Thursday, August 2, 2012

HRA plans have great value in Delaware - Part 3

A few other details about health reimbursement accounts:
  1. Similar to pension plans, some options are available for limiting participation eligibility to after a certain period of employment, etc.
  2. Reimbursements for the former year may be sought until the due date of the tax return, however, time must be allowed for the admin to prepare and mail the annual report before the tax return is filed. 
  3. Former employees are not eligible for reimbursement of expenses incurred while an employee but not submitted for reimbursement until after employment ends.
  4. An HRA is NOT the same as a HSA (health savings acct). A HRA is totally employer funded, nothing may be withheld from employee pay. A HSA only functions in conjunction with the presence of a high deductible health insurance plan. An employee does not have to have any health insurance to participate in a HRA.
  5. The reimbursements are not taxable as compensation to the employee but are fully deductible by the employer as a fringe benefit as long as a qualified plan is established and annually renewed.
  6. Unused allowances may carry forward for one year only and then they are forfeited.
  7. Most states do not allow payment for major medical insurance premiums with an HRA although dental and vision premiums are normally ok. DE now allows reimbursements of health insurance premiums

Wednesday, August 1, 2012

HRA plans have great value in Delaware - Part 2

Health reimbursement accounts are great for certain self-employed persons in Delaware who meet the following criteria:
  • No employees
  • Have no insurance or significant out of pocket medical expenses in spite of insurance
A health reimbursement account can be set up to enable 100% above the line deductions of medical  costs which would otherwise be deducted oin schedule A to they extent they exceed 7.5% of AGI - if you can itemize. Depending on your federal and state tax rates, the break even point for covering the nominal annual admin fee may be as low as $1000 in costs.

Sole-proprietors/partnerships/LLCs will need to initiate employment of a non-owner spouse/s in order to take advantage of this program. Adding the hassles of payroll filings to the mix may negate the benefits of this plan unless medical and medical insurance expenses exceed $3000-$4000/year.

S-corp owner/operators are required to pay themselves wages so payroll will already exist in most cases. Reimbursements are deducted by the corp in the same manner as health insurance premiums - as wages not subject to FICA taxes. The above the line deduction on the 1040 washes out the income at the personal level.

Tuesday, July 31, 2012

HRA plans have great value in Delaware - Part 1

Health reimbursement accounts are an often overlooked fringe benefit option. Effective 2012, Delaware participants may use their HRA to pay medical insurance premiums as well as for out of pocket medical costs. These plans are especially helpfully for employers who wish to offer some type of medical benefits but can't risk being at the mercy of unknown, rising insurance costs.

Typically as an employer you would offer a lump sum of HRA monies - for example $2000 - per employee per year. Employees will submit a vague list of eligible expenses for reimbursement up to the annual limit. The employee is responsible for maintaining evidence of expenses and any repercussions for illegitimate reimbursements would be faced by the employee.
A 3rd party service such as BASE can be retained to assist with annual reporting requirements for a nominal annual fee.

Here is a link to generally allowable expenses:

Monday, July 30, 2012

SE and S-Corp owner Medicare premium above the line deduction

The IRS has stated that Medicare premiums withheld from SS can be treated as self-employed health insurance for the purpose of obtaining an above the line (100%) deduction in some cases. This is more advantageous than deducting the premiums as a part of itemized deductions since A) you have to be able to benefit from itemizing and B) only medical expenses in excess of 7.5% of AGI (10% for years 2013 and beyond if not 65+ years old) may be deducted.

The taxpayer must get reimbursed by the business for premiums paid personally/directly. In the case of S-corp owners, the premiums must be included as wages for federal and state tax purposes in accordance with standard procedures for deducting owner health insurance premiums above the line. Constructive ownership rules apply. (Spouse and some other relations' premiums treated as your own.)

Thursday, July 19, 2012

Impact of carry forwards on new 2013 taxes

Although IRS guidance is still in the making, it would appear from what we currently know that carried forward net operating losses from a business will not offset current year earned income for purposes of calculating the .9% earned income tax. Likewise, carried forward passive losses/capital losses will not offset current-year passive income or capital gains for the purpose of calculating the 3.8% net investment income tax.

Congress did not include in this bill any income averaging options. Even if you generally earn well below $200/$250 these additional taxes may take a bite out of you on the occasion of a once in a lifetime sale of property or real estate. Like kind exchanges (1031 transactions) and installment sales may come back into vogue. Taxpayers currently in the midst of reporting an installment sale may want to elect out of this treatment and pick up the remainder of the gain in 2012.

Wednesday, July 18, 2012

Additional 3.8% tax on 'net investment income' effective 2013

Part of the health care reform bill is a new 3.8% tax on the net investment income of taxpayers with AGI of $200k single/$250k MFJ. Net investment income includes interest, dividends, capital gains net of losses (not adjusted for investment expenses), net rental income, and net passive business income. This tax will be collected via the tax return but must be considered when determining withholdings and estimates as of 2014 to avoid penalties.

