Archive for August 26, 2013

North Carolina Technology Development Credit Extended and Renamed as the Research and Development Credit.

TaxConnections Picture - NC Flag with US FlagGovernor Pat McCrory, North Carolina, signed House Bill 998 (aka Tax Simplification and Reduction Act) into law Tuesday, July 23, 2013. Among other outcomes, the state’s Research and Development Credit, formerly known as the Technology Development Credit, has been extended through 2015. Under the Research and Development Credit, North Carolina businesses with qualified research expenses are allowed a credit of up to 35% of the amount of those expenses. The exact rate depends on the circumstances of the taxpayer, the location of the research activity, and the amount of the expenses. This credit is the only remaining research credit offered by the state, as two of the original three credits previously offered by the state were repealed in 2006, when the state’s tax incentives were revamped. The credit cannot exceed 50% of the amount of tax against which it is claimed, reduced by the sum of all other tax credits allowed against that tax. Any unused portion may be carried forward for the succeeding fifteen taxable years.

TECHNICAL INFORMATION CONTACTS:

Allea Newbold, Principal – Ryan
Stephanie Shell-Condon, Director – Ryan

Written by | Posted in R&D Credit Services

Tax Shock for Foreign Employer With US Employees: Learn Your Withholding Duties

TaxConnections Picture - IncomeIt may come as a shock to foreign (non-US) companies and other foreign businesses to learn that they may have US tax withholding obligations with respect to their US employees, even if the foreign business is not in any way involved in US activity. Pursuant to the US Internal Revenue Code, an employer is required to withhold federal income and social security taxes from the wages of its US employees. Every quarter, the employer must file a Form 941, the Employer’s Quarterly Tax Return, reporting the amount of income and social security tax withheld during the period. A Federal Tax Deposit Form must be filed with the remittance of the withholding taxes the month following the close of each quarter.

Income Tax Withholding

With certain exceptions, every employer making payment of “wages” to US employees is required to deduct and withhold upon those wages an income tax determined in accordance with Internal Revenue Services procedures.

For income tax withholding purposes, “wages” is defined, with certain exceptions, as all remuneration for services performed by an employee for his employer, including the cash value of all remuneration (including benefits) paid in any medium other than cash. The term “wages” includes remuneration for services performed by a citizen or resident of the United States as an employee of a nonresident alien individual, foreign partnership, or foreign corporation whether or not such alien individual or foreign entity is engaged in a trade or business within the United States. Thus, for example, a foreign partnership without any US activities is responsible for income tax withholding on wages paid to its US person employees. Read More

Written by | Posted in Corporate • International

Small Businesses Receive IRS Letter 5036 – Under Reporting of Income

TaxConnections Picture - Guy Reading LetterlThe Internal Revenue Service has over the last week or so started sending Letter 5036 to small businesses questioning the possible under reporting of income. The letter looks intimidating as it’s header states “Notification of Possible Income Under Reporting” and starts with “Your gross receipts may be under reported.”

Rest assured this letter is systematically generated. Basically the IRS matched the information reported on Form 1099-Ks that were sent to the business with income reported on the tax return. Don’t be threatened or upset by this letter but do recognize that you will be required to provide a written explanation, or a completed Form 14420, Verification of Reported Income, explaining why the portion of the gross receipts from credit card payments and other 1099-K transactions was higher than expected. Failure to respond might result in a proposed assessment or further compliance action, so please respond.

My advise is that this might be a job for the accountant, controller or tax practitioner signing the income tax return as accuracy is paramount.

Written by | Posted in United States

IRS Targets Singapore And Hong Kong For U.S. Tax Evaders!

TaxConnections Picture - Fugitive Singapore and Hong Kong continue to be the target of United States prosecutors pursuing a global campaign against evaders of federal taxes, spurred by data acquired in their crackdown on Swiss banks.

Prosecutors are trying to determine what role financial professionals in Hong Kong play in tax evasion, according to people familiar with the matter. They are examining how much taxable money was moved to the former British colony that returned to China in 1997, whether accounts were based there in name only and what banks were involved, the people said.The push follows the government’s success in penetrating Swiss bank secrecy and learning from insiders how UBS AG helped Americans evade taxes. UBS, the largest Swiss bank by assets, avoided prosecution by agreeing in February to pay $780 million and disclose account data on 250 clients. In August, it agreed to supply information on another 4,450.

The government has made it very clear that they are interested in other secrecy jurisdictions, especially Hong Kong & Singapore.

