A New Way to Drive Tax Revenues

Posted on July 28 2016 by admin

The I-95 Corridor Coalition is testing out a new way of collecting tax revenues. With the ever growing popularity of fuel efficient vehicles such as electric cars and vehicles touting high miles per gallon, states are having a hard time coming up with enough revenue to fill the budget for road repairs and rest areas. The more people that invest in more efficient vehicles the less money the state has for the upkeep of roads.

The new proposed tax would be enforced by having a device installed in your vehicle that will track the miles that are driven using GPS. Think of it as a Fitbit for your car. The tax would lower the price of gasoline by getting rid of the state gas tax but cost drivers 1.5 cents per mile. If a driver is unwilling to let the government track their driving activity, there is an option to pay the tax based on a yearly mileage of 30,000 miles (which seems like a higher number of miles than most people drive in a year.)

The Coalition represents Connecticut, Delaware, New Hampshire and Pennsylvania, but these are not the first states to look into this solution to decreasing tax revenues. Oregon and California have already put in similar proposals that are in the testing stage. Each of these states has taken 5,000 volunteers and placed the device in their vehicles. They are using the data to see if this would indeed be a profitable solution. Illinois lawmakers have also tried to implement this tax but were met with such hostile disapproval that it has been shelved until a more agreeable solution could be found.

The main issue that drivers are having with this proposed tax is that it is being looked at as an invasion of privacy. They are seeing this as a way that the government can follow them and know exactly where they are at all times. Some drivers have even gone as far as to say that they can see the government eventually using the GPS feature to track what restaurants they are at and assessing extra taxes for stopping at fast food restaurants. This comes in light of the soda tax that Philadelphia has just put into place to help promote a healthier population.

These mileage taxes are still in a testing phase. However, if the extra revenue outweighs the cost of the devices, I wouldn’t be surprised if more states started adopting this strategy as well.

By Joanna Yergler

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Disproportionate Distributions in an S Corporation

Posted on July 27 2016 by admin

First let us start with the definition. A disproportionate distribution is a payout of corporate profits whereby some shareholders receive cash or other assets and others receive an increased interest in the company.

So why is this important? Good question! S corporations need to carefully monitor distributions to shareholders to make sure there are no disproportionate distributions. Under IRS regulations, disproportionate distributions are viewed as having a second class of stock. And as we all know, one of the requirements of an S corporation is that it only can have one class of stock. With that said a disproportionate distribution can void your S corporation election and put you as a C corporation taxed at the corporate rate of 35%. Something tells me, I have your attention now!

Don’t worry if you’ve already made a disproportionate distribution because you can correct it. If it has occurred, the corporation should take immediate action to correct the error by equalizing the distributions. Simply find out what the actual distribution per share is to each shareholder, identify the shareholder who received the highest distribution per share and then calculate the amount that each shareholder should have received at their per share level. Finally, subtract the amount that was already distributed to equal the amount of the equalizing distribution to that shareholder.

Things to keep in mind: a disproportionate distribution can occur inadvertently. A loan to a shareholder that is not properly documented as a loan can be considered a distribution. A distribution of non-cash property or a sale of corporate property at less than fair market value can be deemed a distribution as well. Distributions other than cash can be tricky; so with that said, if you have any questions on distributions, please contact your tax adviser. Also make sure to have your loans properly documented; this being one of several reasons.

By Chris Morrison, CPA

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Potential $34 Million Error in Amended Return Refunds

Posted on July 26 2016 by admin

The Treasury Inspector General for Tax Administration (TIGTA) recently released a report (Reference number 2016-30-032) stating that improvements are necessary within the IRS’s examination process for approving amended returns with claims for refunds and abatements. TIGTA found that within a statistical sample of 84 amended returns that 31 claims were not appropriately substantiated. The sample results were then projected to the population and TIGTA estimated that a total of approximately $34.4 million in tax refunds and abatements may have been inappropriately allowed.

