Revenooers Reveal This Year’s “Dirty Dozen” Tax Scams

Always vigilant to the endless raft of tax shenanigans going on out there, IRS has released its latest list of favorites – warning taxpayers to be alert to the most egregious potential problems lurking.

  • Identity theft – This is the biggie.  IRS continues to hunt down and prosecute the crooks filing false tax returns using other folks’ social security numbers to secure refunds to which the bad guys are not entitled.
  • Phone scams – We’ve even received one of these – a call from a bad guy impersonating a real Revenooer claiming that unless we pay (a phony “unpaid tax” amount) arrest and other bad things awaits us.
  • Phishing – Though IRS never communicates with taxpayers about unpaid balances, the bad guys do, in an effort to steal personal information.  IRS warns you to be wary of strange emails and websites that are likely nothing more than invitations which, if accepted, will expose your personal information to theft.
  • Return preparer fraud – Deal with reputable professionals only, and beware of preparers, for example, who may pop up with a store front near you, promising all kinds of tax goodies if you engage them.
  • Offshore tax avoidance – IRS has gotten pretty good at nipping this one in the bud, but some folks still think they can hide assets and/or income abroad, keeping IRS at bay.  This can be really bad medicine and folks who play this game will find their pocket book much lighter if/when IRS catches up, not to mention the possibility of a stay in the slammer.
  • Inflated refund claims – Stay away from any preparer who asks you to sign a blank return, promises a big refund before even reviewing your records, or charges fees based on a percentage of your refund!
  • Fake charities – Make sure your donations go to only legit charities and not ones with “sound alike” names to those we all know and love.  If in doubt, check with IRS first (www.irs.gov) who keeps a list of all charities which are truly tax exempt organizations.
  • Falsely padding deductions on returns – this one speaks for itself.  Obviously a “no-no.”
  • Excessive claims for business credits – The fuel tax credit and research credit are high on IRS list of those credits which often are used by cheaters.
  • Falsifying income to claim credits – IRS warns you not to “invent” income so you can incorrectly qualify for such items as the earned income tax credit!
  • Abusive tax shelters – This one, too, used to be of more concern to IRS, which has become pretty good at shutting down these tax avoidance schemes, and even putting some of the folks pushing them in the clink.  If a peddler tries to sell you on one of these, and it “sounds too good to be true,” the likelihood is that it is.
  • Frivolous tax arguments – Believe it or not, there are still some promoters out there who try to encourage taxpayers to make unreasonable and outlandish claims (often based on phony constitutional arguments, or claiming that the income tax law is illegal) in an effort to reduce one’s tax liability.  Amuse yourself by reading about these blokes and their ridiculous arguments, but that should be as far as you go.  And by the way, the penalty for filing a frivolous return is $5,000.Read More

New Rule: IRS No Longer Hires Tax Cheats

Comforting, isn’t it?  To learn that IRS has adopted policies that prohibit its employees who cheat on their own taxes to work for Uncle Sam!

“I have no indication that anyone working for the IRS has not followed the updated procedures,” quoth Commish Koskinen in recent testimony before the Senate Finance Committee.

Recall that a report last year by the Treasury Inspector General for Tax Administration (TIGTA) found that 1,580 IRS employees had willfully failed to pay their taxes.  Of those, TIGTA found 61 percent retained their jobs.Read More

Magnanimous Obama Proposes Retirement Savings Incentives

REVENOOER RANTS – 2/8/16

Lest we be chastised for not giving credit where credit is due, we have to hand it to Obama for recently announcing much needed retirement incentives which will be included in his 2017 budget to be announced this week.  The simple fact is that, unlike the situation in our parents’ generation, most folks just don’t work their entire career with one company, which typically stashed away dough to fund employees’ retirement years.  Further, Obama notes that fewer than 10% of workers without access to a workplace retirement plan contribute to a retirement savings plan of their own.  So, government now proposes to encourage more employers to offer plans and create alternative savings arrangements for folks whose employer does not offer a plan.  To wit:

  • A proposal to triple the existing “startup” credit so small employers which begin offering a retirement plan would receive a tax credit of $1,500 per year for up to three years.  Further, small employers which already offer a plan and add auto-enrollment would get a tax credit of $500 per year for up to three years.
  • For the benefit of part-time workers, a proposal to require that employees who have worked for an employer for at least 500 hours per year for at least three years be eligible to participate in the employer’s existing plan.
  • A proposal which would require employers with more than 10 employees who do not presently offer a retirement plan to automatically enroll their workers in an IRA.  Employers with 100 or less employees that offer an auto-IRA would receive a tax credit of up to $3,000.
  • A proposal to increase the “portability” of retirement savings, in cases of employees who change employers through the course of their working life.Read More

Tax Court Reiterates Employee/Independent Contractor Distinction

Seems like an issue which just won’t go away – the question of whether a worker bee is an employee, or an independent contractor.  Makes a big difference in how the bloke reports his expenses.  If he’s an employee, those expenses go on Schedule A as itemized deductions, and are likely to be subjected to some limitations in the deductible total.  If he’s a contractor, the expenses go on his Schedule C, and further any net profit he reports there can qualify him for retirement plan deductible contributions as well.

So here comes taxpayer Jorge Quintanilla who, the Court notes, is an exceptionally skilled production worker on approximately 150 commercials shot in Southern California.  Jorge believed he qualified as a contractor and reported his expenses on Schedule C as noted above.  The Court further notes that the legal distinction between an independent contractor and a common-law employee is settled as a general matter, though it’s often murky in application.  Courts of various stripes, however, have set forth certain factors over the years, intended to guide one to the proper conclusion as to employee versus contractor, including:Read More

Cat Grabs IRS’ Tongue

Seems the Revenooers plan to go silent – they just don’t want to talk to you anymore.

