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

So You Want To Convert That Second Home To A Rental

 

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

Revenooers’ End Run On Microsoft

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

California Special Rule For 1031 Exchanges

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

IRS Cleans Up Tax Exempt Application Process

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

Tax Court Unimpressed with Good Deed

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

Time For Estate Tax To Go

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

IRS Still Muddling Around With The Identity Theft Problem

 

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.

No deduction!

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.

Consumption Tax On The Horizon?

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

IRS: Thou Shalt Not Skim!

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 jquinn@ashleyquinncpas.com.

IRS Has Dough Waiting For You!

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

Old Guys Rule

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

IRS Allows Breathing Room For Slot Players

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