Harless Tax Blog

Harless Tax Blog

Why Small Businesses Get Big Benefits from Enlisting Outside Accounting Service

Tuesday, February 03, 2015

By Steve R. Harless, CPA
Small business owners like restaurateurs or retailers set up shop because they love food, clothing, birdhouses or whatever items they happen to carry. These folks do not typically go into business because they harbor a secret desire to spend hours pouring over spreadsheets and filing taxes. Thus, almost any small business owner will find much benefit in working with an outside accounting firm. Not only can the accounting team handle bookkeeping, recommend software and train staff to use it and help with everything from inventory tracking to tax reporting, but working with an outside accounting firm will force internal staff to be more accountable. This could result in avoiding pitfalls like embezzlement, waste and disasters at tax time.

For small business accounting, the easiest and least expensive software is QuickBooks, which is flexible for all types of businesses. For larger businesses, Microsoft Dynamics GP is a good choice. Software training is the next step because a package is only effective when used properly. If you put bad information in, you will get useless information out. Common small business mistakes include not reconciling the bank account or not properly costing the inventory, for example receiving inventory into the system but not selling it through the system. Business owners will often let the bookkeeping slide because truthfully, they hate it. Receipts, paperwork and invoices get thrown into a box and tax time turns into a nightmare.

With the help of a small business accounting firm, ongoing bookkeeping and accounting are handled without fuss, and everything gets easier. By using the software correctly, the business owner will even be able to receive helpful reports that can provide an accurate picture of what is going on with the company financially. They now have a tool to help them manage their business, and this will benefit the bottom line. For example, a restaurant will obtain a true cost of sales for each menu item and learn which ones are actually making the most money.

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IRS Warns of Tax Refund Delays

Thursday, January 15, 2015

The IRS normally issues taxpayer refunds quickly. But this year, some filers are going to have to wait.

Due to budget cuts, people who file paper tax returns could wait an extra week for their refund — "or possibly longer," wrote IRS Commissioner John Koskinen in a memo to employees Tuesday. And filers with errors or questions that require additional review will also face delays. [Source: Money.CNN.com]

Last month, Congress approved a $10.9 billion budget for the IRS for fiscal year 2015, which ends in June. That's the lowest level of funding since 2008, Koskinen said.

Koskinen said the budget cuts would result in several other changes at the agency, including:

Fewer audits. Due to cuts in enforcement staff, collection efforts for individuals and businesses will be reduced.

Hiring freeze. The freeze, plus normal attrition rates, will result in 3,000 to 4,000 fewer full-time employees at the agency by the end of June. Including the headcount losses incurred since 2010, that means the agency's full-time staff will be reduced by as many as 17,000 employees over the course of five years.

Less taxpayer help. Cuts in overtime and temporary staff hours will not only delay refunds, but hurt correspondence with taxpayers as well. Koskinen said it's likely that fewer than half the taxpayers that call the agency will be able to get through.

A possible two-day shutdown after tax season. To minimize disruptions, Koskinen said a temporary shutdown, if needed, would likely occur closer to June. But, he added, the agency will do what it can to avoid this option, which he called a "last resort."

Delays in IT investments. Among the delays, will be technologies that offer new taxpayer protections against identity theft.

Uncertain Future for Expired Tax Provisions and Limited Time Remaining for Lame Duck Action

Tuesday, December 30, 2014

With only a few days remaining on Congress's 2014 legislative calendar, there is still no clear answer for whether and how Congress will deal with the nearly 60 "extender" tax provisions—the temporary provisions that have been routinely extended on a one- or two-year basis but were allowed to expire at the end of 2013.

