Media

Business Identity Theft Costs The US Treasury Billions

December 5, 2013

Identity theft is not just a concern for individuals.   Your business can be a victim of identity theft too.    The Treasury Inspector General has just completed a report showing that billions of dollars of fraudulent refunds were issued because of stolen Employment Identification Numbers (EIN).    Here is how it is done:

1)   The identity thief uses the stolen EIN to report false withholding taxes.  These taxes were never actually paid.    The thief has created a phantom account containing phantom taxes withheld from phantom employees.

2)  The next step in the fraud is to file an individual tax return for a phantom employee claiming a refund of this phantom money.

3)  The IRS pays out the refund without the realization that there were never any deposits to begin with.

The report suggests that the IRS develop better procedures to detect this fraud, including the development of third party verification of W-2 information.

In 2011, 277,624 were stolen EINs used to report false income and withholding on 752,656 tax returns with potentially fraudulent refunds issued totaling more than $2.2 billion.

The New Home Office Deduction

August 14, 2013

Home Office Deduction

The Home Office Deduction is available to those who use a part of their home for business purposes, allowing a deduction for the business use of the home.  The deduction is available to homeowners and renters, and starting this year, the calculation of the deduction has become a lot easier for most people.

The basic requirements remain the same.  You must regularly use a part of your home exclusively for business purposes.  For example, running your business out of a room where your business computer and desk are, and where the kids are not supposed to enter.  It need not be that specific, as long as there is a portion of the home taken up exclusively for business purposes, that should suffice.  The second requirement is that your home be your principal place of business.  That isn’t to say that it needs to be an exclusive place of business, you can still have an office elsewhere to carry on work, but your home must be a place where you substantially and regularly conduct business.

So how much is the deduction?

The regular method of figuring out the amount, which was the only method to be used through 2012, is to determine the actual expenses that could be deductible, such as mortgage interest, utilities, depreciation, insurance, repairs, etc., and then multiply those expenses by the ratio representing the square footage of your home used for business compared to the total square footage of the home.  For example, if you have a 100 sq. ft. office in your 1000 sq. ft. home, and your mortgage interest, utilities and other deductions for the year add up to $4520, your deduction would be $452 (100/1000 x $4520).

For the new simplified option, available starting this year, you need only figure out the square footage of the business use of your home and apply a $5 per sq ft standard rate.  So, using that last example, the deduction would be $500 (100 sq. ft. x $5 per sq. ft.).  You don’t have to worry about adding up the actual expenses and then applying the portion attributable to the business use, you can just take the standard rate amount of the deduction and be done with it.

You can use either method starting in 2013, which means you should use whichever maximizes your savings.  Here are a couple of things to keep in mind when you are deciding which to use:

- Expenses such as the mortgage interest, which would typically be claimed on a Schedule A for those who itemize, needs to be apportioned between the personal and business use when using the regular method, which ensures that you don’t claim the same expense twice.  If you are using the simplified option, you don’t have to worry about the apportionment and claim those expenses in full on the Schedule A.

- The simplified option is only allowed for up to 300 sq. ft. of business use of the home.  There is no limit under the regular method beyond the percentage use of the home as described above.

- There is no depreciation deduction under the simplified option.  On the one hand, that makes things a lot easier, but on the other, that could be a significant expense allowed through the regular method.  Also, to the extent that there is gain on the sale of a home that has been depreciated under the regular method, that recaptured gain is taxed at ordinary rates, a problem avoided using the simplified method.

- To the extent that there is a loss attributable to this deduction, that loss can be carried forward using the regular method, but not the simplified option.  Also, use of the simplified option also prevents claiming a carryover loss in the current year that was created from the use of the regular method in a prior year.

How Does IRS Decide Who To Audit?

May 28, 2013

The Internal Revenue Service is living up to its reputation as a bully.   While the current scandal involves applications for tax-exempt organizations, many Americans are questioning IRS procedures.    Everybody agrees that partisan and political targeting is wrong, but the scandal leads to other questions.   How does the IRS select who gets audited?   What are the normal lawful methods for determining who gets audited?

