Harless Tax Blog
Recent tornadoes and massive flooding in the western United States have caused not only major property damage to personal possessions but to many businesses as well. Additionally, June 1st marks the beginning of Hurricane season; therefore, having a plan for business and personal data and record access is an important part of being prepared. Below are some simple steps that can help taxpayers and businesses protect financial and tax records in case of disasters. The IRS also offers a video on their website www.irs.gov “Preparing for a Disaster”
- Take Advantage of Paperless Record keeping for Financial and Tax Records
Don’t rely on your tax preparer to have your current documents. If you are not already receiving bank statements and documents by e-mail, you want to sign up for this service. Electronic format is an excellent method of securing financial documents. Other important tax records such as W-2s, tax returns and other paper documents should be scanned onto an electronic format and saved on a thumb (or jump) drive for portability. Many software companies offer excellent scanning and record retention software.
Be sure to keep a backup copy of your data and store it in a save place such as a safety deposit box or on the cloud. You want this data to be stored away from your home or office because in the advent of a natural disaster, backup data would be destroyed if the office or home were destroyed; therefore, convenience of access to the data is NOT of primary importance.
- Document Valuables and Business Equipment
Avail yourself of other IRS resources such as their disaster loss workbooks for individuals ( Publication 584, Casualty, Disaster, and Theft Loss Workbook) and businesses ( Publication 584-B, Business Casualty, Disaster, and Theft Loss Workbook) that will help you gather a detailed listing of belongings and also calculate their fair market value (FMV). It is also important to write the serial numbers of items as well as taking a photo. The list and photos will help with any potential insurance claim. Once again, store this information away from your home or business.
- Check on Fiduciary Bonds
If you are an employer that uses a payroll service provider you should ask if the provider has a fiduciary bond in place that could help you as the employer if the provider defaults on a payroll.
- Continuity of Operations Planning for Businesses
The planning done today will determine how quickly your company can get back to business after a disaster. It is never too early to start planning so you can improve the likelihood that your company will survive and recover. Review your emergency plans annually and update them as needed because your business preparedness needs change over time just as your business changes over time.
- The following is a list of preparedness strategies that can be applied to all types of disasters.
- Get informed about hazards and emergencies and learn what to do for specific hazards.
- Develop an emergency plan.
- Learn where to seek shelter from all types of hazards.
- Back up your computer data systems regularly.
- Decide how you will communicate with employees, customers and others.
- Use cell phones, walkie-talkies, or other devices that do not rely on electricity as a backup to your telecommunications system.
- Collect and assemble a disaster supplies kit. Include a portable generator.
- Identify the community warning systems and evacuation routes.
- Include required information from community and school plans.
- Practice and maintain your plan.
- Make sure you have a means of receiving severe weather information; if you have a NOAA Weather Radio, put fresh batteries in it.
- Additional resources available from IRS
Immediately after a casualty, you can request a copy of a return and all attachments (including Form W-2) by using Form 4506, Request for Copy of Tax Return (PDF).
If you just need information from your return, you can order a transcript by calling (800) 829-1040 or using Form 4506-T, Request for Transcript of Tax Return (PDF). There is no fee for a transcript. Transcripts are available for the current year and returns processed in the three prior years. IRS.gov is an indispensable resource as you prepare for and recover from disaster.
Q. I just read an article that said I should report a major life change to the Health Insurance Marketplace. What qualifies as a major life change and how do I report it?
A. Take a close look at the list below:
If you answered yes to any of these questions, you are expecting or have had a major life change and these changes should be reported as soon as possible to the Health Insurance Marketplace because any and all of these changes will impact the amount of coverage or savings you are qualified to receive.
You can report the changes in one of two ways, either by phone or online. To report a change by phone call 1-800-318-2596 and to make the change online, visit www.healthcare.gov and log into your existing account and use the menu list on the left side of the page. You can even upload documents, if necessary. DO NOT REPORT THE CHANGE BY MAIL.
Have another question or need clarification on a different tax topic? Contact us via email and one of our CPAs will respond to you within 24 hours.
Do you have foreign assets or foreign earned income? If so, you may have a tax liability to the United States, regardless of whether or not you are a US citizen, a resident alien, maintain dual citizenship, or lived and worked overseas all or part of last year.