The National Taxpayer Advocate, in her recent report to Congress, notes that for the past year and a half, IRS has devoted significant resources to creating a “future state” plan which details how the agency will operate in five years.  The plan is explained and developed in a document known as a Concept of Operations (CONOPS).

But CONOPS gives the Advocate a bit of heartburn – implicit in the plan (and explicit in internal discussion) is an intention of the part of the Revenooers to substantially reduce telephone and face-to-face interaction with taxpayers.  IRS is hoping that taxpayer interactions with IRS through online accounts will address a high percentage of taxpayer needs.

Consider:

  • Taxpayers place more than 100 million telephone calls to IRS each year and have done so in every year since fiscal year 2008.
  • Taxpayers make more than five million visits to IRS walk-in sites each year.
  • Taxpayers send an average of about ten million pieces of correspondence to IRS in response to proposed adjustment notices each year, to which IRS must respond.

Seems the Advocate thinks that if IRS substantially reduces the opportunity for folks to actually talk with IRS employees, many taxpayers will find it much harder to resolve their problems and will have to pay third parties to assist them.  (No doubt!)  Hence, the Advocate has recommended to Congress that IRS make the CONOPS available for public review and comment (heretofore not done).  Indeed, the Advocate has designated the future of taxpayer service (an oxymoron if ever there was one) as the number one most serious problem presently confronting taxpayers.  Quoth the Advocate:  “Of considerable concern….is what is not stated in the CONOPS.  Nowhere in the CONOPS is there a statement that the IRS plans to reduce telephone service or close walk-in sites, even though that is a central component of its strategy……The widespread expectation is that traditional taxpayer services – telephone assistance and face-to-face assistance – will be scaled back dramatically.  Based on our internal discussions with IRS officials, Taxpayer Advocate Service has been left with the distinct impression that the IRS’s ultimate goal is ‘to get out of the business of talking with taxpayers.’”

Who knows – maybe this is a good thing.

And the latest from Hillary, this week: a proposed 4 percent ‘fair share surcharge’ tax on the wealthy – now defined as folks making more than $5 million per year.

“This surcharge is a direct way to ensure that effective rates rise for taxpayers who are avoiding paying their fair share, and that the richest Americans pay an effective rate higher than middle-class families,” says a Clinton aide.

We’d call this a “broken record” argument, but who knows what vinyl is any more.

CONSULT YOUR TAX ADVISOR  – This article contains general information about various tax matters.  You should consult your CPA regarding the implications to your own particular situation.

Jeff Quinn, the author of this article is a CPA recently retired from the firm of Ashley Quinn, CPAs and Consultants, Ltd., with offices in Incline Village and Reno.  He welcomes comments at jquinn@ashleyquinncpas.com.

Watch out for “Hillarytax”

So, here we go – head first into another election year!  And you Hillary fans, out there, should not forget her recent promise to go even beyond Obama’s desired tax schemes, and “to make sure the effective tax rate paid by millionaires reflects a truly fair tax system,” according to one of her aide’s recently.

Recall that Obama, once upon a time, propounded the so-called “Buffett Rule” (named for his buddy, Warren Buffett, billionaire investor.)  Obama thinks taxpayers with adjusted gross incomes exceeding $2 million should pay a minimum tax rate of 30% – vastly higher than the rate applicable to various forms of investment income presently taxed at a top rate of 23.8%.

“The Buffett Rule says that millionaires should pay at least 30% income tax rates….and I want to go even farther,” chirped Hillary recently.  “I want to be the president of the struggling, the striving and the successful.”

Nice.

And obviously former Congressional Budget Office Director Doug Elmendorf likes Hillary’s prescription.  Quoth Doug, “If we make changes to federal spending and taxes, we should make them in ways that impose most of the burden on the affluent, because those are the people who have benefited the most from growth in output and income over the past few decades.”

Unstated by Dougie:  those are also the folks who take the risks and invest the capital which fuels growth and provides jobs, whom he and Hillary would propose to punish.

And isn’t it time somebody stood up to the morons pleading for abolition of the IRS?  We hold the Revenooers in as low esteem as anybody, but let’s get real.  Even National Taxpayer Advocate Nina Olson, in recently suggesting that IRS could, indeed, be smaller, points out the notion that the agency could be abolished is basically impractical.

“I don’t know how people think that would happen,” quoth Nina.  “People talk about, ‘Oh, all we need is a postcard’ (to file taxes on).  Well, you’re going to need some agency that you send a postcard to, and you’re going to need some employees to process that postcard.”

Not to mention someone to administer the system’s complex laws and regulations.

CONSULT YOUR TAX ADVISOR – This article contains general information about various tax matters.  You should consult your CPA regarding the implications to your own particular situation.

Jeff Quinn, the author of this article, is retired from the firm of Ashley Quinn, CPAs and Consultants, Ltd., with offices in Incline Village and Reno.  He welcomes comments at jquinn@ashleyquinncpas.com.

IRS Hangs Tough On IRA 60 Day Rollover Rule

We’ve reported, many times, about various situations in which beleaguered taxpayers have been unable to meet the requisite 60 day IRA rollover rule (to avoid treating the dough coming out of the IRA in the first instance to be taxable), and IRS has bent over – showing its “kinder and gentler” side and not slapping the taxpayer with penalties.  Most of these cases have fact patterns indicating the delinquency was not the taxpayer’s fault, but often times that of the IRA custodian because of that guy’s administrative delays.