Many, if not all, of the provisions listed below were most recently extended by the 2012 Taxpayer Relief Act (passed very early in 2013). At that time, the majority of the provisions had expired at the end of 2011 and were revived and retroactively extended by the Act through 2013. [Source: AccountingToday.com]

In this respect, some of the justifications underlying the provisions—such as to encourage certain types of behavior during the tax year—were weaker given the retroactive passage and amounted more to good fortune to those who had happened to engage in such behavior during the 2012 year. Both then and now, the delay hasn't just affected taxpayers' ability to engage in forward-looking tax planning, but has almost certainly influenced actual taxpayer behavior and had economic spillover effects.

Expired provisions. Below are the actual extender provisions in question, arranged by subject matter.

The expired individual extender provisions include:

•    Deduction for state and local sales taxes (Code Sec. 164(b)(5));
•    $250 above-the-line deduction for certain expenses of teachers (Code Sec. 62(a)(2)(D));
•    Above-the-line deduction for qualified tuition and related expenses (Code Sec. 222);
•    Deduction for mortgage insurance premiums treated as qualified interest (Code Sec. 163);
•    Parity for exclusion for employer-provided mass transit and parking benefits (Code Sec. 132(f));
•    Exclusion of up to $2 million ($1 million if married filing separately) of discharged principal residence indebtedness from gross income; (Code Sec. 108); and
•    Credit for certain health insurance costs (Code Sec. 35(a)).

The expired business provisions include:

•    Research and experimentation credit (Code Sec. 41);
•    Work opportunity tax credit (Code Sec. 51, Code Sec. 52);
•    increase in expensing to $500,000 and in investment based phaseout amount to $2,000,000 and expanded definition of Section 179 property (Code Sec. 179);
•    50 percent bonus depreciation (Code Sec. 168(k));
•    Exceptions under Subpart F for active financing income (Code Sec. 953, Code Sec. 954);
•    Look-through treatment of payments between controlled foreign corporations (Code Sec. 954(c)(6));
•    Special treatment of certain dividends of regulated investment companies (RICs) (Code Sec. 871(k));
•    Employer wage credit for activated military reservists (Code Sec. 45P);
•    Special expensing rules for film and television production (Code Sec. 181(f));
•    Special 100 percent gain exclusion for qualified small business stock (Code Sec. 1202);
•    Reduction in S corporation recognition period for built-in gains tax (Code Sec. 1374);
•    Election to accelerate alternative minimum tax (AMT) credits in lieu of additional first-year depreciation (Code Sec. 168(k));
•    Low-income housing 9 percent credit rate freeze (extended for allocations made before Jan. 1, 2016) (Code Sec. 42);
•    Treatment of military basic housing allowances under low-income housing credit (Code Sec. 42, Code Sec. 142);
•    15-year straight line cost recovery for qualified leasehold property, qualified restaurant property, and qualified retail improvements (Code Sec. 168(e)(3)(E));
•    Deduction allowable with respect to income attributable to domestic production activities in Puerto Rico (Code Sec. 199);
•    Modification of tax treatment of certain payments to controlling exempt organizations (Code Sec. 512);
•    Accelerated depreciation for business property on Indian reservations (Code Sec. 168(j)); and
•    Indian employment credit (Code Sec. 45A).

The expired charitable provisions include:

•    Enhanced charitable deduction for contributions of food inventory (Code Sec. 170);
•    Tax-free distributions for charitable purposes from individual retirement account (IRA) accounts of taxpayers age 70 1/2 or older (Code Sec. 408(d)(8));
•    Basis adjustment to stock of S corporations making charitable contributions of property (Code Sec. 1367); and
•    Special rules for contributions of capital gain real property for conservation purposes (Code Sec. 170(b)(1)(E), Code Sec. 170(b)(2)(B)).

The expired energy provisions include:

•    Credit for construction of energy efficient new homes (Code Sec. 45L);
•    Energy efficient commercial building deduction (Code Sec. 179D(h));
•    Construction date for eligible facilities to claim the production tax credit or wind credit (Code Sec. 45(d));
•    Credit for energy efficient appliances (Code Sec. 45M(b));
•    Credit for nonbusiness energy property (Code Sec. 25C);
•    Alternative fuel vehicle refueling property (Code Sec. 30C);
•    Incentives for alternative fuel and alternative fuel mixtures (Code Sec. 6426);
•    Incentives for biodiesel and renewable diesel (Code Sec. 40A, Code Sec. 6426);
•    Placed-in-service date for partial expensing of certain refinery property (Code Sec. 179C(c)(1));
•    Credit for electric drive motorcycles and three-wheeled vehicles (Code Sec. 30D).

