Tax Return Identity Theft – Not Just a Problem at the Federal Level

Posted on June 23 2016 by admin

Many are aware of the big problem of identity theft relative to federal income tax filings. More and more individuals have been filing their federal income tax returns, only to find out from the IRS that someone already filed one using their information and they absconded with your refund. What many don’t know is that this is a growing problem at the state level as well.

Given that each state has its own unique tax filing rules and protocol, you’ll want to look to the taxing authority in your particular state to see how they recommend you proceed if you suspect that your identity has been stolen relative to your state income tax return. In my home state, besides being directed to take certain actions that are the similar to procedures to follow if your federal data had been stolen, taxpayers are directed to notify local law enforcement, notify the state department of revenue, and paper file your tax return. As this problem has been increasing, some states have joined a multi-state network that shares identity theft reports among participating states in an effort to reduce tax identity theft, but not all states are part of this network.

Curious about where identity theft is the worst? A 2014 Federal Trade Commission report listed Florida as number one for identity theft among the 50 states. Followed by Washington, District of Columbia (though not a state of course), Oregon, and Missouri rounding out the top five. The state with the fewest reports was South Dakota.

By Dale F. Jensen, CPA

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Built-In Gains Tax

Posted on June 22 2016 by admin

The built-in gains tax was originally established in 1986 as a way to prevent C corporations from escaping the double taxation on unrealized gains by electing to be an S corporation. The way it worked was that if a C corporation had any unrealized gains in its assets when it elected S corporation status, it was supposed to track those gains by asset, and if any of the assets were then sold within 10 years of the election, the corporation would pay a tax of 35% of the gain amount.

Over the years, the tax remained unchanged but the recognition period changed a few times. Originally set at 10 years, it was reduced to 7 years and then to 5 years, but only for certain years. The Protecting Americans from Tax Hikes (PATH) Act passed in December of 2015 has permanently (as permanent as anything is in the tax law) set this recognition period at 5 years. This will be a big help in planning for the S corporation election and the timing of assets sales.

Remember, the PATH Act did not do away with the built-in gains tax, it just reduced the recognition period.

As always, consult your tax adviser.

By Rick Schultz, CPA

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Commuting Costs and the Home Office

Posted on June 21 2016 by admin

In general, commuting costs are nondeductible. There is no deduction available for traveling between your home and your normal work location. But how does that change if your home is your normal work location?

First of all, you need to establish that your home is your principal place of business. A number of our other blog posts get into the details of those rules, but essentially, if you are claiming the home office deduction on your tax return then your commuting costs could qualify as deductible expenses.

Next, you will want to keep in mind the normal rules for deducting travel expenses: you can deduct your auto expenses for your business travel once you have reached your work location as long as you keep contemporaneous records of your travel, such as a mileage log. Tax deductions can be taken based on either the standard mileage rate or actual expenses.

Based on those rules, every mile you drive once you leave your home is deductible if you have established that your home office is your principle place of business. The same rules apply: you need to have a business purpose for your travel and you need to be traveling to another work location in the same business.

If you are an employee and your employer reimburses your travel expenses, you don’t need to report the reimbursements as income if they are made under a so-called “accountable plan.” An accountable plan is one that reimburses only deductible business expenses, requires you to substantiate your expenses, and requires you to return amounts in excess of your substantiated expenses. If the plan is not an accountable plan, the reimbursement must be reported as income, and your deductible expenses must be claimed as employee business expenses.

Normally you can’t take a deduction for your commuting costs, but if you are already claiming the home office deduction, then you may want to take a closer look to see if your costs qualify.

By Michael Anderson

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Gift Stock to Help a Loved One – 0% Rate Tip

Posted on June 16 2016 by admin

Do you have a loved one that may be in school, struggling with student loans, or buying a house? Yes? No? To be honest it doesn’t matter, because for this tax savings gifting tip, you don’t need a “qualified” reason or any reason at all! You can simply gift stock, help a loved one out and still reap a small benefit. I’m sure you are all wondering “How can I give away my stock and still benefit?”

You’ve most likely heard of the annual gifting exemption amount ($14,000 for 2015 and 2016), but what do you get out of cutting a check to someone for that amount? I understand that isn’t the point of gifting, however, you can still give yourself a small benefit for being a nice person, right?