But in a recent private letter ruling, IRS refused to waive the 60 day rollover requirement for a taxpayer whose attempt to use an IRA distribution to buy an interest in a partnership failed because the IRA custodian couldn’t hold the interest – a mistake that the taxpayer did not learn of for almost a year.  In response to the taxpayer’s plea that the timeliness failure was due to his receipt of incorrect advice, IRS hung tough on the notion that the failure was in fact due to his decision to use IRA proceeds to fund a business venture.

IRS will consider several factors in determining whether to waive the 60 day rollover requirement, including time elapsed since the distribution, inability to complete the rollover due to death, disability, hospitalization, incarceration, restrictions imposed by a foreign country, postal error, errors committed by a financial institutions, etc.

In this case, the taxpayer’s financial advisor prepared the paperwork for the taxpayer to sign, and on November 21, 2012, the custodian issued a check payable to the partnership.  The taxpayer intended that his IRA purchase the shares, and that they be held by the custodian.

But as it turned out, due to some technicality in the partnership agreement, the custodian was eventually unable to hold the investment on behalf of the IRA.  The taxpayer believed that the financial advisor should have prepared paperwork to transfer the amount to a financial institution that could have held the partnership interest on behalf of the IRA.  The problem was not discovered until October of 2013 – obviously well beyond the 60 day rollover period.

Right or wrong, IRS conclusion, here, was that taxpayer’s failure to complete a timely rollover wasn’t due to any of the factors described above which have been held in the past to constitute valid excuses, but instead was due to his choice to use the IRA proceeds to fund a business venture.

Result:  taxpayer is forced to include the distribution in his taxable income for 2012.

And did you hear the latest from Hillary’s campaign re her tax proposals?  $250 billion in direct “investment” over the next five years.  Plus an additional $25 billion to fund a “national infrastructure bank.”  None of this dough comes from the “middle class,” of course, whose taxes Hillary would “cut.”  Hillary wants to give those folk “a raise,” while she hits the top 3% of earners to pay for all of this largesse.

Heard that one before?  How much is enough?

CONSULT YOUR TAX ADVISOR – This article contains general information about various tax matters.  You should consult your CPA regarding the implications to your own particular situation.

Jeff Quinn, the author of this article, is a shareholder in Ashley Quinn, CPAs and Consultants, Ltd., with offices in Incline Village and Reno.  He welcomes comments at jquinn@ashleyquinncpas.com.

Revenooers Comin’ After High Earners!

And the Treasury Inspector General for Tax Administration (TIGTA) doesn’t like the IRS’ “MO”.

In its most recent audit report, last week, TIGTA notes that IRS has taken steps to improve its audit coverage of high-income taxpayers.  But it should reevaluate whether the threshold of $200,000 for its High-Income and High-Wealth strategy results in an efficient allocation of audit resources.

Translation:  “Doesn’t everybody make $200,000 or more each year?”

TIGTA says that because IRS is devoting more audit resources to these taxpayers, it is important to know at what level of income or wealth taxpayers tend to begin establishing complex financial holdings that are at greater risk for noncompliance with the law.

IRS’ High-Income and High-Wealth strategy devotes nearly 50 percent of its high-income audits to taxpayers earning $200,000 to $399,999, whose tax returns potentially present the least productivity of all high-income taxpayers, says TIGTA.

“The IRS should reevaluate the income level it uses to identify taxpayers for its High-Income and High-Wealth strategy so that it can better allocate audit resources to the most significant audit risks,” says J. Russell George, TIGTA major domo.

The IRS Large Business and International Division (LB&I) established the Global High Wealth (GHW) Industry, which takes a comprehensive approach in auditing high-income taxpayers by extending audits beyond the individual tax return to the entities which these taxpayers control.

But IRS is using resources from three other LB&I industries to assist with auditing GHW cases, though no evaluation has been made regarding the impact of that decision on those other industries.  Further – and importantly – IRS cannot quantify its GHW audit performance because of limitations of IRS audit information systems, and GHW has not implemented a quality review process for its audits.

And you can thank Obama for recently eliminating a process (the “file and suspend method” of claiming Social Security benefits) via recent legislation which will nix this strategy used by married folk to maximize their lifetime benefits.

Under this approach, a higher earning spouse would claim benefits at his full retirement age (presently 66) but suspend the benefits until a later date allowing the Social Security credits to continue to grow.  The lower earning spouse would then claim benefits based on the higher earning spouse’s earnings record, which would be more than the benefits based on his or her own earnings record.  The new rules eliminate this opportunity for claims filed after April 30, 2016.

CONSULT YOUR TAX ADVISOR – This article contains general information about various tax matters.  You should consult your CPA regarding the implications to your own particular situation.

Jeff Quinn, the author of this article, is a shareholder in Ashley Quinn, CPAs and Consultants, Ltd., with offices in Incline Village and Reno.  He welcomes comments at jquinn@ashleyquinncpas.com.

No Penalty Despite Taxpayer’s 5th Amendment Claim

 

Some folks we’ve run into have a hard time with the questions on the individual tax return regarding the existence of foreign bank accounts.  “None of their business!” claim some, even though the law says that it sure is.

So here comes taxpayer Youssefzadeh who asserted his 5th amendment protection against self-incrimination in objecting to provide certain info called for on  Schedule B of his 2011 tax return.  Along come the Revenooers, however, slapping our boy with the $5,000 frivolous return penalty, which the law requires in cases where the return doesn’t contain info on which the substantial correctness of the self-assessed tax may be judged.  Even though his return did include the numerical information, including the total amount of interest income which he received for the year.

“Whoa,” said the Tax Court, in concluding that indeed the return was not frivolous.  Indeed, noted the Court, the document filed by the taxpayer did contain sufficient information for IRS to judge “the substantial correctness of the self-assessment.”  The Court found that the return was sufficient to determine its substantial correctness – which doesn’t necessarily require that It be “completely correct.”  The Court noted that the total amount of interest was included on the return, thus distinguishing Youssefzadeh from other tax protestors who merely fill out a return with zeroes on every line.

