Category Archives: IRS

Congress Passes Tax Cuts and Jobs Act

The Tax Cuts and Jobs Act, which was passed in both houses of Congress earlier this week, was signed into law by President Trump on December 22, 2017. The majority of the provisions contained in the sweeping reform legislation go into effect as of January 1, 2018. Read on for a few recommendations on actions to be taken before the end of 2017 followed by an overview of items included in the act.

Initial Recommendations:

For Individuals

  • Pay state income taxes due before December 31, 2017.
  • Accelerate your charitable contributions into 2017 since all brackets will benefit.
  • If you make charitable contributions to the athletic department of your favorite university in order to be entitled to purchase tickets to athletic events, definitely make those contributions before December 31, 2017.
  • Prepay 2% itemized deductions due (such as investment advisory fees, tax preparation fees, professional licenses, etc.) before December 31, 2017.
  • Prepare for additional estate gifting beginning January 1, 2018.

For Businesses

  • Consider a change of accounting methods for business below $25MM to a cash basis method or completed contract accounting (as opposed to percentage of completion)
  • Consider accelerating equipment purchases for immediate write-offs.
  • Close 1031 exchanges on personal property before 12-31-17
  • Pay for business entertainment in 2017
  • Pay for R&D expenditures in 2017
  • Consider timing of terminated partnerships—technical termination rules go away in 2018
  • Consider choice of business entity.

Items Affecting Individuals:

Tax Rates – The act keeps the seven tax brackets but reduces the rates for five of them. The new bracket rates are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The maximum rate is for income above $600,000 married filing jointly and $300,000 for singles.

Standard Deduction and Personal Exemptions – The standard deduction is increased to $24,000 for married filing jointly and $12,000 for singles. Personal exemptions are repealed.

Mortgage Interest – The mortgage interest deduction is capped at interest on $750,000 of mortgage debt each for a principal residence and a second home. The deduction for interest on home equity lines of credit is repealed.

Taxes – The act puts a $10,000 cap on deductions in connection with state and local income, property, and sales taxes. It also provides that no deduction will be allowed in 2017 for prepayment of tax for years beginning after December 31, 2017.

Medical Expenses – The threshold for deducting medical expenses is temporarily reduced from 10% to 7.5% (for the 2017 and 2018 tax years only).

Child Tax Credit – The per-child tax credit is doubled, rising from $1,000 to $2,000 per qualifying child. The phase out threshold is increased to $400,000 for married filing jointly and $200,000 for those filing singly.

Credit for Non-Child Dependents – The act temporarily allows parents to take a $500 credit for each non-child dependent whom they support, such as a child 17 or older, an ailing elderly parent, or an adult child with a disability.

Pass-Through Income – The act includes a 20% deduction on Qualified Business Income from sole proprietors, S-Corporations, LLCS, and partnerships (subject to limitations).

Alternative Minimum Tax – The act reduces the number of filers who would be hit by this tax by raising the income exemption levels to $70,300 for singles and $109,400 for married filing jointly.

Affordable Care Act Individual Mandate – The individual mandate is repealed as of 2019.

College Athletic Fund Contributions – These contributions, made in exchange for preferential seating, are no longer deductible.

Alimony Deduction – This is repealed after 2018.

Estate Tax – This tax remains at 40% but the exemption is doubled to $10.98 million per individual.

Miscellaneous Tax Breaks – The act preserves some smaller, but popular, tax breaks, including deductions for student loan interest and classroom supplies bought with a teacher’s own money. It also keeps the tax-free status of tuition waivers for graduate students.

Items Affecting Businesses:

Corporate Tax Rate – The corporate tax rate is reduced from a top graduated rate of 35% to a flat 21%.

Corporate Alternative Minimum Tax – The act repeals this tax.

Full Expensing for Certain Business Assets – The bill provides 100% expensing of qualified property acquired and placed in service after September 27, 2017 and before January 1, 2023. It also increases (tenfold) the Sec. 179 expensing limitation ceiling and phase out threshold to $5 million and $20 million, respectively, both indexed for inflation.

Interest Expense – For tax years beginning after December 31, 2017, every business, regardless of its form, is generally subject to a disallowance of a deduction for net interest expense in excess of 30% of the business’s adjusted taxable income. Farming businesses can elect out of these rules if they use ADS to depreciate any property used in the farming business with a recovery period of ten years or more.