With higher capital gains rates already expected effective 2013 plus this tax, 2012 seems to be the best year to sell capital assets with a gain if at all possible. Some people may want to sell and repurchase the same assets just to recognize the gain at the lower rate. Losses will be more valuable to offset gains in future years.

It may be best to sell sooner rather than later as many could rush to sell assets later in the year bringing values down.

Tuesday, July 17, 2012

Additional .9% tax on earned income effective 2013

Part of the health care reform bill is a new .9% tax for households with AGI of $250k for MFJ/$200k for single. This tax will be withheld and remitted by employers in situations where an individual's wages exceed $250k in the year. In many cases, it will be the combination of income from a variety of sources which will push the income up to this level.

The .9% tax due but not withheld by an employer will be calculated on/added to tax due on the tax return. Some taxpayers will need to ask to have extra federal tax withheld or make quarterly estimated tax payments to avoid penalties and interest related to not paying in enough tax throughout the year. This new requirement will really hit home in 2014 after people have paid the .9% with their 2013 return. Each year taxpayers at this level must remit 110% of the total previous year tax to avoid penalties.

Taxes which are withheld but not due - perhaps due to business losses of a spouse - will be refunded with the return.

Monday, July 16, 2012

New medical expensing rules effective 2013

Part of the health care reform bill is a change in the floor for deducting health care expenses. For quite some time, taxpayers who are able to itemize have been able to deduct medical expenses in excess of 7.5% of their AGI, however, as of 2013 this floor will be 10%.

For 2012 taxpayers will have to evaluate whether it would be better to put off expenses (where possible) until 2013 when tax rates are likely to be higher for many people or go ahead and get the expense in before the floor is raised.

Thursday, June 28, 2012

Ltd extension of ability to obtain refund for 2006 tax yr

In general, a taxpayer only has three years to receive a refund due to them from the IRS. For example a 2006 tax return due 4/15/2007 would need to have been filed no later than 4/15/2010 in order to receive the refund. (Note: A taxpayer should still file a delinquent return even if he/she cannot receive a refund because the 3 year statute for audit begins when the return is filed or the due date, whichever is later.) The IRS has announced it will accept refund requests for the telephone excise tax only through 7/27/12. This was only about $60 for most individual taxpayers but some businesses with many phone lines were due a significant amount. Such requests should be filed on a 2006 return.

Wednesday, June 27, 2012

Economic Substance

What is economic substance?

1) the transaction  must change in a meaningful way the taxpayer's economic position and

2)  the taxpayer must have a substantial business purpose for the transaction.

Neither the change in economic position or the business purpose may be saving taxes! This legal doctrine allows the IRS to unravel more complicated/tiered business structures, many times disregarding a tier. It is not allowed t o devlop such structured simply to save taxes. A lack of economic substance can result in an additional 20% or 40% penalty.

Tuesday, June 26, 2012

Supreme Court deliberates the constitutionality of health care reform bill

So what will be impacted if health care refirm is repealed?

Among others:

The penalty on individual taxpayers for any months during which they or their dependents lack minimum essential health coverage;

The premium assistance credit;

The ability of individuals to add children age 27 or under as dependents for employer-provided health coverage;

The reimbursement of qualified health plan premiums as a qualified benefit excludable from wages;

The penalty on large employers that do not offer affordable health care coverage for their full-time employees; and

The small employer health insurance credit.

The 10-percent tax on indoor tanning services.

The new taxes effective 2013 (3.8 on net investment income and .9 on earned income on those with AGI of $200k or more single $250k or more MFJ)

Since a few of these have already been in effect for a couple of years, it may get messy if repealed retroactively. Additionally, some items may be allowed to stand individually although others are nixed. It may not be all or nothing.

Monday, June 25, 2012

IRS form 3115

Form 3115 (change in accounting method) may be required to implement what you are required to implement! These include changes to the treatment of repair and maintenance costs; materials and supplies; rotable and temporary spare parts; de minimis amounts; facilitative costs; acquisition, production or improvement costs; depreciation; dispositions of buildings or their components; and general asset accounts. January 1, 2012 is the effective date of the repair regs. When a taxpayer changes its accounting method, it must ensure the change does not result in the duplication or omission of tax items. However, taxpayers then get audit protection for the prior years.

Thursday, June 21, 2012

Penalties waived for certain farmers/fisherman

The IRS has waived estimated tax penalties for farmers and fisherman who were not able to file by the March 1, 2012 due to failure to receive a 1099 from MF Global. (Farmers and fisherman are exempt form making estimated tax payments as long as they file and pay 100% of the tax due by March 1.)