Anyway, we don’t advise folks to just ignore information requests on returns (like the queries about foreign bank accounts).  This guy may have avoided the frivolous return penalty in his case, but playing fast and loose with the foreign financial account requirements presently permeating the law often is just asking for trouble.

And here’s a novel idea – advanced by Congressman Andy Harris (R-Md) whose recent bill would permit individuals to prepay their federal estate tax during their lives by increasing their income tax obligation by one percent of their adjusted gross income, generally, and foregoing basis adjustments at death.

The  estate tax would be avoided only if the taxpayer paid at least seven years of additional income tax.  If the bloke otherwise dies fewer than seven years after making the election, the taxes paid  would be allowed as a credit against the estate tax liability.

Sounds like one Bernie would favor, don’t ya think?

CONSULT YOUR TAX ADVISOR – This article contains general information about various tax matters.  You should consult your CPA regarding the implications to your own particular situation.

Jeff Quinn, the author of this article, is a shareholder in Ashley Quinn, CPAs and Consultants, Ltd., with offices in Incline Village and Reno.  He welcomes comments at jquinn@ashleyquinncpas.com.

Don’t Forget to Sign the Darned Return!

So you go through all the hassle of getting your records together and getting that return assembled, but at the eleventh hour, you send that joint return to the Revenooers without having your spouse sign the darned thing.

Bad Karma – as learned the hard way by taxpayers Mr. and Mrs. Reifler, who the Tax Court recently slammed down hard as technically not having actually filed a timely return at all in the circumstances!

Mr. and Mrs. Reifler, you see, were married folk who even employed an accountant to prepare their returns.  Mr. Reifler had significant business experience.  For tax year 2000, Mr. Reifler signed the return and left it for the Mrs. to sign but she didn’t – for whatever reason.  Mr. Reifler didn’t notice the omission when he mailed it to IRS before the October 15, 2001 extended due date.

IRS and the taxpayers both acknowledged that Mrs. Reifler relied on her hubby to handle the family financial and tax matters, including preparation and filing of the tax returns, and that she, indeed, intended to file a joint return for 2000.

In any case, the IRS Service Center returned the 2000 return to the taxpayers because of the missing signature (as is the usual procedure in our experience) though the taxpayers claim there was no explanatory information from the IRS regarding why they sent the package back.  Mr. Reifler thought nothing of it because he had requested copies of his tax returns from time to time from IRS for various business reasons.  But unfortunately, upon receipt of the returned return, the taxpayers did not subsequently send the original return back to IRS with the requisite signature.

Sooooo, in 2002, IRS issued a delinquency notice to the taxpayers, informing them that the 2000 return had not actually been received in Uncle Sam’s grubby hands, whereupon the taxpayers then did both sign and return a second copy of their 1040.  And it was this second copy which IRS officially accepted as the originally filed 2000 return – albeit delinquent at this point.

The ensuing beef between the taxpayers and the IRS led the parties to an eventual day in the Tax Court, where the taxpayers made two arguments in support of their claim that the original 2000 return (without Mrs.’ Signature) was validly and timely filed.

  • They first argued the so-called “substantial compliance doctrine,” claiming that their tax return need not have been “perfect” to be valid, as sanctioned by the Supreme Court previously in the Zellerbach Paper Co. case, noting that if a return “purports to be a return, is sworn to as such…and evinces an honest and genuine endeavor to satisfy the law,” it will be treated as a return.
  • The second argument advanced by the Reiflers was based on the so-called “tacit consent doctrine,” premised on the notion that absent Mrs. R’s signature, they truly intended to file a joint tax return.

“No Bueno” concluded the Tax Court on both counts.  And indeed, adding insult to injury as

usually happens, the Court also found that the taxpayers did not exercise ordinary business care and prudence in handling the original 2000 return when IRS sent it back, therefore concluding that the failure to file penalty was applicable!

Moral of the story?  Make sure that both hubby and wifey sign before they seal and deliver!

CONSULT YOUR TAX ADVISOR – This article contains general information about various tax matters.  You should consult your CPA regarding the implications to your own particular situation.

Jeff Quinn, the author of this article, is a shareholder in Ashley Quinn, CPAs and Consultants, Ltd., with offices in Incline Village and Reno.  He welcomes comments at jquinn@ashleyquinncpas.com.

When is IRA Contribution Deductible?

Not really a trick question – the law permits deduction of an IRA contribution in the tax year it is actually made – with one little modification:  you can still deduct your 2015 contribution, f’rinstance, if you deposit it no later than April 15, 2016.

So here come taxpayers Mr. and Mrs.  Stephen J. Dunn – he a tax lawyer, no less –  to butt heads with the Tax Court on this question.  During the first part of 2008, Dunn was employed by a private law firm, and was an “active participant” in that firm’s qualified retirement plan.  (He became self-employed in late 2008 and remained self-employed through the end of 2010.)  Recall that for taxpayers with incomes above a certain level, IRA contributions are not deductible when one is an “active participant” in an employer plan.  Nonetheless, Dunn claimed a deduction for his IRA contribution in 2008.  Upon audit, the Revenooers disallowed the deduction because of the “active participant” status.  But the taxpayer concocted the somewhat novel argument that the 2008 IRA contribution was an “excess contribution” which could be carried forward or, alternatively, should be deemed to have been made for 2009.

“No dice” concluded the Tax Court.  Each IRA contribution year stands on its own.  And, adding insult to injury, clipped Dunn for the “accuracy-related penalty,” based on the fact that as an experienced attorney, he should have known better that his arguments “have no support in the Code, the regulations, relevant case law, or basic tax principles.”

