urging the Internal Revenue Service to adopt a comprehensive Taxpayer Bill of Rights (TBOR).

The Newswire reminds the public that in a prior report, Olson analyzed the IRS’s processing of applications for tax-exempt status and concluded its procedures violated eight of the ten taxpayer rights she has proposed.  The current Report though provided a broad rationale, based on internal coherence, collection efficiency, and international practices for Congress to codify a Taxpayer Bill of Rights, and for the meanwhile the IRS to issue its own.  Examples of international practice included, by example, references to OECD Reports and to Canada’s practice.  The Report quotes Thomas Jefferson: “A bill of rights is what the people are entitled to against every government on earth, general or particular; and what no just government should refuse, or rest on inferences.”{1}

The Newswire quotes the Report “Taxpayer rights are central to voluntary compliance.  If taxpayers believe they are treated, or can be treated, in an arbitrary and capricious manner, they will mistrust the tax system and be less likely to comply with the laws voluntarily. If taxpayers have confidence in the fairness and integrity of the system, they will be more likely to comply.”

Regarding efficiency, the Newswire focuses on the report’s emphasis that the U.S. tax system is built on voluntary compliance: 98% percent of all tax revenue the IRS collects is paid timely and voluntarily. Only 2% results from IRS enforcement actions.  While arguing that knowledge of taxpayer rights promotes voluntary compliance, the report cites a survey of U.S. taxpayers conducted for TAS in 2012 that found less than half of respondents believed they have rights before the IRS and only 11 percent said they knew what those rights are.

Regarding coherence, the Report states: “The Internal Revenue Code provides dozens of real, substantive taxpayer rights.  However, these rights are scattered throughout the Code and are not presented in a coherent way. Consequently, most taxpayers have no idea what their rights are and therefore often cannot take advantage of them.”

The report calls on the IRS to take the taxpayer rights that already exist and group them into ten broad categories, modeled on the U.S. Constitution’s Bill of Rights. The report says the “simplicity and clarity” of a thematic, principle-based Taxpayer Bill of Rights would help taxpayers understand their rights in general terms.

1. The Right to Be Informed

2. The Right to Quality Service

3. The Right to Pay No More than the Correct Amount of Tax

4. The Right to Challenge the IRS’s Position and Be Heard

5. The Right to Appeal an IRS Decision in an Independent Forum

6. The Right to Finality

7. The Right to Privacy

8. The Right to Confidentiality

9. The Right to Retain Representation

10. The Right to a Fair and Just Tax System, Including Access to the Taxpayer Advocate Service

Read the complete Report at http://www.taxpayeradvocate.irs.gov/2013-Annual-Report/full-2013-annual-report-to-congress/

{1} Report Volume 1, Page 7.

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IRS Gives High-Income Taxpayers a Break on New 3.8% Tax

Posted by William Byrnes on January 2, 2014


The IRS has finally given high-income taxpayers a break with the release of the final regulations governing the new 3.8% tax on net investment income.

These final rules mark a dramatic shift from the IRS’s previous position. By adding flexibility to the rules, the IRS’s unanticipated amendments ease the sting of the investment income tax.

Read Professor Robert Bloink and William Byrnes’ analysis of the shift in the IRS’ position at > Think Advisor <  

tax planning case studies for individuals and small business available on Tax Facts online

Posted in Taxation, Wealth Management | Tagged: , , , , , , , | 3 Comments »

IRS Offers Tips for Year-End Giving

Posted by William Byrnes on December 19, 2013


In its December 16th Newswire (IR-2013-98), the IRS reminded individuals and businesses making contributions to charity of several important tax law provisions that have taken effect in recent years. The IRS highlighted the following changes in the end of year Newswire.

Special Tax-Free Charitable Distributions for Certain IRA Owners

This provision, currently scheduled to expire at the end of 2013, offers older owners of individual retirement arrangements (IRAs) a different way to give to charity.  An IRA owner, age 70½ or over, can directly transfer tax-free up to $100,000 per year to an eligible charity. This option, first available in 2006, can be used for distributions from IRAs, regardless of whether the owners itemize their deductions. Distributions from employer-sponsored retirement plans, including SIMPLE IRAs and simplified employee pension (SEP) plans, are not eligible.