U. S. citizens and resident aliens are required to report income from ALL world-wide sources to the Internal Revenue Service including income from foreign trusts, banks and securities accounts; although, only part or perhaps none of the income is taxable.
Additionally, the Financial Crimes Enforcement Network (FINCEN) requires any taxpayer with signature authority or other authority over a foreign bank account(s) that total more than $10,000 (USD) ON ANY GIVEN DAY to file form 114 which reports these assets. The deadline to file this form is June 30th and the form must be filed electronically.
If you would like more information regarding the filing requirements concerning foreign assets, foreign earned income, or foreign income exclusion, please contact us and one of our CPAs will respond to you within 24 hours.
by Kathy Nelson
Breaking News!On April 29, 2015, the Senate Finance Committee approved three changes that improve and extend 529 College Savings Plans. The House of Representatives approved a similar bill on February 25, 2015.
- Computers are now considered qualified expenses.
- Distributions-To-Date Calculations are no longer required of Plan Administrators.
- Refunds from a college or university to a student that arise because the student had to withdraw from school because of illness or other reasons are no longer taxable nor are they subject to a 10% penalty as they were in the past.
The top-earning 1 percent of Americans will pay nearly half of the federal income taxes for 2014, the largest share in at least three years, according to a study.
According to a projection from the non-partisan Tax Policy Center, the top 1 percent of Americans will pay 45.7 percent of the individual income taxes in 2014—up from 43 percent in 2013 and 40 percent in 2012 (the oldest period available).
The bottom 80 percent of Americans are expected to pay 15 percent of all federal income taxes in 2014, according to the study. The bottom 60 percent are expected to pay less than 2 percent of federal income taxes.
While the top 1 percent pay a larger share of taxes, they also earn an outsized share of income. According to the Tax Policy Center, they earned 17 percent of expanded cash income in 2014. (Some studies have given higher estimates for this group's share of income depending on their different definitions of income.)
The high share of taxes paid by one-percenters is due partly to their share of income, but also to the progressive tax code, in which higher earners generally pay higher rates. The one percenters' share of taxes is 2.7 times their share of income in taxes.
There is no comparable historical data for the one-percenter tax payments prior to 2012. Yet the Congressional Budget Office, using a different calculation than the Tax Policy Center, found that the share of federal taxes paid by the top 1 percent of earners has increased dramatically since 1979 as the one-percenter's share of earnings has also gone up.
In 1979, the top one percenters earned 8.9 percent of pretax income and paid 18 percent of federal income taxes. In 2011, the top 1 percent earned 14.6 percent of income and paid 25.4 percent in 2011 of federal income taxes.
The CBO said that the average federal income tax rate paid by the top 1 percent has also dropped since 1979—falling from 22.7 percent in 1979 to 20.3 percent in 2011.
Steering clear of the audit trail
For many a taxpayer, an IRS audit conjures up images of the accused being grilled under hot lights by an angry government official. In reality, it's usually not that bad, but it's still something to be avoided at all costs if possible. [Source: CNBC]
Fortunately, the IRS audit process—highly exaggerated to begin with—clearly became more benign following a 1998 reform that emphasized taxpayer rights. Audits declined after 1998, then climbed a bit before the financial crisis.
In any event, no one wants to be challenged to justify an obscure line in the 1040 that can be so confusing even the most honest taxpayer can get something wrong. And taxpayers often face unfamiliar issues that raise their audit risk. For example, for the first time this year, millions will have to take into account subsidies they received under the Affordable Care Act, or Obamacare.
So with the April 15 filing deadline bearing down on us, here are eight keys to avoiding an audit.
1. Do the math, carefully.
While you may have heard of the perils of claiming a home office or deducting expenses on a rental property, most audits involve mundane matters.
"Math errors are always on top of the list," said Cindy Hockenberry, manager of the Tax Knowledge Center of the National Association of Tax Professionals. Another common audit trigger is a space on the return that was mistakenly left blank, she said.
2. Get that goodwill receipt—and keep it.
Charitable donations are a frequent IRS concern, according to tax experts, because many people fail to obtain the required documentation furnished by the charity.
