Scam Alert! Fake IRS Bills Say You Owe Even More

Posted on September 28 2016 by admin

As if it’s not hard enough already to keep what you pay to the IRS at the legal minimum, the scammers keep coming up with additional ways to make you think you owe them even more! The latest one involves fake emails that say they are from the IRS and have a fake “CP2000 notice” attached. For those that don’t know, CP2000 notices are often generated and sent to taxpayers by the IRS when there is a mismatch between a payer (like an employer or a bank) and a payee taxpayer.

There are many clues to look for that indicates them as fake. First, your CPA and YOU always do a good job in preparation (CPA) and in supplying all the information (YOU) for your returns so there are never any errors, right? Well, most of the time anyway. So the IRS must certainly be wrong in sending one of these to you (fingers crossed). That’s the first clue. Next clue is that the IRS simply does not email out CP2000 notices. They send them snail mail. Some other clues to look for in this particular scam are:

  • The fake CP2000 notices appear to be issued from an Austin, Texas address;
  • The underreporting issue is said to be related to the Affordable Care Act (ACA)
  • The payment voucher lists the letter number as 105C
  • The notice requests a check be made out to “I.R.S.” to the “Austin Processing Center” at a P.O. Box address; and
  • There is also a “payment” link within the email itself.

If you get an email like this, do not respond, do not open the attachment, and if you’re so inclined, let the IRS know about it by forwarding it to phishing@irs.gov.

By Dale F. Jensen, CPA

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Surviving Recruiting: Land the Job and Keep Your Sanity

Posted on September 27 2016 by admin

Accounting is a unique industry when it comes to recruiting out of college. In very few other industries do you get so many companies that, in reality, maintain such a consistent line of work. Sure, every firm will have its quirks, and some offer lines of service not available in others, but almost every CPA firm you will run across at your next Meet the Firms event will have the basic business lines you’d expect. It can make choosing a real headache – how can you pick from all these firms that appear so similar?

Hopefully some of these pointers will help you out in the next few weeks as you go through recruiting:

  • Start off with some research – you’re on a public accounting firm’s website right now… good start! I vividly remember checking the list of firms in attendance at the event and looking up their websites on my phone outside the hall. Here you can find firms that have the services you’re interested in, ones you may be able to tell you don’t care for, and then come up with some questions for the representatives. Other online resources aside from the company’s website should glean some information as well.
  • Have a 30 second commercial rehearsed – Most awkward encounters at Meet the Firms happen after you’ve shook hands, and then commence a very long awkward pause. This is a great time to tell me about you! There are tons of resources online about crafting an elevator speech, and it should give the representative all they need to know about you and create any follow up questions they may have.
  • Be yourself – in interviews, meetings with representatives, networking events, or anywhere else you may meet professionals. You can maintain your professionalism and show us who you are – we want team members with some personality!
  • Follow up – Send a thank you email to everyone you spoke to – it really does make a difference. I’ve also taken to connecting with others on LinkedIn – accounting is a small, small industry, and even if we don’t work in the same firm, a connection can last a long time.
  • Take time for yourself – no doubt, this is essentially a student’s first “busy season” – it seemed when I was job searching that all of my professors intentionally scheduled exams during recruiting season, as if we weren’t stressed enough. Just as we need to occasionally take walks and other brain breaks during tax season, you should take some time for yourself, no matter how short. It helps you from wearing down, keeps your grades up, and will hopefully help you nail that interview.

In short, go with your gut – This is going to be a job that you will sometimes spend more of your waking hours at than at home, so it makes sense that the culture, the people, and the work are all great fits. I can say I’ve found that fit at Henry and Horne, and you should be able to find it at whatever firm you work for as well.

By Brock Yates, CPA

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Government Forgives Certain Student Loan Debts

Posted on September 23 2016 by admin

The amount of student loans outstanding has been called an economic ticking time bomb by some experts – with a long list of reasons why more and more students are having a hard time paying back the borrowed funds. Student loan debt can be difficult to have discharged even in bankruptcy. But there are ways to do so, one of which is the Department of Education’s “Defense to Repayment” discharge process. Another is their “Closed School” discharge process.

