25 May 2011

RENTAL REAL ESTATE — AN INCREASE IN IRS AUDITS

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TIGTA audit concludes that IRS should increase examinations of tax returns with losses from

rental real estate activity [Audit Report No. 2011-30-005]:

IRS should perform more examinations of individual tax returns that report losses from rental real estate activity, the Treasury Inspector General for Tax Administration (TIGTA) said in an audit that was made public on March 9. The impetus for the audit was a 2008 TIGTA report that found at least 53% of individual taxpayers with rental real estate activity for tax year 2001 misreported their rental real estate activity. According to TIGTA, that misreporting resulted in an estimated $12.4 billion of net misreported income. One of the objectives of the new audit was to recommend ways to assist in the identification, selection, and examination of tax returns with rental real estate activity. During fiscal years 2008 and 2009, IRS’s rental real estate Compliance Initiative Program (CIP) examined a small percentage of the 318,339 examinations conducted by revenue agents and tax compliance officers, TIGTA said.

Auditors projected that if the agency increased the percentage of rental real estate CIP tax returns it examined, potential tax assessments could grow by $27.3 million over a five-year period. “Given the magnitude of underreporting in our voluntary system of tax compliance, even small improvements in the IRS’s examination of tax returns with rental real estate activity could increase taxpayer compliance and generate substantial additional revenue to the federal government, helping reduce the tax gap,” said J. Russell George, the inspector general. The audit is located at http://www.treasury.gov/tigta/auditreports/2011reports/201130005fr.pdf.

02 Sep 2010

IRS Warns Taxpayers of Internet Fraud Scheme

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The Internal Revenue Service is warning of a fraud scheme involving individuals and businesses that file their federal taxes electronically.

The IRS does NOT send e-mails to communicate with taxpayers.

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15 Aug 2010

TDP 2010 Newsletter

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Dear Clients:

The following is a summary of the most important tax developments that have occurred in the past three months that may affect you, your family, your investments, and your livelihood. Please call us for more information about any of these developments and what steps you should implement to take advantage of favorable developments and to minimize the impact of those that are unfavorable.

Deadline extended for closing home purchase to qualify for homebuyer credit.
Relief has been provided to taxpayers who couldn’t meet a key June 30, 2010, closing date for qualifying for the homebuyer credit. As a general rule, both the regular first-time homebuyer credit of $8,000 and the reduced credit of $6,500 for long-term residents generally expired for homes purchased after Apr. 30, 2010. However, if a written binding contract to purchase a principal residence was entered into before May 1, 2010, the credit could be claimed if the purchase closed before July 1, 2010. Under the relief measure, if a written binding contract to purchase a principal residence was entered into before May 1, 2010, the credit may be claimed if the purchase is closed before Oct. 1, 2010. Thus, this extension allows homebuyers who signed a contract no later than the April 30th deadline to complete their closing by the end of September.

Guidance addresses tax breaks for hiring new employees.
Employers are exempted from paying the employer 6.2% share of Social Security (i.e., OASDI) employment taxes on wages paid in 2010 to newly hired qualified individuals. These are workers who: (1) begin employment with the employer after Feb. 3, 2010 and before Jan. 1, 2011, (2) certify by signed affidavit, under penalties of perjury, that they haven’t been employed for more than 40 hours during the 60-day period ending on the date the individual begins employment with the qualified employer; (3) do not replace other employees of the employer (unless those employees left voluntarily or for cause), and (4) aren’t related to the employer under special definitions. The payroll tax relief applies only for wages paid from Mar. 19, 2010 through Dec. 31, 2010.

Employers may qualify for an up-to-$1,000 tax credit for retaining qualified individuals.
The workers must be employed by the employer for a period of not less than 52 consecutive weeks, and their wages for such employment during the last 26 weeks of the period must equal at least 80% of the wages for the first 26 weeks of the period.

The IRS has issued guidance on these tax breaks in the form of frequently asked questions.
They carry valuable information on subjects such as the scope of the exemption, how it interacts with other tax breaks, and when an employer must receive the employee’s certification of former unemployment status. For example, the IRS explains that the exemption and credit can be claimed for a new employee replacing a downsized employee.