"Regardless of the amount of the charitable contribution—it could be a dollar in a red bucket last Christmastime—you need to have some sort of receipt" for any contribution that is claimed, Hockenberry said.
3. Double-check the most obvious numbers (think SS#).
"The most common things [triggering IRS inquiries] are simple mistakes, like a Social Security number that doesn't match the name in the Social Security database, or a column of numbers that simply doesn't add up," said Mark Luscombe, principal federal tax analyst for Wolters Kluwer Tax & Accounting US.
Another common audit trigger is a figure in the return that does not match one on a form the IRS received from another source, like the W-2 income form from the employer or a 1099 from the bank, brokerage or mutual fund company, said Greg Rosica, one of the authors of "The Ernst & Young Tax Guide for 2015." Even casino winnings are reported to the IRS, he noted.
Rosica urges filers to reduce the chance of errors by leaving plenty of time to fill out the return, including a day or so to set it aside before taking a fresh look prior to filing.
4. Expect to be more closely watched if you've got a big income.
People with big incomes are more likely to be audited than people with small ones, Luscombe said. The IRS is likely to inquire if a taxpayer claims as a dependent someone who is not eligible. They also often check to see if the taxpayer files a return, if required, for the alternative minimum tax.
That said, you might have another unexpected friend in the government (Congress), and you probably aren't the one with the really big income: that would be a corporation.
"Now we're in a period where Congress is sort of mad at the IRS over various things and is restricting their budget, causing audit rates to somewhat decline again," Luscombe said.
Hockenberry said that as a result, the agency has concluded it "gets more bang for the buck going after businesses."
5. Dont forget: Life-changing events can also change your tax status.
Errors creep into returns after taxpayers have a life-changing event that alters their filing status. "Whether you had a baby, got married or divorced or bought a house, all those things have implications for the tax return," Rosica said.
6. Don't think the IRS will be too busy to miss Obamacare scofflaws.
Because 2014 was the first year for Obamacare, many taxpayers may find the filing requirements confusing. While a federal health insurance subsidy may not be taxable, some large subsidies must be paid back. The numbers must be properly reported on Form 8962, said Jackie Perlman, principal tax research analyst at H&R Block's Tax Institute.
"You do need to do it, and if
you try to send your return in without that form, you will hear from the
IRS and your return will be held up," she said. Another new form, 8965,
is used to claim an exemption from the health insurance mandate.
7. Never rely on logic when making claims.
Because tax rules are often the product of haggling in Congress, it's dangerous to rely on logic when filling out the return. Since many business expenses are deductible, for instance, it may seem logical to claim commuting expenses, Perlman said. But for ordinary taxpayers, commuting costs are not deductible.
8. Don't think you'll get away with fudging "little" numbers.
Aside from the Obamacare requirements, ordinary individual taxpayers face no dramatic changes in filing requirements this year, experts say, and the odds of being audited are small. "I would say, on the whole it's a minor worry, unless you have something very unusual" in the return, Luscombe said.
But tax experts still advise against any attempt to fudge your numbers thinking the risk of an audit is small. "Sometimes that's called 'playing the audit lottery game,' and it's not a good game to play," Perlman said.
Keep in mind that the following will always attract the attention of the IRS:
- Failing to report all income.
- Failing to report payments to household help.
- Failing to report large gifts.
- Exaggerating business expenses.
- Not paying tax on income earned abroad.
A limited liability company has become the
entity of choice for many businesses throughout the United States for
tax and liability purposes, but many of the operating agreements
governing LLCs could have significant defects.
According to the Uniform Law Commission, which recommends proposed legislation that can be adopted in whole or in part by states and other jurisdictions, there are more LLCs being formed than corporations throughout the United States. The ULC found that every state has adopted some type of LLC legislation.
However, the existing state LLC statutes are far from uniform, according to the ULC. Many state LLC statutes have been amended on a patchwork basis and have not kept up with LLC cases and other legal developments.
One of the most important documents governing the rules involving the operations of an LLC is the operating agreement. An operating agreement is a written agreement of the members of the LLC that covers the rules regarding the operation of the LLC. It includes many items, including the rights, limitations and responsibilities of members and managers.
