Archive for August 20, 2013

Entertainment Tax – Good For North Carolina

TaxConnections Picture - Special EventAs part of what may be a longer-term tax reform effort, North Carolina enacted legislation in July that makes a few changes. The one that I want to highlight is broadening the sales tax base to include entertainment. That is, admission to live theater and sporting events and a few other activities that fall within.

While this might sound like a bad idea to many people, consider how much some entertainment costs – season tickets to a major league sports team, premium seating for an Elton John concert. To exempt this type of consumption from sales tax just means that the rate has to be higher on tangible personal property, such as clothes and household items. It makes the sales tax less equitable because it ends up exempting a good amount of consumption of high income taxpayers, paying for that with a higher tax on basic consumption items for everyone, such as clothing and school supplies.

The blog post includes reference to data from the Bureau of Labor Statistics on how much is spent on entertainment by high income individuals versus low income individuals – its quite a difference.

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Swiss Lawyer Co-Operating With IRS Hunt For Offshore Account Holders!

TaxConnections Picture - Floating MoneyA Swiss lawyer accused of helping United States clients conceal millions of dollars in offshore accounts pleaded guilty to conspiracy to commit tax fraud in federal court in New York on Friday and has been telling prosecutors how he helped American clients use secret accounts to hide assets from the Internal Revenue Service. Edgar Paltzer, 57, admitted Aug. 16 in federal court in New York that he conspired to commit tax fraud by helping U.S. clients hide millions of dollars from the IRS. He was indicted on April 16 with a Swiss banker, Stefan Buck.Paltzer, a former partner of Swiss law firm Niederer Kraft & Frey, was first charged in April on one count of conspiracy alongside Stefan Buck, then head of private banking at Bank Frey & Co AG.

Frey, the bank’s founder, had also been a partner in Niederer Kraft & Frey. But he resigned on April 25, with Niederer Kraft at the time saying it “concluded that it was in the best interests” of the law firm.

The indictment accused Paltzer and Buck of conspiring with U.S. taxpayers from 2000 through at least 2012 to help them hide their Swiss accounts from the Internal Revenue Service.

The case shed light on Bank Frey, one of the smaller Swiss private banks with just 1.9 billion Swiss francs ($1.54 billion) under management last year. Read More

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What Could Be Worse Than an Aggressive State Tax Auditor?

TaxConnections Picture - Government EmployeesHow about a tax “bounty hunter” imbued with the power of the government?

The notification that a state or local jurisdiction is going to audit you can cause a range of emotions from mild annoyance to outright paralyzing fear depending on your prior experience and level of compliance. However, state and local tax auditors, on the whole, are a friendly enough group that have a tough job to do and usually do so in a professional manner. Like any group though, there are some individuals who are either out to make a name for themselves or who may seem to have a personal vendetta against you. These individuals can make for some very bad experiences. Now imagine your worst experience, take out some of the checks and balances the state provides, add a profit incentive that encourages aggressiveness and you have the environment in which third-party auditors or collection agents operate. These third parties are often referred to as “bounty hunters.”

The use of third-party auditors is nothing new. State and local governments have been utilizing third-parties in taxpayer compliance for years. Some of these governments have granted vast powers to these third parties such as the ability to investigate, determine nexus and taxability, perform audits, assess and then collect taxes, interest penalties and fines. Many of these audits are done on a contingency basis. One of the arguments for the jurisdictions using bounty hunters, is that these relationships help expand their ability to collect desperately needed additional revenues while operating under the constraints of limited budgets. Read More

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U.S. District Court Rules on Whether Research was “Funded” or “Not Funded” for Research & Experimentation Tax Credit Purposes

TaxConnections Picture - Books_Hour_GlassAs set forth in the pivotal case of Geosyntec Consultants, Inc. v. United States, No. 9:12-cv-80334 (S.D. Fla. 2013), the United States District Court for the Southern District of Florida ruled that engineering work conducted under select customer contracts was “not funded” and consequently eligible for the Research and Experimentation Tax Credit (hereinafter “Research Tax Credit”) pursuant to I.R.C. § 41, while other contracts were deemed “funded” and not eligible for the Research Tax Credit.

Geosyntec Consultants Inc. (hereinafter “Geosyntec”) is an engineering firm that specializes in matters involving the environment, natural resources and geologic infrastructure. Geosyntec’s core business is to develop innovative and sustainable solutions to environmental problems that are less expensive and disruptive than conventional remediation approaches.

Geosyntec sought a refund of $1,677,432 for Research Tax Credits resulting from 370 client projects on which it worked from 2002 through 2005. At issue before the court in cross-motions for summary judgment motion was whether the services rendered by Geosyntec on those projects should be classified as “funded research” under I.R.C. § 41(d)(4)(H) and thus not eligible for the Research Tax Credit.

