September, 2013 | TaxConnections

27 Sep 2013

CPAs Can Help Clients Stave Off IRS Scrutiny

Preventing A Challenge To (Un)Reasonable Compensation- CPAs Can Help Clients Stave Off IRS Scrutiny With A Little Foresight

As the IRS increases scrutiny of executive compensation, CPAs need to proactively advise their clients on how to withstand these inquiries. As a result of IRS training initiatives, three types of entities draw the most attention and therefore need good advice from CPAs.

(1) closely-held C corporations are examined to determine whether they have overpaid their shareholder-employees. These corporations are allowed to deduct only “reasonable” compensation paid to shareholder-employees. So, examiners are looking for a disguised dividend, which is corporate profit being treated as compensation. Since a dividend is not deductible, but compensation is, the IRS may treat the portion of the compensation that it considers excessive as a dividend. The result is that the corporation loses its deduction for that amount and is assessed tax, interest, and penalties on the resulting increase in income.

(2) S corporations are audited to determine whether they have underpaid their shareholder-employees. These shareholders may have set their own pay levels unreasonably low and simultaneously increased their profit distributions. Since compensation is subject to payroll taxes, but distributions are not, some tax savings can Read More

Written by Harold Goedde | Posted in Corporate • Federal • IRS • United States

26 Sep 2013

Home Office Deduction-Changes for 2013

If you use your home for business, there are expenses you can deduct on your tax return. The home office deduction is available to both home owners & renters alike. The home must be used by a self-employed individual or an employee who works from home for his employer’s convenience.

This deduction has been available for a few years now, however with the tax year beginning January 1st, 2013 (filing starting January 1st, 2014), the Internal Revenue Service issued Rev Proc. 2013-13. This revenue procedure details an optional safe harbor available to individual tax payers for calculating a home office deduction.

The individual can claim the Home Office Deduction based on either the Simplified Method or the Regular Method (Details Follow).

Simplified Method:

• A standard deduction of $5 per sq foot for a home used for business up to a maximum of 300 sq feet.

• No home office depreciation deduction is allowed nor is a later recapture for the years the simplified option was used.

• Allowable home related expenses, such as, Mortgage Interest or Property Taxes is claimed in full on Schedule A. Read More

Written by Manasa Nadig | Posted in Individual • North America • Small Business

26 Sep 2013

“V” is for Venture Capital

“V” is for venture capital. Venture capital is a way for small businesses to get needed funding. Venture capital comes in many different ways, but generally a deep pocket invests a bunch of money in a growing company that needs cash to keep expanding. If that sounds like the setup of Shark Tank, well it is. Shark Tank is basically venture capitalists trying to strike a deal with promising companies.

Venture capital is really a financing mechanism but it can have some important tax ramifications. When venture capitalists contribute their money, they normally receive shares of the company in exchange. That purchase is not a taxable transaction, but down the road if they sell, it will be a capital gain or loss. Holding the shares of the company will normally entitle the venture capitalist to a share of the distributions of the business. In partnerships and S corps the distributions are a reduction of basis but not taxable. For C corps, distributions are normally dividends which are taxable when received.

Venture capital can be set up a number of ways, but understanding the tax impact is obviously very important for both the venture capitalist and the business that is seeking the investment. When you get into more complicated royalties or payback models, it’s good for both sides to have a clear understanding of the taxes so you don’t run into problems in the future.

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

In accordance with Circular 230 Disclosure

Written by Advertorial | Posted in United States

26 Sep 2013

IRS “Beating a Dead Horse” – Trying To Regulate Tax Preparers

Talk about beating a dead horse! Yes, that is the Internal Revenue Service’s position before the courts as to why it can regulate and control tax return preparers. The district court properly struck down the IRS’s attempt to control tax preparers as being outside its authority under law. Congress has never authorized the IRS to control tax return preparers, and frankly it is a truly bad idea. Why should the IRS be permitted to regulate and control tax return preparers that are supposed to represent taxpayers who are truly adversarial to the IRS?

In an attempt to show that they have authority to regulate tax return preparers, the IRS argued before the appellate courts yesterday that a law from the year 1884 concerning the regulation of representatives of the people whose horses were killed or lost in the civil war gives every government agency the right to regulate and control any paid person that has anything to do with the agency. That would include tax return preparers. The Obama administration is presenting this ludicrous argument in a continued attempt to expand government and the authority of the Executive branch of government.

Our Constitution establishes that Congress makes the laws and the Executive administers the laws. Unfortunately the Executive branch keeps usurping Congress’s power, even if it means beating a dead horse. It would be very simple for Congress to amend the Internal Revenue Code to authorize the IRS to regulate paid tax return preparers. It could be as simple as one sentence. Congress has not done this and in my opinion should not do this, nevertheless the IRS is spending millions of dollars of taxpayers money to fight for this non-statutory expansion of its authority.