To request a waiver of the estimated tax penalty, complete Form 2210-F, Underpayment of Estimated Tax by Farmers and Fisherman. As stated in the instructions to Form 2210-F, a short statement should be attached to the form stating that you received a late 1099 from MF Global. At the top of your Form 2210-F, write “MF Global”. Taxpayers should be aware that the Form 2210-F and accompanying Form 1040 cannot be submitted electronically. In the case of farmers who have filed their tax returns and an estimated tax penalty is assessed, please contact the IRS, identify this relief and the penalty will be abated.

Tuesday, June 19, 2012

IRS mail audits increase

The IRS is conducting more and more audits via the mail – 78% in 2010 compared with 54% in 2000.
The average labor cost for a field audit is $2834 compared with $135 for a correspondence audit. These audits are initiated by a notice for proposed tax return changes. Taxpayers must respond with proof that the change is not appropriate within 30 days. In the case of no response, the IRS is assumed to be correct so don’t procrastinate.
The benefits of retaining a CPA to handle any audit can't be overstated. We may be able to anticipate the analysis that will be performed by the auditor upon receipt of the requested materials. We can pre-perform the calculations to find discrepencies in advance. This allows for research on the cause of differences so an explanation can be provided to the IRS with the documents.

Monday, June 18, 2012

New IRS software targets unscrupulous preparers

The IRS claims to be targeting 'unscrupulous' preparers by identifying patterns of suspicious returns with computer programs. The IRS wills seek an initial injunction barring the individual from preparing returns, requiring him/her to send a letter to current clients notifying them that their return may contain fraud, and demanding a list of all current/past clients. 

What = unscrupulous? One example:

*Former tax preparer Cruz admitted that he engaged in results-based tax return preparation, where the goal is to maximize refunds rather than accurately report his customers’ actual income and allowable credits and deductions. Although many of Cruz’s customers would bring copies of their tax documents, such as Forms W-2 and 1099 and receipts for potentially deductible expenses, Cruz often ignored them and instead reported unsupported amounts on customers’ federal income tax returns.  Cruz admitted that he prepared more than 7,000 federal income tax returns for tax years 2004 to 2008.

I am sure all of these 7000 clients had been bragging to their friends about their great preparer. The honeymoon is likely over! We have SEVERAL Delaware preparers who practice in this manner. I certainly  hope their days our numbered. Keep in mind that 'the favors' your preparer does for you (making up charitable and business deductions that are 'acceptable') he/she may do for many people making it easy for the new IRS computers to catch them. Every return has $5000 in charitable deductions, etc. Duh!

Friday, June 15, 2012

New installment agreement eligibility parameters

The IRS has raised eligibility thresholds for obtaining an installment agreement.

1) The total tax due has been raised from $25,000 to $50,000.
2) Taxpayers must prove ability to repay their debt in full with penalties & interest within 72 months - vs. the previous term of 60 months.

Taxpayers must be able to remain current on new taxes in addition to making installment payments. (In some cases the taxpayer must prove to the IRS they have this ability in order to be granted an installment agreement.) Taxpayers who either owe more than $50k or don’t have the ability to pay within 72 months while also paying current year taxes must engage in the much more tedious process of seeking an offer in compromise. This can take years to accomplish.

Remaining current on an installment agreement will prevent the IRS from levying your wages, 1099 income, bank account, etc. However, penalties and interest are not abated or reduced by an installment agreement so if you have any other source of funds with which to pay your taxes (family loan, credit card low interest advance, home equity, sell things...) that will probably be a less costly option. Keep in mind the IRS may still secure its debt with a notice of federal tax lien until you are paid in full, even with an installment agreement in place.

An installment agreement can be requested on line here:

Thursday, June 14, 2012

First time home buyer credit audit statistics

The IRS examined 500,000 returns containing the first time home buyer credit and disallowed nearly 1.6 million in such credits. That works out to only 200 adjustments out of 500,000 returns examined, or .04% success. By my math, taxpayers probably paid  a lot more in examiner wages, benefits, and pension funding than what was collected.

It turns out the IRS used outdated methodology for selecting returns to examine. They selected based on criteria indicating a likelihood of math errors instead of the (now preferred) method which selects returns with highest risk indicators for claiming credits which should be disallowed. Chances are quite a few people received credits for which they were not eligible, despite the 500,000 examinations.

I'd like to add that the notices requesting additional information to support the credit were infuriatingly vague. They simply stated 'supply information to support the credit.' We had already attached to the tax return the records called for in the instructions so this left us scratching our heads. Did these documents not reach the correct person? Did they want some other document? Finding the answer ate up our time and the IRS agent's time as we had to seek clarification by phone in each and every case. Totally avoidable!

Wednesday, June 13, 2012

IRS Tax Fraud Alerts

The IRS reports an upsurge in fraudulent income tax refund claims targeted at senior citizens and others with low or no income. The scam artists lure in victims with promises of nonexistent refunds.