An operating agreement should be as specific as possible. To the extent agreed upon by the LLC members, it should cover issues such as:
1. What happens when a member dies;
2. What happens when a member becomes permanently disabled;
3. What happens when a member becomes legally incompetent;
4. What happens when a member voluntarily withdraws;
5. What happens when there is an involuntary withdrawal of a member;
6. Whether or not a member may transfer his/her membership interest by gift, assignment or bequest;
7. Whether or not a member may transfer his/her economic interest by gift, assignment or bequest; and
8. Whether or not a member may sell his/her membership interest.
If the operating agreement does not cover a particular issue, then the limited liability law of the particular jurisdiction is triggered. In essence the limited liability statute is for the most part a default statute.
A member’s interest in an LLC has two parts:
1. Economic interest: the right to receive distributions from the LLC and allocations of profits and losses.
2. Management interest: the right to vote and participate in the management of the LLC.
LLC Problem Areas
Many operating agreements for LLCs were done many years ago and may not have been amended to bring them up to date.
I have reviewed over 100 operating agreements for New York LLCs in the last four years and found that most of them have serious defects. The accountants who were involved in the estate planning for their clients who were members of these New York LLCs assumed that the operating agreements were well constructed. In fact the operating agreements were a disaster.
The accountants failed to read the operating agreements for their substantial clients who were members of these New York LLCs. The operating agreements in many cases either precluded bequests of membership interests to spouses or did not provide for bequests of membership interests to heirs or trusts for heirs.
In the event that an operating agreement is silent on what happens when a member dies, then the LLC statute of the jurisdiction must be looked at. For example, if a New York operating agreement is silent on what happens if a member dies, then legal headaches are triggered under the New York Limited Liability Act.
Under New York law, the default statute is Section 608 of the New York LLC Act. Section 608 covers powers of estate of a deceased or incompetent member and provides as follows:
“If a member who is a natural person dies or a court of competent jurisdiction adjudges him or her to be incompetent to manage his or her property, the member’s executor, administrator, guardian, conservator or other legal representative may exercise all of the member’s rights for purposes of settling his or her estate or administering his or her property, including any power under the operating agreement of an assignee to become a member. If a member is a corporation, trust or other entity and is dissolved or terminated, the powers of that member may be exercised by its legal representative or successor.”
On the death of a member of a New York LLC, he or she is no longer a member. The legal representative of his or her estate must then settle his or her estate regarding the disposition of the decedent’s former membership interest in the New York LLC. If the operating agreement does not permit a bequest of the deceased member’s economic interest or the decedent’s membership interest, then the legal representative must look to the estate’s rights under the operating agreement regarding the value of the deceased member’s interest.
If no provisions are provided for regarding the estate’s rights, then Section 608 is applicable. In that case, the legal representative of the estate of the deceased member would attempt to work out a settlement with the LLC.
In any event the economic rights of the decedent’s membership interest should survive the death of the deceased member in the absence of any contrary provisions in the operating agreement. The management interests do not generally survive the deceased member’s interest unless the operating agreement permits it.
If the surviving LLC members initially held minority membership interests, then they would now control the LLC after the death of the majority member. This would happen if the operating agreement failed to adequately protect the deceased member’s interest.
The Uniform Law Commission drafted a Revised Uniform Limited Liability Company Act in 2006 to help clarify many open issues including fiduciary issues involving LLCs. Further amendments were made by the ULC in 2011 and 2013. The ULC recommends that all jurisdictions consider adopting the suggested changes.
A number of jurisdictions have enacted some version of the Revised Uniform Limited Liability Company Act. These include: Alabama, California, District of Columbia, Florida, Iowa, Minnesota, Nebraska, New Jersey, South Dakota, Utah and Wyoming.
Other states are considering adopting a Revised Limited Liability Company Act as well.
A number of the New York LLCs have problems with their articles of organization as well. An article of organization is the document that is filed with the department of state in order to form a limited liability company. Unfortunately I have found that the articles of organization for a few LLCs had specific dates of dissolution.
In essence, once that date hits, then technically the LLC protection for that LLC may become an issue. This issue can be fixed by amending the articles of organization to provide for the LLC to continue for the maximum period permitted by law or such other words to that effect.