To qualify, the funds must be transferred directly by the IRA trustee to the eligible charity. Distributed amounts may be excluded from the IRA owner’s income – resulting in lower taxable income for the IRA owner. However, if the IRA owner excludes the distribution from income, no deduction, such as a charitable contribution deduction on Schedule A, may be taken for the distributed amount.

Not all charities are eligible. For example, donor-advised funds and supporting organizations are not eligible recipients.

Amounts transferred to a charity from an IRA are counted in determining whether the owner has met the IRA’s required minimum distribution. Where individuals have made nondeductible contributions to their traditional IRAs, a special rule treats amounts distributed to charities as coming first from taxable funds, instead of proportionately from taxable and nontaxable funds, as would be the case with regular distributions. See Publication 590, Individual Retirement Arrangements (IRAs), for more information on qualified charitable distributions.

Rules for Charitable Contributions of Clothing and Household Items

To be tax-deductible, clothing and household items donated to charity generally must be in good used condition or better. A clothing or household item for which a taxpayer claims a deduction of over $500 does not have to meet this standard if the taxpayer includes a qualified appraisal of the item with the return.

Donors must get a written acknowledgement from the charity for all gifts worth $250 or more that includes, among other things, a description of the items contributed. Household items include furniture, furnishings, electronics, appliances and linens.

Guidelines for Monetary Donations

To deduct any charitable donation of money, regardless of amount, a taxpayer must have a bank record or a written communication from the charity showing the name of the charity and the date and amount of the contribution. Bank records include canceled checks, bank or credit union statements, and credit card statements. Bank or credit union statements should show the name of the charity, the date, and the amount paid. Credit card statements should show the name of the charity, the date, and the transaction posting date.

Donations of money include those made in cash or by check, electronic funds transfer, credit card and payroll deduction. For payroll deductions, the taxpayer should retain a pay stub, a Form W-2 wage statement or other document furnished by the employer showing the total amount withheld for charity, along with the pledge card showing the name of the charity.

These requirements for the deduction of monetary donations do not change the long-standing requirement that a taxpayer obtain an acknowledgment from a charity for each deductible donation (either money or property) of $250 or more. However, one statement containing all of the required information may meet both requirements.

Reminders

To help taxpayers plan their holiday-season and year-end giving, the IRS offers the following additional reminders:

  • Contributions are deductible in the year made. Thus, donations charged to a credit card before the end of 2013 count for 2013. This is true even if the credit card bill isn’t paid until 2014. Also, checks count for 2013 as long as they are mailed in 2013.
  • Check that the organization is eligible. Only donations to eligible organizations are tax-deductible. Exempt Organization Select Check, a searchable online database available on IRS.gov, lists most organizations that are eligible to receive deductible contributions. In addition, churches, synagogues, temples, mosques and government agencies are eligible to receive deductible donations, even if they are not listed in the database.
  • For individuals, only taxpayers who itemize their deductions on Form 1040 Schedule A can claim deductions for charitable contributions. This deduction is not available to individuals who choose the standard deduction, including anyone who files a short form (Form 1040A or 1040EZ). A taxpayer will have a tax savings only if the total itemized deductions (mortgage interest, charitable contributions, state and local taxes, etc.) exceed the standard deduction. Use the 2013 Form 1040 Schedule A to determine whether itemizing is better than claiming the standard deduction.
  • For all donations of property, including clothing and household items, get from the charity, if possible, a receipt that includes the name of the charity, date of the contribution, and a reasonably-detailed description of the donated property. If a donation is left at a charity’s unattended drop site, keep a written record of the donation that includes this information, as well as the fair market value of the property at the time of the donation and the method used to determine that value. Additional rules apply for a contribution of $250 or more.
  • The deduction for a car, boat or airplane donated to charity is usually limited to the gross proceeds from its sale. This rule applies if the claimed value is more than $500. Form 1098-C or a similar statement, must be provided to the donor by the organization and attached to the donor’s tax return.
  • If the amount of a taxpayer’s deduction for all noncash contributions is over $500, a properly-completed Form 8283 must be submitted with the tax return.
  • And, as always it’s important to keep good records and receipts.

IRS YouTube Videos:

See Publication 526, Charitable Contributions.

See Online mini-course, Can I Deduct My Charitable Contributions?

 

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IRS’ NEW “HOW TO” VIDEOS FOR FATCA Registration

Posted by William Byrnes on August 27, 2013


For the period from the opening of the FATCA registration website through December 31, 2013, a financial institution (FI) will be able to access its online account to modify or add registration information.