Net Operating Losses (NOL) – For NOLS arising in tax years ending after December 31, 2017, the two-year carryback and the special carryback provisions are repealed, so losses can only be carried forward. However, a two-year carryback applies in the case of certain losses incurred in the trade or business of farming.

Foreign Provisions – The act includes several international tax changes including a repatriation provision—US shareholders owning at least 10% of a foreign subsidiary will include in income the share of the post-1986 historical earnings and profits (E&P) of the foreign subsidiary, to the extent that E&P have not been previously subject to US tax. The portion of E&P attributable to cash or cash equivalents would be taxes at a 12% rate and the remainder would be taxed at a 5% rate.

Farms Property – For property placed in service after December 31, 2017, in tax years ending after that date, the cost recovery period is shortened from seven years to five years for any machinery or equipment (other than any grain bin, cotton ginning asset, fence, or other land improvement) used in a farming business, the original use of which commences with the taxpayer. Additionally, the required use of the 150% declining balance depreciation method for property used in a farming business (i.e., for 3-, 5-, 7-, and 10-year property) is repealed. The 150% declining balance method continues to apply to any 15-year or 20-year property used in the farming business to which the straight-line method does not apply, and to property for which the taxpayer elects the use of the 150% declining balance method.

Cash Method of Accounting – The act increases the cash accounting method applicability threshold for most business up to $25 million in revenue, including businesses with inventory.

Percentage of Completion Requirements – The act increases the percentage-of-completion method applicability threshold to business with average revenue of $25 million or more.

Deduction for Entertainment – This deduction is repealed; previously entertainment was 50% deductible.

Research and Development Expenses – Must be capitalized and amortized over five years.

Technical Termination of Partnership Rules – The act repeals these.

Can You Discharge Those Unpaid 1040 Taxes in Bankruptcy?

by Larry Goldsmith, CPA, JD, CFF, MAFF

Last week, I reviewed a new client’s IRS transcript. The client apparently filed his individual income tax returns late and wanted to file bankruptcy to discharge his 1040 tax obligations. I subsequently learned that the IRS filed substitute individual income tax returns on the client’s behalf and issued an income tax deficiency before the income tax returns were filed.

 The question was: if the Internal Revenue Service files a substitute tax return on behalf of the debtor/ taxpayer, before the taxpayer files their own income tax returns would that late tax return be considered eligible for a bankruptcy discharge under Section 523 tax return?

I have to admit that it was my belief at the time that if the late filed tax returns increased the income tax assessment, the late filed tax returns would be dischargeable if the tax returns qualified under the various timing constraints. However, after further research, examining several court cases, I have concluded that if the income tax returns were filed after the IRS had issued a substitute tax return, or issued a deficiency, a bankruptcy discharge is not attainable, even where the debtor subsequently filed an income tax return.

It appears that the bankruptcy courts have not consistently held on issues of discharge where the debtor filed a late tax return prior to the IRS issuing a notice of deficiency. From the Appellate court statements I doubt if the courts would favor the discharge of the late filed income tax returns.

Here are a couple of cases exemplifying the court’s consistency in this matter:

IN RE PAYNE 431 F.3D 1055 (7TH CIR 2005)

The taxpayer failed to file a 1986 tax return, and the IRS subsequently filed a substitute tax return for the debtor. In 1992 the taxpayer filed an offer in compromise that was rejected. The taxpayer filed a Chapter 7 in 1997. The bankruptcy court discharged the 1986 tax debt.

The 7th Circuit Court of Appeals stated that, the substitute tax return and an offer in compromise do not constitute a tax return and therefore the income taxes were not dischargeable.

MALLO V. INTERNAL REVENUE SERVICE

A married couple filing jointly, the Mallos filed their individual income taxes several years after the IRS issued notices of deficiency. Two years after filing the income tax returns the Mallos filed bankruptcy seeking to discharge the income tax obligations.

The Mallo bankruptcy court held that post assessment filings do not constitute tax returns and are therefore excepted from discharge under 523(a)(1).

The Court of Appeals held that tax debt was not dischargeable because, “the filing of a return after an assessment negates an honest and reasonable attempt to comply with tax law”.

The Court of Appeals held that, “if a Form 1040 is filed late, the tax debt is non-dischargeable under 523(a)(1)(b)(i). The court reasoned that a late tax return is not a return as defined by Section 523(a); it does not satisfy applicable filing requirements.