The Defense to Repayment discharge process allows the Department of Education to discharge certain loans if the borrower can establish an act or omission that gives rise to a cause of action against the school under applicable state law. The cause of action must directly relate to the loan or to the school’s provision of educational services for which the loan was provided. Claims against the school for things such as personal injury or allegations of harassment would not qualify for this process.

The Closed School discharge process allows the Department of Education to discharge certain loans for a school that closed within 120 days of attending it and you have not yet completed all the coursework for the program. This discharge process does not apply if you are completing a comparable education program at another school through an agreement between the schools or if you transferred academic credits at the closed school to another school.

Once you have your debt forgiven, then you have to determine if you must include it in taxable income. In general, debt forgiven is taxable as income though there are exceptions here too. Recently released IRS Rev. Proc. 2015-57 addresses some rules related to the discharge processes noted above and may be beneficial for you to review.

By Dale F. Jensen, CPA

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An Easier, Cheaper 60 Day Rollover Waiver

Posted on September 21 2016 by admin

The IRS has had a major change of heart that is good for taxpayers. They recently issued Revenue Procedure 2016-47 which established a “self-certification” procedure enabling a taxpayer to complete a retirement plan rollover (despite missing the 60-day deadline) by certifying to the administrator of the recipient plan or IRA that the deadline was missed for certain specified reasons.

Generally, a distribution from a retirement plan is taxable, but if you roll the distribution over within 60 days into the same or another retirement plan, it is not taxable. Of course, this is the general rule. Some distributions do not qualify for roll-over and some recipients are not eligible to make roll-over distributions, so be sure to consult your tax advisor to determine if this Revenue Procedure applies to you.

Prior to this revenue procedure, you could get a waiver of the 60-day rollover deadline by filing with the IRS, paying a $10,000 filing fee and waiting a year or more to get an answer. So now if you fit into the common “hardship waiver” situations listed below, you can avoid the filing fee and the wait. If you received a plan distribution, but you have not completed the rollover of that distribution within 60 days, you can make the rollover late, provided you can “certify” to the plan administrator of the plan you are rolling over to that you qualify for a waiver of the 60 day deadline. The plan administrator can rely on your self-certification and accept the rollover. Good news – this Revenue Procedure even includes a sample letter you can use for the certification.

There are 3 requirements or conditions that must be met to qualify for the self-certification:

  • First, you must not have been previously denied a waiver by the IRS for this particular distribution
  • Second, you must have been unable to complete the rollover due to one or more of the 11 reasons in the following list
  • Third, you must complete the rollover as soon as practicable after the reason(s) that prevented you from completing the rollover no longer exist

Completing the rollover within 30 days after the “reasons no longer prevent you” will automatically be deemed to comply with condition number three above.

Common hardship waiver reasons based on the self-certification procedure:

  1. An error was committed by the financial institution receiving the contribution or making the distribution to which the contribution relates.
  2. The distribution was made in the form of a check which was misplaced and never cashed.
  3. The distribution was deposited into and remained in an account that the taxpayer mistakenly thought was an eligible retirement plan.
  4. The taxpayer’s principal residence was severely damaged.
  5. A member of the taxpayer’s family died.
  6. The taxpayer or a member of the taxpayer’s family was seriously ill.
  7. The taxpayer was incarcerated.
  8. Restrictions imposed by a foreign country.
  9. Postal error.
  10. The distribution was made on account of a levy under § 6331 and the proceeds of the levy have been returned to the taxpayer.
  11. The party making the distribution delayed providing information that the receiving plan or IRA required to complete the rollover despite the taxpayer’s reasonable efforts to obtain the information.

By Pamela Wheeler, EA

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Hardship Distributions

Posted on September 20 2016 by admin

There may be a point in your life when you have an event that requires some cash. If you do not have that cash on hand, you may be forced to look into other options such as selling assets. Another option could be a hardship distribution from your retirement plan.

A hardship distribution is when a distribution is made to a participant from an elective deferral account made because of an immediate and heavy financial need. Not all plans allow for this type of distribution and you should review the terms of your plan to determine if it is permitted.