FIs can use the remainder of 2013 to become familiar with the FATCA registration website, to input preliminary information, and to refine that information.  On or after January 1, 2014, each FI will be expected to finalize its registration information by logging into its online account on the FATCA registration website, making any necessary additional changes, and submitting the information as final.

As registrations are finalized and approved in 2014, registering FIs will receive a notice of registration acceptance and will be issued a global intermediary identification number (GIIN).

The IRS will electronically post the first IRS Foreign Financial Institution (FFI) List by June 2, 2014, and will update the list on a monthly basis thereafter.  To ensure inclusion in the June 2014 IRS FFI List, an FI will need to finalize its registration by April 25, 2014.

Below find a link to IRS instructions, user guide and video materials to assist you and your financial institution with FATCA registration:

FATCA Registration Overview (PDF)
FATCA Registration Online User Guide (PDF)
Tips for Logging into the FATCA Registration System
Instructions for Form 8957 (PDF)
Global Intermediary Identification Number (GIIN) Composition (PDF)

“How-to” videos to assist financial institutions with FATCA registration:
Creating a FATCA account for online registration
Logging into a FATCA Account
Recovering a FATCA ID or resetting a FATCA Access Code
Registration System Common Features and Navigation

 

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FATCA Registration Portal Finally Opens

Posted by William Byrnes on August 21, 2013


Update for subscribers of LexisNexis® Guide to FATCA Compliance[1]

FATCA requires that FFIs, through a responsible officer (a.k.a. “FATCA compliance officer”), make regular certifications to the IRS via the FATCA Portal, as well as annually disclose taxpayer and account information for U.S. persons, unless an intergovernmental agreement allows for indirect reporting to the IRS via a foreign government.   On Monday, August 19 the IRS opened its new online FATCA registration system for financial institutions that need to register for compliance with the Foreign Account Tax Compliance Act.[2]  This critical FATCA milestone was supposed to open July 15; however only on July 12 the IRS issued a postponement, as well as a push back of all corresponding impacted milestones and deadlines.

The full text of this article is available on the LexisNexis FATCA http://www.lexisnexis.com/legalnewsroom/tax-law/b/fatcacentral/archive/2013/08/21/the-race-to-register-with-the-irs-online-fatca-system-has-begun.aspx

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Employees and Independent Contactors

Posted by William Byrnes on August 9, 2013


Why is this Topic Important to Financial Professionals? Many small business owners are faced with issues surrounding Form 1099 and how the rules apply to their businesses.  

What are some distinctions of the employees versus independent contractors?

An independent contractor, in general, has a majority of control over the details of his job function and only the end result is dictated by the company or individual who hires.  This is what is commonly known as “the degree of behavioral control.”  Another category used by the IRS and the courts to determine the status of an individual as either an employee or independent contractor is “financial control”.  Financial control involves examining the financial relationship between the parties such as reimbursement, and/or if any materials or space has been provided to accomplish the job.  Other relationship factors such as having a contract or agreement between the parties, as well as the terms of any contract, must also be examined in determining the employment status of the individual.

One of the issues that is often overlooked in the area of an employee relationship instead of an independent contractor relationship is that employees have X number of hours to dedicate to employment each week, whether that number is 40, 50, or anything else that an employment agreement might state.  Independent contracts are often not required to expend a set number of hours to accomplish a task, but instead enough hours to accomplish the task.

Another relevant issue to be considered in determining which of the two employment relations exist is that of termination.  An “At-Will” employee can normally be terminated and generally has no cause for a breach of contract and cannot sue for damages.  An independent contractor cannot usually be terminated without a breach of contract.

Tax Distinctions

Taxation of the two dissimilar positions is significantly different.  Independent contractors essentially work for themselves, and the business that pays them is, in effect, a client.  Generally, and independent contractor will file a tax return as a sole proprietor or closely held corporation, such as a Subchapter S Corporation.  An employee is subject to federal income tax withholding and the employer is subject to payroll taxes, included in the general W-2 process.

Independent contractors, like other businesses, recognize revenue and expenses. The independent contractor usually receives a Form 1099 from the source that pays him.  The Code and Regulations state that when a trade or business pays an individual for certain “services” over $600 that a Form 1099 is required to be filed with the Secretary of the Treasury.[1] And just as other businesses realize “legislative graces of Congress,” such as Section 162 deductions, the sole proprietor too may have expenses that generally qualify as trade or business expenses.