The Court observed that the definition of a filed tax return differs from the IRS’s definition.

The U.S. Supreme Court acknowledged the different interpretations and stated that further review was not warranted, thereby upholding the U.S. Court of Appeals for the Tenth Circuit findings.

My advice after researching this matter? Always file your tax returns in a timely manner.

Questions or comments? E-mail me at larry@cjbs.com if you have any questions about this posting or if I may be of assistance in any way.

Larry Goldsmith is an experienced Financial Forensic expert and CPA who investigates and verifies financial income and assets in matrimonial matters. CJBS, LLC is a Chicago based firm that assists its clients with a wide range of accounting and financial issues, protecting and expanding the value of mid-size companies. 

Partnership Audits Increase; Other Business Audits Drop In FY 2014

Michael Blitstein, CJBS

Michael Blitstein, CJBS

by Michael W. Blitstein, CPA

Just released IRS audit coverage statistics show a slight increase in audits of partnerships, but decreases in audits of large corporations and S corporations in fiscal year (FY) 2014. For all types of businesses, the FY 2014 audit coverage rate was 0.57%, representing a decline from 0.71% in FY 2012 and 0.61% in FY 2013.

Audits of large corporations experienced the steepest decline, according to the IRS, but must balance its audit work with available resources.

Partnerships

Unlike other categories, audits of partnerships increased in FY 2014. In FY 2013, the audit coverage rate for partnerships was 0.42%. The audit coverage rate for partnerships increased slightly to 0.43% in FY 2014.

Since FY 2007, the audit coverage rate for partnerships has been in the neighborhood of 0.40%, the IRS reported.

Large and small corporations

For large corporations (corporations with assets more than $10 million), the audit coverage rate in FY 2014 was 12.23%, compared to 15.84% in FY 2013 and 17.78% in FY 2012. The FY 2014 audit coverage rate was 0.95% for small corporations (corporations with assets less than $10 million). The rate was unchanged from FY 2013 but reflected a decline from FY 2012, when the audit coverage rate for small corporations was 1.12%.

IRS highlighted the decline in audits of large corporations. Audits for corporations with more than $10 million in assets fell by 20% between FY 2013 and FY 2014.  Audits for large corporations are at the lowest rates in a decade.

S corporations

The IRS also reported that audits of S corporations declined. The audit coverage rate for S corporations in FY 2014 was 0.36%, reflecting a decline from 0.42% in FY 2013, and a decline from 0.48% in FY 2012.

Impact of budget cuts

IRS Commissioner Koskinen attributed the decline in audit coverage to recent cuts in the agency’s budget. The IRS budget has fallen by more than $1.2 billion in the last five years. Like overall IRS staffing, the number of compliance employees who conduct audits has also fallen sharply during this period.

The Consolidated and Further Continuing Appropriations Act, 2015 reduced the agency’s FY 2015 budget by approximately $346 million. President Obama has proposed to fund the IRS at $12.9 billion for FY 2016, reflecting a $2 billion increase over FY 2015. This would help the IRS stop this decline in enforcement efforts and help improve critical taxpayer services, Koskinen predicted. Koskinen is scheduled to testify before House and Senate panels this week about the agency’s FY 2016 budget request.

Michael W. Blitstein, CPA is a partner with the firm of CJBS, LLC, in Northbrook, Illinois. Michael advises his clients on tax, business and retirement planning, developing short and long-term strategic plans designed to achieve success for business owners and their businesses.

He can be reached at michael@cjbs.com

www.cjbs.com

IRS Issues 2015 Inflation-Adjusted Vehicle Depreciation Dollar Limits

Michael Blitstein, CJBS

Michael Blitstein, CJBS

by Michael W. Blitstein, CPA

The IRS has released the inflation-adjusted limitations on depreciation deductions for business use passenger automobiles, light trucks, and vans first placed in service during calendar year 2015. The IRS also modified the 2014 limitations to reflect passage of the Tax Increase Prevention Act of 2014 late last year.

At the end of 2014, Congress extended bonus depreciation to the 2014 tax year in the case of passenger vehicles. Congress has not, however, done the same for passenger vehicles placed in service during 2015. This means that although several of the 2015 limits have been adjusted upward for inflation, the total amount a taxpayer may deduct for a vehicle placed in service during 2015 will be effectively $8,000 lower than for a vehicle placed in service during 2014, unless Congress again provides retroactive relief this year.