 

Believe it or not, the first method is called random selection.   However, the audit decision is not truly random.   While returns are selected at random, not all selected returns are audited.   There is a process by which the IRS determines which returns deserves closer scrutiny.    Which returns advance to examination?   How do they make that determination?    Statistics.

 

The IRS has been conducting audits for decades.    They have collected data on taxpayers from everywhere from Honolulu to Hoboken, from every profession from Avon Lady to the zirconium miner.  With all of this data, the IRS has developed sophisticated statistical models to determine what is “normal.”

 

For example after decades of auditing traveling salesmen, the IRS has a pretty good idea what normal range of travel expense for meals for a salesman if he earns, $35k, $50, or $100k annually.    If a taxpayer claims more than the normal range, the return will be sent to an experienced auditor for review to see if the aberration is worth further investigation.

 

A second method for audit selection is document matching.     Most of us receive a W-2 or 1099 of some kind at the beginning of the year.   When your employer, mortgage bank, or investment firm mails that form to you they also mail a copy to the IRS.  If you make an error inputting the information onto your tax return or forget to report one completely, it is very easy for the IRS to catch.   The IRS already has the information reported directly from the source.    In many of these cases a streamlined automated adjustment is made.  A notice of the mismatch error is issued and a correction is proposed without additional questions.   The notice informs you of the right to dispute, but quite often the error is admitted.   The tax is paid, with interest and accuracy penalty.    However, significant underreporting of income can lead to a broader examination.

 

Under a third method, a taxpayer can be drawn into an existing audit of another person.  For example, if one partner in a business is audited, the audit may expand to include all partners because the possible changes will affect all of the partners.   Similarly, an audit may expand to include different parties to a business transaction because the transaction needs to be treated the same by all parties to the transaction.

 

It is this related person audit selection process which the current scandal raises concerns.   Were individuals audited because they were associated with the targeted non-profit organizations?    Many taxpayers believe this to be true.   Only time and a proper investigation will tell.

 

If you find yourself selected for audit you will be wise to consult a professional.   Contact Tax Armory to see if we can help you.

March 15th Is The Deadline for Filing Extensions For Businesses.

March 15, 2013

March 15th is the deadline to file an extension for your business.  Click here to review a Form 7400.      If you need help, contact a Tax Armory professional today!

 

Do You Owe Income Tax On Your Foreclosed Home?

March 12, 2013

Going through a foreclosure is a long and unpleasant experience for too many people. Unfortunatley, just when you think the process is over, you receive a letter in January from your former mortgage lender which includes an IRS form 1099-C. Wasn’t this matter settled months ago? Am I supposed to now pay tax to the IRS?

Perhaps not. The Form 1099-C is issued whenever a lender cancels more than $600 of debt. Debt forgiven is treated as income earned by you, but you may qualify for an exclusion if the debt was a mortgage on your primary residence.

There are two ways you can receive cancelled debt on your primary residence.

First, A lender may cancel debt after a forclosure sale which does not raise enough to pay the mortgage off 100%. Rather than pursue the former homeowner for the left over balance, the lender writes it off, and issues the 1099-C. For example, a home sells for $100k when there is a $150k mortgage resulting in $50k of cancelled debt.

Second, a lender will also issue a 1099-C when it simply agrees to restructure and reduce a mortgage by cancelling part of the debt. For example reducing a $150k mortgage to $100k, would result in $50k of cancelled debt.

If this situation sounds familiar, here are a few steps to follow to determine whether you qualify for the exclusion:

1. First, make sure that the form is correct. The value of the home is listed in Box 7. The amount of the debt cancelled is listed in Box 2. If there is an error, contact your lender immediately and request a corrected form.

2. Next, make sure that mortgage secured your primary residence. A second home, business property, or rental property will not qualify. Secured car loans or equipment loans will not qualify. Credit cards and other unsecured personal loans will not qualify.