For a detailed analysis regarding independent contractors, see Tax Facts Q 814. How are business expenses reported for income tax purposes?

[1] Internal Revenue Code Section (IRC) 6041, Treasury Regulations (TR) 1.6041-1(a)(1)(i), TR 1.6041-1(a)(2).  

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Posted by William Byrnes on June 24, 2013


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Treasury & IRS Issue Final FATCA Regulations

Posted by William Byrnes on January 21, 2013


Treasury Advances Efforts to Secure International Participation, Streamline Compliance, and Prepare for Implementation of the Foreign Account Tax Compliance Act (January 17, 2013 U.S. Treasury Department of Public Affairs)

The U.S. Department of the Treasury and the Internal Revenue Service (IRS) on January 17, 2013 issued comprehensive final regulations implementing the information reporting and withholding tax provisions commonly known as the Foreign Account Tax Compliance Act (FATCA). Enacted by Congress in 2010, these provisions target non-compliance by U.S. taxpayers using foreign accounts. The issuance of the final regulations marks a key step in establishing a common intergovernmental approach to combating tax evasion.

These regulations provide additional certainty for financial institutions and government counterparts by finalizing the step-by-step process for U.S. account identification, information reporting, and withholding requirements for foreign financial institutions (FFIs), other foreign entities, and U.S. withholding agents.

The final regulations issued today:
 Build on intergovernmental agreements that foster international cooperation. The Treasury Department has collaborated with foreign governments to develop and sign intergovernmental agreements that facilitate the effective and efficient implementation of FATCA by eliminating legal barriers to participation, reducing administrative burdens, and ensuring the participation of all nonexempt financial institutions in a partner jurisdiction. In order to reduce administrative burdens for financial institutions with operations in multiple jurisdictions, the final regulations coordinate the obligations for financial institutions under the regulations and the intergovernmental agreements.

 Phase in the timelines for due diligence, reporting and withholding and align them with the intergovernmental agreements. The final regulations phase in over an extended transition period to provide sufficient time for financial institutions to develop necessary systems. In addition, to avoid confusion and unnecessary duplicative procedures, the final regulations align the regulatory timelines with the timelines prescribed in the intergovernmental agreements.

 Expand and clarify the scope of payments not subject to withholding. To limit market disruption, reduce administrative burdens, and establish certainty, the final regulations provide relief from withholding with respect to certain grandfathered obligations and certain payments made by nonfinancial entities.

 Refine and clarify the treatment of investment entities. To better align the obligations under FATCA with the risks posed by certain entities, the final regulations:

(1) expand and clarify the treatment of certain categories of low-risk institutions, such as governmental entities and retirement funds;

(2) provide that certain investment entities may be subject to being reported on by the FFIs with which they hold accounts rather than being required to register as FFIs and report to the IRS; and

(3) clarify the types of passive investment entities that must be identified and reported by financial institutions.

 Clarify the compliance and verification obligations of FFIs. The final regulations provide more streamlined registration and compliance procedures for groups of financial institutions, including commonly managed investment funds, and provide additional detail regarding FFIs’ obligations to verify their compliance under FATCA.

Progress on International Coordination, Including Model Intergovernmental Agreements

Since the proposed regulations were published on February 15, 2012, Treasury has collaborated with foreign governments to develop two alternative model intergovernmental agreements that facilitate the effective and efficient implementation of FATCA. These models serve as the basis for concluding bilateral agreements with interested jurisdictions and help implement the law in a manner that removes domestic legal impediments to compliance, secures wide-spread participation by every non-exempt financial institution in the partner jurisdiction, fulfills FATCA’s policy objectives, and further reduces burdens on FFIs located in partner jurisdictions. Seven countries have already signed or initialed these agreements.

Today, Treasury announced for the first time that Norway has joined the United Kingdom, Mexico, Denmark, Ireland, Switzerland, and Spain as countries that have signed or initialed model agreements. Treasury is engaged with more than 50 countries and jurisdictions to curtail offshore tax evasion, and more signed agreements are expected to follow in the near future.