You may be asking, “What is TIGTA?” Well, TIGTA is the IRS’s watchdog. It was established in 1999 in accordance with the Internal Revenue Service Restructuring and Reform Act of 1998, and it is responsible for all audit and investigation activities related to the work of the tax administration. TIGTA initiated this audit specifically to determine whether the IRS’s controls over the auditing of amended tax returns with claims are being properly implemented and the refunds are being accurately processed.

Karen Schiller, the commissioner of the IRS’s Small Business/Self-Employed Division, issued a statement disagreeing with TIGTA’s projected estimate. In response to the report, Schiller stated that she believes the outcome measures are overstated; however, she confirms that most of the recommendations made by TIGTA will be implemented by the IRS to help improve specific controls and procedures in the examination of amended returns. Does this mean that refunds from amended returns are going to taking longer to get? Well, probably. Only time will tell.

By Stacy Redmond

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When & How to Sign Up for Medicare Parts A & B

Posted on July 21 2016 by admin

As more individuals push off retirement and getting Social Security, many are in danger of missing the enrollment period for Medicare Part B.

In most cases, if you don’t sign up for Part B when you’re first eligible, you’ll have to pay a late enrollment penalty for as long as you have Part B. Your monthly premium for Part B may go up 10% for each full 12-month period that you could have had Part B, but didn’t sign up for it. Also, you may have to wait until the General Enrollment Period (from January 1 to March 31) to enroll in Part B, and coverage will start July 1 of that year

So it’s critical that you get signed up timely during your enrollment window.

Medicare enrollment takes place in the 7 month window of your 65th birthday. This window is the 3 months prior, the month of your birthday, and the 3 months after your 65th birthday.

If you are already getting benefits from Social Security before you reach 65, you will be enrolled automatically in Medicare Part A & Part B.

If you have coverage through a current or former employer, it’s important to understand how your current coverage works with Medicare before making any decisions regarding enrolling or not enrolling.

When can I sign up for Part A & Part B?

Learn about when you can sign up for Parts A & B.

How can I sign up for Part A & Part B?

You don’t need to sign up for Medicare each year. However, each year you’ll have a chance to review your coverage and change plans.

Don’t miss your Medicare enrollment date and pay more!

By Melinda Nelson, CPA

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Refunds for Certain Credits Delayed Next Filing Season

Posted on July 20 2016 by admin

If you expect to claim either the Earned Income Credit or Additional Child Credit on your 2016 tax return, prepare for the possibility that you may need to wait for that refund longer than usual. In an effort to curb fraudulent refunds due to identity theft and fabricated tax returns, the IRS is mandating that no refund shall be issued prior to February 15, 2017 if the return contains either of the credits listed above.

The Earned Income Credit and Additional Child Credit have long been areas of heavy abuse for fraudsters, which has prompted the IRS to crack down in recent years. The more recent epidemic of taxpayer identity theft has further pressured the IRS to take control of these issues. The majority of fraudulent returns are filed early in the tax season, in order for the criminals to beat the actual taxpayer to the punch. This additional time for processing will allow the IRS to more closely examine these early returns, and hopefully cut down on the issuance of fraudulent refunds while also protecting the tax records of legitimate taxpayers.

The new policy stems from the PATH Act (Protecting Americans from Tax Hikes), which was passed in December of 2015. The Act mandates that no refund due to the Earned Income Credit or Additional Child Credit be issued prior to February 15 of the filing season. The theory behind the PATH Act is that fraudulent refunds and other lost revenue sustained by the IRS has the potential to trigger tax increases in order to make up for those losses.

Further information on refund issuance restrictions is expected later in the year, but currently the IRS advises taxpayers to plan on filing their returns as usual come next filing season.

By Austin Bradley, CPA

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Bill Eliminates Tax Penalty on Team USA Medalists

Posted on July 19 2016 by admin

Well, the summer Olympics are almost upon us. The Rio games officially begin on August 5th and our top athletes are hard at work putting in the last of their efforts to train and condition. Team USA is no doubt focused on one thing: WINNING. The athletes probably have not even considered what happens after they win. The U.S. Olympian winners will receive a cash prize of $25,000, $15,000, and $10,000 in addition to their gold, silver, and bronze medals, respectively. This money is considered earned income abroad and is subject to IRS taxation –as high as 39 percent. That could be a tax bill of almost $10,000 for winning a gold medal. Yikes!