3. Was the mortgage for the original purchase of your primary residence? If so you may qualify for the exclusion. However, if the cancelled debt was a refinanced loan, you must determine how much of the debt was used to refinance the origianl purchase. If you pulled out equity to pay off credit cards or a car loan, that portion will not qualify for the exclusion and only that portion attributable to the original purchase may qualify for the exclusion. However, if you funded substantial improvements to your home with a refinance, that portion may qualify. It is very important to have good records of your refinance activity.

4. Was the cancelled very debt large? The limit of the exclusion is $1 million. The limit is raised to $2 million for those who are married and file jointly.

5. Review Form 982. There are certain other exclusions available, especially if there was a bankruptcy discharge. Form 982 should be filed with your tax return.

Just because you receive a Form 1099-C does not mean that you will owe tax on the cancelled debt. Make sure you properly address the issue and claim the exclusion when you file your return, or that home may haunt you later. Consult your tax advisor regarding Form 982. Close the books for good on an unpleasant financial experience and look forward towards a brighter tomorrow.

The Real Deal On Interest & Penalties

February 6, 2013

Many of our clients ask about reducing penalties and interest. The IRS has very specific guidelines for when and to what extent they may abate penalties and interest.

Interest is rarely abated. Essentially, a taxpayer has to show that the IRS did something wrong before they will even consider abating interest. The IRS will not abate interest even if there is a showing of reasonable cause.

Penalty abatement is something different. The IRS will consider penalty relief if the taxpayer can establish that he or she acted with ordinary business care and prudence but nevertheless failed to comply with the tax law. Upon a review of all of the facts and circumstances, if the IRS determines that the taxpayer has established reasonable cause, penalties can be abated. Since it is a facts and circumstances analysis, it isn’t always black and white as to whether an abatement request will be accepted, but the IRS has given guidance as some reasons that might rise to the level of reasonable cause:

- Death, serious illness, or unavoidable absence of the taxpayer, or a death or serious illness in the taxpayer’s immediate family
- Fire, casualty, natural disaster, or other disturbance
- The inability to obtain necessary records

These generally are not going to show reasonable cause:

- A mistake was made
- Reliance on another party to comply on the taxpayer’s behalf or that another party provided erroneous advice
- Ignorance of the law
- Forgetfulness or an oversight by the taxpayer, or another party

Everything is dependent on a review of the facts and circumstances. It’s possible that an inability to obtain necessary records would not be considered reasonable cause, while a mistake could be. It all comes down to the ordinary business care and prudence standard. It never hurts to ask for a penalty abatement, regardless of what the expected outcome may be, but the chances for success are going to be much better where facts are laid out that the taxpayer did as much as possible to comply with the tax laws.

Are There No Prisons? Are There No Workhouses?

December 7, 2012

It is the season for year end charitable giving. A sour economy may have many feeling like Scrooge, but for those generous hearts who give to the less fortunate, it may be wise to make sure that your giving is offset by some tax savings. Be sure to document your gifts. Also, if you will seek a tax deduction, you must make sure that you give to a qualified 501(c)(3) organization. So perhaps with miserly caution you should use this IRS tool: The Exempt Organizations Check.

Click to see if the organization is eligble for tax deductible donations. Armed with this information, you make the call –

Bah Humbug!

or

Merry Christmas!

2013 Standard Mileage Rates Up 1 Cent per Mile for Business, Medical and Moving

December 1, 2012

 

2013 Standard Mileage Rates Up 1 Cent per Mile for Business, Medical and Moving

WASHINGTON — The Internal Revenue Service today issued the 2013 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

Beginning on Jan. 1, 2013, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

56.5 cents per mile for business miles driven
24 cents per mile driven for medical or moving purposes
14 cents per mile driven in service of charitable organizations
The rate for business miles driven during 2013 increases 1 cent from the 2012 rate. The medical and moving rate is also up 1 cent per mile from the 2012 rate.

The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs.

Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.

A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for more than four vehicles used simultaneously.

These and other requirements for a taxpayer to use a standard mileage rate to calculate the amount of a deductible business, moving, medical, or charitable expense are in Rev. Proc. 2010-51. Notice 2012-72 contains the standard mileage rates, the amount a taxpayer must use in calculating reductions to basis for depreciation taken under the business standard mileage rate, and the maximum standard automobile cost that a taxpayer may use in computing the allowance under a fixed and variable rate plan.