So there.

And we were struck by the common sense words of Thomas Sowell, the Rose and Milton Friedman Senior Fellow on Public Policy at the Hoover Institution, as published in the Fall 2015 edition of the Hoover Digest.  To wit:

“In a recent panel discussion on poverty at Georgetown University, President

Barack Obama gave another demonstration of his mastery of rhetoric—and

disregard of reality……In Obama’s rhetoric, those who produced the wealth

that politicians want to grab……are called “society’s lottery winners.”  Was Bill

Gates a lottery winner?  Or did he produce and sell a computer operating system that allows

billions of people around the world to use computers, without knowing anything

about the inner workings of this complex technology?  Was Henry Ford a lottery

winner?  Or did he revolutionize the production of automobiles, bringing the price

down to the point where cars were no longer luxuries of the rich but vehicles that

millions of ordinary people could afford, greatly expanding the scope of their lives?

 

Most people who want to redistribute wealth don’t want to talk about

how that wealth was produced in the first place.

They just want “the rich” to pay their undefined “fair share” of taxes.  This share

must remain undefined because all it really means is “more.”  Once you have

defined it –whether at 30 percent, 60 percent, or 90 percent—you won’t be able

to come back for more.”

CONSULT YOUR TAX ADVISOR – This article contains general information about various tax matters.  You should consult your CPA regarding the implications to your own particular situation.

Jeff Quinn, the author of this article, is a shareholder in Ashley Quinn, CPAs and Consultants, Ltd., with offices in Incline Village and Reno.  He welcomes comments at jquinn@ashleyquinncpas.com.

Lois Lerner Skates

No surprise here – Obama’s Justice Department declared, just the other day, that IRS (in the person of the now famous Lois Lerner) really did nothing nefarious in its myriad investigations and scrutiny of various nonprofit “Tea Party” groups relative to their tax exemption applications.  Obama’s boys have decided that there will be no charges filed against Lerner, or anybody else amongst the Revenooers.

According to Assistant Attorney General Peter Kadzik, Justice has found “substantial evidence of mismanagement, poor judgment and institutional inertia leading to the belief by many tax-exempt applicants that the IRS targeted them based on their political viewpoints.  But poor management is not a crime……We found no evidence that any IRS official acted based on political, discriminatory, corrupt, or other inappropriate motives that would support a criminal prosecution.  We also found no evidence that any official involved in the handling of tax-exempt applications or IRS leadership attempted to obstruct justice.  Based on the evidence developed in this investigation and the recommendation of experienced career prosecutors and supervising attorneys at the department, we are closing our investigation and will not seek any criminal charges.”

So there.

The conclusion obviously leaves Darrell Issa (R-California) cold after his House Oversight Committee spent a few years chasing all of this down.

“The Justice Department’s decision to close the IRS targeting investigation without a single charge or prosecution is a low point of accountability in an administration that is better known for punishing whistleblowers than the abuse and misconduct they expose.”

And more IRS news came down last week – good news, the Revenooers say, for we and thee:  new “protections” being put in place for next filing season, relative to preservation of taxpayers’ identity.

Quoth Commish Koskinen, “Joining me today are representatives from the electronic tax industry, the software industry and the states.  These members of our Security Summit group have collaborated with the IRS on this effort from day one.  We began mapping out a strategy in March, and together we have made significant progress in just a few months……I’m delighted to report that, for next year’s tax filing season, we are on track to fulfill our goal of having new safeguards in place for taxpayers when they file their returns……Most of these new protections will be invisible to taxpayers, but behind the scenes we are putting in place a multi-layered, multi-faceted approach……We’re going on offense like never before.”

Ahhhhhhhhhh, we feel so much better now, secure in the knowledge that IRS is truly on top of things.

CONSULT YOUR TAX ADVISOR – This article contains general information about various tax matters.  You should consult your CPA regarding the implications to your own particular situation.

Jeff Quinn, the author of this article, is a shareholder in Ashley Quinn, CPAs and Consultants, Ltd., with offices in Incline Village and Reno.  He welcomes comments, and can be reached at jquinn@ashleyquinncpas.com.

Good News/Bad News From Low Inflation Rate

If there’s anything good that may have come from Obama’s actions (or inactions, as the case may be) lately it’s the fact that inflation is little or none in the last year or so.

The bad news, of course, is that Social Security recipients can expect zero in the way of a raise, next year, because any annual cost of living increases arise when the consumer price index moves upward.  The good news, however, is that worker bees will experience no increase in the amount of their annual earnings which will be subject to Social Security and Medicare taxes.  Thus, for 2016 the combined FICA and Medicare tax rate will remain at 15.3%, paid half each by the worker and his employer.  Likewise, there will be no change in the tax rates or earnings base applicable to self-employed folk.

And speaking of FICA, an aspect of this annoying levy has long irked folks whose employment arrangements include their earning of certain forms of “deferred compensation.”  And a recent decision of the Court of Appeals for the Federal Circuit (in the case of Mr. Balestra) brings this annoying law front and center.

Seems Mr. Balestra was an employee of United Airlines (UAL) until his retirement in 2004.  He had earned some “nonqualified deferred compensation” which had not been paid as of his retirement date, upon which date the full present value of his deferred comp was included in the FICA tax base, resulting in FICA withholding on income which he didn’t receive as of that point in time!  And unfortunately, UAL had entered bankruptcy in 2002, two years before our boy’s retirement date.  Consequently, of course, UAL’s obligation to pay Balestra’s deferred comp was ultimately discharged, with the majority of the benefits never having actually been paid to Balestra.  In 2010, UAL made the final payments to creditors as required under its bankruptcy plan, leaving Balestra essentially out in the cold – no deferred comp, despite FICA having been paid by him!

