Charitable Contributions

Strict substantiation requirements can trip up charitable donors
At this time of year, when many taxpayers give to charity, it's important that tax practitioners understand the strict substantiation requirements that must be met to qualify for a charitable deduction. A recent Tax Court case illustrates the lengths the Internal Revenue Service will go to enforce the substantiation requirements. The Tax Adviser (12/2012)     

Estate Planning - Young Families

Young families need to consider estate planning, too
Estate planning is important for young families too, especially if there are children or a spouse dependent on one adult's income. Steps young families should take include naming an executor for the estate, naming a guardian for minor children, providing instructions for distribution of assets and planning for disability. PFP/PFS members, for more estate planning considerations, can access the 2012 edition of the comprehensive CPA's Guide to Financial and Estate Planning. National Underwriter Life & Health (11/29)     

IRS issues guidance on 0.9% Medicare surtax

IRS issues guidance on 0.9% Medicare surtax
The Internal Revenue Service issued proposed regulations on the 0.9% additional Medicare tax that will take effect next year. The regulations cover filing requirements, how to make adjustments for underpayments and overpayments of the tax, and how to file refund claims for overpayment of the tax. JournalofAccountancy.com (12/3)     

Free Webinar on Fiscal Cliff

Free client-oriented Web seminar on the "fiscal cliff"

The "fiscal cliff" is the combination of tax increases and spending cuts scheduled to take effect on Jan. 1 for the purpose of increasing government revenue and decreasing the budget deficit. It is imperative not only that your clients have the best strategies in place for maximizing their tax savings and protecting their net worth (view free recording and presentation materials on this topic from the PFP Division), but also to ensure that they understand the economic outlook and long-term outcomes of the fiscal cliff and its impact on them. Invite your clients to a free Web seminar on Dec. 18 from 1 to 2 p.m. ET, where leading CPA financial planners Michael Goodman, CPA/PFS, and Ted Sarenski, CPA/PFS, will walk your clients through a plain-English discussion of the fiscal cliff, the economic outlook and what this means for the consumer. Register now.     

Fiscal Cliff Calculator

"Fiscal cliff" tax calculator tries to shed light on uncertainty
Financial advisers' bread-and-butter clients -- a family with two children, earning $147,000 a year -- could see their tax liability increase by $7,323 if there isn't a resolution to the "fiscal cliff." There are countless scenarios, though, of what could happen, making planning difficult. The Urban Institute and Brookings Institution's jointly run Tax Policy Center has created a fiscal cliff tax calculator that shows how various plans under consideration might affect a taxpayer's liability. Visit aicpa.org/PFP/YearEnd for FREE resources to help you get financial plans in place for your clients now, so you are ready to trigger when there is more certainty. AdvisorOne (11/29)     

Penalty Relief and Installment Agreements to Help Long-term Unemployed.

IRS Offers New Penalty Relief and Expanded Installment Agreements to Taxpayers under Expanded Fresh Start Initiative

WASHINGTON — The Internal Revenue Service today announced a major expansion of its “Fresh Start” initiative to help struggling taxpayers by taking steps to provide new penalty relief to the unemployed and making Installment Agreements available to more people.

Under the new Fresh Start provisions, part of a broader effort started at the IRS in 2008, certain taxpayers who have been unemployed for 30 days or longer will be able to avoid failure-to-pay penalties. In addition, the IRS is doubling the dollar threshold for taxpayers eligible for Installment Agreements to help more people qualify for the program.

“We have an obligation to work with taxpayers who are struggling to make ends meet," said IRS Commissioner Doug Shulman. ”This new approach makes sense for taxpayers and for the nation’s tax system, and it’s part of a wider effort we have underway to help struggling taxpayers."

Penalty Relief

The IRS announced plans for new penalty relief for the unemployed on failure-to-pay penalties, which are one of the biggest factors a financially distressed taxpayer faces on a tax bill.

To assist those most in need, a six-month grace period on failure-to-pay penalties will be made available to certain wage earners and self-employed individuals. The request for an extension of time to pay will result in relief from the failure to pay penalty for tax year 2011 only if the tax, interest and any other penalties are fully paid by Oct. 15, 2012.

The penalty relief will be available to two categories of taxpayers:

• Wage earners who have been unemployed at least 30 consecutive days during 2011 or in 2012 up to the April 17 deadline for filing a federal tax return this year.
• Self-employed individuals who experienced a 25 percent or greater reduction in business income in 2011 due to the economy.