Okay, so here are the requirements. First, the loved one has to fall into the 10%-15% ordinary-income tax bracket. Meaning their “taxable income” (Line 43 of the 1040) has to be $37,450 or below for 2016. If the individual is under that threshold then their long term capital gains tax rate is 0%. This means when you transfer them stock, and they sell it, that gain will be tax free. Now, if you sold it and you are above that threshold, you would be paying tax on that LT Capital gain, which could be at a maximum rate of 20%. On top of that, it could be subject to NIIT, which is another 3.8% for a total tax rate of 23.8%. By gifting the stock instead of selling it and cutting a check, you just saved yourself the tax liability that would have been generated by the gain. The loved one receiving stock won’t have that tax liability on the LT capital gain.

Please note that the gift tax exemption and gifting rules still apply. Also, you have to take into account the amount that was gifted doesn’t put the “taxable income” over the threshold. With that said, the tax savings would be capped by the gift exemption amount. So, this tax savings tip isn’t going to make you rich, but it could definitely put some extra spending money in your pocket. Remember the bigger the gain, the bigger the savings, so choose wisely when gifting and as always, we recommend talking with your tax adviser ahead of time.

By Chris Morrison, CPA

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IRS Changes Partnership Audit Rules

Posted on June 15 2016 by admin

Buried somewhere in the Bipartisan Budget Act of 2015 are provisions which completely change the way the IRS will audit partnership tax returns. To start, let’s look at some of the partnership audit rule changes:

  1. Old rules: All partners were notified of the audit and were individually assessed for any changes.
    New rules: The audits take place entirely at the partnership level and the partnership will be assessed any changes.
  2. Old rules: Any tax changes were assessed in the year being audited.
    New rules: Changes are assessed in the year the audit is completed.
  3. Old rules: Partnerships designated a “tax matters partner”.
    New rules: Partnerships name a “partnership representative”.

Space doesn’t allow for us to discuss these changes in detail. Rest assured that each of these changes will require planning and decision making. For example:

  1. The new rules allow certain partnerships to elect out of these rules.
  2. Once an assessment is made, the partnership may elect an alternative payment system where the partnership issues statements to the partners so that the partners pay their share of the taxes owed.
  3. The partners can file amended returns to reflect their share of the partnership changes and then pay the calculated tax, thereby reducing the amount owed by the partnership.

The primary purpose for these changes is to shift the administrative burden from the IRS to the partnership. The IRS has historically shied away from auditing large partnerships, claiming the work involved in dealing with all of the partners was cost prohibitive. Now, the IRS deals with the partnership representative only. The representative then deals with the partners.

I think the biggest issue is that partnership interests change hands and the assessment at the time of the audit could create some inequities. Typically, a 2018 partnership return won’t be audited until 2020. If assessments are made, the 2020 partners will bear the burden of payment. These may not be the same partners that were in place in 2018.

These changes take effect for all partnership returns filed for years beginning after December 31, 2017. Like all tax laws, I expect to see changes and clarifications between now and then. In the meantime, partnerships should be looking at their agreements and determining if they need amendments. Some of the issues to consider are:

  1. How/who to elect as partnership representative. This person will have more authority than the tax matters person of the past.
  2. Adopt provisions to assess partners who have left for tax changes in the years they were partners.
  3. Should the partnership elect out of these rules? If the agreement doesn’t address this issue, it may be left to the partnership representative.
  4. Require partners to file amended returns?
  5. How should tax payments be allocated?

I’m afraid this blog has more questions than answers. Hopefully, future guidance will clear up some of the confusion. As always, consult your tax adviser.

By Rick Schultz, CPA

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How to Access Frequently Requested IRS Records

Posted on June 14 2016 by admin

Okay, let’s get right to the big one first. You need a copy of a previously filed personal tax return and for whatever reason, you don’t have one. Lost, stolen, fire, flood, or perhaps the dog ate it (my lab probably would). Maybe you’re getting a bank loan, you’re being audited (and yes, the IRS agent may ask for a copy even though they have it), or maybe your future spouse wants to take his or her due diligence to another level. How do you go about getting a copy of your tax return or other frequently requested IRS records? The IRS gives you some options.