Additional Background on the Model Agreements
On July 26, 2012, Treasury published its first model intergovernmental agreement (Model 1 IGA). Instead of reporting to the IRS directly, FFIs in jurisdictions that have signed Model 1 IGAs report the information about U.S. accounts required by FACTA to their respective governments who then exchange this information with the IRS.  Treasury also developed a second model intergovernmental agreement (Model 2 IGA) published on November 14, 2012. A partner jurisdiction signing an agreement based on the Model 2 IGA agrees to direct its FFIs to register with the IRS and report the information about U.S. accounts required by FATCA directly to the IRS.

These agreements do not offer an exemption from FATCA for any jurisdiction but instead offer a framework for information sharing pursuant to existing bilateral income tax treaties. Under both models, all financial institutions in a partner jurisdiction that are not otherwise excepted or exempt must report the information about U.S. accounts required by FATCA. Therefore, the IRS receives the same quality and quantity of
information about U.S. accounts from FFIs in jurisdictions with IGAs as it receives from FFIs applying the final regulations elsewhere, but these agreements help streamline reporting and remove legal impediments to
compliance.

Background on FATCA

FATCA was enacted in 2010 by Congress as part of the Hiring Incentives to Restore Employment (HIRE) Act. FATCA requires FFIs to report to the IRS information about financial accounts held by U.S. taxpayers,
or by foreign entities in which U.S. taxpayers hold a substantial ownership interest. In order to avoid withholding under FATCA, a participating FFI will have to enter into an agreement with the IRS to:

 Identify U.S. accounts,
 Report certain information to the IRS regarding U.S. accounts, and
 Withhold a 30 percent tax on certain U.S.-connected payments to non-participating FFIs and account holders who are unwilling to provide the required information.

Registration will take place through an online system. FFIs that do not register and enter into an agreement with the IRS will be subject to withholding on certain types of payments relating to U.S. investments.

Posted in Compliance, Financial Crimes, Money Laundering, Reporting, Tax Policy | Tagged: , , , , , , , | Leave a Comment »

IRS Quashes Conversion Treatment for Basket Option Contracts

Posted by William Byrnes on March 16, 2012


Long-term gains yield more favorable tax costs than short-term gains. Short-term gains carry an additional 20% tax cost over long-term gains, encouraging the manufacturing of transactions designed to convert short-term to long-term gains. Unfortunately, these transactions attract undue attention from the IRS and are often disregarded by the Service. The IRS recently considered the tax treatment of one of these gain-recharacterization schemes, a basket option contract, in a generic legal advice memorandum (AM 2010-005).

The IRS altered its categorization of  the contract, viewing it as if the investor purchased the securities in a margin account, paying cash equal to 10% of the value of the securities and borrowing 90% of the value from the investment bank. Just as was the case with the “option,” the investor had almost total control over investment of the securities and would reap all appreciation and income from the securities, less interest and brokerage fees.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For in-depth analysis of options, see Advisor’s Main Library: G—Options and Futures.

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IRS Global Settlement for Millennium 419

Posted by William Byrnes on March 6, 2012


A massive increase of lawsuits and IRS investigations have surrounded the Millennium Multiple Employer Welfare Benefit Plan for years, with plan participants claiming it was nothing but a fraudulent device with sole purpose of generating millions in commissions for its agent promoters. There are accusations of taking a total of $500 million from 500 clients by inducing them to participate in a plan that offered no tax or other benefits to its participants.

Several lawsuits are still pending against the Millennium Plan, but at least one aspect of the alleged scam plan has been resolved. The IRS announced on July 5 that it reached an agreement with the Millennium Multiple Employer Welfare Benefit Plan (“Millennium Plan”). After numerous fraud allegations and the IRS abusive tax shelter investigation, the Millennium Plan filed for Chapter 11 bankruptcy.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of welfare benefits plans in Advisor’s Journal, see Tax Courts Holds Employee Taxable for Value of Life Insurance Owned by Welfare-Benefit & Deductions for Life Insurance Premium Payments to Welfare Benefit Plan Denied (CC 10-29).

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How to Lose a Charitable Deduction

Posted by William Byrnes on October 21, 2011


As an advisor, your clients look to you for competent advice in planning their charitable giving. It would be terrible to find out that the gift you thoughtful suggest cannot be deducted due to an avoidable paperwork mistake. Although the IRS sometimes forgives these minor errors, others are unforgivable, as illustrated in recent IRS email advice.