This penalty relief is subject to income limits. A taxpayer’s income must not exceed $200,000 if he or she files as married filing jointly or not exceed $100,000 if he or she files as single or head of household. This penalty relief is also restricted to taxpayers whose calendar year 2011 balance due does not exceed $50,000.

Taxpayers meeting the eligibility criteria will need to complete a new Form 1127A to seek the 2011 penalty relief. The new form is available on IRS.gov.

The failure-to-pay penalty is generally half of 1 percent per month with an upper limit of 25 percent. Under this new relief, taxpayers can avoid that penalty until Oct. 15, 2012, which is six months beyond this year’s filing deadline. However, the IRS is still legally required to charge interest on unpaid back taxes and does not have the authority to waive this charge, which is currently 3 percent on an annual basis.

Even with the new penalty relief becoming available, the IRS strongly encourages taxpayers to file their returns on time by April 17 or file for an extension. Failure-to-file penalties applied to unpaid taxes remain in effect and are generally 5 percent per month, also with a 25 percent cap.

Installment Agreements

The Fresh Start provisions also mean that more taxpayers will have the ability to use streamlined installment agreements to catch up on back taxes.

The IRS announced today that, effective immediately, the threshold for using an installment agreement without having to supply the IRS with a financial statement has been raised from $25,000 to $50,000. This is a significant reduction in taxpayer burden.

Taxpayers who owe up to $50,000 in back taxes will now be able to enter into a streamlined agreement with the IRS that stretches the payment out over a series of months or years. The maximum term for streamlined installment agreements has also been raised to 72 months from the current 60-month maximum.

Taxpayers seeking installment agreements exceeding $50,000 will still need to supply the IRS with a Collection Information Statement (Form 433-A or Form 433-F). Taxpayers may also pay down their balance due to $50,000 or less to take advantage of this payment option.

An installment agreement is an option for those who cannot pay their entire tax bills by the due date. Penalties are reduced, although interest continues to accrue on the outstanding balance. In order to qualify for the new expanded streamlined installment agreement, a taxpayer must agree to monthly direct debit payments.

Taxpayers can set up an installment agreement with the IRS by going to the On-line Payment Agreement (OPA) page on IRS.gov and following the instructions.
These changes supplement a number of efforts to help struggling taxpayers, including the “Fresh Start” program announced last year. The initiative includes a variety of changes to help individuals and businesses pay back taxes more easily and with less burden, including the issuance of fewer tax liens.

“Our goal is to help people meet their obligations and get back on their feet financially,” Shulman said.

Input from the Internal Revenue Service Advisory Council and the IRS National Taxpayer Advocate’s office contributed to the formulation of Fresh Start.

Offers in Compromise

Under the first round of Fresh Start, the IRS expanded a new streamlined Offer in Compromise (OIC) program to cover a larger group of struggling taxpayers. An offer-in-compromise is an agreement between a taxpayer and the IRS that settles the taxpayer’s tax liabilities for less than the full amount owed.

The IRS recognizes that many taxpayers are still struggling to pay their bills so the agency has been working to put in place more common-sense changes to the OIC program to more closely reflect real-world situations.

For example, the IRS has more flexibility with financial analysis for determining reasonable collection potential for distressed taxpayers.

Generally, an offer will not be accepted if the IRS believes that the liability can be paid in full as a lump sum or through a payment agreement. The IRS looks at the taxpayer’s income and assets to make a determination regarding the taxpayer’s ability to pay.

Details on IRS Collection and Other Information

A series of eight short videos are available to familiarize taxpayers and practitioners with the IRS collection process. The series “Owe Taxes? Understanding IRS Collection Efforts”, is available on the IRS website, www.irs.gov.

The IRS website has a variety of other online resources available to help taxpayers meet their payment obligations:

Proposed Changes to Corporate Tax Structure

Obama's corporate-tax proposal would close loopholes, cut rate
President Barack Obama's proposed overhaul of corporate taxes would reduce the basic tax rate from 35% to 28% while eliminating dozens of subsidies and loopholes, a senior administration official said. Manufacturers would be given incentives that bring their effective tax rate down to 25%, while a new minimum tax rate for multinational corporations would be established to curb "accounting games to shift profits abroad." The New York Times (tiered subscription model) (2/22), FoxNews.com (2/22)     

Do You Engage in Bartering?

Four Things to Know About Bartering

In today’s economy, small business owners sometimes save money through bartering to get products or services they need. The IRS wants to remind small business owners that the fair market value of property or services received through barter is taxable income.