Potential Courses of Action
In general, a main point of contention regarding extenders has been whether they should simply be re-extended on a cumulative basis to give taxpayers greater certainty, and then given a closer look on an individual basis as part of comprehensive tax reform, or whether each provision should be evaluated on its merits prior to any extension.

While most parties seem to agree on the ideological merits of addressing them as part of greater reform efforts, the fact that there has been little to no action taken on substantive tax reform over the last year—combined with the growing difficulty in finding political consensus—may undermine this approach.

In addition, there has been significant disagreement over certain provisions as of late (such as the wind credit) that may preclude passage of a cumulative extenders bill. Specifically, there have been reports that some House Republicans would decline to pass any extenders bill that contains provisions they find objectionable and instead take up the fate of extenders in January, when Republicans will also control the Senate.

Earlier this year, the Expiring Provisions Improvement Reform and Efficiency (EXPIRE) Act had some momentum, but ultimately stalled in the Senate when Sen. Harry Reid, D-Nev., engaged in a procedural move that blocked senators from offering amendments to the bill. The bill, which was bipartisan but generally reflected what is viewed as the Democrats' approach to extenders, would have extended the above expired provisions for an additional two years. There has been some indication that the EXPIRE Act could serve as the basis of whatever agreement is potentially forged during the lame duck session.

There have also been a series of bills introduced throughout the year to extend or make permanent one, or several, of the extender provisions, including the research credit and bonus depreciation. These bills generally reflect the Republicans' approach to extenders—i.e., to make a select number of provisions permanent rather than a short-term extension of all of the provisions as a package. It is possible that these bills could also re-surface in the coming weeks.

The President had indicated at the time his intention to veto these bills on the basis that it made provisions permanent without budget offsets. (At this late stage in the game, however, the lack of an offset for extending provisions or even making some permanent might not be an impediment to passage.)

Potential Consequences of Inaction
IRS Commissioner John Koskinen, in a now annually expected warning, said that stalled extender legislation could result in a late start to the upcoming filing season. Further, he said that if Congress doesn't pass extender legislation until 2015, this could cause significant service disruptions and the need for millions of taxpayers to file amended returns. It could also delay refunds, which could in turn have a negative impact on the economy.

Additionally, numerous businesses and business organizations have spoken out about how they would be affected by inaction. In a letter sent to members of Congress, over 500 business groups stated that extenders are "critically important to U.S. jobs and the broader economy" and characterized the failure to extend them as a "tax increase" that would "inject instability and uncertainty into the economy and weaken confidence in the employment marketplace."

Obama Threatens Veto of Emerging Tax-Break Agreement in Congress

Thursday, December 18, 2014

President Barack Obama would veto a tax-break agreement being negotiated in Congress by Senate Democrats and House Republicans.

The president would veto the proposed deal because it would provide permanent tax breaks to help well-connected corporations while neglecting working families,” Jen Friedman, a White House spokeswoman, said in an e-mail today.

Lawmakers are nearing an agreement on extending U.S. tax breaks that lapsed at the end of 2013 and making others permanent. The proposal would add about $450 billion to the budget deficit over the next decade, said a Democratic aide. [Source: AccountingToday.com]

A veto would require an override by two-thirds of lawmakers in the House and Senate, a high barrier for a deal that could draw opposition from some Democrats.

The biggest beneficiaries of the breaks would include corporations that conduct research, residents of states such as Washington and Texas that lack an income tax, and wind-energy producers concerned that their tax benefit would end all at once instead of being phased out. Tax breaks for low-income families that lapse at the end of 2017 wouldn’t be extended.