The IRS was not so forgiving with a taxpayer, who made what would otherwise qualify as a tax-deductible charitable gift. The problem was that the taxpayer “failed to get a contemporaneous written acknowledgment” from the charitable organization. In its advice the IRS said it will deny the taxpayer’s charitable deduction even if the taxpayer takes remedial measures and the charity amends its Form 990 (Return of Organization Exempt from Income Tax) to acknowledge the donation and include the information required by the Code.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of charitable deductions in Advisor’s Journal, see Qualified Charitable Distributions from an IRA (CC 11-03) & IRS Takes Qualified IRA Charitable Distributions off the Table for 2010 (CC 11-15).

 

For in-depth analysis of the charitable deduction under Section 170, see Advisor’s Main Library: B6—The Income Tax Charitable Deduction—I.R.C. §170.

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Tax Court Confirms that Surrender Charges Reduce Value of Life Insurance Policy

Posted by William Byrnes on September 30, 2011


The Tax Court recently determined that the fair market value (FMV) of a life insurance policy distributed by a terminated 419 welfare benefit plan is reduced by surrender charges. [Lowe v. C.I.R., T.C. Memo. 2011-106 (2011)].

This ruling strengthens the Tax Court’s position on surrender charges that was enunciated in Schwab v. Commissioner [Michael P. Schwab et ux. v. C.I.R., 136 T.C. No. 6 (2011)]. The IRS continues to challenge taxpayers who apply surrender charges to reduce or eliminate their tax liability when a policy is distributed to them by a welfare benefit plan. However, this ruling adds another degree of certainty to the FMV calculation.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of Tax Court rulings in Advisor’s Journal, see Tax Court Revives Partnership Self-Employment Tax Debate (CC 11-56).

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IRS QTIP Ruling: Perils of Future Changes

Posted by William Byrnes on August 25, 2011


Clients often want to use Qualified Terminal Interest Property trusts (QTIPs) to separate certain funds to care for a surviving spouse, while retaining some measure of control over the general distribution of the funds—whether they will be distributed to children or a charity. But navigating the QTIP rules as client’s circumstances naturally endure change can be cumbersome.  The danger exists when errors that seem trivial, result in eliminating any transfer tax benefit of the trust.

A recent IRS private letter ruling (PLR 201117005) provides us with a good reminder of the QTIP rules and an example of creative QTIP planning that provides the surviving spouse with adequate lifetime income while giving the grantor (and the surviving spouse) a degree of post-death control over disposition of the trust assets.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all the planning libraries and client presentations if you are not already a subscriber)

For a graphic illustration of the QTIP trust, see the Concepts Illustrated practice aid at G—Credit Shelter Trust and QTIP Trust.

For coverage of QTIPs and other techniques useful in estate planning for blended families, see the Advisor’s Journal article Estate Planning for Blended Families (CC 07-16).

For in-depth analysis of marital deduction planning, see Advisor’s Main Library: G—The Marital Deduction.

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New Cancellation of Debt Rules Leave Grantors on the Hook

Posted by William Byrnes on August 19, 2011


The collapse of the secondary market for life insurance during the recent financial crisis left a lot of trusts anxious to dispose of large face value life insurance policies. Trusts that handed back policies in satisfaction of premium finance loans were then struck, along with their grantors, with massive tax bills for what is known as cancellation of indebtedness or cancellation of debt (COD) income.

The IRS recently released proposed regulations that address the income tax treatment of cancellation of debt income of trusts. Although this highly technical area of the law may not be of interest to lay audiences, it is a vital aspect for advisors selling high-value life insurance policies.

 

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber)

For previous coverage of an interesting case involving a premium financed policy in Advisor’s Journal, see Lawsuit Seeks to Hold Insurer Responsible for Suspicious Death (CC 10-101).

For in-depth analysis of life settlements (which can be structured as a premium finance transaction), see Advisor’s Main Library: B—The Life Settlement Industry.

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IRS High Net Worth Initiative: Fearsome Beast or Paper Tiger?

Posted by William Byrnes on August 16, 2011


The IRS commenced the Large Business and International Division’s high-wealth industry group (“HNW Initiative”) in October 2009 with the aim of examining high-net worth individuals for income tax compliance. But the Service may be “using more rhetoric than resources,” according to Syracuse University’s Transactional Records Access Clearinghouse (TRAC). TRAC’s April 14 report, based on information compiled from public records, accuses the IRS of having “very skimpy” audit goals for the HNW initiative.