The UBS clients who used Hong Kong & Singapore corporations told prosecutors how their bankers and lawyers helped them set up offshore corporations so their assets would be hidden in accounts that didn’t bear their names, court records show. Read More

Written by | Posted in United States

Trust Fund Recovery Penalty – #16 – Appeal Procedure (Final Post In Series)

TaxConnections Picture - Dollar Sign and Money16. APPEAL PROCEDURE

§ 5:82 In General

You must submit a written protest to the assertion and assessment of the Trust Fund Recovery Penalty. An oral protest is inadequate. No interest will accrue during the pendency of your protest Therefore, delays by the Internal Revenue Service in processing a protest usually are to the client’s benefit. Upon receipt of a protest, the Revenue Officer will prepare a rebuttal and submit the file through Special Procedures function (SPF) to the Office of Appeals. [IRM 5.7.6.1.3]

§ 5:83 Appeals Conference

The appeal is considered by the Office of Appeals, which also hears appeals on audit matters. Your client has the right to have a personal conference with an Appeals Officer. He or she may be represented by an accountant or attorney and present evidence and witnesses on his or her behalf. [See also Representation Before the Appeals Division of the IRS, another Tax Practice Workbook]

If you convince the Appeals Officer that your client is not a responsible person, he or she will recommend nonassertion of the Penalty. If you fail to convince the Appeals Officer, an assessment will be made by the Service without your client being granted the right to go to Tax Court. Read More

Written by | Posted in United States

DOMA Decision, Federal Taxes And State Of Marriage

TaxConnections Picture - Marriage CelebrationOn June 26, 2013, the United States Supreme Court found Sec. 3 of DOMA (the Defense of Marriage Act) to be unconstitutional (U.S. v. Windsor). Basically, the Court found a violation of equal protection of the 5th Amendment to treat a same-sex marriage with less respect than an opposite-sex marriage.

There are a variety of federal tax issues associated with the decision. The Internal Rev website still says (since the decision was handed down) that they will move swiftly to update guidance on this topic.

One area I’d like to see the IRS address first is to state that for federal tax purposes, marriage is defined per the state of celebration (where performed) rather than the state of domicile. Some states do not recognize same-sex marriage. So, a couple married, say, in California would not be viewed as married by Texas. If the federal tax law treats a couple as married based on the treatment of their state of domicile, it seems that there would be a problem under the Windsor decision because then the federal government is not treating all marriages as equal. The couple married in California is still married (at least per California law and that of some other states) if they live in a state that does not recognize it. Can the federal government say they are not married based on where they live? It seems contrary to the Windsor decision.

But, we await guidance from the IRS. Hopefully that “guidance” will be in the form of binding guidance rather than the Chief Counsel Advices and FAQs that currently exist. Read More

Written by | Posted in United States

“L” is for Late Fees

TaxConnections Picture - Time and Money“L” is for Late Fees, which can be substantial.  There are late fees for everything when dealing with tax returns.  It’s not fun to be late with your return or late with your payment; the sooner you can get current, the better off you will be.

One of the somewhat hidden late fees is for a late filed Partnership or S Corporation return.  The IRS charges a penalty of $195 per shareholder per month for a late filed 1065 or 1120S return.  So if you have 5 partners and you fail to file an extension and then filed the return in September that would be 6 months late x 5 partners x $195 which equals $5,850.  Yikes!  I would not suggest filing a 1065 or 1120S late as you can see the penalties add up in a hurry.

There are also fees for filing your tax return late or even if you filed for an extension if you have a balance due on your extended return there are penalties for paying late.  An extension is only an extension of time to file your return, not an extension of the time to pay the tax.  If you file on time but don’t pay on time the penalty is ½ of 1% of the tax owed for each month.  If you owe tax and you don’t file your return on time it gets worse and the penalty is 5% of the tax owed for each month.

Anytime there is a penalty for paying something late, there is also going to be interest charged.  The IRS charges interest based on the current interest rates so the IRS rate changes every month.  Since interest rates are low right now the IRS is usually charging 2% to 3% which isn’t too bad, but it can still add up.  To be fair, the IRS also pays you interest when you file amended returns to claim refunds from prior years.

Taxes A to Z – still randomly meandering through tax topics, but at least for 26 posts in an alphabetical order.

Written by | Posted in United States

TaxConnections Blogger Reaches 1,347 Visits In One Day

TaxConnections Picture - Success CompassInnovation and new technology on TaxConnections is helping tax professionals blogs move into higher rankings. TaxConnections created the Worldwide Tax Blogs platform to help tax bloggers attract more traffic to their tax posts. Our members who post tax blogs are receiving a great deal of attention on the site. The mission of TaxConnections is to promote all of our members across multiple channels on the web and we are succeeding on their behalf. For example, Brian Mahany posted a blog recently that generated 1347 views in one day on TaxConnections Worldwide Tax Blogs. This type of traffic is the reason tax professionals enjoy the experience of the site. TaxConnections provides an innovative and affordable marketing tool for all tax professionals and tax brands. TaxConnections boosts a tax professional’s traffic simply by the tax community working together on an authority site. With Google announcing authority sites gaining preference on the top of their algorithm, TaxConnections has a lot of very happy members who now have an easy way to attract and generate new clients.

