A recent decision of the Tax Court (in the Redisch case) reminds us of how a bloke has to act with respect to the “conversion” of that vacation home to a rental property, entitling the taxpayer to the potential tax benefits of that rental loss, and the possibility of even deducting a loss upon the eventual sale of the property.
The Court found the facts in this case fairly cut and dried, in concluding that these folks did not convert their Florida vacation home to property “held for the production of income”. Their rental effort wasn’t serious and the property was actually never rented. As a result, they couldn’t deduct their rental expenses or claim a loss on the sale.Read More
Seems IRS’ recent deportment in dealing with Microsoft has got Senate Finance Committee Chairman Orrin Hatch (R-UT) all riled up. Hatch wrote to Commissioner Koskinen, last week, complaining of IRS’ use of a private law firm to help out in a pending audit of the software giant.
Under the law, of course, IRS is empowered to make inquiries, and eventually assessments of taxes, relative to a taxpayer’s income tax return filings. And in this regard, IRS can examine books and records, and take testimony for purposes of determining the propriety of a return which has been filed. IRS can also issue summonses, ordering taxpayers to appear before IRS, and to produce books, records and to render testimony.Read More
Those of you out there who think Section 1031 solves all problems (Federal as well as state) should not lose sight of California’s requirements.
Recall that this section of the Internal Revenue Code permits a bloke (who dots all of the i’s and crosses all of the t’s) to dispose of his investment real estate, replace the old property generally with property of equal or greater value, and thus defer current recognition of the gain on the sale. And California has long observed generally the same rules.Read More
Or so they say. So here comes the Treasury Secretary for Tax Administration (TIGTA) to check the situation out.
Recall that TIGTA had previously found that ineffective IRS management has resulted in (1) inappropriate criteria being used to identify for review organizations applying for tax exempt status based on names and policy positions instead of indications of political campaign intervention, (2) substantially delayed processing of certain applications, and (3) unnecessary information requests being issued by the Revenooers.Read More
So here comes another taxpayer tale of woe from our “no good deed goes unpunished” department.
Seems Elroy Earl Morris was the primary and sole beneficiary of a traditional IRA owned by his Dad, and when the old guy passed on, Elroy got the dough from the Farm Bureau Life Insurance Co. of Michigan, which reported the payments to him on a Form 1099R, as usual. Elroy also sought some advice from a local law firm, relative to the settlement of the estate, and was told by a paralegal that there would be no tax due – referring to Federal and state estate taxes, which seems to have slipped by Elroy’s understanding which is what may have led him to omit the distributions from his income tax return.
Further, implementing what he believed to be his father’s wishes, he passed some of the IRA money along to two of his siblings in the aggregate amount of $37,000.Read More
That’s what the Tax Foundation is saying, and it may just be that the powers that be are listening for a change.
Generally speaking, the Foundation says estate and inheritance taxes are poor economic policy, because for the most part they hit accumulated capital which makes America richer and more productive as a whole. These taxes restrict job growth, hurt the economy and their repeal would lead to the creation of nearly 150,000 jobs and an increase in overall Federal tax receipts of $8 billion per year.Read More
Victims of identity theft are still coming out on the short end of the stick insofar as the IRS is concerned. So says the Treasury Inspector General for Tax Administration (TIGTA).
In an audit report released last week, TIGTA noted that IRS has not been providing quality customer service to identity theft victims, when it comes to ongoing delays and errors with respect to victims’ receipt of claimed refunds.
“Refund fraud adversely affects the ability of innocent taxpayers to file their tax returns and timely receive their tax refunds, often imposing significant financial hardship,” notes TIGTA J. Russell George. “While the IRS is making some progress in assisting victims of identity theft, those who have been affected by this devastating crime deserve better.”
TIGTA made five recommendations to the IRS, including that it develop processes and procedures to: ensure that case closing actions and account adjustments are accurate; accurately calculate the average time it takes to fully resolve taxpayer accounts affected by identity theft; and, accurately report the number of identity theft cases resolved to include only those taxpayers for whom the IRS fully resolves their account and issues any refunds due.
And if, like most of us, you donated household goods and other property to your favorite local charity, check out the recent Tax Court decision in the Kunkel case, which held that despite the Court having no doubt that the taxpayer donated the property in question, none of his contributions totaling over $37,000 (as claimed) were deductible because the taxpayer failed the charitable contributions substantiation tests. And, to add insult to injury, taxpayer Kunkel was slapped with the “accuracy related penalty” of 20%!
The rules with respect to the required substantiation vary with respect to the size of the contribution, and on whether the gift is of cash or property. Contributions of property valued at less than $250 cause the taxpayer to obtain a receipt from the donee organization (unless impractical, in which case the donor must maintain reliable written records, including the name of the done, the date and location of the contribution, a description of the property and the method used to determine its fair market value.) Contributions valued at $250 or more require the taxpayer to obtain a contemporaneous written acknowledgement from the done.