TRAC’s orginal goal was to audit a mere 122 returns for the 2011 fiscal year. However, according to reports, TRAC will fall far short of this modest benchmark, and instead only audit 19% of the projected returns for the first six months of the year.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber)

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Aggressive IRS Gift Tax Audit Initiative: John Does Summons

Posted by William Byrnes on July 29, 2011


In recent years, the IRS has increased  its search for taxpayers who fail to disclose a gift tax return for reportable transactions. Now, the Justice Department’s Tax Division is getting in on the action, initiating an unprecedented fishing expedition and scouring state government records for information that may lead to taxpayers who have failed to file a gift tax return.

The Justice Department hopes to collect the identities of taxpayers who have gifted real property to relatives without reporting the transaction to the IRS. Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

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IRS Announces Lenient Lien Program for Small Businesses

Posted by William Byrnes on July 11, 2011


If you have small business clients who are struggling with back taxes and/or tax liens, you can tell them help is on the way. The IRS is offering assistance for both individuals and small businesses that are struggling to “meet their tax obligations, without adding unnecessary burden to [the] taxpayers.”  The new program includes a number of features discussed in today’s Advanced Markets Journal.   Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

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A Date Can Make the Difference in Valuation Cases

Posted by William Byrnes on April 29, 2011


Today we re-examine the case in-depth, focusing on how the IRS utilizes the step transaction doctrine to deny taxpayers valuation discounts.  The case is yet another example of how important the dating of transactions is when you’re looking to secure a valuation discount.  A single date on a document can mean the difference between a substantial valuation discount on a gift and the expense of fighting the IRS through the court system.  Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of valuation discounts in Advisor’s Journal, see IRS Rebuffed by Federal Court of Appeals in Valuation Discount Case (CC 11-21), Vigorous Debate over Qualified Appraisal Standard for Valuation of Donated Policies (CC 10-92) & Valuation Discounts: Only for a Bona Fide Business (CC 10-60).

For in-depth analysis of gift tax valuation discounts, see Advisor’s Main Library: A—Family Limited Partnerships and Estate & Gift Tax Valuation Discounting.

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IRS Kicks Off New Offshore Amnesty Program

Posted by William Byrnes on April 6, 2011


Taxpayers with assets hidden in offshore accounts will get a second chance to voluntarily declare their assets to the IRS in return for reduced penalties under the new Offshore Voluntary Disclosure Initiative (“OVDI”).

This newest offshore amnesty program offers a reduced, 25% penalty which will be calculated based on the highest aggregate amount in the taxpayer’s offshore account between 2003 and 2010.   In addition to penalties, program participants will be required to pay eight years of back taxes plus interest, accuracy related penalties, and delinquency penalties.  Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of offshore issues in Advisor’s Journal, see IRS Planning New Voluntary Disclosure Program for Offshore Assets (CC 10-118), Offshore’s Limited Shelf Life (CC 10-47) & IRS Proposed FATCA Guidance Expands Offshore Compliance Initiatives (CC 10-52)

 

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The Perils of Not Re-Visiting a Client’s Plan—a $3MM Tax Bill

Posted by William Byrnes on March 24, 2011


In a recent case, the IRS denied an estate a fractional interest discount on the family ranch, resulting in a seven digit tax bill and the likely liquidation of the family homestead.  The father had numerous options for securing a valuation discount on, or excluding the value of, a significant tract of property from his gross estate, but hadn’t done any planning since 1965, resulting in total denial of a discount.  When he died in 2004, the property was worth $6,390,000.  Don’t let this be your client.

The dispute between the IRS and the father’s estate centered on whether the property’s value in the gross estate was: (1) the undiscounted value of a fee simple interest in the property or (2) the aggregated value of the children’s fractional interests in the property—valued separately with fractional interest discounts.  Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of valuation discounts in Advisor’s Journal, see IRS Rebuffed by Federal Court of Appeals in Valuation Discount Case (CC 11-21) and Valuation Discounts: Only for a Bona Fide Business (CC 10-60).

For in-depth analysis of valuation discounts, see Advisor’s Main Library: A—Family Limited Partnerships and Estate & Gift Tax Valuation Discounting.

 

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IRS Rebuffed by Federal Court of Appeals in Valuation Discount Case

Posted by William Byrnes on March 6, 2011


Valuation discounts will always be a disputed issue between taxpayers and the IRS, but as illustrated by the recently published Ninth Circuit Court of Appeals case, a properly timed gift can still qualify for a discount.  The parents contributed cash, securities, and real property to an LLC and then transferred LLC interests to a trust (“the children’s trust”) naming their children as beneficiaries.