Pursuant to Treas. Reg. § 1.41-4A(d) there are two requirements for determining whether research and experimentation analysis rendered for a third party is considered “not funded” and therefore not excluded from the Research Tax Credit under I.R.C. § 41(d)(4)(H): Read More

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Trust Fund Recovery Penalty – #14 – Recommending Assertion of Penalty

TaxConnections Picture - Dollar Sign and Money14. RECOMMENDING ASSERTION OF PENALTY

§ 5:70 In General

Having completed a preliminary investigation, the Revenue Officer next prepares proposed Trust Fund Recovery Penalties against the persons whom he or she believes to be responsible persons. For this purpose the Revenue Officer prepares a report titled “Recommendation Re: Trust Fund Recovery Penalty Assessment.” The report calls for the Revenue Officer to determine whether to assert against each potentially responsible person. The Officer can decide not to assert against a responsible person if it is determined that the penalty would not be collectible from that party. (Since the Internal Revenue Service views the Trust Fund Recovery Penalty as a collection device, the author has found that the greater his client’s net worth, the less likely the IRS is to determine the client not to be a responsible person.)

§ 5:71 Notice To Taxpayer

The completed recommendation is presented to the Revenue Officer’s Group Manager for concurrence. Upon approval by the Group Manager, a Letter 1153 and Form 2751 (Proposed Assessment of Trust Fund Recovery Percent Penalty) are mailed to each potentially responsible person. The letter is mailed to the person’s last known address. That letter grants the taxpayer ten days to contact the Revenue Officer to present a defense, or the taxpayer may request an appeals conference within sixty days of the letter. The format for a protest is set forth on the reverse side of the letter. Read More

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Research: Using What You Have Learned – Part 5 of a 6 Part Series

TaxConnections Picture - Gold IRS ManAssuming that you, unlike me, actually have an end purpose to your research other than just learning new stuff; today we are going to look at some avenues to put this information to use.

Obviously, the most basic reason for someone in our profession to do in-depth research is to complete the tax return. But that isn’t the only thing we need to do with our material. If you are taking a position from one of the lower standards in Part 2 of our series you may need to cite your research material on an IRS Form 8275, Disclosure Statement. This is the IRS form to use when you need to explain why you did something on a return that may not make sense to someone without the details. You need to lay out you case for the deviation and then include your citations for the authority to do so.

That isn’t your only use for the research you have done. If you are assisting a client with an IRS letter or audit you may need to quote your citations. Make sure you use IRS titles for the citations. Instead of putting IRC XXX.XX(x) put Cod. Sec. XXX.XX(x). When using citations you should drill down to the most relevant paragraph in your correspondence as well. Instead of putting Cod. Sec. 162, which is approximately 14 pages long, use Cod. Sec. 162(g)(1).

Some of the things you will use as citations frequently should be identified as follows: Read More

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Online FATCA Registration System Now Open For Business!

uncle-sam-taxesThe Internal Revenue Service announced today the opening of a new online registration system for financial institutions that need to register with the Internal Revenue Service under the Foreign Account Tax Compliance Act (FATCA).

Financial institutions that must register with the IRS to meet their FATCA obligations can now begin the process of registering by creating an account and providing required information. Financial institutions will also be able to provide required information for their branches of operation and other members of their expanded affiliate groups in which the financial institution is the lead organization.

The registration system, designed to enable secure account management, is a web-based application with around-the-clock availability.

Within a secure environment, the new registration system enables financial institutions to:

•  establish online accounts;

•  customize home pages to manage accounts;

•  designate points of contact to handle registrations;

•  oversee member and/or branch information; and

•  receive automatic notifications of status changes. Read More

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Working Overseas? Do You Understand Self-Employment Tax?

TaxConnections Picture - JOBWhat is Self-Employment Tax?

The self-employment tax is a social security and Medicare tax based on net earnings from “self- employment”. We’ll review what it means to be “self-employed” later in this posting. The dollar threshold trigger for paying self-employment tax is quite low – you must pay self-employment tax if your net earnings from self-employment are at least US$400.

For self-employment income earned in 2013, the self-employment tax rate is 15.3% imposed on your net earnings. The rate consists of two parts: 12.4% for social security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance).

If you are a “self-employed” United States citizen or United States resident, the rules for paying self-employment tax are generally the same whether you are living in the US or living and working overseas.

Effect of Foreign Earned Income Exclusion (FEIE)

You must take all of your self-employment income into account in figuring your net earnings from self-employment, even income that is exempt from income tax because of the FEIE. Briefly, for those who may not be familiar with the FEIE, Americans working abroad may be eligible to exclude certain foreign earned income (wages, compensation for services) from US taxable income under the rules governing the Foreign Earned Income Exclusion (FEIE), and certain foreign housing costs paid by their employers. If one is self-employed, then instead of taking a housing exclusion, a housing deduction is taken which further reduces the amount of taxable income. For self-employed persons, both the FEIE and the housing deduction will be calculated based on the individual’s net income as figured on Schedule C or Schedule F. Calculating the right amount of the exclusion depends on figuring one’s business income accurately. Read More

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Research: Basis Reconstruction – Part 4 of a 6 Part Series

TaxConnections Picture - Climbing a Pile of FilesHow many of you have ever had the frustrating job of trying to recreate basis on a stock or mutual fund for a client? Lots of fun isn’t it? The best place to start of course is in the clients records, because all of our clients keep well maintained documents and records and always bring us everything we need, right? What, no? OK, then where are some other avenues?