The tax break for corporate research, which would be expanded and made permanent, benefits companies including Intel Corp. and Johnson & Johnson. A benefit for small-business investments also would be locked in.

The plan would make permanent a provision allowing individuals to deduct state sales taxes, an issue important to Senate Democratic Leader Harry Reid of Nevada. In that state 22 percent of tax filers take advantage of the break, the second- highest percentage in the U.S., according to the Pew Charitable Trusts.

Wind Energy
The production tax credit for wind energy would be phased out over several years, said the aide, who spoke on condition of anonymity because the package wasn’t yet public.

A tax break for mass-transit commuters would be permanently extended as would a tax credit for college tuition, the aide said. Those are items championed by Senator Charles Schumer of New York, the third-ranking Senate Democrat.

Other breaks that may be made permanent include incentives for landowners to donate conservation easements and for individuals to make charitable donations directly from tax- advantaged retirement accounts.

Dozens of other tax breaks that expired at the end of 2013 would be continued through 2015. Among those that have lapsed are a provision that lets home sellers exclude from income the forgiven debt from short sales, as well as accelerated depreciation for motorsports tracks.

Child Credit
After reports of an emerging agreement yesterday, the Obama administration issued a statement signaling that it opposed a package that doesn’t extend expansions of the child tax credit and earned income tax credit that lapse at the end of 2017.

“An extender package that makes permanent expiring business provisions without addressing tax credits for working families is the wrong approach, at the expense of middle-class families,” Treasury Secretary Jacob J. Lew said yesterday. “Any deal on tax extenders must ensure that the economic benefits are broadly shared.”

Congress returns on Dec. 1 to finish its post-election session, and lawmakers want to leave Washington by Dec. 11.

That time frame might make it difficult for Obama to veto any plan, especially because the Internal Revenue Service has warned that waiting could delay tax refunds next year.

If this proposal falls apart, House Republicans’ fallback plan is to extend the lapsed breaks through Dec. 31, 2014, Ways and Means Committee Chairman Dave Camp said yesterday.

That approach would require lawmakers to return to the issue next year, when Republicans will control the House and the Senate.

Can You Spot a Government Imposter?

Tuesday, December 16, 2014

Your caller ID says “FTC” or “IRS,” and the phone number has the “202” Washington, DC area code. You might even look the number up and see that it’s a real government phone number.

But the person calling isn’t really from the FTC, IRS, or any other agency. It’s a government imposter whose goal is to convince you to send money before you figure out it’s a scam. The big giveaway? The caller wants you to send money.[Source: Consumer.ftc.gov]

What imposters might tell you

A lot of imposters pretend they’re with the government to scare you into sending money. They say you owe taxes or some other unpaid debt, and, hoping you’ll panic, warn that you’re about to be arrested if you don’t pay up. Before you can investigate, you’re told to put the money on a prepaid debit card and tell them the number — something no government agency would ask you to do.

Other scammers promise you money — a big prize you need to claim. They say the FTC or some other agency is supervising the sweepstakes, and that the money will be released as soon as you pay for the shipping, taxes, or some other expense. But it’s all a fake. There is no prize and no money.

What you should know

  • Federal government agencies and employees don’t ask people to send money for prizes or unpaid loans. The FTC doesn’t supervise sweepstakes, and when the IRS contacts people about unpaid taxes, they usually do it by postal mail, not by phone.
  • Federal government agencies and employees also don’t ask people to wire money or use a prepaid debit card to pay for anything. Prepaid cards and money transfers are like sending cash — once it’s gone, you can’t get it back.
  • You can’t rely on caller ID. Scammers know how to rig it to show you the wrong information (aka “spoofing”). Scammers might have personal information about you before they call, so don’t take that as a sign they’re the real thing. If you’re not sure whether you’re dealing with the government, look up the official number of the agency. That way you know who you’re talking to.