Also, keep in mind that although you may recieve an email from your CPA letting you know that your e-filed return has been accepted, the IRS will NEVER contact you directly via email!!

See the below link for more IRS tax fraud alerts:

Tuesday, June 12, 2012

Self-employment tax primer

The tax court has affirmed that a net operating loss carry forward or carry back cannot offset self-employment income in the year in which it is utilized even though the loss may have been produced from an activity that would have resulted in self-employment tax if there had been income instead of a loss.

I have found that many people don't know what self-employment tax is - even those who pay it! Employers pay half of the social security and Medicare taxes for W-2 employees and 1/2 is withheld from wages. Self-employed individuals must pay in all the tax themselves. In 2012 this amounts to a 13.3% SE tax on business/farm profits. So self-employment tax is a simply social security and Medicare for those who do not receive a W-2 for earned income. Note: Self-employment income can be reported on a business or a farm tax form as well as passed through from a partnership. (Rental income, interest, dividends, pensions = not 'earned' from a tax perspective, not subject to SE tax.) 
This tax is assessed on the individual tax return against the profits from self-employment (in other words after business expenses have offset business income). Itemized deductions and AGI adjustments do not offset self-employment income - only the expenses directly related to the business. Half of the SE tax does reduce AGI. Self-employment income is then also subject to federal and state income taxes at the same rate as your other household income. With all taxes combined, profits from an unincorporated business can be taxed at over 50% depending on your federal tax bracket and state's tax rate.

Friday, June 8, 2012

TE entities must make application & other info public once status is granted

The IRS has reiterated that applications/supporting documents submitted to obtain tax exempt status as well as the determination letter and any subsequent letters or documents related to the tax exempt status must be made available for public inspection as soon as the status has been granted. This remains the case even after tax exempt status has been rescinded, when such circumstance applies.

Thursday, June 7, 2012

2012 first year depreciation for non heavy duty vehicles

First year depreciation for passenger automobiles, light truck, and vans (over 6000# plus misc. other requirements = not considered light) is more strictly limited than that of other vehicles. For automobiles placed in service during 2012 the maximum for new vehicles is $11,160, used $3160. For light trucks and vans $11,360 if new and $3360 if used. The IRS requires a small inclusion in income for leased vehicles. The 2012 lease inclusion tables may be found here:

Wednesday, June 6, 2012

CPA did not take a reasonable salary

Appeals upheld a circuit court ruling that s corp dividend distributions were additional wages subject to social security and Medicare taxes for a CPA that brought home $24k in wages and $200k+ in dividends. The IRS determined that a reasonable salary would have been $91k per year. This case provides some insight that should be heeded by many taxpayers. In this instance, the CPA worked full time and was the primary revenue producer in the firm.

Tuesday, June 5, 2012

Don't forget to file your FBAR by 6/30

A US person who has signature authority over any foreign financial account must file a form called an FBAR by June 30 if the value of such account is $10k at any time during the previous year.

A “foreign country” includes all geographical areas outside the United States, the commonwealth of Puerto Rico, the commonwealth of the Northern Mariana Islands, and the territories and possessions of the United States (including Guam, American Samoa, and the United States Virgin Islands).

“United States person” includes a citizen or resident of the United States, a domestic partnership, a domestic corporation, and a domestic estate or trust. the tax rules concerning disregarded entities do not apply with respect to the FBAR reporting requirement so single member LLCs are not disregarded for this purpose.

A person has signature authority over an account if such person can control the disposition of money or other property in it by delivery of a document containing his or her signature (or his or her signature and that of one or more other persons) to the bank or other person with whom the account is maintained. Other authority exists in a person who can exercise power that is comparable to signature authority over an account by direct communication to the bank or other person with whom the account is maintained, either orally or by some other means.

Failure to file an FBAR when required to do so may potentially result in civil penalties, criminal penalties or both.

FBAR forms are available:

Online via in PDF.

Online via Department of the Treasury’s Financial Crimes Enforcement Network Web site in PDF.

By calling the IRS at 800-829-3676.

Monday, June 4, 2012

New audit technigue guide for artists

The IRS must make available to teh general public all guides they give to their examiners for use while conducting audits. Audit technique guides which have been around for awhile include:construction industry, cash intensive businesses, wine industry, retail industry, business consultants, attorney, veterinary, minister, new vehicle dealership - nd many more! Now at long last we have an ATG for Artists and Art Galleries.,,id=254019,00.html

Saturday, June 2, 2012

Tax change proposals still focus in pass through entities

The Congressional Research Service reports that most recent proposals for tax change focus on increasing taxes on high income recipients of pass-through income. Taxpayers with AGI over $250k receive 62% of pass-through income.

A recent Joint Committee on Taxation report focuses on pass through entities. They recommended a uniform pass-through entity utilizing a combination of partnership and S corp rules and doing away with both entities as they are now. Businesses would simply elect pass through or not pass through. Something to keep an eye on!