Bartering is the trading of one product or service for another. Usually there is no exchange of cash. However, the fair market value of the goods and services exchanged must be reported as income by both parties.

Here are four facts on bartering :

1. Organized barter exchanges A barter exchange functions primarily as the organizer of a marketplace where members buy and sell products and services among themselves. Whether this activity operates out of a physical office or is internet-based, a barter exchange is generally required to issue Form 1099-B, Proceeds from Broker and Barter Exchange Transactions, annually to their clients or members and to the IRS.

2. Barter income Barter dollars or trade dollars are identical to real dollars for tax reporting purposes. If you conduct any direct barter – barter for another’s products or services – you must report the fair market value of the products or services you received on your tax return.

3. Tax implications of bartering Income from bartering is taxable in the year it is performed. Bartering may result in liabilities for income tax, self-employment tax, employment tax or excise tax. Your barter activities may result in ordinary business income, capital gains or capital losses, or you may have a nondeductible personal loss.

4. How to report The rules for reporting barter transactions may vary depending on which form of bartering takes place. Generally, you report this type of business income on Form 1040, Schedule C Profit or Loss from Business, or other business returns such as Form 1065 for Partnerships, Form 1120 for Corporations or Form 1120-S for Small Business Corporations.

For more information, see the Bartering Tax Center in the Business section at www.irs.gov.

Social Security Tax Cut Extended

Payroll-tax cut extension passed by Congress
Congress passed the Middle Class Tax Relief and Job Creation Act on Friday, extending the reduced 4.2% Social Security tax rate through the end of the year. The lower rate had been scheduled to expire Feb. 29. The bill now goes to the president's desk for signature. JournalofAccountancy.com (2/17)     

Missing a W-2 From an Employer?

What to Do If You Are Missing a W-2

Make sure you have all the needed documents, including all your Forms W-2, before you file your 2011 tax return. You should receive an IRS Form W-2, Wage and Tax Statement, from each of your employers. Employers have until Jan. 31, 2012 to issue your 2011 Form W-2 earnings statement.

If you haven’t received your W-2, follow these four steps:

1. Contact your employer If you have not received your W-2, contact your employer to inquire if and when the W-2 was mailed. If it was mailed, it may have been returned to the employer because of an incorrect or incomplete address. After contacting the employer, allow a reasonable amount of time for them to resend or issue the W-2.

2. Contact the IRS If you do not receive your W-2 by Feb. 14, contact the IRS for assistance at 800-829-1040. When you call, you must provide your name, address, Social Security number, phone number and have the following information:

• Employer’s name, address and phone number

• Dates of employment

• An estimate of the wages you earned, the federal income tax withheld, and when you worked for that employer during 2011. The estimate should be based on year-to-date information from your final pay stub or leave-and-earnings statement, if possible.

3. File your return You still must file your tax return or request an extension to file by April 17, 2012, even if you do not receive your Form W-2. If you have not received your Form W-2 in time to file your return by the due date, and have completed steps 1 and 2, you may use Form 4852, Substitute for Form W-2, Wage and Tax Statement. Attach Form 4852 to the return, estimating income and withholding taxes as accurately as possible. There may be a delay in any refund due while the information is verified.

4. File a Form 1040X On occasion, you may receive your missing W-2 after you file your return using Form 4852, and the information may be different from what you reported on your return. If this happens, you must amend your return by filing a Form 1040X, Amended U.S. Individual Income Tax Return.

Form 4852, Form 1040X and instructions are available on this website or by calling 800-TAX-FORM (800-829-3676).

Not All Income is Taxable

Taxable or Non-Taxable Income?

Although most income you receive is taxable and must be reported on your federal income tax return, there are some instances when income may not be taxable.

The IRS offers the following list of items that do not have to be included as taxable income:

• Adoption expense reimbursements for qualifying expenses
• Child support payments
• Gifts, bequests and inheritances
• Workers' compensation benefits (some exceptions may apply; see Publication 525, Taxable and Nontaxable Income)
• Meals and lodging for the convenience of your employer
• Compensatory damages awarded for physical injury or physical sickness
• Welfare benefits
• Cash rebates from a dealer or manufacturer

Some income may be taxable under certain circumstances, but not taxable in other situations. Examples of items that may or may not be included in your taxable income are:

• Life insurance If you surrender a life insurance policy for cash, you must include in income any proceeds that are more than the cost of the life insurance policy. Life insurance proceeds, which were paid to you because of the insured person’s death, are generally not taxable unless the policy was turned over to you for a price.
• Scholarship or fellowship grant If you are a candidate for a degree, you can exclude from income amounts you receive as a qualified scholarship or fellowship. Amounts used for room and board do not qualify for the exclusion.
• Non-cash income Taxable income may be in a form other than cash. One example of this is bartering, which is an exchange of property or services. The fair market value of goods and services exchanged is fully taxable and must be included as income on Form 1040 of both parties.