O tempora, O mores!

Balestra went to Court, seeking a refund of the FICA withheld, but the Revenooers and the Courts told him to take a hike.

Nice.

And finally, this week, we recently learned via The Wall Street Journal that the Tax Foundation’s annual International Tax Competitiveness Index finds that, once again, the U.S. of A. ranks a dismal 32nd out of 34 industrialized nations.

The index measures various factors that determine how “friendly” a government is to business and investment, including the amount of taxation and the complexity of tax rules.  While Uncle Sam gets credit for not imposing any sort of “value added tax” over and above all of the other taxes, the U.S. comes in “dead last” among the 34 developed countries in the Organization for Economic Cooperation and Development (OECD) when it comes to taxing corporate income!  The U.S. top marginal corporate rate of 39% is a whopping 14 points above the OECD average of 25%!

Don’t laugh, but Estonia again cops the top ranking in this year’s index – with a flat 20% rate on both personal and corporate income – and zero tax on personal dividend income!

CONSULT YOUR TAX ADVISOR – This article contains general information about various tax matters.  You should consult your CPA regarding the implications to your own particular situation.

Jeff Quinn, the author of this article, is a shareholder in Ashley Quinn, CPAs and Consultants, with offices in Incline Village and Reno.  He can be reached at jquinn@ashleyquinncpas.com.

Some Recent Development Which May Affect You

So, we’re into the last quarter of the tax year – no time like the present to start your tax planning, and enhance your awareness of some recent changes in the rules.  A few items of importance, starting with some provisions of the recently enacted “Surface Transportation and Veterans Health Care Choice Improvement Act of 2015” (the Transportation Act):

  • Partnerships and S corporations must file their 2016 returns by the 15th day of the third month after the end of the tax year – this means March 15 for calendar year entities.  This is a change for partnerships, which previously had until the fourth month after year end by which to file.  C corporations will have to file by the 15th day of the fourth month after year end – previously the deadline for these entities was the third month after year end.
  • Effective for returns required to be made and statements required to be furnished after December 31, 2016, lenders must report more info on mortgages, including the origination date, the amount of outstanding principal, and the address of the underlying property.  (More info for use by the Revenooers in potential audits of issues associated with your mortgage loan!)
  • IRS will now have six years (instead of just three) within which to audit your return in situations where overstatement of your tax basis (and not just omission of gross income) results in a substantial understatement (2 5% or more) of your taxable income.  (The Revenooers had long thought these facts always allowed them the three additional years for audit, but they consistently lost the issue in the courts – including cases before the Supremes – so they now have been successful in their efforts to have the law actually changed to reflect the answer they want.)

Another important recent change, courtesy of the Ninth Circuit Court of Appeals, results in a doubling of the home mortgage interest deduction for unmarried taxpayers, as we recently mentioned.  The limitations on the amount of debt eligible for the home mortgage interest deduction ($1 million of mortgage “acquisition debt” and $100,000 of home equity debt) are to be applied on a “per individual” basis, and not on a “per residence” basis as IRS had always thought.  Consequently, for unmarried co-owners of a residence, the combined limit for the mortgage interest deduction is doubled from a maximum of $1.1 million to a maximum of $2.2 million!  Pretty nice windfall!

CONSULT YOUR TAX ADVISOR – This article contains general information about various tax matters.  You should consult your CPA regarding the implications to your own particular situation.

Jeff Quinn, the author of this article, is a shareholder in Ashley Quinn, CPAs and Consultants, Ltd., with offices in Incline Village and Reno.  He may be reached at 831-7288, and welcomes comments at jquinn@ashleyquinncpas.com.

Busy September Tax Court

The Tax Court was quite busy in September – particularly in hammering taxpayers with a “nice try, but no cigar” conclusion to their cases.  Three in particular:

  • In Ronald C. Fish v. Commissioner, the taxpayer tried one which has been pled to us on many occasions by beleaguered taxpayers:  deduction on the 1040 of losses passed through from partnership investments owned by his IRA.  The taxpayer in this case argued that (in his view) an IRA has “all the attributes of a grantor trust and is therefore a pass through entity which makes all items of income, deduction and credit treated as belonging…(to him) and reportable on …(his) individual tax return.”  Of course, IRS and the Tax Court did not agree, because clearly transactions occurring within the IRA do not result in taxable events which are reported on the holder’s individual income tax return.  The law is quite clear that only distributions from and payments out of an IRA trigger income tax consequences for the payee or distribute.  And if you think about it, the taxpayer eventually will get the benefit of the losses – in the form of less dough available within the IRA to distribute to him as retirement income.  It’s just that simple.
  • And then we have Donald L. Dunnigan v. Commissioner which was another “nice try” on the taxpayer’s part, but to no avail.  Seems that Dunnigan obtained a business line of credit to help support his sole proprietorship appraisal business, and he drew $50,000 down on the line over time.  In 2009, he was unable to repay the borrowed funds in full, negotiating with the lender to settle the obligation for about $15 grand.  The lender ultimately issued a Form 1099-C at year end, reporting the $35 grand as cancellation of indebtedness income, of course, but erroneously checked the box on the form indicating that the taxpayer was not “personally liable” for the debt repayment.  So, in preparing his income tax return for the year, Dunnigan improperly relied on the incorrect 1099-C, in addition to concluding that he was exonerated from reporting the income on some theory of “hardship” (due to a medical condition).  Unfortunately, neither claim succeeded, in that the incorrect 1099-C was irrelevant, given the actual legal agreement which the taxpayer had signed in the first place, and further, the law does not provide any form of “hardship” exception for health reasons relative to this kind of tax event.
  • Finally, in Charles Okonkwo, et ux. v. Commissioner, IRS slapped the taxpayers for trying to deduct a rental loss associated with a house rented to their daughter for less than a “fair market value” rental rate.  The Internal Revenue Code is crystal clear in stating that a dwelling unit is used as a residence of the taxpayers (and thus, by definition, a personal use property and not a rental property) if the taxpayers or a family member uses it for personal purposes for more than a defined period of time and/or does not pay fair market value rent.  Thus, daughter’s use of the residence in question was personal and is attributed to the taxpayers themselves.  Result:  no allowable rental loss!