Depreciation limits

The Internal Revenue Code imposes dollar limitations on the depreciation deduction for the year the taxpayer places the vehicle in service in its business, and for each succeeding year.  The IRS adjusts for inflation the amounts allowable for depreciation deductions.

Passenger automobiles

The maximum depreciation limits for passenger automobiles first placed in service during the 2015 calendar year are:

  • $3,160 for the first tax year;
  • $5,100 for the second tax year;
  • $3,050 for the third tax year; and
  • $1,875 for each succeeding tax year.

Trucks and vans

The maximum depreciation limits under for trucks and vans first placed in service during the 2015 calendar year are:

  • $3,460 for the first tax year;
  • $5,600 for the second tax year;
  • $3,350 for the third tax year; and
  • $1,975 for each succeeding tax year.

Sport Utility Vehicles (SUVs) and pickup trucks with a gross vehicle weight rating (GVWR) in excess of 6,000 pounds continue to be exempt from the luxury vehicle depreciation caps based on a loophole in the operative definition.

Michael W. Blitstein, CPA is a partner with the firm of CJBS, LLC, in Northbrook, Illinois. Michael advises his clients on tax, business and retirement planning, developing short and long-term strategic plans designed to achieve success for business owners and their businesses.

He can be reached at michael@cjbs.com

www.cjbs.com

Top Tax Developments of 2014 with Impact on 2015

Michael Blitstein, CJBS

Michael Blitstein, CJBS

by Michael W. Blitstein, CPA

2014 was a notable year for tax developments on a number of fronts. Selecting the top tax developments for 2014 requires judgment calls based upon uniqueness, taxpayers affected, and forward looking impact on 2015 and beyond. With respect to David Letterman, the following list of 2014 tax developments reflects this prioritization in no particular order.

Passage of the Extenders Package
2014 was not a year for major tax legislation in Congress. In fact, Congress even failed to pass its usual two-year extenders package, instead settling on a one-year retroactive extension to January 1, 2014. As one senator put it, “This tax bill doesn’t have the shelf life of a carton of eggs,” referring to the fact that the 50-plus extenders provisions expired again on January 1, 2015. Instead, it has been left to the 114th Congress to debate the extension of these tax breaks in 2015 and beyond, and for taxpayers to guess what expenses in 2015 will again be entitled to a tax break.

Affordable Care Act
In many ways, 2014 was a transition year for the Affordable Care Act. One of the most far reaching requirements, known as the “individual mandate”, took effect on January 1, 2014. Unless exempt, individuals who fail to carry minimum essential health coverage will make a shared responsibility payment in 2015. Another key provision, the “employer mandate”, was further delayed to 2015. Employer reporting for 2014 is voluntary. The IRS also developed new forms for reporting many new requirements.

Repair Regulations
In 2014, the IRS finished issuing the necessary guidance on the treatment of costs for tangible property under the sweeping “repair” regulations. The most important development was the issuance of final regulations on the treatment of dispositions of tangible property, including the identification of assets, the treatment of dispositions, and the computation of gain and loss. The complexity of the repair regulations has not gone unnoticed by many tax professionals, who have asked the IRS to simplify some of the provisions.

IRS Operations
IRS predicted a complex and challenging 2015 filing season due to cuts in the Service’s funding. This dictates the Service having to do more with less because of budget cuts. The IRS is funded $1.5 billion below the amount requested. IRS could face another round of budget cuts under the new Republican controlled Congress for 2016.

Net Investment Income Tax
Many higher income individuals were surprised to learn the full impact of the net investment income tax (“NII”) on their overall tax liability during the 2014 filing season when their 2013 returns were filed. Starting in 2013, taxpayers with qualifying income have been liable for the 3.8 percent net investment income tax. Recent run ups in the financial markets, combined with the fact that the thresholds are not adjusted for inflation, have increased the need to implement strategies that can avoid or minimize the NII tax.