All other items—including income such as wages, salaries, tips and unemployment compensation — are fully taxable and must be included in your income unless it is specifically excluded by law.

These examples are not all-inclusive. For more information, see Publication 525, Taxable and Nontaxable Income, which can be obtained at the IRS.gov website or by calling the IRS at 800-TAX-FORM (800-829-3676).


Link: IRS Publication 525, Taxable and Nontaxable Income

2011 Tax Law Changes

Tax Law Changes for 2011 Federal Tax Returns

Before you file your 2011 federal income tax return in 2012, you should be aware of a few important tax changes that took effect in 2011. Check www.IRS.gov before you file for updates on any new legislation that may affect your tax return.

Due date of return. File your federal tax return by April 17, 2012. The due date is April 17, instead of April 15, because April 15 is a Sunday and April 16 is the Emancipation Day holiday in the District of Columbia.

New forms. In most cases, you must report your capital gains and losses on the new Form 8949, Sales and Other Dispositions of Capital Assets. Then, you report certain totals from that form on Schedule D (Form 1040). If you had foreign financial assets in 2011, you may have to file the new Form 8938, Statement of Foreign Financial Assets, with your return.

Standard mileage rates. The 2011 rates for mileage are different for January 1 through June 30 than for July 1 through December 31. For business use of your car, you can deduct 51 cents a mile for miles driven the first half of the year and 55 ½ cents for the second half. Medical and moving mileage are both 19 cents per mile for the early half of the year and 23 ½ cents in the latter half.

Standard deduction and exemptions increased.

• The standard deduction increased for some taxpayers who do not itemize deductions on IRS Schedule A (Form 1040). The amount depends on your filing status.
• The amount you can deduct for each exemption has increased $50 to $3,700 for 2011.

Self-employed health insurance deduction. This deduction is no longer allowed on Schedule SE (Form 1040), but you can still take it on Form 1040, line 29.

Alternative minimum tax (AMT) exemption amount increased. The AMT exemption amount has increased to $48,450 ($74,450 if married filing jointly or a qualifying widow(er); $37,225 if married filing separately).

Health savings accounts (HSAs) and Archer MSAs. The additional tax on distributions from HSAs and Archer MSAs not used for qualified medical expenses increased to 20 percent. Beginning in 2011, only prescribed drugs or insulin are qualified medical expenses.

Roth IRAs. If you converted or rolled over an amount from a traditional IRA to a Roth IRA or designated Roth in 2010 and did not elect to report the taxable amount on your 2010 return, you generally must report half of it on your 2011 return and the rest on your 2012 return.

Alternative motor vehicle credit. You can claim the alternative motor vehicle credit for a 2011 purchase only if the vehicle is a new fuel cell motor vehicle.

First-time homebuyer credit. The credit expired for most taxpayers for 2011. Some military personnel and members of the intelligence community can still claim the credit in 2011 for qualified purchases.

Health coverage tax credit. Recent legislation changed the amount of this credit, which pays qualified health insurance premiums for eligible individuals and their families. Participants who received the 65 percent tax credit in any month from March to December 2011 may claim an additional 7.5 percent retroactive credit when they file their 2011 tax return.

Mailing a return. The IRS changed the filing location for several areas. If you're mailing a paper return, see the Form 1040 instructions for the correct address.

Detailed information on these changes can be found on the IRS website – www.irs.gov.

Tax Credit for Hiring Vets

IRS Releases Guidance on How to Claim Expanded Veterans Tax Credit; Certification Requirements Streamlined

WASHINGTON — The IRS today released the guidance and forms that employers can use to claim the newly-expanded tax credit for hiring veterans. The IRS also announced that employers will have more time to file the required certification form for employees hired on or after November 22, 2011, and before May 22, 2012. The VOW to Hire Heroes Act of 2011, enacted Nov. 21, 2011, provides an expanded Work Opportunity Tax Credit (WOTC) to businesses that hire eligible unemployed veterans and for the first time also makes the credit available to certain tax-exempt organizations.