The IRS rejected the valuation discount, claiming that the parents did not make a gift of the LLC interests to the trusts as they claimed, but instead made an indirect gift of the assets owned by the LLC.  The IRS also argued that, even if the LLC were funded prior to the gifting of the LLC interests to the children, the transaction’s two steps—transfer of assets to the LLC and the gift of the LLC interest to the children’s trust—were really a single transaction, an indirect gift of the assets, under the step transaction doctrine.   Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

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LLC Series and Cell Companies

Posted by William Byrnes on March 3, 2011


Late last year the IRS published proposed regulations regarding the classification for Federal tax purposes a domestic series limited liability company (LLC), a domestic cell company, or a foreign series or cell that conducts an insurance business.

A number of States, such as Delaware, have enacted statutes providing for the creation of entities that may establish series, including limited liability companies (series LLCs).  In general, most series LLC statutes provide that a limited liability company may establish separate series.

Although the series LLC generally are not treated as separate entities for State law purposes, the treatment of rights and obligations is similar to separate entities, creating in essence “associated members”.  Members’ association with one or more particular series is comparable to direct ownership by the members in such series, in that their rights, duties, and powers with respect to the series are direct and specifically identified.   If the conditions enumerated in the relevant statute are satisfied, the debts, liabilities, and obligations of one series generally are enforceable only against the assets of that series and not against assets of other series or of the series LLC.

Read the analysis at AdvisorFYI

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Tax Season Starting Late for Some Taxpayers

Posted by William Byrnes on February 5, 2011


Some taxpayers are going to have to wait until mid-to-late February to file their 2010 income tax returns, delaying much needed refunds and potentially clogging up the system for other taxpayers. The IRS is blaming the filing delay on Congress waiting until the end of December to pass the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, H.R. 4853 (Tax Relief Act), which includes a bevy of tax provision extensions, a new two-year estate tax, and a one-year, 2 percent Social Security tax holiday.  Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of the Tax Relief Act of 2010 in Advisor’s Journal, see Obama Tax Compromise Provides 100 Percent Bonus Depreciation of Business Assets Through 2011 (CC 11-01), Obama’s Social Security Tax Holiday: Penny Wise and Pound Foolish? (CC 10-119), Does the New Estate Tax Make the Bypass Trust Obsolete? (CC-10-122), and 2010 Estates: To Elect or Not to Elect (CC 10-124).

 

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New Rules For Tax Preparers

Posted by William Byrnes on January 31, 2011


Seal of the Internal Revenue Service

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Prior to January 1, 2011, any individual could prepare a tax return or claim for refund for compensation.  An individual who prepared and signed a taxpayer’s return or claim for refund as the preparer generally could also represent that taxpayer during an examination of the taxable period covered by that return or claim for refund.

All that has changed ever since the IRS issued regulations which state that after December 31, 2010, in order to prepare a tax return for a fee, or to otherwise represent a taxpayer before the IRS, an individual must obtain a preparer tax identification number (PTIN). …

The Treasury Department and the IRS have decided to adopt the proposed regulations that establish a $50 user fee to apply for or renew a PTIN, which are estimated to recover the full cost to the IRS for administering the PTIN application and renewal program.

Read the full analysis at AdvisorFYI

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The Economic Substance Doctrine Can Unwind Even the Best Laid Plans

Posted by William Byrnes on October 29, 2010


A rush of IRS challenges to transactions that provide your clients with a significant tax benefit may be on its way.  The IRS has new options for denying tax deductions and other tax benefits when it— at its discretion—believes that a transaction has been entered into solely for a tax reduction and not a valid business purpose.

This IRS`s “new” tool is the recently-codified economic substance doctrine, which was signed into law earlier this month by President Obama as part of the Health Care and Education Affordability Reconciliation Act of 2010. The IRS says that the act codifies only existing case law, but in practice, it gives the service the power to supplant a taxpayer`s business judgment with the service`s judgment of whether a transaction has profit potential, the end result being a denial of the tax benefit of transactions that the IRS judges not to have an economic purpose other than the reduction of taxes.

Read this complete article at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

We look forward to your comments on AdvisorFYI.

 

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