Who you can tell

  • You can file a complaint with the FTC at ftc.gov/complaint under “Other” and then “Imposter Scams.” If it involves the IRS, add “IRS Telephone Scam” in the notes.
  • IRS imposter scams also can be reported to the Treasury Inspector General for Tax Administration (TIGTA) online or at 800-366-4484. If you think you owe federal taxes, call the IRS at 800-829-1040 or go to irs.gov.

Read Government Imposter Scams for more.

IRS Provides Cost-of-Living Adjustments for Retirement Savers

Thursday, November 13, 2014

While IRS and good news aren’t usually synonymous, the retirement contribution maximums the agency has just released might give you something to smile about. Several allowable contribution amounts have increased in order to reflect a rise in the cost of living for 2015.

Beginning with 401(k) contributions, employees will be able to put in $18,000 per year (an increase of $500 from 2014). For those over age 50, the catch-up contribution has gone up to $6,000. This means that in total, taxpayers over 50 can contribute up to $24,000 in retirement funds in 2015.

The phase-out adjusted gross income (AGI) amounts for taxpayers making contributions to a traditional IRA, but who are covered by a workplace retirement plan have increased by $1,000 for singles and $2,000 for married couples filing jointly. The $2,000 AGI increase is also true when only one spouse is covered by a workplace retirement plan. Roth IRA phase-out AGI levels have increased as well.

For low and moderate income taxpayers receiving retirement savings contribution credit, the threshold will rise $1,000 for married couples filing jointly, $750 for heads of household and $500 for individual filers.

What hasn’t changed is the maximum IRA contribution, which is holding steady at $5,500, with a catch-up amount of $1,000.

With these positive adjustments coming up next year, it’s a good time to check with your accountant to make sure you have everything in place to make your maximum allowable contribution. 

IRS Offshore Voluntary Disclosure Program Offers Stark Choices for Taxpayers

Friday, November 07, 2014

The program has been available to anyone except those who are already under IRS audit, those whose unreported income came from illegal activity, those who are promoters of the use of offshore tax avoidance schemes and others whose names IRS already knows. The original 2009 version of the OVDP required a 20 percent penalty for the highest balance over the prior six years. Additionally, it demanded a 20 percent accuracy penalty on the tax due plus interest on the tax. There is a guarantee of no criminal prosecution if you are permitted entry into the program. [Source: AccountingToday.com]

This penalty scheme has been described as “take it or leave it" since the IRS has no authority to reduce or limit the penalties. The 2009 OVDP began on March 26, 2009 and ended on Oct. 15, 2009. The 2009 program was successful so the IRS started another Offshore Voluntary Disclosure Initiative on Feb. 20, 2011. This time the penalty was 25 percent for the highest balance over the prior eight years. That program ended Aug. 31, 2011.

Then came the 2012 OVDP program on Jan. 9, 2012. This time the penalty was 27.5 percent for the highest balance over the prior eight years. It is open ended with no specific end date. It can close at any time without warning. The 2012 OVDP was then modified on June 18, 2014 and clarified on Sept. 10, 2014 for filers commencing July 1, 2014. The program, as modified, is now known as the 2014 OVDP.

There are now two classes of filers: willful and non-willful. Willful filers are still subject to the 27.5 percent penalty, but that can go up to 50 percent if any account is at a foreign institution that has publicly agreed to provide account information to the U.S. authorities. All willful filers still receive the guaranty of no criminal prosecution if accepted into the program.

Streamlined Filing Option
There is also a streamlined option for non-willful taxpayers. They only pay 5 percent for the highest balance over the prior three years. Under the modified program, all tax, penalties and interest must be paid at the time of the submission.

The advantages of the streamlined program are the reduced FBAR (foreign bank account report) penalty and lack of a 20 percent accuracy penalty. The disadvantages are that the taxpayer gets no guarantee of avoiding criminal prosecution. If the taxpayer fails as a streamlined candidate, he or she is ineligible to enter into the regular OVDP.