The credit can be as high as $9,600 per veteran for for-profit employers or up to $6,240 for tax-exempt organizations. The amount of the credit depends on a number of factors, including the length of the veteran’s unemployment before hire, hours a veteran works and the amount of first-year wages paid. Employers who hire veterans with service-related disabilities may be eligible for the maximum credit.

Normally, an eligible employer must file Form 8850 with the state workforce agency within 28 days after the eligible worker begins work. But according to today’s guidance, employers have until June 19, 2012, to complete and file this newly-revised form for veterans hired on or after Nov. 22, 2011, and before May 22, 2012. The 28-day rule will again apply to eligible veterans hired on or after May 22, 2012.

In an effort to streamline the certification requirements, IRS today clarified and expanded upon 2002 guidance to facilitate employers’ use of electronic signatures when gathering the Form 8850 for transmission to state workforce agencies. The guidance confirms that employers can transmit the Form 8850 electronically, and also allows employers to transmit the Form 8850 via fax, subject to the ability of the state workforce agencies to accept submissions in those formats. The IRS expects the Department of Labor to issue further guidance to the state workforce agencies providing further clarification.

Notice 2012-13, posted today on IRS.gov, and the instructions for Form 8850 provide further details.

Businesses claim the credit on their income tax return. The credit is first figured on Form 5884 and then becomes a part of the general business credit claimed on Form 3800.

This credit is also available to certain tax-exempt organizations by filing Form 5884-C. The guidance released today also provides instructions and a new set of forms for tax-exempt organizations to claim the credit. For more information, including how to claim the credit, go to IRS.gov.

New Capital Gain/Loss Reporting Requirements Will Increase Tax Preparation Fees

Eight Facts about New IRS Form 8949 and Schedule D

The IRS has a new form taxpayers must use to report most capital gains and losses from transactions relating to investment property. In previous years, these transactions would have been reported on your IRS Schedule D or D-1, but for tax year 2011, use Form 8949, Sales and Other Dispositions of Capital Assets.

Here are eight important points about the new Form 8949 and IRS Schedule D, Capital Gains and Losses:

1. Short-term capital gains or losses (assets held for one year or less) are now reported on Part I of Form 8949.

2. Long-term capital gains or losses (assets held for more than one year) are now reported on Part II of Form 8949.

3. Fill out Form 8949 before you fill out line 1, 2, 3, 8, 9 or 10 of Schedule D.

4. Most property you own and use for personal purposes, pleasure or investment is a capital asset. Use Form 8949 to report the sale or exchange of a capital asset you are not reporting on another form or schedule (such as Form 6252 or 8824).

5. At the top of each Form 8949 you file, you'll need to check box A, B or C, based on what is indicated in box 3 of the Form 1099-B or substitute statement.

• Check box A if your broker reported the transaction to you and the basis of the securities sold also was reported to the IRS
• Check box B if the transaction was reported to you but box 3 of the Form 1099-B is blank or your statement says the basis was not reported to the IRS.
• Check box C for all other transactions.

6. If you have a lot of transactions, use as many Forms 8949 as necessary to report all of them, but make sure that each Form 8949 includes only the type of transactions described in the text for the box you checked (A, B or C).

7. The reporting of certain transactions has changed. If you have to adjust your gain or loss, you may have to enter a code in column (b) and an adjustment in column (g). For details, see the 2011 Instructions for Schedule D (and Form 8949).

8. For 2011 transactions, Schedule D-1 is no longer in use. Form 8949 replaces it.

High Levels of Unemployment Among College Grads Creating Debt Problems

Student loan debt overload will be next financial crisis, survey says
People with large student-loan debts are increasing their inquiries about bankruptcy, a survey finds, prompting bankruptcy attorneys to predict that the next financial crisis will be triggered by defaults on student loans. The National Association of Consumer Bankruptcy Attorneys survey found that 81% of the bankruptcy attorneys polled said such clients have increased "significantly" or "somewhat" in the past three to four years. Ninety-five percent said few of the debtors have any chance of obtaining a discharge. Accounting Today (2/9)     

Tips if You've Had a Name Change

Five Tips for Recently Married or Divorced Taxpayers with a Name Change

If you changed your name after a recent marriage or divorce, the IRS reminds you to take the necessary steps to ensure the name on your tax return matches the name registered with the Social Security Administration. A mismatch between the name shown on your tax return and the SSA records can cause problems in the processing of your return and may even delay your refund.

