Understanding Your 5071C Letter: Identity Verification

Posted on January 29 2015 by admin

If you’ve received a 5071C letter, the IRS needs more information to verify your identity in order to process your tax return accurately. The IRS will continue processing your tax return once your identity is verified. Follow the identity verification steps below in order to provide the IRS with necessary information.

The steps are as follows:

  • Use the secure Identity Verification Service website idverify.irs.gov. To complete the entries you will need your name, date of birth, social security number and a copy of your most recently filed tax return.
  • If you cannot use the Idverify website, you can call the Identity Verification department telephone number provided in your letter.
  • If you did not file the return in question, you can use either option to notify the IRS.

The IRS is looking at ways to increase data security and protect taxpayers’ identities. To learn more on how to protect your identity, please click here.

By Shant Andonian

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Form 1099 Reporting Requirements

Posted on January 28 2015 by admin

It is necessary to file form 1099-MISC, Miscellaneous Income for each person to whom you have paid during the year:

  • At least $10 in royalties or broker payments in lieu of dividends or tax-exempt interest
  • $600 or more in rents, crop insurance proceeds, payments to an accountant and attorney
  • $600 or more for medical health care payments, including the purchase of supplies and payments for lab fees
  • Payments totaling $600 or more to individual contract workers for services rendered
  • Any fishing boat proceeds

In addition, use Form 1099-MISC to report that you made direct sales of at least $5,000 of consumer products to a buyer for resale anywhere other than a permanent retail establishment. You must also file Form 1099-MISC for each person from whom you have withheld any federal income tax under the backup withholding rules regardless of the amount of the payment.

Trade or business reporting is only reported on Form 1099-MISC when payments are made in the course of your trade or business. Personal payments are not reportable. You are engaged in a trade or business if you operate for gain or profit. However, nonprofit organizations are considered to be engaged in a trade or business and are subject to these reporting requirements. Other organizations subject to these reporting requirements include trusts of qualified pension or profit-sharing plans of employers, certain organizations exempt from tax under Section 501(c) or (d), farmers’ cooperative that are exempt from tax under Section 521, and widely held fixed investment trusts. Payments by more than 10 children or more than five other individuals are reportable on Form 1099-MISC.

Payment Types:

  • Attorney, fees and gross proceeds (Due to IRS February 15th)
  • Auto reimbursements, nonemployee
  • Awards, nonemployee
  • Bonuses, nonemployee
  • Car expense, nonemployee
  • Commissions, nonemployee
  • Compensation, nonemployee
  • Direct sales of consumer products for resale
  • Fees, nonemployee (i.e. Accountant)
  • Health care services
  • Medical services
  • Mileage, nonemployee
  • Nonemployee compensation
  • Prizes, nonemployee
  • Rental Expense
  • Rental Income
  • Royalties
  • Vacation allowance, nonemployee

Due Date to IRS (unless indicated otherwise): February 28th*
Due Date to Recipient (unless indicated otherwise): January 31**

By Dan Blackwell

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We’re from the Government and We’re Here to Help Finance Your Education

Posted on January 27 2015 by admin

President Obama’s recent proposal to offer two free years of community college tuition has garnered a lot of attention. But like my favorite finance guru Dave Ramsey likes to say, “When the government says ‘free’, pull out your wallet.”

Along with the idea of ‘free’ college tuition, the President’s proposal includes some tax hikes. One of the most alarming, at least to me as a parent of a young child with a 529 college savings account, is the President’s proposal to start taxing the earnings on those college savings accounts. A 529 Plan is an educational savings plan designed to help families set aside funds for future college costs. Earnings in the plan are allowed to grow tax free and distributions from the account are tax-free as well, provided they are used to pay for tuition, fees, books, supplies, and sometimes room and board while the student beneficiary is enrolled in an accredited college, university, or vocational school.

The administration has tried to frame the proposal as a way to redirect more money to middle class families, but 529 accounts are used almost exclusively by middle class families. Poor households don’t have the extra income to contribute to the plans, and very wealthy families don’t need them. The College Savings Foundation is calling on the White House to recall and Congress to oppose the proposal, citing research that shows over 70% of 529 plans are owned by households with income below $150,000 and almost 95% of 529 accounts are held by households with income below $250,000. For many families, taxing distributions from the plans would eliminate a significant incentive to save for college, and perhaps result in more families using student loan debt to finance higher education. A bad idea when the nation’s outstanding student loan debt stands at more than $1 trillion.

Under the proposal, withdrawals from 529 plans would be taxed at ordinary income rates, which can go as high as 39.6%. If this proposal were to go through, taxpayers would be better off saving for college by investing in mutual funds than in a 529 plan, since long-term capital gains tax rates are lower than ordinary income tax rates. Experts predict that 529 plan contributions would dry up immediately, hurting the plans’ financial positions. Most plans are administered by states, so states that are unable to retain sufficient assets in their plans would have a difficult time keeping them open.

But wait, in exchange for getting taxed on our college savings accounts, we’re getting two free years of community college? Not such a great trade-off, if you ask me. According to a study by the National Student Clearinghouse, only 15% of community college students utilize those institutions as a stepping stone to a 4 year degree. Most drop out; community colleges only have a 22% graduation rate. Those who do complete community college often wind up in the work force with a degree unlikely to lead to a highly skilled job after graduation.

Would free tuition change these statistics? Unlikely. Proponents of free community college argue that direct federal funding will compel community colleges to improve student achievement. But we need only look at the difficulty that the federal Title 1 program in K-12 has had in improving underperforming public schools, even with the stringent accountability provisions of No Child Left Behind.

So thanks but no thanks, Washington. As one of my Facebook friends ranted when I shared this information, “We’re saving so [our kids] can go anywhere they want . . . not community college.”

By Janet Berry-Johnson, CPA

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Do You Know and Trust Your Accountant?

Posted on January 26 2015 by admin

What do you look for in a CPA? Knowledge of tax codes? Professionalism? Business advice? Personality? Wait, what? Did that last one throw you for a loop?

It may seem odd to include personality on the list, but it is actually important. Think about it. People like doing business with people they like. Do you like your accountant? Or better yet, do you know and trust your accountant? The question carries a lot of weight. Your accountant plays a pivotal role in helping to guide your financial well-being. That’s a major area of your life to entrust to someone else. See where I’m going here? You don’t want someone who’s simply going to put your tax return together and send you on your way while saying see you next year.

The Merriam-Webster dictionary defines the word accountant as “someone whose job is to keep the financial records of a business or person”. That definition is true, but it’s also boring and only scratches the surface of what it means to be a CPA!

We view and treat our clients as more than just financial records. That’s because we know your business is more than just your livelihood – it represents your dreams, your passions and your hard work. Saving on taxes is more than just putting money back in your pocket – it’s about reaching your goals and making sure your family is financially secure. How do we know all of this? Because we have the same passions, dreams, goals and desires for ourselves and our families.

That’s why we’re taking a new, unique approach to showcasing the Firm’s leadership with video bios. There’s more to our talented team members than where they went to school and their professional designations. What we’re saying is – Accountants: They’re Just Like Us! Head to our website to check out our video bios and get to know the CPAs who truly care about more than just the numbers.

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Identity Theft: How to Protect Yourself

Posted on January 22 2015 by admin

With tax season underway and scams running rampant, here are some tips to help you avoid becoming a victim of identity theft:

  • The IRS does not initiate contact with taxpayers by email or social media tools to request personal or financial information.
  • If someone contacts you claiming to be from the IRS and threatens police arrest if you don’t pay immediately, that is a sign that it isn’t the real IRS calling.
  • Your identity may have been stolen if a letter from the IRS indicates more than one tax return was filed for you, or the letter states you received wages from an employer you don’t know.
  • If your tax records are not currently affected by identity theft, but you believe you may be at risk due to a lost wallet, questionable credit card activity, or credit report, you need to provide the IRS with proof of your identity.
  • Show your Social Security card to your employer when you start a job or to your financial institution for tax reporting purposes.
  • IRS impersonations can take the form of email, websites, even tweets. Scammers may also use a phone or fax to reach their victims. If you receive a paper letter or notice via mail claiming to be the IRS but you suspect it is a scam, check the IRS phishing page at IRS.gov/phishing to determine if it is a legitimate IRS notice or letter.
  • Once your tax return has been e-filed, save the file to a CD or flash drive and then delete the personal return information from your hard drive.
  • If you become the victim of identity theft or believe you may be at risk due to a lost/stolen purse or wallet, questionable credit card activity or credit report, please contact the IRS at the Identity Protection Specialized Unit, at 1-800-908-4490 in order to take steps to further secure your account. The IPSU hours of operation are Monday – Friday, 7 a.m. – 7 p.m. local time.

You will also need to fill out the IRS Identity Theft Affidavit, Form 14039 and fax it to (855) 807-5720 or mail it to:

Internal Revenue Service
P.O. Box 9039
Andover, MA 01810-0939

By Shant Andonian

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Save Twice with the Saver’s Credit

Posted on January 21 2015 by admin

Are you a low-to-moderate income worker? If so, the saver’s credit allows you to save for your retirement while also saving on your taxes with a special tax credit.

Save for retirement. The formal name of the saver’s credit is the retirement savings contributions credit. You may be able to claim this tax credit in addition to any other tax savings that also apply. The saver’s credit helps offset part of the first $2,000 you voluntarily save for your retirement. This includes amounts you contribute to IRAs, 401(k) plans and similar workplace plans.

Save on taxes. The saver’s credit can increase your refund or reduce the tax you owe. The maximum credit is $1,000 for single taxpayers or $2,000 for married couples.

Income limits. Income limits vary based on your filing status. You may be able to claim the saver’s credit if you are a:

  • Married couple filing jointly with income up to $60,000 in 2014 or $61,000 in 2015.
  • Head of Household with income up to $45,000 in 2014 or $45,750 in 2015.
  • Married person filing separately or single with income up to $30,000 in 2014 or $30,500 in 2015.

When to contribute? If you’re eligible you still have time to contribute and get the saver’s credit on your 2014 tax return. You have until April 15, 2015, to set up a new IRA or add money to an existing IRA for 2014. You must make an elective deferral (contribution) by the end of the year to a 401(k) plan or similar workplace program.

Special rules apply. Other special rules that apply to the credit include:

  • You must be at least 18 years of age.
  • You can’t have been a full-time student in 2014.
  • Another person can’t claim you as a dependent on their tax return.

By Becky Barnett, EA

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California’s New College Access Tax Credit

Posted on January 20 2015 by admin

California recently passed a new personal and corporate California tax credit called the College Access Tax Credit (CATC). If you donate to the College Access Tax Credit Fund, you can offset your California taxes by 60% (for 2014) of the amount of the donation. In addition, the donation qualifies as a charitable deduction on your federal tax return.

The CATC Fund was created to provide additional Cal Grants to eligible low income college students in California.

Other facts about the new credit:

  1. The CATC is limited to 60% of the donation in 2014, 55% for 2015 and 50% for 2016. For example, if you donate $10,000 to the CATC Fund in 2014, you would have a $6,000 California tax credit available to offset your California tax liability and a $10,000 charitable donation for federal tax purposes. There is no charitable deduction for the $10,000 in California since a credit was received.
  2. Your donation must be certified by California Educational Facilities Authority (CEFA) in the California Treasurers office. Information and the application are available at the CEFA website here. CEFA must certify that the contribution amount eligible for the CATC credit within 45 days following receipt of the taxpayer’s donation to the CATC Fund. A maximum of $500 million in contributions can be certified in 2014.
  3. If the credit exceeds the amount of tax owed in that year, the excess credit can be carried forward up to six years.
  4. The credit does NOT offset California alternative minimum tax.

Check with your Henry & Horne, LLP tax professional to see if the new CATC credit benefits your California tax situation while you help low-income California college students.

By Melinda Nelson, CPA

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Business Use of a Vacation Home

Posted on January 14 2015 by admin

Recently, a client came to me with a question. My clients’ primary residence is in Arizona, but they also own a beach house in California. The office of an important business connection is just blocks away from the beach house. The clients and their family visit the beach house often. While there, they meet with the business connection and host get-togethers and dinners for the business connection and employees.

The client has been deducting mortgage interest and real estate taxes as itemized deductions on Schedule A of Form 1040, but with the Pease limitation reducing their itemized deductions, they weren’t getting much benefit from the deduction. Could they claim all, or even a portion, of the vacation home as a business expense?

A recent Tax Court ruling offered some insight on the question. Dell and Judith Jackson owned Dell Jackson Insurance Services in Copperopolis, California. In 2004, the Jacksons started selling RV insurance. To market their RV insurance policies, the Jackson’s purchased an RV and began attending RV rallies on the weekends. They gathered sales leads at the rallies every day, outfitted the RV with a banner, and set up an information table outside of their RV promoting the RV insurance product. When the Jacksons returned to the office the next week, they would generate rate quotes for the leads they’d generated at the rally and contact the potential clients to close the deal.

The Jacksons claimed large depreciation deductions on their RV for 2006 and 2007 on Schedule C of Form 1040. They reported business use of 100% for 2006 and 99.95% for 2007.

There was no doubt that the RV had a business purpose. The Jacksons maintained a calendar for the fifteen business trips they took in the RV in 2007 and provided a log describing, in detail, their meetings with specific clients and potential clients. The court agreed that the Jacksons sold insurance policies at these rallies and spent at least two thirds of their time working on their business while attending the rallies. But it wasn’t enough to allow the deduction.

Section 280A(a) and (b) provide the general rule that individual and S Corporation taxpayers cannot deduct expenses for “the use of a dwelling which is used by the taxpayer during the taxable year as a residence.” In the Jackson’s case, their RV is a dwelling unit if used for personal purposes for more than fourteen days. Section 280A9d) defines personal purposes: “taxpayer shall be deemed to have used a dwelling unit for personal purposes for a day if, for any part of such day, the unit is used . . . for personal purposes by the taxpayer.” Thus, any personal use, including watching TV or cooking breakfast in the RV, makes the entire day a personal day. The court ruled that the Jacksons used the RV as a dwelling unit for personal purposes for more than fourteen days.

In the Jackson’s case, the tax court judge wrote: “Section 280A casts a wide net . . . and sometimes catches taxpayers like [Mr. and Mrs. Jackson], who in addition to their personal use had genuine business purposes.” So although the Jackson’s RV was absolutely used in their business, they did not meet the requirements of Section 280A to claim depreciation on the RV as a business expense.

In my clients’ case, although their beach house may be used as a place of lodging while visiting their business connections in California and may be used to entertain business associates on a regular basis, there is no doubt that the beach home is used as their family vacation home first and foremost. I advised them to enjoy their family vacations at the beach, but forget about taking them as a business expense.

By Janet Berry-Johnson, CPA

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When Happily Ever After Isn’t: Innocent Spouse Relief

Posted on January 13 2015 by admin

The union of two people in life generally comes with optimism for the future; a hope for the life that will be “happily ever after”. Reality however, can sometimes have a different agenda. There are situations where one spouse or ex-spouse finds themselves on the wrong side of the IRS for a jointly filed tax return. Innocent spouse relief may provide a needed reprieve for them.

When a joint income tax return is filed, the tax law holds both of the spouses responsible for the entire tax liability. This is referred to as joint and several liability. Under the provisions of joint and several liability, the parties are responsible for not only the tax liability shown on the return but any additional tax liability the IRS may later assess resulting from changes to the return. While a divorce may sever your ties with your spouse, the bond with the IRS holding you responsible remains as strong as ever. Provisions in your divorce decree holding your former spouse responsible for the tax will not keep the IRS from attempting to collect the tax from you under the joint and several liability principles. Relief can be sought through the innocent spouse relief provisions.

There are four types of relief available: (1) innocent spouse relief, (2) separation of liability relief, (3) equitable relief and (4) relief from liability for tax attributable to an item of community income. To qualify for innocent spouse relief, you must have (1) filed a joint return for the year; (2) have an understated tax on the return due to erroneous items of the person with whom you filed the return; (3) can show that when you signed the return you did not know and had no reason to know that the understated tax existed; (4) taking into account all the facts and circumstances, it is held that it would be unfair to hold you liable for the understated tax; and (5) you have made a timely election to qualify for relief. All five of the criteria must be satisfied by the taxpayer to qualify for relief under the innocent spouse provision. Each of the other types of relief has their own qualifying criteria.

Innocent spouse relief is not automatically granted. Form 8857 is filed with the IRS to request the innocent spouse relief. The form should be filed as soon as you become aware of a tax liability for which you believe only your spouse or former spouse should be held responsible. If the IRS has begun collection actions to collect a tax that you believe the innocent spouse relief provision should apply to, you must file the form no later than two years after the first attempt by the IRS to collect the tax. It is the taxpayer’s burden to prove to the IRS that they qualify for relief under the applicable provision.

The IRS will review and make a determination if you qualify for relief. Your spouse or former spouse will be contacted by the IRS and asked if he or she would like to participate in the process. After review, the IRS will issue a preliminary determination letter to the requestor and the spouse or former spouse. If neither party appeals the decision, the IRS will then issue a final determination letter to both parties.

It may not be your “happily ever after” – but if you qualify for relief under the provisions, you may be back on the road to finding it.

By Cheryl Dickerson, CPA

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UPDATE: 2015 Change to Exemption for Arizona Retail Sales to Out-of-State Buyers

Posted on January 8 2015 by admin

The Arizona Department of Revenue has released additional information on the effective 1/1/2015 change to the retail sales tax exemption for sales to out of state buyers after the amendment of Arizona Revised Statutes (A.R.S.) § 42-5061.A.14.

Under prior law, the exemption for sales to out of state buyers included language that made tangible personal property sales exempt from sales tax merely by shipping or delivering directly to an out of state location (even if the buyer was in your Arizona retail location).

The law was changed for all tangible personal property except MOTOR VEHICLES (old law still applies).

Beginning 1/1/2015, qualifying tangible personal property sales (except motor vehicles) for the transaction privilege tax (sales tax) exemption under interstate and foreign commerce must follow these rules:

  • The sale must be BOTH ordered from an out-of-state location and delivered to an out-of-state location.
  • The exemption for buyers only temporarily in Arizona NO LONGER EXISTS.

Arizona’s information release included the following example:

“A customer goes into a retail store and purchases tangible personal property. The customer asks that the tangible personal property be shipped to a location in Canada. Prior to January 1, 2015, this sale was not subject to tax. As of January 1, 2015, this sale is subject to tax.”

Additional information is available in the ADOR release found here.

By Melinda Nelson, 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, LLP 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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