For noncash contributions in excess of $500, taxpayers are required to maintain written records that must include, among other things, (1) the approximate date the property was acquired and the manner of its acquisition, (2) a description of the property, (3) the cost or other basis of the property, (4) the fair market value of the property at the time of contribution, and (5) the method used in determining the fair market value. Contributions of property valued in excess of $5,000 require the additional documentation of a “qualified appraisal.”
In addition to flunking these tests, the Court further found that most of the items Kunkel allegedly donated consisted of clothing and household items, and he failed to present credible evidence that these items were “in good used condition or better” as is also required.
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 [email protected].
Who’s to say? It could happen.
So saith The Wall Street Journal, last week, quoting Senator Ben Cardin (D, MD), co-chairman of a Senate Finance Committee working group looking into this plan in the context of the often-mentioned overhaul of the tax system, which should come sooner rather than later.
Cardin actually introduced legislation, last year, to enact a form of consumption tax known as a “value added” tax (essentially, a national sales tax on goods and services purchased by we and thee) while lowering business taxes and shelving income taxes altogether for lower income folks.
The rap on a consumption tax approach has always been, of course, that it hammers poor people, while favoring, in comparison, the rich among us.
We shall see.
And a recent decision of the Tax Court reminds us of the rules which allow taxpayers to deduct expenses of maintaining an office in their home.
In its decision to the detriment of taxpayers Mr. and Mrs. Arunas Savulionis, the Court zeroed in on the rule which permits the deduction of home office expenses only if the portion of the home in question is used exclusively and on a regular basis as the principal place of one’s trade or business. The taxpayers claimed that their house was, indeed, the principal place of business and, more specifically, that the home’s entire living room was used exclusively for business purposes.
Choking back laughter, however, the Court makes mention of the fact that entry to and exit from the house was through a door in the living room. Access to all other rooms in the house was through the living room. Three individuals lived in the house (the taxpayers and their daughter) and likely congregated in the living room and “no doubt” otherwise engaged in other family activities in that room.
The taxpayers claimed, on the other hand, in justification for their deductions, that the entire living room was used exclusively for business purposes, which the Court found “wholly inconsistent with a commonsense notion of the everyday realities of family life of a three-person family residing in a dwelling unit.”
Nice try – no cigar.
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.Read More
That’s the message to taxpayers from the recent Tax Court decision in the Musa case.
The story is that this bloke owned a restaurant, and decided to simply not report as revenue significant amounts of cash which he skimmed from the restaurant’s take. If that were not enough, he also apparently lied to his accountant and payroll service company, and committed other nefarious deeds, resulting in his liability for the IRS’ civil fraud penalty associated with his entire tax underpayment – a hefty 75% penalty when facts like this are determined.
When the IRS latches on to a situation like this, they are inevitably led to an effort to prove factors which the courts have defined as “badges of fraud” – direct and circumstantial evidence in support of the fact that the taxpayer just outright cheated Uncle Sam out of the dough. These “badges” include:
- Understating income
- Maintaining inadequate records
- Implausible or inconsistent explanations of behavior
- Concealment of income or assets
- Failing to cooperate with tax authorities
- Engaging in illegal activities
- An intent to mislead which may be inferred from a pattern of conduct
- Lack of credibility of the taxpayer’s testimony
- Filing false documents
- Failing to file tax returns
- Failing to make estimated payments, and
- Dealing in cash
Musa managed to badge himself with a number of these, resulting in the finding of the Tax Court.
And for you California taxpayers out there, be aware that the Franchise Tax Board never ceases working on ways to improve and enhance its electronic communications with taxpayer-folk, including a system which will allow taxpayers to elect to receive all communications and notices from the FTB electronically, rather than via snail mail. Plans are that this new system will be available by July 1, 2015.
And finally, this week, as April 15 looms, don’t forget that your favorite Franchise Tax Board allows an automatic and paperless extension process. Nothing to file, unless you owe dough, and you have until October 15 to get your actual return in!
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, 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 [email protected].
That’s right – they just can’t wait to send you money, if you’re one of the million or so blokes who hasn’t yet filed for the 2011 tax year and are entitled to a refund. And by IRS’ reckoning, those as yet unclaimed refunds total about a billion or so!
In situations where a tax return has not been filed, the law allows most folks a three year statutory period in which to claim a refund. For 2011 tax returns, nonfilers will be out of luck if they don’t cure their dalliance by April 15, 2015. If no return is filed by that date, Obama keeps the dough.
Understand, however, that if you are one of the folks with money on the table from 2011, even filing that 2011 return by this coming April 15 won’t make any difference if you still have not yet filed your 2012 or 2013 returns.Read More
When it comes to Social Security, that is. So saith the Social Security Administration’s (SSA) Inspector General, who recently stumbled across the fact that something like 6.5 million folks, age 112 or older, have active Social Security Numbers!