The accountant for an LLC is in a perfect position to review the operating agreement and articles of organization and to bring any obvious defects in the operating agreement and articles of organization to the attention of the LLC members. This is especially important since the operating agreements of an LLC client and articles of organization may have been prepared many years ago.
This could be a significant value-added benefit to the client as well as increase the accountant’s status as a trusted advisor to the LLC client.
Seymour Goldberg, CPA, MBA, JD, is a senior partner in the law firm of Goldberg & Goldberg, P.C., in Long Island, N.Y., and professor emeritus of law and taxation at Long Island University. He has taught many CLE and CPE programs at the state and national level as well as CLE courses for the New York State Bar Association, City Bar Center for Continuing Legal Education, New Jersey Institute for Continuing Legal Education, local bar associations and law schools. He is a member of the IRS Long Island Tax Practitioner Liaison Committee and the Northeast Pension Liaison Group. He was formerly associated with the Internal Revenue Service and has been involved in conducting continuing education outreach programs with the IRS. He has authored guides for the American Bar Association and the American Institute of CPAs on the trust accounting income and principal rules. His most recent guide in 2014 is entitled, “Can You Trust Your Trust? What You Need to Know About the Advantages and Disadvantages of Trusts and Trust Compliance Issues,” published by the American Bar Association. The guide will also be available through Amazon.com and Barnes & Noble on June 10, 2015
From start to finish, the average taxpayer filing a Form 1040 spends 16 hours on his or her taxes—including eight hours combing through records. Yet despite that scrutiny, you could still be leaving money on the table.
"Sometimes folks just automatically assume their taxes are going to be the same as they were in the prior year," said Melissa Labant, director of tax advocacy for the American Institute of Certified Public Accountants. "That is dangerous." Changes in tax law, changes in your financial situation or a combination of both can mean you're eligible for a host of breaks that you weren't before. [Source: CNBC]
"The one I see that gets overlooked a lot is charitable contributions," said Labant. Consumers usually comb through their checkbook and credit card statements, but can miss cash donations and donations of physical goods. Some companies let workers donate from their paycheck, but that won't show up on your W-2, she said—you'll need to look at your year-end paystub for the total.
And volunteers might not realize they can deduct mileage driven to and from charitable activities, at 14 cents per mile.
The retirement savers credit is a bigger-ticket benefit that often gets passed over. "That's a tax break of up to $1,000, or up to $2,000 if you're married, for making contributions to retirement accounts," said Labant. Taxpayers just starting out don't often know about it, and so miss out. Others don't even consider the break due to its low income threshold—single filers making more than $30,500 and married filing jointly making more than $61,000 don't qualify. But if you were unemployed or retired for part of the year, or had a bad year as a freelancer, your income might have dipped enough to grab at least a partial credit, she said.
Another possible miss? The dependent care credit, which is worth as much as 35 percent of up to $3,000 in qualifying expenses for one child (or other qualifying person); $6,000 for two or more. Most parents know to grab the break for daycare and nanny services, but the IRS also allows some qualifying medical expenses and day camps.
Even after April 15, make sure you're not missing out on other valuable tax breaks for the rest of 2015—namely, pre-tax contributions to an employer-sponsored retirement plan or flexible spending accounts for medical, child care and transit expenses. "That's money left on the table," Labant said.
By Steve Harless, CPA
Of all the things that can be stolen, your identity is probably the most damaging. Identity theft occurs when someone uses your personal information to commit fraud, open accounts or make purchases in your name and brings with it a ripple effect of problems that could take a year or more to sort out. If you have been a victim of identity theft, you will need to repair your credit history and possibly your standing
By The Numbers
- 12 million Americans were victims in 2012.
- Florida has the highest per capita rate of reported identity theft complaints followed by Georgia (Miami-Ft. Lauderdale-#1).
- 1 in 4 people receiving letters regarding a data breach become a victim of identity theft and fraud.
- 32% do not notify the police of their theft.
- The elderly are most susceptible to government benefit fraud and medical identity fraud.
- The highest percentage of victims are between ages 20 and 29 due to their constant use of social
- Mobile security thefts have risen 350% since 2010.
- 68.4% of individuals use the same password for multiple websites.