In accordance with Circular 230 Disclosure

Written by Ronald Cappuccio | Posted in Federal • Individual • IRS • United States

26 Sep 2013

Supervision of Offshore Transactions – Part II

Taxpayer’s Defenses

It is in the context of summons and subpoenas that contestable issues occur promoting the need for the government in its supervisory role to utilize what is referred to as a Formal Document Request procedure and the use of treaty agreements. In understanding Formal Document Requests and treaty agreements, it is advantageous to first understand the glitches and defenses to the process available in the international context regarding summons and subpoenas.

There are two (2) basic taxpayer’s defenses asserted in resistance to summons and subpoenas. One such defense is that the taxpayer lacks the necessary control of the information sought to verify in satisfaction of the reporting requirements. The second basic defense is that to comply with the issued summons or subpoena would violate blocking statutes of a particular country. It is the success of the taxpayer with these basic defenses that create the necessity of the government to utilize Formal Document Requests and treaty agreements.

The crux of a taxpayer’s posture in its effort to avoid compliance with a summons or a subpoena is sometimes based on the lack of United States or other country’s jurisdiction, premised upon a lack of due process. The issue is raised as to the question of proper in personam jurisdiction in the service of summons and subpoenas on a foreign taxpayer. In determining a due process issue, the government is asserting judicial jurisdiction, in personam, based on due process of law. In this jurisdictional sense, due process arises when a statutory provision or constitutional authorization purports to provide a United States court a jurisdictional basis, and the assertion complies with due process notions. Read More

Written by William Richards | Posted in International • United States

26 Sep 2013

Accumulated Adjustment Accounts

Now that the corporate tax extension deadline is past and we all prepared, signed and filed our 2012 1120-S IRS forms (yeah right!), I write to report some of my codified thoughts on Analysis of Accumulated Adjustments Account, Schedule M-3, Other Adjustments Account, and Shareholders’ Undistributed Taxable Income Previously Taxed. Or in tax speak the “AAA”.

Generally your corporation’s Accumulated Adjustments Account (AAA) is an account of the corporation. It belongs to the corporation, not to you the shareholder. If you have elected S-Corporation Status the AAA tracks the amount of undistributed income that has been subject to income tax at each respective shareholder’s marginal tax rate. Its treatment is similar in nature to the manner in which earnings and profits generally track a C corporation’s undistributed income.

The AAA became relevant in 1983, so if you formed your S-Corp any time then or later the first day of the first year your corporation is an S corporation the balance of the AAA is zero. Each year after that the AAA is adjusted under mandate. I’ll address how to adjust the AAA a bit later in the post.

The significance of the AAA is that it allows previously taxed but undistributed income to be distributed income tax-free to shareholders up to the value of the shareholder’s investment in the corporation. This can be a difficult concept to grasp and without adequate bookkeeping even more difficult to track.

Here’s why… Read More

Written by John Dundon | Posted in Corporate • Federal • United States

26 Sep 2013

Rhode Island Considers Dumping Sales Tax

The State of Rhode Island has a special legislative commission to study the possible repeal of sales tax! That should sound shocking since states with a sales tax typically generate at least 25% of their General Fund revenues from the sales tax. What might lead a state to consider dumping a longstanding revenue generator? Well, we do hear a lot about problems with the sales tax including:

♦ It’s eroding base of tangible personal property in a digital/services world of today.

♦ It’s tax gap generated from e-commerce and catalog sales where many vendors have physical presence (and thus tax collection obligations) in only one or just a few states.

I don’t think these problems are reasons to repeal the tax though, but instead to reform it.

In accordance with Circular 230 Disclosure

Written by Annette Nellen | Posted in Sales/Use Tax • State And Local Tax (SALT) • United States

26 Sep 2013

City of Los Angeles Offers Delinquent Businesses a Tax Amnesty

The City of Los Angeles announced their tax amnesty program for qualified taxpayers owing Business, Utility Users Taxes (Telephone, Electricity, Gas), Commercial Tenant’s Occupancy, Transient Occupancy, and/or Parking Occupancy Taxes. The amnesty program is being administered by the City of Los Angeles, the Office of Finance from September 1, 2013 to December 2, 2013 and allows taxpayers to resolve outstanding balances without penalties.

To qualify, all the following requirements must be met between September 1, 2013 and December 2, 2013:

• All principal, interest, and fees must be paid

• A taxpayer must sign and return the Tax Amnesty Billing notice

• If unregistered, a business must complete, sign, and return a Tax Amnesty application

Participating taxpayers that are currently registered with the Office of Finance and have received a bill for outstanding taxes may file for amnesty and pay their bill online by accessing finance.lacity.org/amnesty and utilizing the Amnesty Online Bill Pay.

Following the amnesty period, the Office of Finance will vigorously pursue a range of enforcement actions, as applicable.

In accordance with Circular 230 Disclosure

Written by Betty Williams | Posted in TaxConnections

26 Sep 2013

Tax Provisions Of The 2012 American Health Care Act – Part 3

This article will discuss the tax provisions enacted as part of the Act and its implications and hardships that will be created for businesses and individuals.