Retirement Planning
A number of changes were made during 2014 affecting IRAs and other qualified plans, which cumulatively rise to the level of a “top tax development” for 2014:

  • Distributions from a qualified retirement plan account are now able to have the taxable and non-taxable portions of the distribution directed to separate accounts.
  • 401(k) plans can now offer deferred annuities through target date funds.
  • A Tax Court ruling held that a taxpayer is limited to one 60-day rollover per year for all IRA accounts rather than one 60-day rollover per year for each IRA account. The IRS stated that the new interpretation of the rollover rules would be applied to rollover distributions received on or after January 1, 2015.
  • A 2014 Supreme Court decision found that inherited IRA accounts were not retirement assets and therefore not subject to creditor protection under the Bankruptcy Code.
  • The IRS announced the 2015 cost-of-living adjustments for qualified plans. Many retirement plan contribution and benefit limits increase slightly in 2015.

Identity Theft
Although clearly not confined to the area of Federal tax, identity theft has been a major issue for both the IRS and taxpayers. In 2014, the IRS put new filters in place and took other measures to curb tax related identity theft. The agency also worked with software developers, financial institutions and the prepaid debit card industry to combat identity theft.

Tax Reform
Although 2014 was clearly not the year for tax reform, the foundations for serious tax reform discussions were laid in 2013 and 2014. Looking ahead to 2015 and beyond, it is possible that Congress will complete some form of tax reform in 2015 or 2016.  The major difference of opinion, however, surrounds whether or not the reform would only address corporate tax provisions or also include individual provisions. Many leaders have called for tackling comprehensive tax reform on both the business and individual side. The Senate Finance Committee expects to hold tax reform hearings in 2015.

Conclusion
So what does this all mean? To continue the theme from the last few years, the tax world is ever evolving with increased complexity. Both current and long term planning is as essential as ever. Other 2014 developments may prove more significant to your particular situation.  Be sure to seek advice from a dental specific tax accountant to discuss your unique circumstances.

Michael W. Blitstein, CPA is a partner with the firm of CJBS, LLC, in Northbrook, Illinois. For more than 30 years, Michael has worked closely with the dental community and is intimately familiar with the unique professional and regulatory challenges of creating, running and maintaining a successful dental practice. Michael advises his clients on tax, business and retirement planning, developing short and long-term strategic plans designed to achieve success for dental practice principals and their businesses.

He can be reached at michael@cjbs.com

www.cjbs.com

Tax Audit Red Flags

by Michael W. Blitstein, CPA
The IRS audits only slightly more than 1% of all individual tax returns annually. So why do they pick some returns to investigate and ignore others?  Although there’s no sure way to avoid an IRS audit, you should be aware of the following red flags that could increase your chances of drawing unwanted attention from the IRS.

You Have Foreign Assets…

Stashing money overseas? Then you’re probably well aware that the IRS has been ramping up its efforts to rein in offshore accounts.  Launched in 2009, the agency’s voluntary disclosure program has already raked in more than $5 billion in back taxes, interest and penalties for illegally hiding assets in offshore accounts.

Taxpayers are asked to check a box on Schedule B if they have an ownership interest in foreign accounts. If they then fail to provide information about those assets, it will undoubtedly trigger an audit.

Indicating on your return that you do business in foreign countries or take many trips abroad for work could also raise eyebrows if no foreign assets are reported.

Your Return Has Too Many Zeroes…

While rounding numbers on your tax return to the nearest dollar is okay, rounding to the nearest thousand is not – especially when itemizing deductions like business expenses, unreimbursed employee expenses and job hunting costs.  If you submit figures like $5,000 in auto costs, $2,000 in gas mileage and $4,000 in lodging, it may look like you pulled those numbers out of thin air or inflated them by rounding – since it’s unlikely that every single expense was a perfect multiple of $1,000.

You Have a Home Office…

Just because you do some work on your couch while watching TV doesn’t mean it counts as a home office.

After years of watching people abuse the home office deduction, the IRS is on the look out. In order to avoid being scrutinized, make sure you only claim reasonable expenses – and only those that directly apply to the part of the home used as an office.  Remember, the credit can only be claimed if the home office is your primary place of business and is used exclusively for work. People get into trouble when the IRS suspects they are mixing personal costs with their business costs.

You Forgot Some Income…

For people who earn money from various places, remembering to report every single cent can be difficult. But ‘I forgot’ isn’t a good enough excuse for the IRS.  For any miscellaneous income over $600 you received throughout the year, the company you worked for should send you a Form 1099. If you don’t receive it for some reason – it was mistakenly sent to a previous address, for instance – you can be sure that the IRS will still get it.  You can either request the missing form from the employer or simply report the income without the form. This is why it helps to track your income throughout the year.