Wednesday, May 30, 2012

Estate tax exclusion now transfers to surviving spouse

The estate and gift tax for 2011/2012 is $5mil. If the first spouse dies in 2011/2012 and the estate is less than the exclusion, the estate can elect to transfer the unused exclusion to the surviving spouse with the form 706, timely filed within 9 months of date of death. The election cannot be made without filing a form 706 which technically is not necessary if you estate is less than $5mil and which is quite an extensive form. This would be worth doing if it was anticipated that the estate of the surviving spouse would be greater than $5mil at date of death.

Thursday, February 23, 2012

VOW to Hire Heroes Act expanded the WOTC

Under a special rule included in a new IRS notice, employers have until June 19, 2012, to complete and file this newly-revised form for veterans hired on or after Nov. 22, 2011, and before May 22, 2012. The standard rule (file form 8850 with with your respective state workforce agency within 28 days after the eligible worker begins work) will again apply to eligible veterans hired on or after May 22, 2012.

Employers that hire veterans who have been looking for employment for more than six months may be eligible for a maximum $5,600 credit per employee (Returning Heroes Tax Credit); employers that hire veterans who have been looking for employment for less than six months may be eligible for a credit of up to $2,400 per employee. Employers that hire veterans with service-connected disabilities who have been looking for employment for more than six months may be eligible for a credit of up to $9,600 per employee (Wounded Warriors Tax Credit).

Tuesday, February 21, 2012

New for c-corps

C-corps with revenues of $500k+ must disclose officer compensationon the new form 1125-E for tax years beginning in 2011.

The enhanced deduction for charitable contributions of qualified food inventory,  the enhanced deduction for corporate charitable contributions of computers, and the enhanced deduction for corporate charitable contributions of qualified book inventory to public schools expired 12/31/11.

Tuesday, February 14, 2012

New investment advisor fee disclosure is coming

Effective July 1 covered service providers (such as investment advisors) that expect to receive at least $1,000 in compensation for services to a covered plan to more thoroughly and clearly disclose their total compensation. If fees are based on revenue numbers which are unknoen until the year is over, the rules state that a record keeper can provide a reasonable estimate accompanied by an explanation of how the cost was calculated.

Thursday, February 9, 2012

Exempt Organizations News

Request for Miscellaneous Determination

The new form 8940 can be used to make a request for a determination that an organization is exempt from the requirement of filing a 990 form, among other more obscure requests. See section 8d at the link below:

Select Check

This is an on-line search tool that allows users to select an exempt organization and check certain information about its federal tax status and filings. It consolidates three former search sites into one, providing expanded search capability and a more efficient way to search for organizations that:

• Are eligible to receive tax-deductible charitable contributions (Publication 78 data),

• Have had their tax-exempt status automatically revoked because they have not filed Form 990 series returns or notices annually as required for three consecutive years (Auto-Revocation List), or

• Have filed a Form 990-N annual electronic notice (e-Postcard).

Beginning in February 2012, Exempt Organizations Select Check data will generally be updated on the third Monday of each month for automatically revoked organizations and organizations eligible to receive deductible contributions, and weekly for Form 990-N (e-Postcard) filings. In addition to searching for a particular organization, users may download a complete list of each of the three types of organizations through Exempt Organizations Select Check

Tuesday, February 7, 2012

New Hire Retention Credit

Employers may claim the credit for each retained worker. A retained worker is a qualified employee (see below) who remains an employee for at least 52 consecutive weeks, and whose wages (as defined for income tax withholding purposes) for the last 26 weeks equal at least 80% of the wages for the first 26 weeks. The amount of the credit is the lesser of $1,000 or 6.2% of wages (as defined for income tax withholding purposes) paid by the employer to the retained worker during the 52 consecutive week period.

A “qualified employee” is an employee who:

• Begins employment with you after February 3, 2010, and before January 1, 2011;

• Certifies by signed affidavit (Form W-11 or similar statement) under penalties of perjury, that he or she has not been employed for more than 40 hours during the 60-day period ending on the date the employee begins employment with you;

• Is not employed by you to replace another employee unless the other employee separated from employment

• Is not related to you. An employee is related to you if he or she is your child or a descendent of your child, your sibling or stepsibling, your parent or an ancestor of your parent, your stepparent, your niece or nephew, your aunt or uncle, or your in-law. An employee is also related to you if he or she is related to anyone who owns more than 50% of your outstanding stock or capital and profits interest or is your dependent or a dependent of anyone who owns more than 50% of your outstanding stock or capital and profits interest.

The credit may be claimed for a retained worker for the first taxable year ending after March 18, 2010 for which the retained worker satisfies the 52 consecutive week requirement. Calendar year taxpayers are first eligible to claim the credit on their 2011 tax returns due April 15, 2012. For fiscal year filers, the earliest date to file a return claiming the credit would be fiscal years ending after February 3, 2011.

