Tag Archive for Harold Goedde

IRS Extends Fast-Track Settlement to Smaller Businesses Nationwide

Formerly available only to large and midsize businesses and in a geographically limited pilot program for smaller entities, the IRS’s Fast Track Settlement program is now available to smaller businesses nationwide, the IRS announced Wednesday, November 6.

Fast-track settlement allows the IRS and business or self-employed taxpayers under examination to use alternative dispute resolution procedures to resolve tax controversies more quickly, without a formal administrative appeal or litigation. The program began on a pilot basis in 2001 for businesses over which the IRS’s Large and Mid-Size Business Division (LMSB, now the Large Business and International Division) had jurisdiction—those with more than $10 million in assets. Read More

Written by | Posted in North America • Tax Controversy

Taxes and Penalties in the 2012 Affordable Health Care Act

The 2012 “Affordable Health Care Act” (Obama Care) [The Act] contains many provisions for penalties and additional taxes for businesses that do not provide health care coverage for their employees. Health care coverage is mandated for businesses employing a certain number of “full-time” employees. It also imposes penalties on individuals who do not have health care coverage. Businesses have until January 1, 2015 to comply and individuals until March 31, 2014. There is legislation pending in Congress to extend the individual mandate until January 2015.

This article will discuss the Act’s ramifications, particularly for small businesses, in determining if they are required to cover employees with health insurance and penalties for failure to do so. A Even businesses that provide insurance today may get caught up under Read More

Written by | Posted in Affordable Healthcare Act

Reasonable Compensation For S Corporation Shareholder-Employees

Over the past five years, a few widely noted cases and multiple government reports have made reasonable compensation a key tax issue for S corporations. Two recent Tax Court opinions focusing on reasonable compensation for S corporation shareholder-employees provide important takeaways for owners and practitioners by addressing common issues surrounding distributions and loan repayments in the context of reasonable compensation.

Background

Secs. 3111 and 3301 require employers to pay FICA and FUTA employment taxes on wages paid to their employees. For federal employment tax purposes, an employee includes any officer of a corporation. An officer who performs more than minor services for a corporation and who receives remuneration in any form for those services is considered an employee Read More

Written by | Posted in Corporate • Individual • United States

2013 Tax Saving Tips

TaxConnections Picture - TIPSThe two biggest ways to lower your 2013 taxes are to increase your deductions before the end of the year or decrease your income subject to tax.

(1) Make additional charitable contributions of cash or property-particularly unwanted household items and clothing. An excellent way to increase non-cash contributions is to make gifts of appreciated property, particularly securities. By doing this, you receive a donation for the fair value on the date of the gift. The big advantage of doing this instead of selling it and make a cash donation is not having to pay tax on the gain. If you do this discuss with your broker which securities would be best to donate. Your broker will take care of transferring the securities to your designated charity.

(2) Make a contribution to your traditional IRA or SEP (you have until April 15, 2014 to make a contribution for the 2013 tax year).

(3) Pay health insurance premiums and other medical expenses in 2013 instead of next year. The 2013 threshold for medical expenses rises to 10% of Adjusted Gross Income (7.5% for taxpayers 65 or over).

(4) Make the January payments for your mortgage, mortgage insurance (deductible in addition to interest), and 2014 property taxes in December. If you pay these by escrow, direct the mortgage holder to take them out in December. Read More

Written by | Posted in Individual • Tax Tips

IRS Cannot Enforce Health Care Penalties

TaxConnections Picture - IRS Building in WashingtonThe Internal Revenue Service probably will bark at you if you fail to obtain health insurance next year, but the agency won’t have much bite. On this issue, Congress pulled the watchdog’s

Story Highlights

• IRS could deduct penalty from tax refunds

• For those who aren’t owed a refund, the IRS options are limited

• Penalty in 2014 is $95 or 1 percent of person’s income

The Internal Revenue Service probably will bark at you if you fail to obtain health insurance next year, but the agency won’t have much bite. On this issue, Congress pulled the watchdog’s teeth. The Affordable Care Act declares that most Americans will face a penalty if they’re uninsured, starting in 2014. But experts predict the government will have a tough time forcing people to pay up. The IRS could deduct the penalty amount from any tax refund you’re due. But what if you’re not due a tax refund? “They might send you a sternly worded letter,” said Andy Grewal, a “University of Iowa law professor who specializes in tax issues. And if you toss the IRS’ hectoring note into the recycling bin, you should brace yourself for another sternly worded letter.

Much has been made about the fact that the penalty for failing to obtain health insurance next year is set at just $95 or 1 percent of a person’s income. That amount is set to rise substantially in subsequent years, but it will remain less than the Read More

Written by | Posted in Affordable Healthcare Act • Federal • Individual • IRS

IRS Not Detecting Fraudulent Returns

TaxConnections Tax Blog Post - Statute of Limitations on Tax EvasionOn October 28, the Treasury Inspector General for Tax Administration (TIGTA) released the results of its review of the Internal Revenue Service’s fraudulent tax return detection system, the Electronic Fraud Detection System (EFDS), concluding that inadequate income and withholding verification resulted in the IRS’s missing many fraudulent returns (TIGTA, Income and Withholding Verification Processes Are Resulting in the Issuance of Potentially Fraudulent Tax Refunds, Rep’t No. 2013-40-083 (8/7/13)).

The IRS claimed to prevent $1.2 billion of fraudulent tax refunds in 2013, but TIGTA found in an analysis of 2010 tax year returns that the IRS’s EFDS did not screen 92% of the 1.5 million returns that TIGTA identified as potentially fraudulent. Although income and withholding verification is the most efficient method to detect fraud, the IRS is stymied in using that system because most of the information necessary to do this verification is received after many taxpayers have filed their income tax returns. (A new system, the Return Review Program, is expected to replace EFDS beginning in 2015.)

TIGTA specifically reviewed a random sample of 272 of the 120,197 potentially fraudulent 2010 tax returns for which tax refunds were issued and that received a high enough EFDS score to be sent for income and withholding verification. TIGTA found that IRS examiners confirmed that 96 of these tax returns had false income and withholding, but the IRS did not take timely
actions to prevent the issuance of the fraudulent refunds. Another 8 tax returns were not screened within the required time period to prevent the Read More

Written by | Posted in IRS • Tax Fraud/Evasion/Crimes

Debt and Proving Basis in Flowthrough Entities

TaxConnections Picture - Tax written on computer keyboardS Corporations

Taxpayers with ownership interests in flow-through entities cannot deduct entity losses if they do not have basis in those entities. Consequently, a taxpayer’s basis is often scrutinized by the IRS, particularly when basis is claimed based upon debts incurred by a flow-through entity.

In mid-2012, the IRS issued Prop. Regs. Sec. 1.1366-2 (REG-134042-07) to establish a standard for when shareholders can increase basis in S corporations based upon loans to the S corporation. Under this standard, a shareholder may increase basis by “bona fide indebtedness” of the S corporation that runs directly to the shareholder. Partners, in contrast, are subject to the more complex partnership basis rules of Secs. 752 and 465. As basis laws change and develop over time, the IRS will continue to scrutinize reported losses.

Shareholders Basis

The proposed regulations do not establish factors or criteria to determine when S corporation indebtedness is bona fide. Instead, whether indebtedness is bona fide is determined under general tax principles. The preamble to the proposed regulations cites four cases that establish whether a debt is bona fide: Knetsch, 364 U.S. 361 (1960); Geftman, 154 F.3d 61 (3d Cir. 1998); Estate of Mixon, 464 F.2d 394 (5th Cir. 1972); and Litton Business Systems, Inc., 61 T.C. 367 (1973). Geftman, for instance, established three factors to determine whether a loan is bona fide: (1) contemporaneous intent to repay; (2) Read More

Written by | Posted in Corporate • Federal • Partnership

1099-K Notices Bewilder Taxpayers – To Match or Not to Match?

TaxConnections Blog PostDo you have tax clients who run small businesses or decided to sell their household items on e-bay this past year? Or perhaps you are a CPA who accepts credit card payments from your clients? If so, you may have already received a notice from the IRS or should be aware of the latest updates on the IRS push for information matching with Form 1099-Ks (Payment Card and Third Party Network Transactions). Some AICPA members have received 1099-K mismatch notices assessing thousands of dollars in penalties.

Less than a year ago, the AICPA raised the topic in a blog post about a major initiative that requires merchant card companies to report gross receipts on Form 1099-K. At the time, the IRS was carrying out a compliance program that sent notices to small business taxpayers to match their sales information with merchant provided Form 1099-K reports. The program was used to ensure business taxpayers were reporting adequate income from their credit card receipts. A driving force behind this decision was the growing US tax gap, as IRS data indicated that a major source for the gap was related to underreporting of business income on individual tax returns.

As a result, many taxpayers, especially self-employed Schedule C filers, are beginning to receive notices related to Form 1099-Ks. In these notices, the IRS is providing basic instructions such as “Read the notice thoroughly and complete any Read More

Written by | Posted in Federal • IRS • Sales/Use Tax • Tax Provision/Tax Reporting

Audit – IRS Allowing Billions In Improper Tax Payments

TaxConnections Blog PostThe IRS has failed to clamp down on improper refundable tax credit payments, according to a new federal audit. In all, the IRS said it wrongly distributed as much as a quarter of Earned Income Tax Credit (EITC) payments, between $11.6 billion and $13.6 billion, according to Treasury’s inspector general for tax administration. Between 2003 and 2012, the IRS erroneously paid out at least $110.8 billion and as much as $132.6 billion, the new report says.

Due to a 2009 executive order, the IRS is supposed to have targets for rolling back those improper payments. But the agency has yet to do so, and the Treasury inspector general says in its audit that the IRS needs to rethink its methods for cutting down on waste in EITC payments.

Russell George, the tax administration inspector general, noted that the IRS had made some strides in stopping inappropriate payments, and in educating taxpayers about EITC eligibility. Still, George said the billions of dollars lost to waste each year was “disturbing.” The IRS must do a better job of reining in improper payments in this and in other programs,” George said in a statement. Senator Orrin Hatch (Utah), the top Republican on the Finance Committee, called on the IRS to “aggressively crack down on these erroneous payments,” insisting the agency’s issue with the EITC “doesn’t bode well” for its oversight of subsidies for President Obama’s healthcare law. Read More

Written by | Posted in Audit • Federal • IRS

Tax Aspects – Business v. Hobby – Part II

TaxConnections Blog PostSee Part I

Treatment of Hobby Expenses

If activity is deemed to be a hobby a loss cannot be deducted. In determining the allowable expenses, three tiers of expenses must be considered.

Tier 1.

These expenses are those that are allowed as an itemized deduction-medical, contributions, state and local taxes, mortgage interest, and casualties. These expenses are allowable with out regard to income from the activity. They are reported on Schedule A of Form 1040 and are deductible to the extent they exceed 10% of AGI for medical and casualties and are allowable only if total itemized deductions exceed the standard deduction.

Tier II.

These are business related expenses directly attributable to the activity. Examples are salaries, utilities, advertising, supplies, accounting and legal fees, travel, meals and entertainment (after 50% reduction), repairs and maintenance, insurance, office expenses. If any income remains after deducting business related expenses These are reported as miscellaneous deductions on Schedule A of Form 1040. Read More

Written by | Posted in IRS • Small Business

Tax Aspects – Business v. Hobby – Part I

TaxConnections Picture - Small BusinessMany taxpayers engage in activities they enjoy and do it for a business purpose. Whether the IRS considers it as a business or hobby has important income tax implications. If the activity is considered a business, all legitimate substantiated expenses will be allowed and a loss can be deducted from other income. All income and expenses are reported on Schedule C. If the activity is deemed to be a hobby, income is reported as other income on page one of form 1040 and expenses are deductible only to the extent of income from the activity-a loss is not deductible from other income. Business related expenses will be treated as a miscellaneous itemized deduction reduced by 2% of AGI. If the taxpayer doesn’t have total itemized deductions, including the hobby related expenses, that exceed the standard deduction, none of the expenses will be deductible. Whether the IRS deems an activity to be a business or a hobby depends on several factors outlined below.

Presumption of Profit-Seeking Motive

In determining if an activity will be considered a business or hobby, the IRS uses a time period for earning a profit. If the taxpayer meets this requirement, the burden of proof is on the IRS. The taxpayer is presumed to have engaged in a for profit activity if a profit is made in at least three of five years, including the current year. For horse, raising, racing, training, or Read More

Written by | Posted in IRS • Small Business
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