How should you and your clients decide whether to try for the reduced penalty scheme for non-willful taxpayers? Ask your clients some hard questions: Did they intend to avoid or evade U.S. taxes? Could their actions seem like they had a purpose of avoiding or evading paying U.S. tax (for example, bringing the funds out of the U.S. or back to the U.S. using cash or “mules” rather than checks and wires)? Did they move funds from account to account? What is the size of the accounts and other tangible foreign assets? Were the funds ever reported as income? Were the funds from illicit activity? What was the income earned in the accounts? Did they file FBARs for some foreign accounts but not others? Did they provide a false answer to their tax return preparer regarding whether they had a foreign account? Are they in a profession that might be held to a higher standard, such as law enforcement or government?

A new harrowing decision must be made whether to seek to enter into the streamlined program and fail to enter the regular program, perhaps risking possible criminal prosecution in exchange for a lower penalty structure if accepted. There is no law to guide us on the streamlined question. There was one jury case, but it did not precedent. In United States v. Zwerner, Civ. No. 13¬22082 (S.D. Florida May 2014), the jury awarded the U.S. a 150 percent FBAR penalty (three years at 50 percent per year) against a Swiss bank customer who attempted a “quiet disclosure” rather than entering the 2009 OVDP.

How to File
For anyone with a foreign bank account, the annual FBAR filing due date is June 30 for the prior year. The FinCEN Form 114 from the Financial Crimes Enforcement Network is electronic and replaces the prior paper form known as TD F 90-22.1.

Since 2013 this is done electronically only. Presumably the IRS will cross-reference current filers against prior FBAR filings. Since 2011, in addition to the FBAR, detailed disclosures should be made of foreign accounts and other assets on Form 8938, and attached to Form 1040 every year. Without these filings, the statute of limitations does not commence.

To enter the OVDP or the streamlined version, taxpayers and their representatives should consult the extensive Q&As on the FAQ pages on IRS.gov explaining the procedures for requesting either OVDP treatment or streamlined treatment.

Still unsure whether your client should enter into the OVDP at all? If your client doesn’t file and is audited, IRS auditors are issuing pointed Information Document Requests and demanding that taxpayers appear for in-person interviews. Many are referred to the Criminal Investigation Division, where steep civil penalties of 50 percent per year are being imposed.

Why are foreign banks disclosing accounts to the U.S.? The Foreign Account Tax Compliance Act, also known as FATCA, requires foreign banks to enter into agreements to disclose their U.S. customers or face 30 percent gross withholding on every transaction they conduct in the U.S. Last year, the U.S. Department of Justice announced a “Bank Program” under which banks can enter into negotiations with the DOJ, disclose the extent of their business dealings with U.S. taxpayers, and obtain either a non-prosecution agreement (NPA) or non-target letter (NTL), thereby avoiding penalties of 20 to 50 percent of the highest balance in each account.

The banks can avoid paying penalties at all if the taxpayers either reported properly or have entered the OVDP. Many banks are entering into NPAs and NTLs.

In conclusion, the ultimate decision of whether to enter into either the OVDP or the streamlined OVDP is one that should be made only after a careful and full analysis of all of the factors. Legal counsel is a must, especially since there is potential criminality involved.

Will Congress Extend IRA Donation Rule?

Saturday, November 01, 2014

For the past several years, clients who are 70-1/2 years of age or older have been able to make charitable donations of up to $100,000 directly from their IRAs. These donations, known as qualified charitable distributions (QCDs), can serve as required minimum distributions, thus reducing the donor's reported income. [Source: financial-planning.com]

These QCDs allow non-itemizers to get a tax benefit from an otherwise non-deductible donation. High-income taxpayers who would lose their tax breaks to phaseouts may also get some tax relief, since the amount of the QCD is not included in their reported income.

"This provision is important for people who have charitable intent, and either don't itemize or have phaseouts based on adjusted gross income," says David Hultstrom, president and chief investment officer at Financial Architects, a financial planning and wealth management firm in Woodstock, Ga.