The audit, released in early March, concluded that SSA lacks the controls necessary to find out about death information from the records of SS Number holders who exceed “maximum reasonable life expectancies.”Read More
A little good news from the Revenooers this week, for those of you who indulge in slot machine play. Here comes a proposed Revenue Procedure which, if finalized, would allow you to use an optional “safe harbor” in determining your wagering gains and losses.
Longstanding IRS regulations say that gains from wagering transactions are included in your gross income. Sounds simple enough, but unfortunately neither the actual statute nor the IRS regs define the term “transactions.” Whoops. Makes it tough for you follow the rules which allow your losses from wagering “transactions” to the extent of gains from such “transactions.”Read More
Generally speaking, distributions from IRAs before one reaches age 59-1/2 trigger a penalty for early withdrawal – the Revenooers want you to keep the dough in the account until you are truly long in the tooth and truly need the money to support yourself in retirement.
But for any number of reasons, a bloke may take the money out early without the imposition of the IRS fine. Some of the permissible early withdrawal situations are:
- After the death of the participant (We guess the Revenooers are just being reasonable, here, figuring that you can’t take it with you, so why not allow distributions.)
- Total and permanent disability of the participant.
- To enable the participant to pay for qualified higher education expenses.
- To allow a “qualified first time homebuyer” to get into that new abode (up to $10,000).
- To pay for unreimbursed medical expenses.
- To pay for health insurance premiums while unemployed.
So, be advised, when you receive that 1099 (which also goes to IRS)
reporting your IRA withdrawals last year, if you’re below the magic age.Read More
Or is it the “Dirty Dozen?”
In any case, beware of the IRS’ most worrisome tax scams, the more egregious of which are:
- Phone scams – These are aggressive and threatening phone calls by criminals impersonating IRS agents. The scam artists threaten police arrest, deportation, license revocation and other similar nasty results if you don’t comply with their demands.
- Phishing – These are fake emails or websites designed to attempt to capture your personal information. The real IRS simply doesn’t send you emails about the status of your account(s) with them; only letters which come by snail mail.
- Identity theft – IRS is always on the prowl for criminals who file fraudulent returns using legit taxpayers’ Social Security numbers.
- Inflated refund claims – Be wary of anybody who promises you a hefty refund. (As the saying goes, if it’s too good to be true, it probably is.) Don’t sign a blank return, and watch out for preparers who charge fees based on a percentage of any refund.
- Fake charities – Beware of groups masquerading as charitable organizations to attract donations. Check out www.irs.gov, where IRS will make known to you all of the legit charities. If a group is not listed, don’t deal with them. And in this regard, be wary of charities with names that are similar to familiar or nationally known organizations.
- Abusive tax shelters – Yes, there are some of these still around, touted by unscrupulous promoters.
- Frivolous tax arguments – This is one of our favorites. Promoters of frivolous schemes (Google “Irwin Schiff” if you’re looking for some entertainment in this area.) encourage folks to make unreasonable and outlandish claims to avoid paying Uncle Sam. Big penalties for doing this if IRS catches on.Read More
In her annual report to Congress, National Taxpayer Advocate Nina Olson paints a bleak picture of the IRS, in general, and its interaction with taxpayers. She emphasizes four broad areas of concern:
- The budget environment of the last five years has resulted in a “devastating erosion of taxpayer service.” (No argument from us on that one, for sure!)
- The lack of effective administration and congressional oversight, in conjunction with the failure to pass taxpayer rights legislation, has eroded taxpayer protections enacted more than 16 years ago.
- The combined effect of these trends is reshaping tax administration in ways that are “not positive for future tax compliance or for public trust in the fairness of the tax system.”
- This “downward slide” can be addressed if Congress makes an “investment” in the IRS and holds it accountable.
Some of the “most serious problems” identified by the Advocate include:
- The IRS does not have a rigorous methodology for making the difficult resource allocation decisions required by today’s tight budget environment.
- Notwithstanding the “tremendous progress” made by IRS in dealing with the tax implications of Obamacare, lots needs still to be done, including the whole process of accounting for and reconciling the proper amounts of “Advance Premium Tax Credits” which will become a here and now challenge within the next few weeks.
- The whole penalty situation – the law contained only 14 in 1955, with the number ballooning to today’s more than 170 such provisions! And the Advocate notes that more than 20 years ago, Congress recommended that the IRS ‘develop better information concerning the administration and effects of penalties’ to ensure they promote voluntary compliance. But what have we got now? The Advocate states, “The IRS Office of Service-wide Penalties (OSP) is an office of six analysts buried three levels below the Small Business/Self-Employed Division Commissioner (that) cites insufficient resources, insufficient staffing, employees with the wrong skill sets, and a lack of access to penalty-related data as barriers to conducting penalty research.’ (Sound like the government you’ve come to know and love?)Read More
So saith the Treasury Inspector General for Tax Administration (TIGTA) anyway.
Seems TIGTA recently found in one of its audits that between 2010 and 2013, hundreds of former employees were rehired for whom IRS records show performance and conduct issues associated with their previous IRS employment.Read More