- The IRS processed $4B in fraudulent refunds for 2012.
- There were 1.2M tax-related identity thefts in 2012 and 1.6M in the first 6 months of 2013.
- The IRS sent 655 refunds to a single address in Lithuania and 343 refunds to a single address in Shanghai in 2012.
Commitment, Caution and Foresight
- Keep all important documents secure, especially your social security card.
- Be mindful of credit card use, keep your card in sight when it is used.
- Secure gadgets and passwords, change regularly and use a unique password on every site.
- Limit the information you use online, especially Facebook, Twitter, and other social media.
- Keep open communication with your bank, inform them when you are traveling.
- Avoid opening unfamiliar links.
- Don’t miss out on your mail, pick up often and hold at post office when traveling.
- Secure your receipts, scan and shred.
- Keep your PIN secure.
- Check your credit report regularly (www.creditkarma.com).
- Don’t share personal information on the phone. The IRS will not call you!
In order to truly recover from identity theft, you must be diligent and take specific steps.
Generate a Report
- Immediately after the discovery of identity theft, create an Identity Theft Affidavit through the Federal Trade Commission (FTC).
- With your completed Affidavit, file a police report.
- Together, your Affidavit and police report form your Identity Theft Report. You will need copies of this report to send to credit agencies and the IRS.
Repair Your Credit Report
- Pull your credit report! (Equifax, Experian and TransUnion). These should be free because you have been the victim of fraud.
- Have the credit reporting agencies place a fraud alert on your file. You will only need to contact one bureau, which will notify the others.
- Write letters disputing each charge and send certified mail with a copy of your credit report highlighting the error. Do this for each error reporting from each agency.
- Request to have information that was the result of the identity theft blocked from your credit report.
- As problems are resolved, obtain a new credit report. Identity theft can have long-running ramifications, so keep up with your credit report regularly.
Contact Lending Institutions that Issued Credit
- Get in touch with the fraud departments at the companies that erroneously authorized credit to the thief in your name.
- Send these companies the same letters and credit report copies.
- Ask the companies to block fraudulent information, and the company will have to stop reporting the fraudulent information and will not be able to sell the debt for collection.
- Request copies of the documents that were fraudulently used to get credit or make changes in your name. This will enable you to have a copy of the fraudulent signature. The company is required to send it to you within 30 days of your request.
Inform the IRS
- As indicated above, tax identity theft is also a problem. In this case, the thief has used a taxpayer’s identity and real or falsified W-2s to file fraudulent returns claiming a refund. You may not know this has happened until you file and find out your refund has already been taken.
- If you think someone has stolen your refund or used your social security number, notify the IRS immediately.
- Fill out the IRS Identity Theft Affidavit, Form 14039.
- When you receive correspondence from the IRS, respond right away.
Restaurants also need to keep a tight control on inventory. It’s recommended that inventory be taken each week or once a month at the least to prevent theft and keep food cost under control. Another opportunity for theft occurs due to cash handling and discounts through the POS (point of sale) system. By using appropriate software like QuickBooks, it is possible to run reports to track all discounts, find out who is running them and create audit reports. Restaurants and retailers also need to keep up with sales tax returns.
Proper reporting of expenses throughout the year will make things simpler when it’s time to file annual tax returns. The type of return depends on what type of legal entity is used for the business, i.e. sole proprietor, Limited Labiality Company, Sub S Corporation, partnership or Regular Corporation. All expenses that are ordinary and necessary for the running of the business are deductable against the business income. There are new regulations coming out dealing with what payments can be deducted as repairs and what must be capitalized and depreciated. Also there are new rules as to how income from credit cards is reported and depending on the size of the business, the effect of the “Obama Care Health law.” These regulations can be confusing at best for small business owners.
Bringing in an outside accounting team means having an outside party keeping a watchful eye on operations. It keeps everyone more honest. The accounting team sets up controls, cash drawer counting methods, daily sales tracking and more, making sure that everything balances throughout the year. These experts will also understand complex issues like which payments can be expensed and what must be capitalized and what are ordinary and necessary business expenses. And this all means that tax reporting each year will become a breeze rather than a tornado.
Steve R. Harless, CPA is the Managing General Partner of Harless & Associates.