Here are five tips from the IRS for recently married or divorced taxpayers who have a name change.

1. f you took your spouse’s last name -- or if you hyphenated your last names, you may run into complications if you don’t notify the SSA. When newlyweds file a tax return using their new last names, IRS computers can’t match the new name with their Social Security number.

2. If you recently divorced and changed back to your previous last name, you’ll also need to notify the SSA of this name change.

I3. nforming the SSA of a name change is easy. Simply file a Form SS-5, Application for a Social Security Card, at your local SSA office or by mail and provide a recently issued document as proof of your legal name change.

4. Form SS-5 is available on SSA’s website at http://www.socialsecurity.gov/, by calling 800-772-1213 or at local offices. Your new card will have the same number as your previous card, but will show your new name.

5. If you adopted your spouse’s children after getting married and their names changed, you'll need to update their names with SSA too. For adopted children without SSNs, the parents can apply for an Adoption Taxpayer Identification Number – or ATIN – by filing Form W-7A, Application for Taxpayer Identification Number for Pending U.S. Adoptions with the IRS. The ATIN is a temporary number used in place of an SSN on the tax return. Form W-7A is available on the IRS.gov website or by calling 800-TAX-FORM (800-829-3676).

Repaying 2008 Homebuyer Credit

New Tool Available on IRS Website to Help Taxpayers Who Have to Repay Their First-Time Homebuyer Credit

The IRS has a tool to help people who have to repay their First-Time Homebuyer Credit. Reminder letters will no longer be mailed to taxpayers who have to repay the credit but you can now use an online lookup tool on the IRS website to check your repayment obligation. The following four tips will help you look up information on your First-Time Homebuyer Credit:

1. Who needs to repay the credit? If you bought a home in 2008 and claimed the First-Time Homebuyer Credit, the credit is similar to a no-interest loan and must be repaid in 15 equal annual installments that began with your 2010 return. Also, anyone who sold their home, or stopped using it as their main home, may have to repay the entire credit whether their home was purchased in 2008, 2009 or 2010.

2. Information needed to access the tool The First-Time Homebuyer Credit Tool will provide critical account information to help you report your repayment obligation on your tax return. To access the tool you will need: your Social Security number, date of birth and complete address. If you file a joint return, you’ll only be able to access your portion of the First-Time Homebuyer Credit account information.

3. What the tool provides The tool will show the original amount of the credit, annual repayment amounts, total amount paid and the total balance left to be paid. You will be able to print your account page to share with your tax preparer and keep for your records.

4. How to repay the credit To repay the First-Time Homebuyer Credit, add the amount you have to repay to any other tax you owe on your federal tax return. This could result in an additional tax owed or a reduced refund. To repay the credit, you report the repayment on line 59b on Form 1040, U.S. Individual Income Tax Return. If you make an installment payment, you do not need to attach Form 5405, First-Time Homebuyer Credit and Repayment of the Credit, to your tax return. However, if you are repaying the credit because the home stopped being your main home, you must attach Form 5405.

You can access the First-Time Homebuyer Credit Lookup Tool, 24 hours a day, seven days a week, visit the IRS.gov website

2012 Federal Deficit and Unemployment Projections

CBO predicts higher deficit, unemployment than forecast earlier
The Congressional Budget Office expects the federal budget deficit to rise to $1.08 trillion this year, up from the $973 billion it had forecast in August. The CBO also expects unemployment to increase to 8.9% by year-end, and to 9.2% next year. The new forecast is based on weaker-than-expected economic growth, lower corporate tax revenue and the extension of the payroll-tax cut. The Hill (1/31)     

Recovery Lags Other Recessions

Outside the Box Archives | Email alerts

Jan. 27, 2012, 2:48 p.m. EST

Economic recovery is still threatened

Commentary: Tax cut, jobless benefits needed to support consumers

By Adam Hersh

WASHINGTON (MarketWatch) — The U.S. economy picked up speed in the last quarter of 2011, but it is still hung over from the 2000s’ real-estate-bubble-driven economy, according to data released today by the Bureau of Economic Analysis. With our economic recovery still facing numerous risks, policy makers should continue soon-to-expire payroll tax cuts and unemployment insurance benefits to sustain growth momentum.

In the final quarter of 2011, U.S. gross domestic product, or GDP — the measure of all goods and services produced by workers and property in the United States — expanded at 2.8% annualized rate and now stands $96 billion larger than before the start of the recession four years earlier.