Send a completed IRS Form 4506 (available from the IRS web site) to the address provided in the form’s instructions to receive copies of your tax returns as originally filed. The IRS charges a fee of $50 for each copy provided (ouch!). If you are web challenged, you can call the IRS hotline at (800) 829-3676 and have the form mailed to you.

Maybe a “transcript” of your tax return will work for you? For example, some colleges and loan originators will accept IRS “transcripts” vs. actual tax return copies. The good news with these is that they are free. Individuals can call (800) 908-9946 or (800) 829-4933 for business transcripts.

Doing some due diligence on a charity you’re thinking of making a big donation to? You can get tax-exempt or political organization returns or other documents that are publicly available by filing a Form 4506-A, or by calling (877) 829-5500.

By Dale F. Jensen, CPA

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Documentation Requirements for Non-Cash Contributions

Posted on June 9 2016 by admin

Many taxpayers donate unused clothing or household items to Goodwill or other charitable organizations each year, and probably view it as a win-win situation. The donations go to a good cause, the taxpayer is able to remove some clutter from their house, and last but certainly not least, gets to deduct the donation on their tax return. Sounds like a pretty great transaction, right? Well if you aren’t careful, that tax deduction part could be trickier than you think.

Recent court cases suggest that the IRS is beginning to crack down on taxpayers claiming deductions for non-cash contributions without the proper documentation. Charitable organizations commonly provide donors with a blank slip upon drop-off, or a doorknob hanger if the items are picked up from the taxpayer’s residence. Unfortunately, more often than not these receipts are not sufficient for purposes of the tax deduction.

The degrees of documentation required vary based on the value of the property donated. For property valued at $250 or less, a receipt that contains the name of the charitable organization, date and location of the donation, and a basic description of the property donated will suffice. The same rules apply for property valued between $250 and $500, with the additional requirement that the receipt state whether any goods or services were provided to the taxpayer in exchange for the donation, and if so, a good-faith estimate of their value. These requirements are known as “contemporaneous written acknowledgement.”

If you are making non-cash donations in excess of $500, the rules become even more stringent. Form 8283 must be filed with your tax return, which requires even more information about the contribution. Additional requirements include the fair market value of the item at the time of donation, how the fair market value was determined, date the property was acquired by the donor, how the property was acquired by the donor, and the original cost of the property.

Thinking of donating property valued at $5,000 or above? Be prepared to meet all of the previous requirements, as well as obtain a professional appraisal of the property.

So next time you donate some old clothes, keep these rules in mind to make sure you receive the appropriate tax deduction! For all the details check out IRS Publication 526, or simply give your tax adviser a call.

By Austin Bradley, CPA

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IRS Tax Refund Offset Program Needs Improvement

Posted on June 8 2016 by admin

A recent report from the Treasury Inspector General for Tax Administration (TIGTA) found that the IRS’s computer programming and current processes are not able to effectively identify taxpayers’ outstanding tax debts and apply refunds to outstanding debts.

The IRS requires that a taxpayer’s refund be offset first to pay outstanding federal tax debt before it can be applied to offset nontax debts or applied as a credit to a future tax period. However, the IRS’s existing computer programming is not capable of identifying sole proprietors with business tax debt.

For the 2013 tax year, TIGTA identified approximately 53,000 individual taxpayers who received $74.5 million in tax refunds that should have been offset against outstanding debts on the taxpayers’ associated business tax accounts. TIGTA also reported the 502 individual tax refunds totalling approximately $780,000 were incorrectly applied to outstanding tax debts on LLC business tax accounts.

Several recommendations were made to the IRS for improving the tax refund offset program, including revising its tax debt identification programming and correcting procedural errors.

While the IRS agreed with TIGTA’s recommendations and began implementing some changes, the IRS stated that implementation of the requisite programming changes is subject to budgetary constraints, limited resources, and competing priorities. Due to those constraints, the IRS could not provide an implementation date for all of TIGTA’s recommendations.

By Janet Berry-Johnson, CPA

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Tax Court Rule Changes

Posted on June 7 2016 by admin

Many are aware of the last minute tax “extender” provisions passed in December 2015. But you may not be aware of the numerous other tax provisions passed in conjunction with this legislation. One of them being relative to Tax Court rule changes.