Fortunately, there is some good news for our Olympians. The Senate just approved the United States Appreciation for Olympians and Paralympians Bill (Sen 2650) by unanimous consent on July 12th. The measure is now headed to the House for consideration. It is not finalized yet, but there is definitely progress in that direction. The Senate is hoping the bill will move quickly through the House to become law.

If enacted, the value of any medals awarded and/or prize money received from the U.S. Olympic Committee on account of winning would be exempt from income taxation, beginning with the 2016 Olympic Games in Brazil. Senator John Thune commented after the bill was passed saying, “Having this bill signed into law would mean victorious athletes from Team USA won’t have to worry about a new tax burden and instead can focus on the warm welcome and congratulations from a grateful nation.”

Go Team USA!

By Stacy Redmond

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401(K) Withdrawals

Posted on July 14 2016 by admin

A 401(K) is a type of retirement plan established by employers that permits employees to defer part of their salary on a pretax basis. Early withdrawals from a 401(k) plan or IRA accounts are subject to a 10% penalty prior to reaching age 59½. A Roth 401(k) works in a similar manner but the deferrals are funded with after-tax dollars.

The basic concept of the 401(k) plan is to save money slowly over time and allow it to build up for retirement savings. However, there are times when you may need to tap into those savings. To dissuade participants from doing this before retiring, the IRS imposes a ten percent early withdraw penalty. However, there are some exceptions and the early withdrawal penalty may not apply to the following situations:

  • The participant’s death
  • The participant becomes disabled
  • The participant incurs a hardship and the participant is over age 59 ½ (the plan must allow for it and the plan may have certain stipulations)
  • Distributions to a qualified reservist that is called to active duty (period in excess of 179 days)
  • Use the money to pay for federal income taxes as a result of a levy on the specific retirement plan
  • Use the money to pay for unreimbursed medical bills that exceed 7.5% of your Adjusted Gross Income (AGI) (The medical expenses must be incurred in the same year as the distribution)
  • Payments made to prevent eviction from your residence or foreclosure on your residence
  • Plan loans (You can borrow money from the 401(k) plan and arrange to repay the money over a certain period of time including interest)

The IRS allows you a penalty free withdrawal for distributions from an IRA but not from a 401(k) for first-time home buyers and you can receive a distribution for acquisition costs. You can qualify if you have not owned a home during the two years prior to the date of buying the home. However, if your 401(k) plan allows it, you can roll the money over to an IRA from your 401(k) and then withdraw the funds from the IRA to use the exception.

All of these types of withdrawals are subject to the most common tax argument, “it depends”. If you are planning on making one of these distributions, contact your plan administrator to see if your plan allows the distribution and what consequences it will create.

By Kelsey Olsen

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Righting the Wrongs – The Wrongful Incarceration Exclusion

Posted on July 13 2016 by admin

It’s difficult to imagine being convicted of a crime and wrongfully incarcerated. It’s even harder to imagine that when ultimately the truth sets you free the damages you receive are subject to tax. Congress too saw the irony in the fact that awards are often given to assist the wrongfully convicted and incarcerated persons establish their life again only to find out a portion of it would be lost to tax. In December of 2015 a new exclusion from income under section 139F was added to the Internal Revenue Code as part of the PATH Act.

To qualify for the wrongful incarceration exclusion an individual who was convicted of a covered offense and served all or part of a sentence of imprisonment relating to the covered offense must meet one of the following three requirements:

  1. The individual was pardoned, granted clemency or granted amnesty for that covered offense because the individual was innocent of that covered offense.
  2. The judgement of conviction for the individual for that covered offense was reversed or vacated and the indictment, information, or other accusatory instrument for that covered offense was dismissed.
  3. The judgement of conviction for the individual for that covered offense was reversed or vacated and the individual was found not guilty at a new trial after the judgment of conviction for that covered offense was reversed or vacated.