CONSULT YOUR TAX ADVISOR – This article contains general information about various tax matters.  You should consult your CPA regarding the implications to your own particular situation.  Jeff Quinn, the author of this article, is a shareholder in Ashley Quinn, CPAs and Consultants, Ltd., with offices in Incline Village and Reno.  He may be reached at 831-7288, and welcomes comments at jquinn@ashleyquinncpas.com.

Tangible Asset Expensing Limit Set to Expire

Many folks have come to know and love the Internal Revenue Code’s “Section 179” deduction.  Under this rule, tangible personal property which would otherwise be capitalized and depreciated over several years can be written off in full in the year the property is purchased and placed in service.

And indeed, the deduction has been quite generous in recent years – allowing taxpayers to deduct expenditures of as much as $500,000 in the acquisition year.  But unless Congress takes action to retroactively restore this generous allowance to property purchases after December 31, 2014, the limit drops from $500,000 to $25,000!  So if you bought that fancy machine in January or later of this year, get on the horn to your Congressman and insist that he and his cronies extend this provision, lest you be stuck with only a measly depreciation deduction for this year’s expenditure.Read More

“Kiddie Tax” Nuisance

Recall that some dependent children must file a Form 8615 with their tax return, and subject unearned (generally, investment) income to income taxation at his parents’ tax rate.  The form must be filed for any child who meets all of the following conditions:

  • The child had more than $2,000 of unearned income.
  • The child is required to file a tax return.
  • The child either was under age 18 at the end of the tax year, or was age 18 at the end of the year and did not have earned income that provided more than half of his support, or was a full-time student at least age 19 and under age 24 at year end and did not have earned income that provided more than half of his support.
  • At least one of the child’s parents was alive at the end of the year.
  • The child does not file a joint return.Read More

Judge Hammers Obama On Privacy Fishing Expedition

 

A Federal judge, last week, ordered the Revenooers to turn over the records of any requests from the White House which may have sought taxpayer private info in recent times.

Judge Amy Berman Jackson said IRS cannot simply refuse on the basis of confidentiality laws.

“This court questions whether Section 6103 (of the Internal Revenue Code) should or would shield records that indicate confidential taxpayer information was misused, or that government officials made an improper attempt to access that information,” quoth Judge Amy who denied IRS efforts to close the case.Read More

Court Slaps Private Foundation: Private Inurement

A recent decision of a district court in the District of Columbia agreed with the Revenooers, who actually revoked the tax exempt status of a foundation because some of its activities resulted in extraordinary benefits (“private inurement,” to use the vernacular of the bureaucrats) to the entity’s founder’s family.

Seems a decedent’s estate gave about $2.5 million to a foundation which had previously been put in place.  The estate, of course, took a charitable deduction for estate tax purposes, resulting in zero, zip, nada being paid in estate taxes.Read More

Ninth Circuit Liberalizes Mortgage Deductibility For Unmarrieds

The Ninth Circuit Court of Appeals (our jurisdiction) recently reversed the Tax Court and potentially handed unmarried mortgage debtors a significant windfall.

The panel’s decision involved the debt limit provisions – recall that the Internal Revenue Code has long allowed taxpayers to deduct interest on up to $1 million of home acquisition debt and $100,000 of home equity debt.  The case of Voss v. Comm. involved two unmarried co-owners of real property.  Voss and Sophy are domestic partners registered with the State of California.  They co-own two homes as joint tenants – one in Rancho Mirage, California and the other, their primary residence, in Beverly Hills, California.Read More

“Beware of Scammers”, Warn Revenooers

Apparently taking note of ever-increasingly blatant tactics foisted upon we and thee by scammers, IRS recently issued a new warning to taxpayers.

These thieves, you see, pop up by telephone, emails and letters on authentic-looking letterhead, in an effort to trick taxpayers into providing personal financial information, or scare folks into making a payment to the criminal, ostensibly in settlement of the target’s delinquent tax account.Read More

IRS Commish Seat Getting Hotter

If you listen to U.S. District Court Judge Emmet Sullivan, anyway.

Judicial Watch recently announced that Sullivan has threatened to hold IRS Commissioner Koskinen (and Justice Department attorneys!) in contempt of court after IRS failed to produce status reports and recently obtained emails of Lois Lerner.Read More

Hillary Coming After Your Capital Gains!

Hold on to your wallets, you Dems out there.  Here comes Hillary – after all of us, actually, and not just you!

Last week she made known her plan to significantly increase the tax on long term capital gains for we and thee!  It’s currently 20% (plus, of course, the Obama exaction of another 3.8% to help save Medicare) if your holding period is at least one year, but Hillary wants to raise it all the way up to 39.6% unless you hold on to your capital asset for six years or more!

Not quite sure whose votes she’s after with this, as she seems to be even further sagging in the polls.Read More

IRS Sorry State Of Affairs

In her mid-year report to Congress, National Taxpayer Advocate Nina Olson came up with a real tear-jerker, noting that “With funding down about 17 percent on an inflation-adjusted basis since FY 2010, and with the IRS having had to implement large portions of the Affordable Care Act (ACA) and the Foreign Account Tax Compliance Act (FATCA) this year without any supplemental funding, sharp declines in taxpayer service were inevitable.”