This marks the 10th consecutive quarter of economic expansion and the best growth performance for the U.S. economy since the height of the Recovery Act in early 2010. Read MarketWatch’s full coverage: Economy expands 2.8% in fourth quarter.

But beneath the surface of today’s headline growth figure, middle-class and low-income families’ financial stress, residual real estate weakness, and government fiscal contraction are taking a toll. Our economic health is much more fragile than the fourth-quarter growth suggests, and what drove growth this quarter is unlikely to sustain moving forward.

U.S. GDP rises 2.8%

The U.S. economy grew at its fastest pace in more than a year and a half in the final three months of 2011, rising at an annual rate of 2.8%. Kathleen Madigan reports on the Markets Hub.

Consider that nearly two-thirds of the overall increase in GDP was driven by businesses restocking their inventories after depleting them earlier in the year. The next-largest contributor to growth in the fourth quarter came from households, who cut back on saving in order to spend more on consumer goods.

But with household indebtedness exceeding 114% of after-tax income, consumers will eventually be forced to boost saving and reduce consumption. Cutbacks on public investments and services are likely to further reduce demand at present and along with that the foundation of longer-term private sector growth.

There are also some bigger picture concerns. Comparing the experience of consumption and investment through the current business cycle with the experience on average in previous post-World War II recessions makes clear that the post-bubble debt-overhang we now face distinguishes this recovery from most others. (See the charts at the top of this article.)

It’s true that consumer spending by households, the single-largest component of the U.S. economy, increased at a 2% rate in the past quarter. It’s now up 1.5% over pre-recession levels. But compared to previous recessions, the recovery of household consumption looks markedly weak. At this point in past business cycles, consumption on average had increased nearly 14%.

And the slow growth of consumption actually understates the financial stress faced by households: Despite growing in aggregate, personal consumption is actually 1.4% lower on a per-capita basis than four years ago. Without critical social safety net programs, it would be even lower.

The persistently weak residential real estate market is further adding to the financial stress on families. Whereas in typical recessions residential investment tends to lead the recovery, up 23% on average at this point in the business cycle, at present it is languishing more than 45% below its pre-recession level. With home prices yet to stabilize in most regions, owners coping with overvalued mortgage payments, and one in eight mortgages in foreclosure or delinquency, resolving weakness and uncertainty in the real estate market are central to boosting both household consumption and residential investment.

The economy is clearly not working for all Americans, either, with 13 million unemployed workers and countless middle-class and low-income families struggling financially. The gap left in consumer demand by financially stressed families is restraining private business growth and investment, as well. For a time, the Recovery Act and related increased public investment, services, and tax cuts helped fill the hole in demand. But in each of the past four quarters government fiscal contraction slowed economic growth by more than half a percentage point on average.

Small-business owners surveyed by the National Federation of Independent Businesses reported “poor sales” (i.e., lack of demand) as their number one problem for the past 40 months. With uncertain prospects for expanding sales, business investment, too, is far behind the pace of previous economic recoveries. Investment in equipment and software grew incredibly through late 2009 and much of 2010 in concert with Recovery Act investments and tax incentives, but slowed to 5.2% growth at the end of 2011, primarily in information technologies. Four years later, equipment investment is 3% above its pre-recession level, but it’s more than 12% behind the pace of previous recoveries. Insufficient demand also constrains business investment in commercial real estate and factories, which is down 35% since the start of the recession.

In addition to weak demand that hampers growth, numerous risks on the world economic horizon — Europe’s simmering banking crisis, slowing growth in China, and potential oil price volatility — threaten to blow headwinds against the still-fragile growth in 2012.

But perhaps the biggest threat to growth remains the home-grown risk of self-inflicted damage from continued political intransigence in Congress. American businesses, and the middle-class consumers on which they rely, will take a big hit if Congress fails to continue unemployment insurance benefits and payroll tax cuts for all working Americans, both set to expire in February.

Keeping this money in the pockets of consumers will help families to continue meeting their needs and give certainty to businesses about where their next sale will come from so they will hire and invest more.

Adam S. Hersh is an economist at the Center for American Progress,

Independent Contractor or Employee? IRS and Dept of Labor to Share Data

Worker Classification Issues on Washington Agenda DC CURRENTS

by Benson S. Goldstein, J.D.