Yet making these sorts of donations before year-end has become unexpectedly tricky, because the QCD break has expired.

It's widely expected to be re-introduced before the end 2014 -- or even, retroactively, in 2015 -- but with renewal still uncertain, what should advisors suggest to interested clients now?

"If clients are going to make a charitable contribution anyway, they should do it out of their IRA, following the rules," says Hultstrom. That is, donations must go directly from the IRA to the charity.

Rob Siegmann, principal and chief operating officer at Financial Management Group in Cincinnati, agrees. "We encourage clients to gift from their IRAs, up to their RMD amount, even before we know if the charitable IRA provision will be extended," he says. "This allows clients to meet philanthropic goals while putting them in a position to benefit from the likely extension of the charitable IRA provision."

As Siegmann explains, clients who are eligible for charitable IRA gifting must take required minimum distributions before year-end. That distribution will be taxable to clients unless it is gifted to a qualified charity (assuming the QCD provision is extended).


Clients face two possible outcomes if they make donations from their IRA now. If the QCD provision is extended, IRA money gifted to charity will be excluded from income. "This is the better result," says Siegmann.

If QCDs are not extended, then the IRA money gifted to charity is taxable as a normal IRA distribution. IRA owners will get an offsetting itemized tax deduction.

"Our firm expects Congress to extend the charitable provision," Siegmann says, "but it may not happen until too late for most people to utilize. The only way for clients to benefit from a late decision is to follow a strategy that assumes the extension."

Donald Jay Korn is a Financial Planning contributing writer in New York. He also writes regularly for On Wall Street.

Tax-Break Smackdown

Tuesday, October 21, 2014

There may be fewer changes to the federal tax code this year than in 2013, but the handful that exist could still impact what you owe. Some, like the new health insurance tax credit, could put more jingle in your pocket, while the expiration of more than four dozen temporary tax breaks that Congress has yet to renew might instead leave students, teachers, retirees and homeowners out in the cold. [Source: CNBC.com]

First and foremost, said Jackie Perlman, principal tax researcher for The Tax Institute at H&R Block, all taxpayers this year will see a new check box on their 1040 federal tax return, where they'll be required to disclose whether they have had qualified health insurance all year, per the Affordable Care Act mandate.

"That is by far the biggest change this year, because this is the year when the individual mandate goes into effect," said Perlman. "If you purchased insurance through the health-care exchanges, or marketplace, you're going to get a brand-new form in the mail called a 1095A. Keep it in a safe place for filing your return."

If you or your dependents did not obtain minimal essential coverage, you will pay a penalty equal to 1 percent of your yearly household income, or a maximum of $95 per person, on your 2014 federal income tax return, due April 2015. That penalty increases to 2 percent of household income, or $325 per person, in 2015; and 2.5 percent of income, or $695 per person, in 2016.

A few exemptions exist. You may be able to avoid the penalty, for example, if you are uninsured for fewer than three months out of the year, if the lowest-priced coverage available to you exceeds 8 percent of your income or you don't file a tax return because your income is too low.

Taxpayers with moderate income who obtain their health insurance through the Health Insurance Marketplace may also be eligible for a new premium tax credit to help defray the cost of coverage. Determining eligibility, however, is complicated and is calculated based on household income, the number of exemptions you already claim and the federal poverty line for your family size.

Mark Luscombe, principal tax analyst for tax analysis company Wolters Kluwer, CCH, also reminds taxpayers with foreign assets to be extra vigilant this year with compliance.

U.S. citizens and resident aliens, including those with dual citizenship who have lived or worked abroad during part of the year, have long been required to report any worldwide income, including income from foreign trusts and foreign bank and securities accounts.

In most cases, affected taxpayers must fill out and attach Schedule B to their tax returns. They may also have to fill out and attach Form 8938, Statement of Foreign Financial Assets.