 

IRS Developing Leave Donation Program To Benefit Sandy Victims

November 21, 2012

WASHINGTON — As part of the administration’s efforts to bring all available resources to bear to support state and local partners impacted by Hurricane Sandy, the Treasury Department and the Internal Revenue Service today announced special relief i

n

tended to support leave-based donation programs to aid victims who have suffered from the extraordinary destruction caused by Hurricane Sandy.

Under these programs, employees may donate their vacation, sick or personal leave in exchange for employer cash payments made to qualified tax-exempt organizations providing relief for the victims of Hurricane Sandy.

Employees can forgo leave in exchange for employer cash payments made before Jan. 1, 2014. Under this special relief, the donated leave will not be included in the income or wages of the employees. Employers will be permitted to deduct the amount of the cash payment. Details on this relief are in Notice 2012-69.

The IRS continues to monitor the situation and will provide additional relief related to Hurricane Sandy as needed.Rich Text AreaToolbarBold (Ctrl + B)Italic (Ctrl + I)Strikethrough (Alt + Shift + D)Unordered list (Alt + Shift + U)Ordered list (Alt + Shift + O)Blockquote (Alt + Shift + Q)Align Left (Alt + Shift + L)Align Center (Alt + Shift + C)Align Right (Alt + Shift + R)Insert/edit link (Alt + Shift + A)Unlink (Alt + Shift + S)Insert More Tag (Alt + Shift + T)Toggle spellchecker (Alt + Shift + N)▼
Toggle fullscreen mode (Alt + Shift + G)Show/Hide Kitchen Sink (Alt + Shift + Z)
FormatFormat▼
UnderlineAlign Full (Alt + Shift + J)Select text color▼
Paste as Plain TextPaste from WordRemove formattingInsert custom characterOutdentIndentUndo (Ctrl + Z)Redo (Ctrl + Y)Help (Alt + Shift + H)

WASHINGTON — As part of the administration’s efforts to bring all available resources to bear to support state and local partners impacted by Hurricane Sandy, the Treasury Department and the Internal Revenue Service today announced special relief intended to support leave-based donation programs to aid victims who have suffered from the extraordinary destruction caused by Hurricane Sandy.
Under these programs, employees may donate their vacation, sick or personal leave in exchange for employer cash payments made to qualified tax-exempt organizations providing relief for the victims of Hurricane Sandy.
Employees can forgo leave in exchange for employer cash payments made before Jan. 1, 2014. Under this special relief, the donated leave will not be included in the income or wages of the employees. Employers will be permitted to deduct the amount of the cash payment. Details on this relief are in Notice 2012-69.
The IRS continues to monitor the situation and will provide additional relief related to Hurricane Sandy as needed.
Path:

Hurricane Sandy Victims Have New Option To Borrow Or Withdraw from 401(k)s.

November 16, 2012

Retirement Plans Can Make Loans, Hardship Distributions to Sandy Victims

WASHINGTON — As part of the administration’s efforts to bring all available resources to bear to support state and local partners impacted by Hurricane Sa

ndy, the Internal Revenue Service today announced that 401(k)s and similar employer-sponsored retirement plans can make loans and hardship distributions to victims of Hurricane Sandy and members of their families.

401(k) plan participants, employees of public schools and tax-exempt organizations with 403(b) tax-sheltered annuities, and state and local government employees with 457(b) deferred-compensation plans may be eligible to take advantage of these streamlined loan procedures and liberalized hardship distribution rules. Though IRA participants are barred from taking out loans, they may be eligible to receive distributions under liberalized procedures.

Retirement plans can provide this relief to employees and certain members of their families who live or work in the disaster area. To qualify for this relief, hardship withdrawals must be made by Feb. 1, 2013.

The IRS is also relaxing procedural and administrative rules that normally apply to retirement plan loans and hardship distributions. As a result, eligible retirement plan participants will be able to access their money more quickly with a minimum of red tape. In addition, the six-month ban on 401(k) and 403(b) contributions that normally affects employees who take hardship distributions will not apply.