Claim the credit using the below form:

Wednesday, February 1, 2012

2011 Status of Tax Credits Rewarding Taxpayers for Energy Efficiency

Few credits have been more confusing than the on-again, off-again credits rewarding taxpayers for energy efficient improvements to their residences: the nonbusiness energy property credit and the residential energy efficient property credit.

The nonbusiness energy property credit expired after 12/31/11. For property placed in service in 2011 there are new limitations. The credit now has a lifetime limit of $500, of which only $200 may be used for windows. Subject to the lifetime limits, only 10% of qualified energy efficiency improvements is allowed and the residential energy property costs are limited to $300 for energy efficient building property, $150 for any qualified natural gas, propane, or oil furnace or hot water boiler, and $50 for any advanced main air circulating fan. Also new, include any labor costs properly allocable to the onsite preparation, assembly, or original installation of the energy property.

The residential energy efficient property credit is scheduled to expire after December 31, 2016. Both credits are claimed on Form 5695, Residential Energy Credits. This is the credit of 30% of your costs of qualified solar electric property, solar water heating property, small wind energy property, geothermal heat pump property, and fuel cell property. Include any labor costs properly allocable to the onsite preparation, assembly, or original installation of the residential energy efficient property and for piping or wiring to interconnect such property to the home. This credit remains relatively unchanged from last year.

Tuesday, January 31, 2012

More Emotional Distress Settlements May be Excluded from Income

The IRS has new guidance in relation to the on "on account of" test. Previously emotional distress has to be clearly be “on account of” a physical injury in order for settlements related to such distress to be excludable from income. The new guidance supports the exclusion of not only damages directly linked to personal injuries or sickness but also damages for emotional distress, even not necessarily attributable or related to a physical injury or physical sickness, to the extent that the damages for emotional distress are not in excess of amount paid for medical care related to such emotional distress. This is a loosening of the rules apply to damages paid under a written binding agreement, court decree or mediation award entered into or issued after September 13, 1995, and received after January 23, 2012.

Taxpayers who paid tax on a settlement that would be excludable under the new guidance on a return that is within the statutory period for amending to claim a refund (3 years from due date of return) may amend if such amounts were paid under a written binding agreement, court decree, or mediation award entered into or issued after September 13, 1995.

Friday, January 27, 2012

2012 IRS Audit Goals

The IRS has stated the following as among the top areas of noncompliance:

• Sham business losses;

• False or inflated business deductions;

• Abusive Schedule A deductions; and

• False claims for the Earned Income Tax Credit (EITC)

The IRS has a stated goal of increasing tax compliance among high-income or high-wealth taxpayers (with income of $200,000 or more). The are testing a new audit approach that will focus on taxpayers who are most at risk for non-compliance such as those who control multiple or tiered entities, or have more than one flow-through business.

The IRS plans to conduct approximately 2,000 compliance visits to return preparers. To determine compliance with the earned income credit requirements, proper recordkeeping, and use of the preparer tax identification number (PTIN).

Thursday, January 26, 2012

Among the most litigated tax issues for FY 2011...

• Trade or business expenses under Code Sec. 162 and related sections (i.e inreimbursed employee expense);

(162: allows as a deduction all of the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.)

• Gross income under Code Sec. 61 and related sections;

(61: except as otherwise provided in this subtitle gross income means all income from whatever source derived)

• Accuracy-related penalty under Code Sections 6662(b)(1) and 6662(b)(2);

(this penalty of 20% or 40% of the increase in tax is due in the case of substantial understatement of tax, substantial valuation misstatements, transfer pricing adjustments, or negligence or disregard of rules or regulations)

• Innocent spouse relief;

• Charitable deductions

Wednesday, January 25, 2012

US Citizens Living & Working Abroad

Many people do not realize that a U.S. citizen, whether residing at home or abroad, must file a U.S. income tax return if the individual's gross income equals or exceeds the applicable personal exemption or standard deduction even if none of that income was earned in the US. Various credits apply so as to minimize the duplication of tax liabilities with 2 countries involved.

Tuesday, January 24, 2012

Changes to 2011 Form 1040

There is a new box at the end of the form's second page, adjacent to the blank reserved for a spouse's occupation, for certain taxpayers to input their identity theft protection PIN (IP PIN). In 2011, the IRS sent IP PIN numbers by letter to taxpayers who were victims of identity theft. If they do not enter the IP PIN, and they received the letter, the return will probably be rejected.

There has been a drastic reduction in tax credits available for qualified energy efficient home improvements. The federal tax credit now stands at a maximum lifetime credit of $500. In 2010 the maximum was $1,500. Any credits taken in earlier years are subtracted from the $500 limit.