Of course, some people earn money that may not get reported on.  Even if the IRS doesn’t know about it, you must report this income as well or you risk the agency finding out.

You Exaggerate Donations…

Even good deeds can spark suspicion at the IRS.  If you report extremely high charitable contributions – especially relative to your income – make sure you have the proof to back it up.  Receipts for cash donations of more than $250 are required in the event the IRS comes knocking.  Donating items gets a little trickier, because it’s common for people to think the items are worth a lot more than someone will actually pay for them. So it’s important to be reasonable with your valuations.

You Own a Money Losing Business…

If you own a business that is reporting losses year after year, the IRS may grow suspicious that it’s actually a hobby.  There’s a rule-of-thumb saying you must have a profit in two [out] of five years – if you don’t have a profit they’re going to look at it as a hobby.  To fend off the IRS, make sure to keep diligent financial records and do little things like have business cards and company letterhead.

You Have a Shady Tax Preparer...

If your tax preparer tries to convince you to claim deductions that sound too good to be true or to report income that doesn’t line up with what you would have reported, watch out.  You want a preparer that will get you the best refund possible – but not if it means breaking the law.

CJBS, LLC is a Chicago based firm that assists its clients with a wide range of accounting and financial issues, protecting and expanding the value of mid-size companies. E-mail me at michael@cjbs.com if you have any questions about this posting or if I may be of assistance in any way.

www.cjbs.com

IRS Increases Audit Examinations

by Michael W. Blitstein, CPA 

The Internal Revenue Service has stepped up its examinations in the past year of taxpayers with high adjusted gross income.

The IRS released its 2012 IRS Data Book on March 25th, providing a snapshot of agency activities for the fiscal year. The report describes activities conducted by the IRS between October 1, 2011 and September 30, 2012, and includes information about returns filed, taxes collected, enforcement, taxpayer assistance and the IRS budget and workforce, among others.

The IRS said it examined just under 1 percent of all tax returns filed and about 1 percent of all individual income tax returns during fiscal year 2012.  Overall, in fiscal year 2012, individual income tax returns in higher adjusted gross income (“AGI”) classes were more likely to be examined than returns in lower AGI classes.

The IRS examined about 12.1 percent of the 337,477 tax returns reporting income of $1 million or more, compared to 2.8 percent of those reporting at least $200,000 and under $1 million, and 0.4 percent of those reporting income under $200,000 who didn’t file a Schedule C, E, F or Schedule 2106, and 1.1 percent of those with income under $200,000 and filing Schedule E or Form 2106. Of the 1.5 million individual tax returns examined, nearly 54,000 resulted in additional refunds. In addition, the IRS examined 1.6 percent of corporation income tax returns, excluding S corporation returns, in fiscal 2012.

During fiscal year 2012, the IRS collected almost $2.5 trillion in Federal revenue and processed 237 million returns, of which almost 145 million were filed electronically. Out of the 146 million individual income tax returns filed, almost 81 percent were e-filed. More than 120 million individual income tax return filers received a tax refund, which totaled almost $322.7 billion.

IRS acknowledged that one of the biggest challenges confronting the IRS today is tax refund fraud caused by identity theft. The IRS has more than doubled the number of staff dedicated to preventing refund fraud and assisting taxpayers victimized by identity theft, with more than 3,000 employees working in this area. As a result of these increased efforts, the IRS during fiscal year 2012 was able to prevent the issuance of more than 3 million fraudulent refunds worth more than $20 billion. Despite these efforts, much more work remains on identity theft as well as on overall refund fraud.

The IRS made significant progress last year on international enforcement, specifically in its efforts to combat the practice of illegally hiding assets and income in offshore accounts. They have continued a two-pronged approach: offering a voluntary disclosure program for those who want to come in and get right with the government, while at the same time pursuing tax evaders and the promoters and banks assisting them.

CJBS, LLC is a Chicago based firm that assists its clients with a wide range of accounting and financial issues, protecting and expanding the value of mid-size companies. E-mail me at michael@cjbs.com if you have any questions about this posting or if I may be of assistance in any way.

www.cjbs.com

Payroll Tax Services – Who is Responsible to the IRS?

by Larry Goldsmith, C.P.A., J.D., C.F.F.A.