Penalties (Taxes) on Large Businesses

Under the ACT, starting January 1, 2015 (this provision was to start January 1, 2014 but was postponed by President Obama), large businesses (employing 50 or more) are required to purchase health coverage for all full-time employees (more than 30 hours per week or, if the employer elects, at least 130 hours of service per month) [Prop. Regs. Sec 54.4980H-(a)(18)]. The 50 employee requirement is determined by the sum of all full-time employees and full-time equivalents for each calendar month in the preceding year, divided by 12. If the result is 50 or more, the employer is a large employer for the calendar year unless a seasonal worker exception applies. [Sec. 498H(c)(2)]. If employees are paid by the hour, actual hours of service are used. For non-hourly employees, the employer must count actual hours or apply an equivalent of eight hours daily or 40 hours per week, provided the method used does not substantially understate the employees hours of service that would cause the employees not to be treated as full time [Prop. Regs. Sec 54.4980H-(3)(b)]. To determine the 30 hours per week requirement, individually, but, in combination, are counted as full-time solely to determine if an employer is a large employer. The number of full-time employees is determined by calculating the average number of monthly hours of service by all employees who worked less than full-time (capped at 130 hours for any single employee) divided by 12 [Prop. Regs. Sec 54.4980H-(2)(c)] . The employer is considered to offer health care coverage to full-time employees and their dependents for a calendar month if, for that month, it offers such coverage to at least 95% of its full-time employees and their dependents [Prop. Regs. Sec 54.4980H-(4)(a)]. The previous information was taken from “Prop. Regs. Clarify ‘Play or Pay’ Rules of the Affordable Care Act”, The Tax Adviser, May 2013. Read More

Written by Harold Goedde | Posted in Corporate • Federal • Individual • IRS • United States

25 Sep 2013

IRS Expands Automated $10,000 Penalty Program to Form 5472

The IRS has begun applying automatic penalties to late-filed Form 5472’s. We knew that since 2009 the IRS has automatically assessed a $10,000 penalty for late-filed Forms 5471’s – Information Return of US Persons With Respect to Certain Foreign Corporations.

However, we have been receiving a lot of calls from businesses who have recently received penalty notices regarding late filed or non-filed Form 5472’s.Upon further investigation, we discovered that the IRS has updated its IRM 20.1.9, Penalty Handbook, International Penaltieson March 21, 2013 to now include and Automatic Assessment of this $10,000 Penalty for Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business.

The Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business (Under Sections 6038A and 6038C of the Internal Revenue Code), is filed as an attachment to the U.S. income tax return by the due date of that return, including extensions. If the reporting corporation’s income tax return is not timely filed, Form 5472 nonetheless must be timely filed at the campus where the return is due. When the income tax return is ultimately filed, a copy of Form 5472 must be attached.The IRM 20.1.9, Penalty Handbook, International Penalties also provides: Read More

Written by tbeecher | Posted in IRS • United States

25 Sep 2013

Comments on the DRAFT OECD Handbook TP Risk Assessment

The above handbook was circulated for comments on 30 April 2013, setting out key suggested information how tax authorities should go about conducting transfer pricing audits.

The DRAFT was presented at a recent Africa TP Summit, which caused a bit of a scene with the South African Revenue Service authorities who stormed out of the presentation suggesting that the Professor who was presenting the content of the OECD DRAFT for delegates to take note of its details, was misrepresenting SARS. Delegates, and some later SARS officials were confused by this. But it does indicate that SARS seems to think it should not pay attention to international benchmark standards developed by the OECD, despite the fact that South Africa has observer status at the OECD, and its former Commissioner, now Minister of Finance, Pravin Gordhan was Chairperson of its Tax Administration Forum. Read More

Written by Daniel Erasmus | Posted in International

25 Sep 2013

Supervision of Offshore Transactions – Part I

Introduction

Recently there has been a flurry of activity with respect to International Financial Centers and their standing and obligations concerning the disclosure of their financial clients and records. This text will direct itself to the fundamentals of the tools that have traditionally been utilized to monitor, sensible regulation, reasonable supervisory monitoring, and appropriate national enforcement.

This will be presented in segments of regulation, the tools of enforcement of those regulations, and taxpayer defenses to enforcement. A main purpose is to establish an understanding of principles that will give a more meaningful understanding of the various unilateral agreements between the United States and various countries regarding business activities, including the use of anonymous banking facilities.

Basic Requirements Imposed Upon United States Taxpayers.

The apparatus of the United States government in implementing a supervisory role of international transactions emphasizes the functions of the Treasury Department and its collection agency, the Internal Revenue Service (hereinafter the Service). The functions can be divided into record keeping requirements imposed on taxpayers, examination authority of the Service in the monitoring phase of international activity, and enforcement used to compel compliance. Read More

Written by William Richards | Posted in International • United States