Capital gains and losses must now be reported on Form 8949 and the totals are reported on Schedule D. This schedule provides additional information to the IRS regarding the transaction.

If you own foreign financial assets, you may need to disclose these assets to the IRS on Form 8938.

Monday, January 23, 2012

Max Value for Cents per Mile Method of PUCC Fringe Benefit Calculations

The maximum fair market value (FMV) for employer-provided automobiles, trucks, and vans first made available for personal use of company car (PUCC) in 2012 for which the vehicle cents-per-mile valuation rule may be used are:

• $15,900 for a passenger automobile (up from $15,300 in 2011); and

• $16,700 for a truck or van, including passenger automobiles such as minivans and sport utility vehicles, which are built on a truck chassis (up from $16,200 in 2011).

Taxpayers with employer-provided vehicles within the designated FMV amounts may apply the vehicle cents-per-mile rule or fleet average valuation rule, unless the employee is an owner. The mileage allowance rate for 2012 is 55.5 cents-per-mile. Owner-employees and/or employees availed of more expensive company cars may not use this method to put value on their PUCC.

Sunday, January 22, 2012

Suspended Passive Losses & Yea of Death

Suspended passive losses from rental real estate which is to be moved into a trust may be claimed on the decedent’s final return to the extent that the losses are in excess of the difference between the property’s fair market value and adjusted basis.

Saturday, January 21, 2012

All Mutual Fund Gains Are Not Subject to 15% CG Tax

Sales of mutual funds that invest in gold and silver result in gains taxed at the 28-percent tax rate on collectibles. The 28-percent rate is applies regardless of whether the taxpayer physically holds the cold or simply owns shares in a gold exchange-traded fund.

Friday, January 20, 2012

Recognizing Roth Conversion Income in 2011/12

Taxpayers engaging in one of these transactions during 2010 must report half of the taxable amount from the transfer on their 2011 tax return and half in 2012, unless the taxpayer:

• Elected to include the taxable amount in income in 2010 (this election cannot be revoked after the due date for the 2010 tax return);

• Recharacterized the transfer to a Roth IRA as a traditional IRA (the deadline for recharacterizing a 2010 transfer was October 17, 2011; or

• Received a taxable distribution in 2010 or 2011 from the Roth IRA (in which case, the taxpayer would report a different amount on the 2011 return).

On Form 8606 of the 2010 return taxpayers would have reported the transfer and either made the election to report it in 2010 or identified the 50 percent amounts reportable in 2011 and 2012. Assuming they did not receive a distribution in 2011, the IRS instructed taxpayers this same amount will be included on the 2011 Form 1040 under IRA distributions, and pensions and annuities.

If the taxpayer received a taxable distribution (of the converted amount) in 2010 or 2011 from the Roth IRA, then in 2011 the taxpayer would follow different reporting guidelines.

Thursday, January 19, 2012

IRS Ruling Clarifies Deductibility of Employer-Provided Meals

Meals provided by an airline to its crew members while they are working on a plane are only 50 percent deductible by the airline even though the meals may legally be totally excluded from the employees’ income. The meals in this case are excludable not because they are de minimis fringe benefits but because they are furnished for the convenience of the employer. The code limits the deduction for food and beverages to 50 percent unless an exception applies.

Wednesday, January 18, 2012

Deducting Excess Residence Interest

Taxpayers may deduct interest on up to $1mil of qualified residence initial acquisition interest and up to $100,000 of home equity interest. Many taxpayers do not realize that once you pay down an original mortgage, if you receive proceeds increasing the mortgage upon a refinance, that debt actually falls under the home equity limit for purposes of these calculations. Primary mortgage does not necessarily equal initial acquisition debt.

Interest on debt which exceeds these thresholds, and which was used for other than improving the property is secured by, may be eligible for deduction on a rental or business schedule of the proceeds of the loan can be traced to that endeavor. It may also be nondeductible such as if used to pay off credit card debt, loan to children, go on vacation, purchase non-business assets, etc. There has been a lack of clarity regarding allowable methods for prorating the interest when necessary.

“Chief Counsel has determined that taxpayers can use any reasonable method to allocate debt that exceeds the limits, including the exact method, the simplified method, the Pub 936 method, and a reasonable approximation of those methods. Regardless of the method used, the taxpayer may allocate amounts that exceed the limits, according to the use of the debt proceeds. Taxpayers can elect to treat the debt as not secured by a residence, but do not have to make the election. If an election is made, the entire debt is treated as not secured by the residence; if an election is not made, only the debt portion that exceeds the limits is traced according to the use of the proceeds.” (CCA 201201017)

Tuesday, January 17, 2012

More Guidance on Code DD Reporting on 2012 W2 Forms (issued 2013)

For certain employers and with respect to certain types of coverage listed below, the requirement to report the value of coverage will not apply for the 2012 Forms W-2 AND will not apply for future calendar years until the IRS publishes guidance giving at least six months of advance notice of any change to the transition relief.