As a Forensic CPA, I often hear stories about clients or their partners, employees, or spouses who have stolen or have hidden assets. But there’s one scam which you don’t hear about very often and which should scare every business owner: what happens when your trusted payroll service fails to make your tax payments to the IRS?

Just today a small business owner confessed to me that his payroll service stole $7 million from him and other businesses. The payroll service collected tax monies from their clients, and instead of making the payments to the IRS, the owners of the service simply pocketed the money. The trusting small business owner was required to pay the IRS nearly $40,000; in effect paying the payroll tax obligation twice.

Who is responsible?

More and more we hear about trusted people and businesses stealing from their clients and associates. Violation of fiduciary responsibility inevitably escalates during periods of economic hardship, but the potential to be a victim of ‘white collar crime’ is always present. As a business owner, it is important to continually verify that employees and business partners are doing what is expected of them.

Who is responsible in the case of non-payment of payroll taxes when a payroll service has been engaged? The Internal Revenue Service regulations state quite clearly:

  • The employer is ultimately responsible for the deposit of Federal tax liabilities.
  • The employer is liable even if a third party payer fails to make the payroll tax deposits in a timely manner.
  • It is the employer, not the payroll service, who is liable for unpaid taxes, penalties and interest.
  • The employer has a duty to review their EFTPS account to verify that the third party payer actually paid the taxes.

An ounce of prevention is always worth the proverbial pound of cure.  To avoid the headaches and financial distress of misplaced trust, CJBS recommends that business owners follow this Five Step Anti-Swindle procedure:

  1. Examine checks clearing the bank accounts monthly.
  2. Have someone verify payroll tax deposit credits on-line.
  3. Examine customer credit memos regularly.
  4. Examine delinquent accounts receivable.
  5. Spot check cash payments.

CJBS, LLC is a Chicago based firm that assists its clients with a wide range of accounting and financial issues, protecting and expanding the value of mid-size companies. E-mail me at larry@cjbs.com if you have any questions about this posting or if I may be of assistance in any way.

IRS Expands Its Fresh Start Initiative; Provides Penalty and Installment Payment Relief

by Michael W. Blitstein, CPA 

The IRS announced enhancements to its “Fresh Start” initiative by providing higher dollar thresholds for using the streamlined application process for installment agreements and new penalty relief for qualified individuals affected by the economy in 2011. The IRS doubled the dollar threshold amount and increased the maximum term for streamlined installment agreements. Unemployed taxpayers, if they file their returns after April 17th, and the self-employed may be eligible for late payment penalty relief. The agency has updated its online materials about the Fresh Start initiative to reflect the new relief.

Fresh Start

The IRS launched its Fresh Start initiative in early 2011 to help taxpayers affected by the economic slowdown. The IRS modified its lien policies by increasing the lien-filing threshold to $10,000 from $5,000 and by creating a process in which a lien will be released if the taxpayer qualifies for a direct-debit installment agreement. Additionally, it eased and streamlined installment agreements to make them available to more small businesses. Small businesses with an outstanding tax liability balance of $25,000 or less are able to apply for an installment agreement without providing a financial statement and financial verification. Additionally, they could apply for up to 60 months to pay off their outstanding tax liability.

Installment Agreements

Effective immediately, the IRS has raised the threshold amount for using the streamlined installment agreement without having to provide a financial statement or verification from an outstanding tax liability of $25,000 or less to a balance due of $50,000 or less. The agency also increased the maximum term for streamlined installment agreements from the current 60 months to 72 months.

Taxpayers must agree to direct-debit payments. Under the Direct Debit Installment Agreement (DDIA) system, funds are automatically debited from a taxpayer’s bank account for the agreed upon installment amount.

Taxpayers should file Form 9465-F, Installment Agreement Request, but do not need to provide a financial statement, Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, or Form 433-F, Collection Information Statement. Taxpayers seeking installment agreements exceeding $50,000 will still need to furnish a financial statement. Taxpayers must also pay down their balance due if over $50,000 to take advantage of the expanded streamlined program.