How about things like this:

1. Call the broker – Sometimes they have records that are not on the reporting documents or statements.

2. Trace back what records they do have – Have the client bring those stocks of unopened monthly statements or other communications from the brokers that they have stuffed in a drawer.

3. Call the employer if it’s Employee Stock Purchase Plan (ESOP) or stock options – Most of the employers will either have records or can point you in the direction of the company that manages their plan.

4. Review prior year returns schedule D – Did they have some of the same stocks/funds on prior year returns? Where did they come up with that basis? Did they come up with a basis or just take $0 (possible amendment opportunity here).

These are all good options and great places to look at. How about the client who comes in who worked for AT&T for 30 years and has stock from the ESOP? AT&T has an investor relations site that can at least point you in the right Read More

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Tax Identity Theft

Crime identity hackingTax identity theft has grown exponentially over the past several years. Identity theft has topped the Internal Revenue Service’s “Dirty Dozen” annual list of tax scams for both 2012 and 2013, and also appeared on the list in 2011. According to the National Taxpayer Advocate Service, identity theft grew by more than 650 percent between fiscal years 2008 and 2012. Unfortunately, the predictions are that this trend will continue, even in the face of growing safeguards that are currently being put into place by the IRS, tax practitioners and taxpayers themselves. An audit report released in August 2012 by the Treasury Inspector General for Tax Administration estimated that during the next five years, the IRS could lose a projected $21 billion to fraudulently claimed tax refunds related to identity theft. This figure, according to TIGTA, takes into account the new fraud controls that the IRS has put in place that the agency touts as having saved $20 billion of fraudulent refunds on 2012 returns alone.

Impact On Individual And Businesses

Generally, identity theft as encountered by the IRS, typically involves a taxpayer’s stolen Social Security number that is then used to file a tax return and claim a fraudulent refund. When the legitimate taxpayer then files their return, the IRS rejects it. The taxpayer must correct the situation to obtain their refund, which in many cases can consume a considerable amount of time, effort and expense. In best-case scenarios, a six-month delay has been common. Identity theft usually plays out differently when a business taxpayer’s identity is stolen. Similar to return filings for individuals, the theft can occur in the form of a fraudulently claimed tax refund, but often involves more subtle schemes that remain undetected until the business receives a notice from a government agency related to unpaid employment taxes, erroneously claimed tax credits, unreported merchant payment card income, and similar business transaction-generated subterfuge. Read More

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Trust Fund Recovery Penalty – #13 – Information Gathering

TaxConnections Picture - Dollar Sign and Money13. INFORMATION GATHERING

§ 5:68 In General

Once, a Revenue Officer has determined the basic financial and organizational information about a company, he or she will begin gathering supporting documents. It is standard practice to summon the company’s banks for corporate resolutions, signature cards, bank statements, cancelled checks, and loan agreements. Revenue Officers will also seek copies of contracts, leases, and corporate minutes books. Normally at the outset of the investigation, the Revenue Officer will not have the corporate tax returns, but as the investigative process begins, he or she will request copies from the Service Center.

§ 5:69 Oral Presentations

Oral presentations on behalf of your client sometimes will prevent assertion. Always point out your client’s dire financial situation when appropriate since the Internal Revenue Service might give her a pass based upon uncollectibility. [IRM 5.7.5.3]

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“K” is for Kids on the Payroll

TaxConnections Picture - Varsity letter K“K” is for Kids on the payroll.  Putting your kids on the payroll sounds like a shady topic, but it’s a legitimate way to save taxes and invest in their future.  First you need to have a business and that business needs to hire the kids.  If you work for 3M you might have a hard time hiring your kids at work, but for people with a small business or that work for a small business, hiring your kids is a real possibility.

Often there are administrative tasks, janitorial services or basic job functions which can be done by your children.  It’s a good way to introduce them to working or to introduce them to the family business.  The key here is that the kids need to be actually working for the business.  Paying them to do chores around the house like cleaning their room and washing the dishes is not the same as paying them for providing services to a business.

One tax benefit is you can open an IRA for the child and contribute to the extent they have earnings.  The annual limit for an IRA is now $5,500 so a child with $4,000 of wages could contribute $4,000 to a Roth IRA which can serve as a great vehicle for tax-free savings.

The second big benefit of having kids on the payroll is that there are no payroll taxes when you hire your children that are under the age of eighteen.  Considering the 2013 standard deduction is $6,100, the first $6,100 of earnings for your kid will have no income tax and no payroll tax which is a pretty good deal.

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

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