First, you normally don’t want to find yourself in Tax Court. It can be an expensive and long journey when you have the Commissioner of Internal Revenue as the respondent in Tax Court cases. But anyone can file a petition who has received a notice of deficiency or a notice of determination. You can also file a petition (in certain circumstances) if you filed a claim with the IRS for relief from joint and several liability (innocent spouse relief).

The act changes the filing period for interest abatement cases filed in the Tax Court and makes them eligible to be heard under the small tax case procedures if the abatement request does not exceed $50,000.00.

Changes are also made to the venue for appeals of spousal relief and collection cases. It suspends the running of the period for filing a petition for spousal relief or for filing a petition in a collection case where there is a pending bankruptcy case.

The act also clarifies in Sec. 7441 that “The Tax Court is not an agency of, and shall be independent of, the executive branch of the Government.” (The Tax Court was established as an Article I (legislative) court by the Tax Reform Act of 1969, P.L. 91-172, which amended Sec. 7441; before that it was an independent agency of the executive branch performing a judicial function.

By Dale F. Jensen, CPA

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Baby Now We Got Bad Blood: Breakup Results in 1099-MISC & A Lawsuit

Posted on June 2 2016 by admin

From November 2009 until March of 2011, Lewis Burns (72) and Diane Blagaich (54) were romantically involved. During early 2010, Burns wired $200,000 to Blagaich’s bank account, gave her a $70,000 Corvette and wrote her various checks totalling $73,819 (in all, $343,819).

Burns had no desire to marry, but wanted to confirm his commitment to Blagaich and provide for her financially, so in November of 2010, the couple signed a written agreement promising to respect each other, spend time together, and be faithful to one another. The agreement also required Burns to make an immediate payment of $400,000 to Blagaich, which he did.

Alas, true love was not to be and the relationship deteriorated over the course of the next few months. In March of 2011, Blagaich moved out of Burns’ residence and Burns sent her a notice of termination of their agreement. Burns also claimed he suspected Blagaich had been unfaithful, despite her assurances to the contrary.

In late March 2011, Burns initiated a civil suit in the state court against Blagaich, seeking nullification of the agreement and return of the Corvette, diamond ring, and all cash that Burns had provided to her. He also filed a Form 1099-MISC with the Internal Revenue Service, reporting $743,819 in miscellaneous income payments to Blagaich for 2010.

Believing the money and car were gifts, Blagaich did not report the income on her 2010 return. Gifts are non-taxable under IRC Sec. 102(a). The IRS acted on the 1099-MISC and added the $743,819 to her taxable income for the year, assessing additional tax, penalties and interest. When Blagaich protested the assessment, the IRS asked the Tax Court to delay action on the case until the conclusion of the state court case.

In November 2013, the state court found that Blagaich had fraudulently induced Burns to enter into the agreement and ordered her to repay the $400,000 to Burns’ estate (Burns had passed away shortly after the trial). The Corvette, $200,000 wire transfer and various checks were found to be “clearly gifts” and she was entitled to keep them. Subsequently, one of the executors of Burns’ estate issued an amended 1099-MISC reducing the income reported to Blagaich in 2010 to $400,000.

Following the state court decision, the IRS concluded that Blagaich should be taxed on the entire $743,819. Blagaich disagreed, arguing that the IRS was bound by the state court ruling that $343,819 was a non-taxable gift. Also, since she’d repaid the $400,000 per court order, under the doctrine of rescission she should not be required to include that amount in income.

The Tax Court disagreed with Blagaich on both points. They pointed out that the IRS was not a party to the litigation over the nature of the $343,819 so were not required to adhere to the state court’s findings. They also found that the doctrine of rescission didn’t apply, thus, the full $743,819 was considered taxable income for federal purposes, even though a state court had found otherwise. I think it’s safe to say Burns and Blagaich are never ever ever getting back together.

By Janet Berry-Johnson, CPA

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There is nothing more complex than the world of taxes. We know this and yet we chose careers where we face these issues everyday. We get questions day in and day out about new tax laws, forms and news items and how they affect everyday people and businesses. Well, here at Henry & Horne we have set out to do what we do best; help everyday people understand what is going on in the world of state, local, federal, estate and international taxation. We will provide these weekly posts and we encourage you to give us feedback on those posts as well as letting us know what else you would like to know more about. Welcome to "Tax Insights." We hope you find this blog informative and worthy of your time.

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