This broad-based relief means that a retirement plan can allow a Sandy victim to take a hardship distribution or borrow up to the specified statutory limits from the victim’s retirement plan. It also means that a person who lives outside the disaster area can take out a retirement plan loan or hardship distribution and use it to assist a son, daughter, parent, grandparent or other dependent who lived or worked in the disaster area.

Plans will be allowed to make loans or hardship distributions before the plan is formally amended to provide for such features. In addition, the plan can ignore the limits that normally apply to hardship distributions, thus allowing them, for example, to be used for food and shelter. If a plan requires certain documentation before a distribution is made, the plan can relax this requirement as described in the Announcement.

Ordinarily, retirement plan loan proceeds are tax-free if they are repaid over a period of five years or less. Under current law, hardship distributions are generally taxable. Also, a 10 percent early-withdrawal tax usually applies.

Further details are in Announcement 2012-44, posted today on IRS.gov.Rich Text AreaToolbarBold (Ctrl + B)Italic (Ctrl + I)Strikethrough (Alt + Shift + D)Unordered list (Alt + Shift + U)Ordered list (Alt + Shift + O)Blockquote (Alt + Shift + Q)Align Left (Alt + Shift + L)Align Center (Alt + Shift + C)Align Right (Alt + Shift + R)Insert/edit link (Alt + Shift + A)Unlink (Alt + Shift + S)Insert More Tag (Alt + Shift + T)Toggle spellchecker (Alt + Shift + N)▼
Toggle fullscreen mode (Alt + Shift + G)Show/Hide Kitchen Sink (Alt + Shift + Z)
FormatFormat▼
UnderlineAlign Full (Alt + Shift + J)Select text color▼
Paste as Plain TextPaste from WordRemove formattingInsert custom characterOutdentIndentUndo (Ctrl + Z)Redo (Ctrl + Y)Help (Alt + Shift + H)

Retirement Plans Can Make Loans, Hardship Distributions to Sandy Victims
WASHINGTON — As part of the administration’s efforts to bring all available resources to bear to support state and local partners impacted by Hurricane Sandy, the Internal Revenue Service today announced that 401(k)s and similar employer-sponsored retirement plans can make loans and hardship distributions to victims of Hurricane Sandy and members of their families.
401(k) plan participants, employees of public schools and tax-exempt organizations with 403(b) tax-sheltered annuities, and state and local government employees with 457(b) deferred-compensation plans may be eligible to take advantage of these streamlined loan procedures and liberalized hardship distribution rules. Though IRA participants are barred from taking out loans, they may be eligible to receive distributions under liberalized procedures.
Retirement plans can provide this relief to employees and certain members of their families who live or work in the disaster area. To qualify for this relief, hardship withdrawals must be made by Feb. 1, 2013.
The IRS is also relaxing procedural and administrative rules that normally apply to retirement plan loans and hardship distributions. As a result, eligible retirement plan participants will be able to access their money more quickly with a minimum of red tape. In addition, the six-month ban on 401(k) and 403(b) contributions that normally affects employees who take hardship distributions will not apply.
This broad-based relief means that a retirement plan can allow a Sandy victim to take a hardship distribution or borrow up to the specified statutory limits from the victim’s retirement plan. It also means that a person who lives outside the disaster area can take out a retirement plan loan or hardship distribution and use it to assist a son, daughter, parent, grandparent or other dependent who lived or worked in the disaster area.
Plans will be allowed to make loans or hardship distributions before the plan is formally amended to provide for such features. In addition, the plan can ignore the limits that normally apply to hardship distributions, thus allowing them, for example, to be used for food and shelter. If a plan requires certain documentation before a distribution is made, the plan can relax this requirement as described in the Announcement.
Ordinarily, retirement plan loan proceeds are tax-free if they are repaid over a period of five years or less. Under current law, hardship distributions are generally taxable. Also, a 10 percent early-withdrawal tax usually applies.
Further details are in Announcement 2012-44, posted today on IRS.gov.
Path: