Taxpayers sometimes still owe after installment agreement

Some taxpayers still owe taxes even after the successful completion of a streamlined installment agreement program, according to a report from the Treasury inspector general for tax administration.  Installment payments have not included current and future accruals of penalties and interest, meaning that many taxpayers continue to owe money to the Internal Revenue Service after the 60-month program.
  Accounting Today (9/27)     

What Employers Need to Know About Claiming the Small Business Health Care Tax Credit

Many small employers that pay at least half of the premiums for employee health insurance coverage under a qualifying arrangement may be eligible for the small business health care tax credit. This credit can enable small businesses and small tax-exempt organizations to offer health insurance coverage for the first time. It also helps those already offering health insurance coverage to maintain the coverage they already have. The credit is specifically targeted to help small businesses and tax-exempt organizations that primarily employ 25 or fewer workers with average income of $50,000 or less.

High-Low Per Diem Extended

IRS reinstates high-low method, issues per diem rate guidance
On Friday, the Internal Revenue Service stated that it will continue to allow taxpayers to use the high-low method to substantiate travel expenses, reversing a July decision to discontinue the method.  The IRS also provided guidance on the use of the federal per diem rate. JournalofAccountancy.com (9/30)      .  If you incur business related travel, oftentimes per diem rates will provide a larger deduction for you than the actual expenses you incurred.  Contact me if you have questions regarding the use of per diem rates.

Impairment-Related Work Expenses

Impairment-Related Work Expenses

Impairment-related expenses are those ordinary and necessary business expenses that are:
1. necessary for you to do your work satisfactorily;

2. for goods and services not required or used, other than incidentals, in your personal activities; and

3. not specifically covered under other income tax laws.

For these rules to apply, you must first meet the definition of disability. You have a disability if you have:

a physical or mental disability (for example, you are blind or hearing-impaired) that functionally limits your being employed; or

a physical or mental impairment (for example, a sight or hearing impairment) that substantially limits one or more of your major life activities, such as performing manual tasks, walking, speaking, breathing, learning or working.

If you have a disability, you can take a business deduction for expenses that are necessary for you to be able to work. If you take a business deduction for these impairment-related work expenses, they are not subject to the 7.5 percent limit that applies to medical expenses.

Red flags that might prompt an IRS audit of a wealthy taxpayer
The Internal Revenue Service is auditing wealthy taxpayers at a higher rate than the general population via it Global High Wealth Industry unit.  Among the red flags that could prompt an audit: property-transfer records without corresponding gift-tax returns and high mortgage-interest deductions. Barrons.com (9/17)        Wealthy taxpayers should consult with their CPAs before engaging in property transfers to insure gift tax returns are filed when necessary.  It is also important to remember that the mortgage interest deduction is only available on a primary residence and one second home and that the aggregate amount of mortgage indebtedness may not exceed $1 million.  Interest paid on indebtedness over these limits is non-deductible personal interest.

Hurricane Victim IRS Filing Extensions

IRS announces extensions and other relief to Hurricane Irene victimsSeptember 2, 2011 – The Internal Revenue Service is providing tax relief to individual and business taxpayers impacted by Hurricane Irene. The IRS has announced that certain taxpayers in North Carolina, New Jersey, New York, and Puerto Rico will receive tax relief, and other locations are expected to be added in coming days following additional damage assessments by the Federal Emergency Management Agency (FEMA).

The tax relief postpones certain tax filing and payment deadlines to October 31, 2011. It includes corporations and businesses that previously obtained an extension until September 15, 2011, to file their 2010 returns and individuals and businesses that received a similar extension until October 17. It also includes the estimated tax payment for the third quarter of 2011, which would normally be due September 15.

Senate finance panel considers retirement, 401(k) reform
The Senate Finance Committee hearing today will consider options for overhauling the retirement investment industry.  Among the options under consideration: the replacement of the 401(k) tax deduction with a flat-rate tax-break; an increase in retirement age; and a change in the method for calculating Social Security benefits. Reuters (9/13), ABC News (9/14)     

AICPA Shares Insight on Community Colleges

Introducing Community College Blueprint
	The tough economy has increasing numbers of high school students, as well as career-changing adults, considering attending community colleges. To help them map their path through the community college system and on to four-year universities and careers in accounting, the AICPA has released a new community college section on StartHereGoPlaces.com. The site offers a deeper understanding of community college options; describes the many benefits of attending community colleges; shares insights on who community college might be a good fit for; provides information on how to select a school as students take the first step toward four-year success; explains the community college path and options for transferring; and much more. Visit StartHereGoPlaces.com/CommunityCollege for more information.

Proof of Delivery to IRS

Delivery of Tax Returns and Other Documents to IRS: According to IRC Sec. 7502(c) , registered or certified mail constitute prima facie (i.e., legally sufficient) evidence that a tax return or other document was delivered to the government. There is a conflict among the Federal circuit courts of appeal about whether this provision provides the only way to establish prima facie evidence of delivery of a document to the IRS or the Tax Court. After considering comments, the IRS decided to establish criteria for designating certain services offered by Private Delivery Services (PDSs) (e.g., UPS or FedEx) for purposes of the prima facie evidence of delivery rule. Thus, the final revisions to Reg. 301.7502-1 provide that, other than direct proof of actual delivery, proof of proper use of registered or certified mail, or a PDS duly designated by the IRS, are the sole means to establish prima facie evidence of delivery of documents that have a filing deadline prescribed by the internal revenue laws.  Thus, one of these three means of proof of delivery must be met to prove timely delivery of returns to the IRS.

Overlooked Beneficiary Designations Can Lead to Undesired Results

When you have a change in marital status or a birth or death in the family it is often generally assumed that if you have make the appropriate changes to your will that you will have accounted for these changes and your final bequest desires will be honored.  Unfortunately, many people forget to consider beneficiary designations that have been made on IRAs, Pensions, Annuities and Life Insurance Policies.  The beneficiary designations made on these financial instruments and plans take precedence over bequests made in wills and can often lead to disappointing surprises for family members you leave behind.  Any time you have a change in the status of your family or final bequest desires, request information as to the beneficiary designations you have listed for these financial instruments and complete a change of beneficiary designation form for the appropriate entity to affect your desired changes.  You can make your estate the beneficiary of these instruments, but doing so can often lead to unintended income tax consequences.  It's best if you consult with your CPA or estate attorney to insure that you are making the best choices.

Deduction for Taxpayer's Own Work

In 2007, taxpayer worked 1,000 hours developing a web-based business. His proprietorship did not pay him for his services, but did accrue a $50,000 liability for his work to set up the website, based on the $45 to $55 per hour he would have paid an unrelated third party for performing similar website development work. In upholding the IRS's disallowance of the deduction, a Tax Court summary opinion noted that a taxpayer is not entitled to a deduction under the accrual method "if there is no legal obligation during the taxable year to make such payment." In this case, there would have been no legal consequences if taxpayer had refused to pay himself—he would not have taken collection action nor would he have sued himself. This has always been the IRS position and I am surprised that the Tax Court was even willing to hear the case. 

Social Media Resources for IRS

The IRS lists five "social" ways to access tax information from the IRS:
(1) IRS2Go—a smartphone application allowing users to check refund status and tax updates;
(2) YouTube—the IRS posts short information videos on various topics;
(3) Twitter—the IRS tweets, @IRSnews, tax-related announcements, news for professionals and updates for job seekers;
(4) Audio Files for Podcasts—short recordings with information on one tax-related topic and made available on iTunes or www.irs.gov ; and
(5) Widgets—tools that can be placed on websites, blogs, or social media networks directing others to www.irs.gov for information.
So, if you have a burning desire to keep tabs on what the IRS is thinking, here is a way to do so.

Business Expense Substantiation

In a recent court case the Tax Court granted a self-employed handyman a partial deduction for amounts paid to individuals who assisted him in performing certain jobs, but denied deductions for meals and entertainment, vehicles, telephone and legal fees due to lack of documentation.  This case reinforces the need for self-employed persons to maintain receipts for all business expenditures and to keep mileage logs for business vehicle use.  If meal and entertainment expense is going to be claimed, it is necessary to document who was entertained and what business was discussed either before, during or immediately after the meal or entertainment.  Also, when claiming meal expenses it is important to remember that generally only out-of-town meal expense is allowed.  Published per-diem meal and incidental expense deductions may actually allow for more deduction than the actual expenses incurred.  You should check with your CPA to make sure that you are getting the maximum deduction for your out-of-town meal expenses.

IRS Steps Up Audit Enforcement

Over the past few years the IRS has added roughly ten percent additional enforcement staff positions bringing the total number to just under 23,000 positions.  The audit rate was 1.11 per cent of all taxpayers last year, but for certain groups such as those who operate their own business the audit rate is just over four per cent.  The IRS estimates that Schedule C filers understate their income by about $69 billion a year.  Although the numbers are still small, IRS audit representation can be costly and it is important that you have your returns prepared by someone familiar with all pertinent sections of the tax code and IRS regulations regarding self-employed taxpayers.

New IRS Publication to Assist Displaced Workers

The IRS has released a new brochure, IRS Publication 4128 (Tax Impact of Job Loss), which addresses many of the issues faced by workers who have recently lost their jobs.  The publication addresses such items as severance pay, unemployment compensation, gifts from friends or relatives, food stamps, and withdrawing money from retirement accounts or IRAs.  It also contains information regarding starting a new business and allowable deductions regarding job search expenses.  If you or someone you know could use this brochure it can be downloaded from the IRS website at http://www.irs.gov/.