A covered offense is any criminal offense under federal or state law.

The wrongful incarceration exclusion applies to an award that a wrongfully incarcerated individual received in a prior, current or future tax year. An individual who received an award in a prior year and included it in income may file an amended return for the prior year and claim a refund. Generally, a refund claim must be filed within three years from the date the individual filed the return or two years from the date the individual paid the tax on the award. Congress suspended those deadlines for qualifying individuals if the refund claim is made by December 19, 2016.

An award received for wrongful incarceration that did not also result in a conviction of a crime is not eligible for the exclusion. The exclusion does not apply to damage awards received by spouses, children or parents of the wrongfully incarcerated individuals.

Thirty states in the nation have some type of statutory compensation for wrongful conviction and incarceration. Advancements in technology and DNA testing have resulted in the reversal of a number of earlier convictions. There are studies that estimate that the wrongful conviction rate in the United States is 5,000 to 10,000 of convictions per year. People’s lives are forever changed by wrongful incarceration. The exclusion cannot restore a person’s life to their pre-wrongful incarceration status but it does provide common sense tax treatment to the awards they receive.

By Cheryl Dickerson, CPA

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IRS Modernization – The Fax Machine is Not Dead

Posted on July 12 2016 by admin

The fax machine’s heyday may have come and gone, but it hasn’t gone the way of the eight track or cassette tape player just yet. In fact, it is even part of the IRS’s current modernization effort. But then again, wouldn’t “modernization” and “fax” be considered an oxymoron these days? Probably. But if you’re an organization still working on updating from 1960s era technology in some areas of your operations, then making more use of faxes could still be considered a modern improvement. Even in 2016. Right? I guess. Well OK. I think you can see that I’m still trying to convince myself here same as I’m trying to convince you. I think in the end we just have to accept the fact that when it comes to government bureaucracy, some improvements come a bit late and in baby steps.

Starting last November, the IRS has expanded its very limited acceptance of signed forms by fax to include consents to assess additional tax of any amount, taxpayer closing agreements involving any amount, and consents to extend the time to assess tax. Just be aware that the IRS will not independently send an acknowledgement of received faxes. The taxpayer or representative with a power of attorney (POA) would need to call and request a verbal confirmation of receipt for that.

Other notable forms and correspondence now accepted by fax include:

  • Taxpayer statement about a refund.
  • Installment agreements and offers in compromise (Forms 433-D and 656).
  • Collection information statements (Forms 433-A and 433-B).
  • Election by small business corporations (Form 2553).
  • Letters to request non-assertion of a penalty or to provide a reasonable cause statement.
  • Taxpayer closing agreements.

By Dale F. Jensen, CPA

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Did Messi’s Mess Get Him “Locked Away”?

Posted on July 7 2016 by admin

Finally a verdict to what we know you’ve all been waiting for since our last blog together! (Click to view our previous blog.) The Spanish court system came out with a decision on the fate of Lionel Messi (World’s best soccer player) and his father after a month of deliberations following the allegations of tax fraud. Messi and his father have been found guilty, and have both been sentenced to jail time in addition to some hefty fines.

The soccer player and his father have both received a 21 month jail sentence for their involvement, but don’t feel too bad for them because under Spanish law, if a jail sentence is less than 2 years, it can be served through probation. They were also fined a total of roughly $4 million, even though they had paid the original debt plus accrued interest back in 2013 when the sponsorship money first came into question.

Much like the R. City song, “Locked Away” featuring Adam Levine, this decision most likely has Messi asking himself the question about his fans and followers – “will you still love me the same?” However, it looks like the soccer star doesn’t have to worry about that. His soccer club came out in full support of the athlete’s innocence in this matter.

Messi and his father are expected to appeal this decision as they are sticking to Messi’s original defense of “I just worried about playing football”. He also claims that he signed papers without reading them because he trusted his father and his advisers. The decision to appeal has not been made as of now, but we promise to keep you (our loyal readers) informed. Stay “tuned”… get it?

By Chris Morrison, CPA and Joanna Yergler

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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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