Penalty Relief

Taxpayers normally have until April 17, 2012, to file their 2011 tax returns and pay any tax due. Taxpayers requesting an extension of time to file have until October 15, 2012, to file their 2011 returns. This year, certain unemployed and self-employed taxpayers may be eligible for a six-month grace period on failure-to-pay penalties. Penalty relief is available to the following two groups of taxpayers:

  • Wage earners who have been unemployed at least 30 consecutive days during 2011 or in 2012 up to the April 17th deadline for filing a Federal tax return this year.
  • Self-employed individuals who experienced a 25 percent or greater reduction in business income in 2011 due to the economy.

The taxpayer’s 2011 calendar year balance must not exceed $50,000. Additionally, the taxpayer’s income must not exceed $200,000 if he or she files a joint return or $100,000 if he or she files as single or head of household.

The request for relief from the failure to pay penalty is only available for tax year 2011 and only if all taxes, interest and any other penalties are paid in full by October 15, 2012.

Generally, taxpayers who fail to pay taxes owed by the original due date are subject to a failure to pay penalty of 0.5 percent of the unpaid taxes for each month or part of a month after the due date that the taxes are not paid. The penalty can reach 25 percent of the unpaid taxes. Thus, under this program, taxpayers will have until October 15, 2012, to avoid the penalty.

The IRS is legally required to continue to charge interest at the current annual rate of three percent on the unpaid tax liability. It does not have the authority to waive statutorily imposed interest. Taxpayers should note that the failure to file penalty remains in effect at 5 percent a month with a 25 percent cap.

Offers in Compromise

The IRS also reminded taxpayers that the expanded streamline Offer in Compromise (OIC) program, one of the first Fresh Start Initiative, is still available. The streamlined OIC application is available to more taxpayers, has fewer financial document requirements, and, most importantly to struggling taxpayers, a greater flexibility and more common-sense approach to determining feasibility of collection.

CJBS, LLC is a Chicago based firm that assists its clients with a wide range of accounting and financial issues, protecting and expanding the value of mid-size companies. E-mail me at michael@cjbs.com if you have any questions about this posting or if I may be of assistance in any way.

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IRS Issues Guidance on Expanded Work Opportunity Tax Credit

by Michael W. Blitstein, CPA 

The IRS has released guidance and posted online Frequently Asked Questions (FAQs) for employers planning to claim the enhanced Work Opportunity Tax Credit (“WOTC”) for hiring qualified military veterans.  The guidance contains transition relief, describes electronic submission of the form used to claim the credit and describes the procedures for tax-exempt organizations to claim the credit.

The WOTC was enhanced as part of the VOW to Hire Heroes Act, passed by Congress at the end of November 2011. Employers who hire members of targeted groups, and who obtain a certification from an appropriate state agency as to each employee’s status as a member of the targeted group, are entitled to a tax credit.

For military veterans, the VOW to Hire Heroes Act expanded the WOTC, which rewards employers with a tax credit for hiring individuals from targeted groups. The “Returning Heroes Tax Credit” and the “Wounded Warriors Tax Credit” are intended to encourage employers to hire unemployed military veterans.

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).

Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, must be submitted to the state agency within 28 days of the employee beginning work for the employer. The credit applies in the case of qualified veterans who begin work prior to 2013.

The IRS guidance contains transition relief, providing that employers of veterans hired on or after November 22, 2011, and before May 22, 2012, have until June 19, 2012, to complete and submit the newly revised form to the state agency. The 28-day rule will apply to veterans hired after May 21, 2012. This transition relief also applies to qualified exempt organizations claiming the credit. Qualified tax-exempt organizations that employ veterans who are members of a targeted group also may take advantage of the credit.

The FAQs on the IRS website address topics such as how employers claim the enhanced WOTC for hiring qualified veterans, how a non-profit organization can claim the credit, and more.

In the case of exempt organizations, the credit is allowed against the employer’s Federal Insurance Contribution Act (FICA) tax obligation on wages paid to the veteran within one year of hiring. However, the liability on the organization’s employment tax return is not reduced by the credit; rather, the credit is processed separately and the amount properly claimed is refunded to the exempt organization. This is likely to occur after the filing of the return, so organizations are cautioned not to reduce their FICA obligation on their returns in anticipation of the refund.

CJBS, LLC is a Chicago based firm that assists its clients with a wide range of accounting and financial issues, protecting and expanding the value of mid-size companies. E-mail me at michael@cjbs.com if you have any questions about this posting or if I may be of assistance in any way.

www.cjbs.com