If the plan does allow the distribution, it should describe events that qualify under the plan’s definition of a “hardship”. Some safe harbor situations provided by the IRS regulations are:

  • Medical expenses (to the extent not reimbursed by insurance)
  • Costs related to the purchase of the principal residence
  • Payments for education
  • Payments necessary to prevent eviction or foreclosure
  • Costs of burial or funeral expenses
  • Certain expenses to repair damage to the employee’s principal residence

*Note: These payments may be made for the employees’ dependents.*

The plan will also describe any limitations on the distribution that may exist. For example, hardship distributions are limited to the amount necessary to fulfill the financial need. It is also limited by the amount of other resources available to the employee that can fulfil the need such as insurance reimbursement, liquidation of assets or loans. The distribution cannot be repaid to the plan so it does reduce your retirement savings permanently.

Hardship withdrawals are subject to income taxes and possible withholdings and may be subject to a 10% additional tax on early distributions depending on your age and any other exceptions you may qualify for.

By Kelsey Olsen

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Transfer Pricing, IRC 482 and Control

Posted on September 15 2016 by admin

First let’s start with IRC 482. IRC 482 allows the IRS to make allocations to ensure that taxpayers clearly reflect income attributable to controlled transactions and to prevent the evasion of taxes. This refers to both domestic and international transactions that relate to transfer pricing between two related entities. In order for IRC 482 to even apply, three requirements have to be met:

  1. There must be two or more organizations, trades or businesses; AND
  2. There must be common ownership or control, either directly or indirectly of such entities; AND
  3. The IRS must determine that an allocation is necessary either to prevent evasion of taxes, or to clearly reflect the income of any of those entities.

We are going to focus on #2 above assuming that prerequisite #1 has already been met.

IRC 482 gives a broad definition of what constitutes control. Of these, they include, direct, indirect, legally enforceable or not, two or more taxpayers acting in concert, reality of the control is decisive and form of the control is not decisive. Basically saying…they can look at any kind of control.

You would think control would be one of those easy things to define and show, but it is not always that clear and just going by ownership (Stock) percentage is not always the case. So if you honestly don’t know who has control, ask yourself some of the following questions:

  • Do you have actual or practical control in the other party to the transaction?
  • Do you have two independently owned companies acting in concert with each other?
  • Do you have income or deductions that have been arbitrarily shifted?
  • Does one individual or party have enough control or influence to move the party in question to act as instructed?
  • Who is the single largest shareholder?
  • Do some parties have the same board of directors?
  • Is there a management agreement that gives specific authority?

If you ask yourself any of these questions and you or the IRS come up with an answer of “yes there is common control”, then the IRS can move on to prerequisite #3 and look to make sure allocation is done according to control and ownership. They can then make allocations if they feel that the transactions were executed in a way that did not properly reflect an arm’s length transaction and hence create a case in which one person, or entity, did not pay their full share of tax due.

These rules are very complex and control can be an easy or difficult item to prove. If you have any questions or if the above information relates to you or your company, you should consult a tax adviser to reassure yourself that your related transactions are in compliance and the allocations fairly represent the control or power for each party involved.

By Chris Morrison, CPA

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Taking on the Tax Court – What Happened to Bruno?

Posted on September 14 2016 by admin

This all comes from a recent Tax Court case, Bruno Bruhwiler v Commissioner. Bruno is a self-employed post-production film compositor living in Los Angeles. He hadn’t filed a tax return during the last ten years. What Bruno wasn’t aware of was that the IRS received matching documents from his bank and his clients showing that he had income of $17,510. With this information, the IRS made a “substitute for return” and determined that he owed $2,851. The IRS sent him a notice of deficiency. Bruno then decided to petition the Tax Court.

Rather than dispute the income or tax determined by the IRS he “advanced 27 frivolous contentions, including the assertions that: (1) he ‘is not a U.S. citizen but in fact is a California National’; (2) he is not ‘a resident of the United States’ or of ‘any Federal Territory’; (3) he is not subject to title 26 taxes; (4) the Social Security laws do not apply to him; (5) the IRS officials who examined his return are ‘agents of a foreign principal’; (6) the IRS erroneously treated him as ‘a fictional entity’ whereas in fact ‘Bruno Bruhwiler is a man’; and (7) ‘the due process of Bruno Bruhwiler has been violated and dishonored.’”

The Tax Court warned him multiple times not to waste their time with such outlandish statements, explaining that the Tax Court could impose a penalty up to $25,000 “if the taxpayer’s position is frivolous or is being maintained solely for the purpose of delay.” Yet this did not deter Bruno on his crusade. When asked about his income, “He replied: ‘I don’t even know what you mean by “income.” I have my own definition of income.’ Asked what that definition was, he replied: ‘It’s a cat with a pink bow. I earned no income. I’m in my own jurisdiction. * * * I am not part of the legal society; I have my own society.’”

Unfortunately, Bruno was not successful in disputing the tax liability determined by the IRS. In the end the Tax Court fined him $3,500 for the run around he gave them. This was in addition to the $3,840 that consisted of the original tax deficiency ($2,851) with penalties for his failure to file and pay the tax timely ($1,006).

There are several lessons to learn from Bruno’s story. First, the IRS receives information about you (like W-2s and 1099s) and can determine your tax liability whether you file your return or not. So don’t think you can hide from them. Second, if you owe tax and you don’t file and/or pay on time, there are penalties. The late filing penalty is 5% of the unpaid amount for each month with a maximum of 25%. The late payment penalty is 0.5% of the unpaid amount for each month with a maximum of 25%. Third, don’t petition the Tax Court unless you have a good cause. If you end up wasting their time, you could owe up to $25,000.

By Richard Christensen

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Sales Tax Audits

Posted on September 13 2016 by admin

Unfortunately, we are all too familiar with the sales tax audits – or in Arizona, transaction privilege tax audits. The regulatory agency in question usually has an onerous list of records that they want to peruse, frequently covering a five year period, or sometimes more. Arizona has also been known to misplace filed sales tax returns and send requests for such reports – often as far back as six, seven or more years!

But sales tax audits are not just a factor of life here in Arizona – they happen everywhere. And they all have different quirks that apply to those states. I have a client in Nevada, and Nevada seems to get through the audits fairly quickly. I have had audits in Arizona that have been ongoing for more than three years. While this may not be the norm, if there is one thing an auditor is stuck on, they just keep going back and back to that issue. After three years and counting on one audit, I finally asked the client if I could make a deal and just end the entire thing – they agreed. Do you want to know how much we settled for? It was less than $200 – yes, an audit had been open for that long and there was not even substantial revenue to the city in question.

According to this great informational document from the Brotman Law Firm, California sales tax audits can also be somewhat of a nightmare. But there is really great information in here that can apply to every state – or audit type, for that matter. There is information on how to prepare for the audit – this is a great resource for any type of audit that you may be facing.

So – after the initial stomach drop when notified of a sales tax audit, notify your trusted tax advisor and just get to work pulling together the information requested. Yes, it is a pain. Yes, it takes away from your daily operations. But it is all about the cost of being in business – and this, too, can be survived!

By Donna H. Laubscher, CPA

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Fiduciary Access to Digital Assets and Accounts

Posted on September 8 2016 by admin

Think about the number of online accounts you have. There are social media accounts, financial accounts, e-mail accounts, cloud storage accounts, membership or professional accounts, music accounts and many others. Online accounts require less physical storage space, allow the user to access the account anywhere he or she has an internet connection and sometimes even provide a benefit for “going paperless.”

However, digital assets may cause issues for your executor, trustee, conservator or power of attorney (your “fiduciary”) in the event you become disabled or pass away. First, your fiduciary may not be able to determine what assets you have. Previously, a fiduciary could simply monitor a person’s mail to figure out what assets that person owned. But with more people handling transactions entirely online, the fiduciary may not receive statements in the mail and may miss the full picture of a person’s assets. Second, even if your fiduciary can determine what assets you have, he or she may have trouble accessing those assets or information about those assets. These two things can make it very difficult for your fiduciary to gather the information to prepare necessary tax returns and handle financial transactions on your behalf.