"That has been in effect for awhile now, but new this year is the reporting requirement imposed on foreign financial institutions," said Luscombe. "Be aware that a lot more information is likely to be coming to the [Internal Revenue Service] from foreign firms about U.S. account holders, so it's best to report voluntarily before the IRS finds you."

Continue Reading: Tax extenders expire

Identity Theft and Taxes

Friday, October 17, 2014

Identity theft is a growing and frustrating problem in today’s world.

Perpetrators run the gamut from sophisticated thieves breaching the security of large retailers to people rummaging through garbage for useful information, to everything in between. We have been warned not to reveal personal information, and to shred documents containing Social Security numbers, account numbers or other sensitive information. [Source: AccountingToday.com]

The tax world has also been touched by identity theft. This has most commonly been manifest by unscrupulous individuals using stolen Social Security numbers and filing fraudulent tax returns claiming a refund. Typically the fraudulent tax return is filed early in the tax season before the true tax return gets file

The IRS and the states have programs in place if you have been, or suspect you are, the victim of identity theft. The most direct example of detecting a tax-related identity theft is if the IRS receives multiple tax returns using the same Social Security number. In that case the IRS will notify a taxpayer by mail and follow a protocol to ensure that he or she is the true individual associated with the Social Security number.

If any of your tax clients receives a notice from the IRS, they should respond immediately by calling the telephone number on the notice. Once they have been identified by the IRS as an identity theft victim and have provided the required information, the IRS will issue them an identity protection PIN, which will be mailed to them and included in the following year’s tax return to authorize electronic filing.

A taxpayer who knows or believes they may have been the victim of identity theft (whether generally or specifically with respect to tax matters), but has not received an IRS notice, should promptly call the IRS identity theft specialized unit at 800-908-4490.

The taxpayer should also complete Form 14039 and submit it to the IRS. These steps put the IRS on notice of potential problems, and will also prompt it to issue the identity protection PIN.

Note that IP PINs are only issued at one time during the year, typically in October or November.

Therefore if the IRS does not have sufficient time to process Form 14039 before PINs are issued for the year, the taxpayer will need to wait for the following year cycle before receiving a PIN.

The consequence of not having an IP PIN is that the tax return will need to be paper filed rather than filed electronically. If one of your clients has been issued a PIN, but you or they cannot locate it, they can retrieve it on the IRS Web site, www.irs.gov, or call the identity theft unit’s telephone number noted earlier.

As a way to identify and combat identity theft, starting with the 2014 tax year the IRS will limit to three the number of direct deposit refunds per bank account. More than three will get flagged and may not be processed. Legitimate multiple deposits will most likely come into play with respect to a family unit, where refunds from parents and multiple minor children are directed to a single account. If that’s the situation of some of your clients, they should request that some or all refunds be issued by check rather than direct deposit.

While less common, businesses have also been victimized by identity theft. The most prevalent scenario has been the use of a business’s tax identification number in generating a fraudulent W-2, which in turn is used to obtain fraudulent refunds by individuals. All business owners should be aware of this possibility and should limit exposure of their tax identification number (also known as employer identification number, or EIN).

Be aware that the IRS will not telephone taxpayers or send them an email threatening dire consequences if they fail to pay an amount allegedly owing or fail to provide identification or banking information. IRS contact is always done by mail. Fraudsters have manipulated caller ID to make it appear that an incoming call is from the IRS. Do not be fooled by this!

Also, do not be fooled if someone calls and correctly gives you the last four digits of your Social Security number, either to trick you or your clients into believing they are who they say they are, or to supposedly confirm your identity. Documents such as W-2s, pay stubs, Form 1099 or financial documents are frequently issued with only the last four digits of the Social Security number showing.

Should such a document fall into the wrong hands, a fraudster can use it to create a pretext, gain trust and proceed to elicit confidential information, which an otherwise suspicious person may now give willingly. The same warning equally applies to the last four digits of a credit card.

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