Written by | Posted in TaxConnections • United States

Research: Building Your Client Base Part 6 of a 6 Part Series

TaxConnections Picture - Computer SoftwareNow that we have all learned how to do great research, I’m going to spend some time today showing you how to put it to use for other things then communicating with the IRS. Let’s see how you can build your reputation, referrals, and client base using good research techniques.

The best way to build your reputation among your fellow professionals and among prospective clients is to network. When you join those professional organizations, I mentioned in Part 1, be an active member. Get to know folks from all over the country and in all levels of the career fields. Be the “go to” person on specific subject matter. I’m the go to person among my network for military and veterans affairs. I get calls, consultations, and referrals from all over the country.

Get online! Sign up for some of the great professional websites for tax information out there. Websites like this one, TaxConnections.com. From this one website you can get recognized worldwide as a knowledgeable tax professional, blog about your passions in the field, market yourself and your material, take CPE, answer questions for clients that have the potential to become your clients, and so much more. I’ve gotten several clients and consults from this board. And this is just one website; there are tons of them out there. I’m a little biased towards this one as you may have noticed. Read More

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Repeal 6050W – Small Businesses, IRS “Notices” And The Tax Gap

TaxConnections Picture - small businessA recent article in the Wall Street Journal noted that about 20,000 small businesses (out of millions of them) received notices (Letter 5036) from the Internal Revenue Service that they may have underreported their income (“Small Business in IRS Sights,” 8/9/13). The article includes quotes from some small business owners rightfully upset that the IRS presumes they have underreported their income and makes them take the time to explain (again – they already did this on their original filed return) what their gross receipts are. The IRS has acknowledged the sending of notices and offers guidance on how to respond.

The problem ties to Form 1099-K, a requirement added to the law in 2008 (IRC Section 6050W). It requires the companies that process credit and debit card transactions for merchants to issue a 1099-K to the merchant and the IRS showing the amount processed. Paypal and similar processors also have to file, but there is a de minimus threshold for those types of transactions.

There are reasons why the 1099K might not tie to the merchant’s proper amount to report as gross receipts. For example, the small business might be a C corporation using a tax year other than the calendar year used for 1099 reporting. Or, as one merchant notes in the WSJ article, the 1099-K includes the sales tax charged to customers – an amount not reported in the small business’s gross receipts because the sales tax belongs to the state, not the business. Read More

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Reviewing Mortgage Interest Deduction Limitations – Sophy v. Commissioner

TaxConnections Picture - Tax BurdenTaxpayers living in Vail Colorado contacted me most recently to represent them in an Internal Revenue Service audit covering tax years 2009, 2010 and 2011 relevant to several small items but specifically to the mortgage interest deduction claimed on Schedule A of Form 1040.

The taxpayers are domestic same sex partners each filing their own federal and Colorado income tax forms. Upon further inquiry it became clear to me that this file had many of the same characteristics of the United States Tax Court Case Sophy v. Commissioner.

In Sophy v. the Commissioner a domestic couple owned their principal residence in California as joint tenants. Together they held a mortgage of $2,000,000 on the residence and took out an additional $300,000 line of credit secured by the residence. They were not married and as such on their respective tax returns deducted mortgage interest on their respective portion of the mortgage.

In examination the IRS’ position was that the $1,000,000 and $100,000 limitations apply per property and not per taxpayer limiting the interest deductions to the interest on the combined total of $1,100,000. The United States Tax Court agreed with the IRS.

According to Internal Revenue Code 163 and Internal Revenue Bulletin 2010-44 there are two limits on mortgage interest which are applied per property: Read More

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Trust Fund Recovery Penalty – #15 – Defense Tactics

TaxConnections Picture - Dollar Sign and Money15. DEFENSE TACTICS

§ 5:75 In General

The practitioner’s goal in defending a Trust Fund Recovery Penalty is to remove the onus from one’s client and place it on some other person or in the alternative to limit the amount of liability. Literally, one of the best ways to protect your client is to use the “he did it” defense. Blame someone else!

§ 5:76 “He Did It” Defense

The “he did it” defense can first be asserted at the initial interview of your client. Be prepared to present documentation to support why another person bore ultimate responsibility for payment of the taxes. The best evidence may be affidavits from third parties and your client asserting that some other party was responsible.

§ 5:77 Protest

Upon receipt of the letter proposing liability, submit a protest in the format set forth on the back of the IRS letter. Even if your client is a responsible person and willfully failed to pay the tax, you may protest the computation of the tax. It is not unusual for the IRS to miscalculate the Trust Fund Recovery Penalty and you have the right to assure that the penalty is in the proper amount. Read More

Written by | Posted in Estate Planning Tax
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