Sniff, sniff.

F’rinstance, notes the Advocate, the IRS answered only 37 percent of taxpayer calls routed to customer service representatives overall, and the hold time for taxpayers who got through averaged 23 minutes.  This level of “service” represents a sharp drop-off from the 2014 filing season, when IRS answered 71 percent of its calls and hold times averaged about 14 minutes.Read More

Ninth Circuit Slams Pot Dispensary On Deductions

The Ninth Circuit Court of Appeals recently hammered the marijuana industry (once again) in holding that a taxpayer was precluded by the Internal Revenue Code from deducting any expenses related to its legal marijuana dispensary business.

Generally, a business may deduct from its gross income all of the ordinary and necessary expenses paid or incurred in carrying out its trade or business.  But a specific provision of the Code precludes a taxpayer from deducting if the trade or business in question consists of trafficking in controlled substances.Read More

Importance Of Keeping IRS Informed Of Your Current Address

 

So you think you can move around and keep one step ahead of the IRS, thus avoiding receipt of their occasional nasty grams which most of us get at one time or another.

But it’s not that simple, and you keep the Revenooers in the dark at your peril!

The Internal Revenue Code repeatedly uses the phrase “last known address” which is an important concept with respect to your ability to receive refunds, as well as a variety of notices and documents which IRS may send you from time to time.  And now hear this:  when a document is sent to a taxpayer’s “last known address,” it is legally effective even if the taxpayer never receives it!Read More

Intentional “Defect” May Make Sense

Sounds a little “counterintuitive,” right?  But who ever said that all tax code terminology was intended to make sense to the average bloke?

Anyway, our subject for today is a clever estate planning device known as an “intentionally defective grantor trust.”  Sounds like somebody might be making a mistake in creating such a critter, but not so.

An “intentionally defective grantor trust” (IDGT) is an irrevocable trust drafted in such a way as to cause the trust’s income to be taxable to the grantor (rather than the trust itself, hence the intentional defect concept) while assets transferred to the trust can be thereby removed from the grantor’s estate at the time of his death.Read More

Nevada’s Low Tax Rep Takes A Hit

Thanks to Republicans.

Recall that nary a few weeks back, the Nevada legislature approved a budget based on $1.4 billion of new and extended taxes for the next two year cycle.  The plans call for an increase in the annual corporation business fee, expansion of the payroll tax, increase in the cigarette tax and creation of yet a new tax:  the so-called “commerce tax” on the gross receipts of businesses with at least $4 million in Nevada revenue.

And all of this starts hammering we and thee on July 1 – just around the corner.

The centerpiece of the legislation is the new “commerce tax,” which divides producers into 26 business categories, each of which has an assigned gross receipts tax rate which range from 0.051 percent (mining) to 0.331 percent (rail transportation).

The “commerce tax” is, of course, reminiscent of the teacher espoused gross receipts tax initiative which was soundly defeated in last November’s election.  As the Tax Foundation points out, such taxes have fallen out of favor since their peak in the 1930s because of the “pyramiding” inherent in their structure.  Pyramiding occurs when taxes are imposed at each stage of production, resulting in multiple layers of taxation on the same goods.

And as folks with foreign financial accounts stare down the upcoming June 30 deadline for 2014 reporting, IRS has announced an unusual bit of leniency for blokes who may not have observed these reporting requirements in years past.  Indeed, if you have not filed a required Report of Foreign Bank and Financial Accounts (FBAR), are not under any civil examination or criminal investigation by IRS, and have not already been contacted by IRS about your delinquent FBAR(s), you can get caught up – penalty free – if you properly reported on your income tax returns and paid all tax on the income arising from the foreign accounts!

If this is you, grab this opportunity.  IRS penalties for noncompliance in this area are otherwise draconian!

And from our tax reform department comes word, this week from Presidential candidate Rand Paul that he proposes a “fair and flat tax” that would “blow up” the Internal Revenue Code, and cut taxes by $2 trillion over the next decade.

Paul proposes a 14.5 income tax rate on all individuals and businesses.

“Basically my conclusion is that the tax code can’t be fixed and should be scrapped,” says Paul.  “We should start over.”

Has some merit.

CONSULT YOUR TAX ADVISOR – This article contains general information about

various tax matters.  You should consult your CPA regarding the implications to your own

particular situation.

Jeff Quinn, the author of this article, is a shareholder in Ashley Quinn, CPAs and

Consultants, Ltd. with offices in Incline Village and Reno.  He can be reached at 831-7288, and welcomes comments at jquinn@ashleyquinncpas.com.

IRS Tough On Gambling Loss Documentation

A recent decision of the Tax Court (in the Zetina Renner) case reminds folks of the rather strict IRS rules regarding documentation of any number of tax return deductions, including deductions for gambling losses.

The Courts love to remind us that tax deductions “are a matter of legislative grace,” with the taxpayer bearing the burden of proving entitlement to any deduction claimed.Read More

Dissolved Corporation Must Still File Returns

A recent private letter ruling issued by the Revenooers may come as a surprise to some.  IRS says that a corporation’s dissolution under state law is not the equivalent of a “termination” for income tax purposes, and the corporation must continue to file returns as long as it operates in a corporate manner.

In this case, a bloke formed a corporation which was administratively dissolved by the state in which it was formed (due to some neglect in a routine state filing, or payment of some state required fee).  During the period in which the taxpayer was unaware of the dissolution, he continued to file the annual corporate tax return and pay all corporate taxes as they came due.Read More