Published January 01, 2012

Worker classification issues have become a major tax administration focus in our nation’s capital over the past few months. First, on September 21, 2011, the IRS issued Announcement 2011-64 establishing a new voluntary classification settlement program (VCSP) “that provides partial relief from federal employment taxes for eligible taxpayers that agree to prospectively treat workers as employees.” Second, in the same month, the IRS and the Department of Labor (DOL) signed a memorandum of understanding (MOU) to share information regarding employee “misclassification.” And should those actions not prove sufficient, President Barack Obama included a worker classification provision in the September 2011 release of his plan “Living Within Our Means and Investing in the Future: The President’s Plan for Economic Growth and Deficit Reduction.”
Worker classification cases have been a significant bone of contention for the IRS for decades. Businesses that hire workers as independent contractors save money on federal employment taxes, and the independent contractors may view themselves as “entrepreneurial” small-business persons. Determining whether a worker should be treated as an employee or as an independent contractor depends upon a facts-and-circumstances test revolving around a common-law test of whether the service recipient has the right to direct and control how the worker performs the services provided.
IRS revenue agents often take the position that these workers are misclassified and that a business utilizing the skills of these workers owes a large federal employment tax bill. Sometimes the IRS wins such cases against business taxpayers based on the common law; under other circumstances, the Service finds itself stymied from pursuing a case due to Section 530 of the Revenue Act of 1978.
Robert W. Wood, a California attorney, calls Section 530 “a veritable get-out-of-jail-free card that forgives many instances of worker misclassification” (Wood, “Independent Contractor or Employee? The 100-Year War,” 132 Tax Notes 199 (July 11, 2011)). As long as a taxpayer has a reasonable basis for treating a worker as an independent contractor, Section 530 may permit the worker to be treated as a nonemployee.
Under the VCSP, taxpayers may voluntarily reclassify workers as employees for federal employment tax purposes and obtain relief similar to that offered under the current classification settlement program (CSP). To be eligible for the VCSP, the taxpayer must:

• Have consistently treated its workers in the past as nonemployees;
• Have filed all required Forms 1099 for the workers for the past three years; and
• Not currently be under audit by the IRS, the DOL, or a state agency concerning worker classification matters.

If an entity is interested in applying for the VCSP, the taxpayer should complete Form 8952, Application for Voluntary Classification Settlement Program, at least 60 days before it wants to start treating the workers as employees. Employers accepted into the VCSP will pay an amount effectively equal to 10% of the employment tax liability due on compensation paid to the reclassified workers for the past year. (For more information on the VCSP, see the IRS website.)
Under the September 19 MOU, the DOL’s Wage and Hour Division will share information or data with the IRS related to DOL investigations involving employment tax compliance. In return, the IRS will (1) evaluate and classify employment tax referrals provided by the DOL and conduct employment tax examinations if appropriate; (2) share (when consistent with applicable federal laws) the DOL’s employment tax referrals with state and municipal taxing agencies if approved information-sharing agreements are in place; and (3) share with the DOL annual reports and aggregate data relating to trends in misclassification in a manner that protects return information and taxpayer identities. Both agencies mutually agree to share training materials and participate in joint public outreach events. (For more on the MOU, see this month's Tax Clinic.)
President Obama’s jobs plan for economic growth and deficit reduction, mentioned above, includes a provision that would permit the IRS to (1) issue regulations or other guidance addressing the “proper” classification of workers and (2) require the prospective reclassification of workers who are currently considered misclassified and whose reclassification would otherwise be prohibited under Section 530. The plan would waive penalties for service recipients with a small number of employees and a small number of misclassified workers, if the service recipient has consistently filed all required information returns for its workers and has agreed to prospective reclassification of the workers to employee status.
The only certainty in all this is that the IRS will continue to offer its classification settlement program to businesses that it believes are misclassifying workers as independent contractors. With respect to congressional action on the president’s jobs plan or even a separate worker reclassification bill, the chances of passage during 2012 are unclear, given the upcoming national election and the fact that the Senate is controlled by the Democrats and the House of Representatives is in Republican hands.

EditorNotes

Benson Goldstein is senior technical manager (taxation) at the AICPA in Washington, DC, and is staff liaison to the AICPA’s IRS Practice and Procedures Committee. For more information about this column, contact Mr. Goldstein at bgoldstein@aicpa.org.

Handling IRS Requests of Quickbook Data Files

Handling IRS requests for accounting software backup data
Internal Revenue Service agents have begun requesting backup files from taxpayers' accounting software during examinations. Practitioners need to understand the scope of the IRS's authority to make these requests and how to help clients provide the necessary data, but not more information than is required. Journal of Accountancy (1/2012)