Q&A

As you visit this site you may think of particular tax questions or issues that you would like addressed.  Since other bloggers may share your interests or concerns, if you will either email or comment to me I'll address them in Q&As on this blog.

The Cost of Raising a Child

The average cost of raising a child born in 2011 (including attendance at a public university) is estimated to be $310,262 (Source: USDA 2009 Annual Report and Babycenter.com), so it is never too soon to start saving for your child's education.  There are provisions in the Tax Code to help you get there:

One of which is to setup custodial accounts for children under the Uniform Gift to Minor's Act which allows you to make gifts up to $13,000 per donor per child per year.  The first $950 of investment income earned on these accounts is exempt from taxation with the next $950 subject to taxation at the child's rate, which is currently 10%.  Investment income over the $1,900 is taxed at the parent's incremental rate which can be as high as 35%.  However, by carefully selecting investments that do not throw-off much income, such as stock index funds a good deal of money can be shifted to a child's account with the potential for significant tax savings.  These funds are not restricted and can be used to pay any of the child's expenses.  However, once the child reaches the age of majority, technically (note I said in a technical sense) they have control over the funds.

Another provision is the adoption of an Education Savings Account.  Annual non-deductible contributions can be made up to $2,000 per child.  The advantage to these accounts is that to the extent the funds are used to pay for the beneficiary child's education, the income earned in the account is never taxed.  There are some contributor income limitations to making the contributions, but these accounts remain a good option for education savings.

Another option is to open a 529 College Savings Plan.  These plans must be adopted by states or educational institutions and the investment returns of these state sponsored plans vary greatly.  Internet searches can easily be performed on these plans to determine which state plan best suits your needs.  Again, there is no current deduction for amounts contributed and the contribution is limited to the present value of the cost of the college education.  Contributions can be made on a systematic ongoing basis or in a lump sum.  Lump sum contributions are subject to annual gift limitations although one large gift may be used ratably over a five-year period to avoid gift tax consequences.

Determining what option is best for you can be a bit confusing and I suggest you consult with your CPA as to which plan may best suit your contribution limitations and tax needs.

7 Tax Tips For Bloggers

If you are blogging with the intent to earn money then there are some provisions in the tax code you should be aware of and also certain tax benefits that you may be able to tax advantage of:

1.  If you barter your services in exchange for goods or services in return, you are required to
  report the fair market value of those goods and services in income on your income
  tax return.
2.  If certain conditions are met and your blogging income exceeds your expenses you may  
  be entitled to a home office deduction.
3.  You may be able to take the Child and Dependent Care Credit on your tax return for
  enrolling your child in summer camps if your blogging activity is showing a profit.
4.  You may claim business use of auto deductions if you drive to either acquire or test 
  products or services that you blog about.  Mileage records should be maintained to
  account for business usage of your auto.
5.  You may take a portion of the cost of computers, accessories and supplies and internet
 access fees as they relate to your blogging.  Any other out-of-pocket expenses incurred in
 your blogging business are also deductible on your tax return.
6.  The costs of developing websites and blog content are also deductible expenses in
  determining your net taxable income from blogging.
7.  Even if you are not yet generating revenue from blogging and are in the development
  stage of building your blog site, you may still be able to deduct certain blogging related
  expenses.

In determining which expenses are and are not deductible on your income tax returns you should consult a CPA knowledgeable in tax matters.
    

Interest Rates Projected to Rise

U.S. core inflation rises; higher interest rates likely
U.S. core inflation, which excludes food and fuel prices, rose 0.3% in May, the biggest one-month increase in the past five years. The annual core inflation rate for the first five months of this year is 2.4%. The accelerating rate is likely to trigger interest-rate increases, experts said. TheFiscalTimes.com (6/27), iMarketNews.com (6/27), Reuters (6/27)

New Auto Mileage Rates for Business Use

Starting July 1, motorists who use their personal vehicles for business will be able to deduct 55 1/2 cents a mile from their taxable income, the agency announced Thursday. That's an increase of 4 1/2 cents from the first six months of the year.

Tax Freedom Day 2011

America Celebrates Tax Freedom Day®

Tax Freedom Day® will arrive on April 12 this year, the 102nd day of 2011. That means Americans will work well over three months of the year, from January 1 to April 12, before they have earned enough money to pay this year's tax obligations at the federal, state and local levels.
Tax Freedom Day arrives three day later in 2011 than it did in 2010, but nearly two weeks earlier than in 2007. This shift toward a lower tax burden since 2007 has been driven by three factors:

• The Great Recession has reduced tax collec­tions even faster than it has reduced income.

• President Obama and the Congress, after a long debate, extended the Bush-era tax cuts for two additional years.

• As part of the extension agreement, the Making Work Pay tax credit was replaced with the 2 percent reduction in the payroll tax.

Despite these tax reductions, Americans will pay more in taxes in 2011 than they will spend on groceries, clothing and shelter combined.

Source: The Tax Foundation @thetaxfoundation.org.