Detailed guidance released on new small business health care credit.
The IRS has issued detailed guidance on the small employer health insurance credit created by the recently-enacted health reform legislation. Under the new law, effective for tax years beginning after Dec. 31, 2009, an eligible small employer (ESE) may claim a tax credit for nonelective contributions to purchase health insurance for its employees. An ESE is an employer with no more than 25 full-time equivalent employees (FTEs) employed during its tax year, and whose employees have annual full-time equivalent wages that average no more than $50,000. However, the full credit is available only to an employer with 10 or fewer FTEs and whose employees have average annual full-time equivalent wages from the employer of not more than $25,000. The new guidance adopts a liberal approach to the new law’s requirements, including three alternative methods for figuring total hours of service (important for determining how may FTEs an employer has), and also explains how small employers claim the credit if their State provides a credit or subsidy for employee health coverage. The IRS has released a state-by-state table of average health insurance premiums for the small group market for the 2010 tax year. The table is needed to calculate the credit for this year.

Guidance issued on new under-age-27 rule for health coverage of children.
The IRS has issued guidance on the tax treatment of health coverage for children under age 27 under the new health reform law. The new under-age-27 rule, which went into effect March 30, 2010, applies broadly to employer-provided coverage or reimbursements, cafeteria plans, flexible spending arrangements (FSAs), health reimbursement arrangements (HRAs), voluntary employees’ beneficiary associations (VEBAs), and the above-the-line deduction for a self-employed individual’s medical care insurance costs.

Availability of FICA exception for medical residents to be resolved.
The Supreme Court has agreed to review a 2009 decision of the Court of Appeals for the Eighth Circuit, which upheld the validity of regulations that generally prevent medical residents from qualifying for the FICA student exception. Under these regulations, an employee includes a medical resident who works 40 hours or more for a school, college or university is not eligible for the student exception. The Supreme Court will now decide their validity. Its decision will have important ramifications for the many teaching hospitals and their residents.

States address estate planning uncertainty.
As of now, there is no estate or generation-skipping transfer (GST) tax for individuals who die this year. There are issues as to how formula clauses in wills and trusts using estate or GST tax terms (e.g., “the applicable exclusion amount,” or “the marital deduction”) will be construed, if the decedent dies in 2010. Several states have addressed this situation by enacting laws providing a special rule of construction under which formula clauses that refer to certain estate and GST tax terms generally will be construed as referring to the federal estate tax and GST tax laws which applied to estates of decedents dying on Dec. 31, 2009. These statutes could impact the amount that will pass under one’s will to a person’s spouse and children.

Deadline extended for retirement plans in federally declared disaster areas in eight States.
The IRS has administratively extended to July 30, 2010, the April 30, 2010, deadline for restating affected pre-approved defined contribution plans and, if applicable, for submitting determination letters to the IRS, and the Code Sec. 401(b) remedial amendment period for these retirement plans. The relief applies to sponsors of defined contribution plans that were affected by the storms and other severe weather in counties in Alabama, Connecticut, Massachusetts, Mississippi, New Jersey, Rhode Island, Tennessee and West Virginia that were federally declared disaster areas in the period from March 1 through May 31, 2010.

Therapeutic Discovery Project Program implemented.
The IRS has established the guidelines for applying for the new Therapeutic Discovery Project Program created by the recently enacted health reform legislation. The program will provide tax credits and grants to small firms that show significant potential to produce new and cost-saving therapies, support good jobs and increase U.S. competitiveness. Small firms may apply for certification for tax credits or grants under the program on Form 8942, which must be postmarked no later than July 21, 2010.

Temporary regulations fill in statutory gaps on new indoor tanning tax.
The IRS has issued temporary regulations on the health reform’s legislation’s new 10% excise tax on indoor tanning services provided on or after July 1, 2010. The regs address practical considerations that may not have been contemplated when the law was drafted. For example, they addresses prepayments for tanning services and services provided as part of a gym membership.

10 Aug 2010

California Personal Income Tax and Nevada Gambling Winnings Collide

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A California resident was taxable on her Nevada gambling winnings since all income of California residents regardless of source, is subject to tax by the State of California. Taxpayer was denied a credit for income taxes paid to other states because she did not provide evidence that she paid Nevada income tax on the gambling winnings. In fact, taxpayer conceded that Nevada does not impose state income tax on income derived from gambling winngs.

The State Board of Equalization declined to consider constitutional issues raised by the taxpayer such as violations of the Commerce Clause and due process rights because constitutional issues are beyond the scope of this SBE’s authority. (Appeal of Monica Blake, SBE, Case No. 449351, 05/25/2010 (not to be cited as precedent

12 Jul 2010

IRS Agents To Request Electronic Copies of Taxpayer QuickBooks Records

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NATP has learned that IRS agents are being instructed to obtain a copy of the taxpayer’s data base for examinations for any taxpayer who uses QuickBooks. This will not be done in all examinations, only for those that the IRS agent deems necessary based on the judgment of the agent.

If the taxpayer refuses to provide the database and the revenue agent (RA) or manager determines it is necessary, a Summons to obtain the information would be issued. The agents would look at only the information for the year under audit unless they decided to expand the examination to prior years, then information for those years would be reviewed.

The IRS has purchased 1,500 to 2,000 licenses from Intuit and will have one agent trained and licensed per group to assist others in the examination of taxpayers who use QuickBooks. You may not have heard of this yet, but as the software finds its way into RA groups and more agents are trained in its use, we could definitely be seeing a trend in the way exams are conducted since so many small businesses use QuickBooks.

10 Jul 2010

Senate Considers Beefed-up Small Business Tax Package

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Late on June 29, Senate Finance Committee Chair Max Baucus (D-MT) introduced a substitute amendment to the House-passed H.R. 5297, the Small Business Jobs and Credit Act of 2010, which includes a tax title called the Small Business Jobs Tax Relief Act of 2010. The substitute amendment, called the Small Business Jobs Act of 2010, significantly expands the House-passed Small Business Jobs Tax Relief Act of 2010.

Here’s a summary of the tax changes in the substitute amendment: NOTE – THIS IS NOT YET LAW.
· For the first tax year of the taxpayer beginning in 2010, eligible small businesses could carry back unused general business credits for five years. Eligible small businesses would consist of sole proprietorships, partnerships and non-publicly traded corporations with $50 million or less in average annual gross receipts for the prior three years.

· For tax years beginning in 2010, eligible small businesses, as defined above, would be able to use all types of general business credits to offset their AMT.
· Bonus 50% first year depreciation would be extended to apply to property placed in service in 2010 (in 2011, for certain long production period property).

· For a tax year beginning in 2010, the deduction for startup expenses under Code Sec. 195 would be increased from $5,000 to $10,000 and the phaseout threshold would be increased from $50,000 to $60,000.
· For a tax year beginning after Dec. 31, 2009, but before Jan. 1, 2011, when calculating self-employment taxes, the deduction for health insurance costs of a self-employed taxpayer under Code Sec. 162(l) could be taken into account (i.e., could be deducted) in computing net earnings from self-employment. THIS WOULD REDUCE YOUR SELF-EMPLOYEEMENT TAX.

· For payments made after Dec. 31, 2010, persons receiving rental income from real property would have to file information returns (A FORM 1099 MISC.) with IRS and service providers reporting payments of $600 or more during the year for rental property expenses. Exceptions would be provided for individuals renting their principal residences (including active members of the military), taxpayers whose rental income doesn’t exceed an IRS-determined minimal amount, and those for whom the reporting requirement would create a hardship (under IRS regs).

· For information returns (1099 FORMS) required to be filed after Dec. 31, 2010, the Code Sec. 6721 penalties for failure to timely file information returns to IRS would be increased. For example, the first-tier penalty would be increased from $15 to $30, and the calendar year maximum would be increased from $75,000 to $250,000. For small filers, the calendar year maximum would be increased from $25,000 to $75,000 for the first-tier penalty. The minimum penalty for each failure due to intentional disregard would be increased from $100 to $250. The Code Sec. 6722 penalties for failure to file information returns to payees also would be increased.

09 Jul 2010

Anxiety Over Tax Increases

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In 2001, President Bush signed the Economic Growth and Tax Relief Reconciliation Act, reducing tax on Long-term capital gains, estate taxes, and gift taxes.  Many of the provisions of the Act are repealed in 2010, and new tax increases are schedulted to take effect as of 2013.  Are you ready for this?  Read more for Tax Strategies.

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09 Jul 2010

Kiplinger Tax Information Newsletter

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The newsletter includes paragraphs on:  the new health care reform law, Medicare taxes, medical deduction limit raised, business tax news, IRA’s, enforcement audits.  To see the details and how you may be affected, click on “more.”

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02 Jul 2010

COST Scorecard on Tax Appeals & Procedural Requirements

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The Council On State Taxation (COST) has long monitored and commented on state tax appeals prosesses and administrative practices.  Part of that effort has resulted in the regular publication of a Scorecard.  The COST Scorecard evaluates state tax appeals processes by asking two questions:  1- whether the appeals system is truly independent, and 2- whether a taxpayer must prepay the disputed tax or assessment prior to an opportunity for an independent hearing.  California Scores D minus.

28 Jan 2010

Getting Organized for the Upcoming Tax Year

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Tips for the “Organizer” and the “Less Enthusiastic Organizer”

“Today, it takes more brains and effort to make out the income-tax form than it does to make the income.”
Alfred E. Neuman

During the first months of the year, I start to notice people becoming nervous and anxious over the prospect of filing their income tax return. Much of this anxiety can be reduced significantly by staying organized throughout the course of the year. Being organized does not need to be an overwhelming process, but it does require some effort. In a perfect world, every client would walk into our office with neatly organized folders with all the correct supporting documents. Since we don’t live in a perfect world, it is not unusual for people to procrastinate and wait until the very last minute to organize their tax documents and fill out their organizer.

Everyone approaches organization differently. I like files, but I realize that my desire to keep documents tidily stowed in a file cabinet is part of my personal style. I know plenty of people who “file” documents in a trash can (naughty) or a huge pile. Organize according to your personal style. In other words, be realistic when setting up your tax file. For the super organized individual, creating neat file folders to house receipts and statements is a fun, relaxing (for some!) project. For others, getting documents into files would be a Herculean task…just not going to happen.

As such, I offer two solutions to get organized for the tax season.

For the “Less Enthusiastic” Organizer:

We all know people who “file” their important paperwork in one stack that sits in a dark, dusty corner of the closet. Anything and everything can be found in this endless stack of documents: old receipts, miscellaneous photos, newspaper clippings, gift certificates, etc. And really, there is no shame in this. Admit and accept this is your personal style. If you are the type of individual who finds organizing documents the painful equivalent of getting a root canal, adopt a simple, easy-to-use system to collect the necessary paperwork to prepare your tax return.

Grab a BOX (a shoe box will work), writes “2010 TAXES” on the side and start putting everything into this box. Yes, start throwing everything into this box. If you are really inspired, add in several envelopes and label them with categories:

  • INCOME
  • Deductions & Expenses
  • Investments
  • Misc.

Keep in mind, this simple system doesn’t get you off the hook entirely. At some point, you will want to rummage through this box to sort out all the forms and numbers you need to successfully file your tax return. Also, if you are audited and asked to provide back up documentation of your expenses, you will need to go through this box thoroughly. However, on a day-to-day basis, the shoe box will, at a bare minimum, allow you to keep all of your tax-related documents in one, designated location. And this is crucial: keep all your tax documents in ONE location, not scattered around the house. Compiling your tax documents should not result in an Easter egg hunt.

For the Organizer:

This solution is geared for the individual who wants to have their taxes neatly organized for maximum efficiency. As with the “less enthusiastic organizer,” it is recommended that you keep all of your files and documentation in a dedicated place for safe-keeping (for example: a filing cabinet drawer, a banker’s box, an accordion folder, etc.). The benefit of keeping all your tax documents in one location is crucial, as you avoid going through the nightmare question: “Where did I put that?”

Go out and pick up file folders, labels, post-it notes, various clips and pens. If you are an organizer at heart, you can really go to town on this part of the process.