The transition relief applies to the following:

(1) employers filing fewer than 250 Forms W-2 for the previous calendar year

(2) multiemployer plans;

(3) Health Reimbursement Arrangements;

(4) dental and vision plans that are not integrated into another group health plan;

There were numerous other clarifications, however, the above will negate this issue for all of our client base so we don’t need to delve into them!

Monday, January 16, 2012

2011 Audit Statistics Released

The IRS audited 1 in 8 individuals with incomes over $1 million during their last fiscal year. In 2011 1.02% of individual returns with incomes under $200k and 3.93% of individual returns with income of $200k + were audited.  C corporations with assets of $10mil and higher were audited 17.64% of the time, $250mil and higher 27.6%, and under $10mil 1.02%. The IRS audited .4% of partnerships and .42% of S corporations. The IRS budget was cut by $305 million for FY12 which will likely have an impact on the number of audits during 2012.

Saturday, January 14, 2012

IRS issues proposed guidelines to provide relief to more innocent spouses

A Notice proposing a new revenue procedure, revises the threshold requirements for requesting equitable relief and revises the factors used by the IRS in evaluating these requests. The new guidelines are available immediately and will remain available until the finalized revenue procedure is published. The IRS will immediately begin using these new guidelines when evaluating equitable relief requests. This is the second major change made to the innocent spouse program. In July, the IRS extended help to more innocent spouses by eliminating the two-year time limit that previously applied to requests seeking equitable relief.

this proposed revenue procedure expands how the IRS will take into account abuse and financial control by the nonrequesting spouse in determining whether equitable relief is warranted

provides that abuse or lack of financial control may mitigate other factors that might otherwise weigh against granting equitable relief

provides for certain streamlined case determinations

provides new guidance on the potential impact of economic hardship

revises the weight to be accorded to certain factual circumstances in determining equitable relief

Friday, January 13, 2012

Binding Temporary Regs Govern Repair Expense vs Capitalize Decisions on or after 1/1/12

The IRS sought to clarify and expand existing standards for capitalization of specific expenses associated with property and provide some bright-line tests for applying the standards. The document is HUGE. Will have to put a pin in this until after tax season!

Thursday, January 12, 2012

Voluntary Classification Settlement Program (VCSP)

This program enables employers to voluntarily reclassify as employees workers misclassified as subcontractors for federal employment tax purposes and take advantage of audit production and a reduced penalty framework. The VCSP is open to taxpayers currently treating their workers as independent contractors or other nonemployees and that want to prospectively treat the workers as employees. Other requirements also must be satisfied such as 1099 forms must have been sent. The reduced penalty framework absolves the employer from the employee’s portion of the tax and assesses a 10% penalty on the unremitted employer’s portion. In round numbers, $8500 may be due on $100,000 of wages misclassified as contractor payments. It is a great deal! Apply with form 8952.,,id=246203,00.html

Wednesday, January 11, 2012

The IRS released final Form 8939, Allocation of Increase in Basis for Property Acquired From a Decedent

The executor of an estate of a decedent who died in 2010 can elect to apply modified carryover basis treatment to property acquired from the decedent. If the election is made the estate will not be subject to federal estate tax and does not need to file a form 706 even if the value of the estate is $5mil or more. Instead, in most cases the recipient’s basis will be the LESSER of the decedent’s basis or the FMV at the date of death. The election is irrevocable after the due date of return.

Tuesday, January 10, 2012

Tax Cuts Expire

Effective January 1, 2012, a number of popular but temporary tax incentives expired. They include in part: the research tax credit, grants for energy property in lieu of tax credits, transit benefits, the state and local sales tax deduction, and the higher education tuition deduction. There is no AMT patch past 2011, but that is par for the course.

Monday, January 9, 2012

Two Month Payroll Tax Cut

Employers should implement the just-passed two-month extension of the employee-side payroll tax cut as soon as possible – in other words just continue it from last year. Hopefully, if they extend this to all of 2012 they will do so before the 2 months end and not make it retroactive AFTER everyone has withheld the higher amount. In this instance, employers will (1) need to make an adjustment on their Form 941 to obtain and reflect the refunded portions previously remitted to the IRS, and (2) may either need to provide the employees with these funds while awaiting the refund from the IRS or have the employees face a delay in receiving a refund of the overwithheld Social Security taxes.

This time the cut includes a recapture provision which applies only to those individuals who receive more than $18,350 in compensation during the two-month period and only if the cut is not extended to a full year. The recapture of the 2% not withheld would be payable in 2013 when the individual files his or her income tax return for the 2012 tax year. This additional recapture tax is an add-on to income tax liability that the employee would otherwise pay for 2012 and is not subject to reduction by credits or deductions.