Earlier this year, the Arizona legislature enacted the Revised Uniform Fiduciary Access to Digital Assets Act (S.B. 1413). This legislation attempts to make it easier for a fiduciary to access the digital accounts of a disabled or deceased person. A person can specify in a will, trust, power of attorney or other record that his or her fiduciary is allowed to access the person’s digital assets. If the user does not provide direction in an estate planning document or complete a site specific tool (e.g. Google inactive account manager), then the fiduciary may still be entitled to access to some, but not all, of the information found in the person’s digital accounts under the new law.

There are several ways you can make it easier for your fiduciary to manage your financial affairs and digital assets if something happens to you:

  • Prepare an inventory of your digital assets – Make a written list of your electronic devices and online accounts that your fiduciary may need to access. This list should be easily accessible to the fiduciary, meaning you should not keep it in a safe deposit box or in electronic form on a device that your fiduciary cannot access. The list should include your usernames, passwords, account numbers, or any other information that may assist your fiduciary in handling your affairs.
  • Create a back-up of your digital assets offline – Keep a local copy of information, such as photos and important financial documents, on your computer, external hard drive or USB flash drive. This may make it easier for your fiduciary to handle your affairs because all of the information he or she needs will be in a central location.
  • Complete site-specific tools and institution-specific powers of attorney – If a website offers a site-specific form that you can complete to allow your fiduciary access to your account, take the time to fill out the form. Additionally, some financial institutions have an institution-specific power of attorney. Filling out these forms makes it less likely that your fiduciary will encounter problems with the institution not accepting other, more general forms.
  • Contact your attorney to update your estate planning documents to include a provision allowing your fiduciary to have access to your digital assets.

By Jenny Maas

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When You Sell Your Home Impacts Your Taxes

Posted on September 7 2016 by admin

In the world of taxes, there are times when you do something one way and everything is fine, but do it another way and the results are dramatically different, and not in a good way. Selling your home can be one of those things. Depending on the circumstances of when you sell your home (among other factors), you may be able to exclude all or a portion of any gain realized.

How to qualify

In order to qualify for the exclusion, there are two basic tests that you must meet: the ownership test and the use test. In short, you have to own and use the property as your principal residence for two of the last five years. While it is probably most common that both tests are met in the same time period, it doesn’t have to be that way. You could move into a house as a renter for a year, buy the house and live in it for another year, then use it as a second home for another year and then sell it. In this scenario, you used the property as a principal residence for two years, one as a renter and one as a homeowner. You owned the house for two years, one while you were living in it and one when you used it as a second home. This scenario is probably fairly uncommon, but you would meet both the use and ownership test.

Exclusion amount

The maximum exclusion amount is $500,000 for married filing jointly taxpayers or $250,000 for all other filing statuses. In order to claim the full $500,000 both spouses must meet the use test while only one needs to meet the ownership test.

Some important details that may affect how much you can exclude

First of all, you can only use the exclusion once every two years. In the case of married filing joint, if one spouse has used the exclusion within the last two years, the maximum amount that can be excluded is $250,000.

The exclusion may be reduced by any nonqualified use of the property. Nonqualified use essentially means any use other than use as a principal residence (so think along the lines of rental or second home). However nonqualified use does not include:

  • Any time after the last date the property was used as a principal residence
  • Any period two years or less for temporary absences due to changes in employment, health conditions or other unforeseen circumstances
  • Time spent serving in the military (not to exceed 10 years)

If you move prior to meeting the two years, you still may be able to exclude a portion of the gain. The exceptions for this are a change in employment, health conditions or unforeseen circumstances. If this is the case, you can exclude a proportional amount of the $250,000/$500,000.For example, if you only lived at the residence for 18 months, you could exclude $187,500/$375,000 (18/24 X 250,000).

In conclusion, this is definitely an area where it’s worth knowing the facts beforehand. It could be the difference between picking up $500,000 of income or not. When in doubt, ask!

By Richard Christensen

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Welcome


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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