Once you have your supplies, start labeling your files. Your file labels might include:
INCOME: Keep track of everything you earn (salary, dividends, earnings, distributions, interest) Remember, the IRS does receive copies of each income statement you receive! If you really want to stay organized, keep a running log at the front of your file and write down all income sources and the amounts earned. Alternatively, you can keep track of your income with an Excel spreadsheet or money management software.
INVESTMENTS: It’s a good idea to break up your investments into several folders.
– Investment Properties: If you have several investment properties (example: rental properties), create a separate file for each property (as each property will have its own set of expenses).
– Deductible/Tax-Deferred Investments: This file will contain records that show annual contributions to qualified retirement plans. For example, Roth contribution records (so that you are not taxed twice); and distribution records (1099s) once you start taking money out of your retirement account(s).
– Taxable investments: Include any statements, or confirmation slips, that prove the cost basic of your investment (reinvested dividends, capital gains, capital losses, mergers, 1099s, and K-1 forms). Most brokers will send you a combined 1099-statement for multiple brokerage accounts. For tax purposes, look for your 1099 Year End Statement.
– Nondeductible investments: Store records for Traditional IRA contributions (not eligible for preferential tax treatment) in this file.
*You might even label of these files “RETIREMENT ACCOUNT”.
CHARITABLE DONATIONS: Every time you make a donation to a “qualified charity”, you should receive a receipt confirming your gift (of money, household items, etc.).
HOME EXPENSES: Your home file might contain numerous documents such as:
– Property Tax Statements;
– Mortgage Interest Statements;
– Miscellaneous documents: For example: if you purchased energy efficient windows for your home that are eligible for a Federal tax credit, include all documentation on the purchase in this file.
HOME OFFICE: If you have a home-based business and have a designated home office, you’ll want to keep track of several items: mortgage interest, property tax, cable/internet/phone bills, insurance, utility bills and any office related purchases. Depending on how big the home office is relative to the size of the home, a portion of these expenses may be claimed on your tax return.
BUSINESS EXPENSES: Sole Proprietors (One-owner business who is not incorporated or a Single Member LLC company), will want to keep records of their qualified business expenses. These expenses may include: travel, dining out and other qualified business expenses.
VEHICLE/AUTO: For those who use their vehicle for business purposes, keep: your loan servicing documents, gas receipts, maintenance records, license/registration, and repair receipts. Also, you will want to keep a mileage log that records a full-year of business-related activity.
MEDICAL EXPENSES: If you incur a lot of medical expenses, it might be worth keeping track of all your out-of-pocket expenses, including: receipts for medication, receipts for doctor/dentist visits, lab fees, etc. Medical expense deductions are limited. You may ONLY deduct medical and dental expenses that are more than 7.5% of your adjusted gross income.
EXAMPLE:
Your adjusted gross income (AGI) is $40,000
7.5% x $40,000 = $3,000
(Thus your medical/dental expenses must be more than $3,000 to get any deduction)
EDUCATION: Use this file to keep records of tuition payments made, and any additional information (scholarships, Pell grants received, etc.)
CHILDCARE: Records of payments made to a qualified childcare provider should be kept in this file.

For Everyone:

Of course, depending on your own situation, you may have more OR less files than what is listed above. This list is not exhaustive by any means. You can re-use these files from year to year. Once you have successfully filed your tax return, you can clean out your files. Rubber band or clip all documents to together (I recommend keeping each file separate: Rubber band all “Medical Expenses” together and label with a sticky note), and put them into an accordion file marked PERSONAL INCOME TAXES 2010. Then put the file away in a safe location. You’ll want to hold onto ALL your tax documents for at least 7-years.

The main thing is that you keep a paper trail of any and all taxable events.

Admittedly, it is not fun to keep copious quantities of paperwork, but this organized effort has its benefits. Not only will preparing your tax return be less stressful (because you have everything!), good record keeping is your best line of defense if you are ever audited. Most of us would prefer to have hundreds of receipts, cancelled checks, and statements taking up space in our garage than go through an audit!

Whether you’re a “Power Organizer” or a “Less-than-enthusiastic” Organizer, be mindful throughout the year. Remember, a few file folders (even an old shoe box!) can save you time, money and effort in the long run.

Some additional helpful websites:
Get organized Receipt.catcher™ by Buttoned Up®
On Sale $7.99 Item #34989 at http://www.organize.com/
This website also has a good assortment of storage boxes.

Tax Prep Tools at http://www.bindertek.com/intaxbi.html?from=hplowleft