Harless Tax Blog
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.
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).
2 POSSIBLE OUTCOMES
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.
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."
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.
Are you, your spouse or a dependent heading off to college? If so, here’s a quick tip from the IRS: some of the costs you pay for higher education can save you money at tax time. Here are several important facts you should know about education tax credits:
- American Opportunity Tax Credit. The AOTC can be up to $2,500 annually for an eligible student. This credit applies for the first four years of higher education. Forty percent of the AOTC is refundable. That means that you may be able to get up to $1,000 of the credit as a refund, even if you don’t owe any taxes.
- Lifetime Learning Credit. With the LLC, you may be able to claim a tax credit of up to $2,000 on your federal tax return. There is no limit on the number of years you can claim this credit for an eligible student.
- One credit per student. You can claim only one type of education credit per student on your federal tax return each year. If more than one student qualifies for a credit in the same year, you can claim a different credit for each student. For example, you can claim the AOTC for one student and claim the LLC for the other student.
- Qualified expenses. You may include qualified expenses to figure your credit. This may include amounts you pay for tuition, fees and other related expenses for an eligible student. Refer to IRS.gov for more about the additional rules that apply to each credit.
- Eligible educational institutions. Eligible schools are those that offer education beyond high school. This includes most colleges and universities. Vocational schools or other postsecondary schools may also qualify.
- Form 1098-T. In most cases, you should receive Form 1098-T, Tuition Statement, from your school. This form reports your qualified expenses to the IRS and to you. You may notice that the amount shown on the form is different than the amount you actually paid. That’s because some of your related costs may not appear on Form 1098-T. For example, the cost of your textbooks may not appear on the form, but you still may be able to claim your textbook costs as part of the credit. Remember, you can only claim an education credit for the qualified expenses that you paid in that same tax year.
- Nonresident alien. If you are in the U.S. on an F-1 student visa, you usually file your federal tax return as a nonresident alien. You can’t claim an education credit if you were a nonresident alien for any part of the tax year unless you elect to be treated as a resident alien for federal tax purposes. To learn more about these rules see Publication 519, U.S. Tax Guide for Aliens.
- Income limits. These credits are subject to income limitations and may be reduced or eliminated, based on your income.
For more information, visit the Tax Benefits for Education Information Center on IRS.gov. Also, check Publication 970, Tax Benefits for Education. You can get it on IRS.gov or by calling 800-TAX-FORM (800-829-3676).
The IRS is again warning the public about phone scams that continue to claim victims all across the country. In these scams, thieves make unsolicited phone calls to their intended victims. Callers fraudulently claim to be from the IRS and demand immediate payment of taxes by a prepaid debit card or wire transfer. The callers are often hostile and abusive.
The Treasury Inspector General for Tax Administration has received 90,000 complaints about these scams. TIGTA estimates that thieves have stolen an estimated $5 million from about 1,100 victims. To avoid becoming a victim of these scams, you should know:
- The IRS will first contact you by mail if you owe taxes, not by phone.
- The IRS never asks for credit, debit or prepaid card information over the phone.
- The IRS never insists that you use a specific payment method to pay your tax.
- The IRS never requests immediate payment over the telephone.
- The IRS will always treat you professionally and courteously.
Scammers may tell would-be victims that they owe money and that they must pay what they owe immediately. They may also tell them that they are entitled to a large refund. Other characteristics of these scams include:
- Scammers use fake names and IRS badge numbers to identify themselves.
- Scammers may know the last four digits of your Social Security number.
- Scammers spoof caller ID to make the phone number appear as if the IRS is calling.
- Scammers may send bogus IRS emails to victims to support their bogus calls.
- Victims hear background noise of other calls to mimic a call site.
- After threatening victims with jail time or driver’s license revocation, scammers hang up. Others soon call back pretending to be from the local police or DMV, and caller ID again supports their claim.
- If you know you owe taxes or you think you might owe taxes, call the IRS at 800-829-1040. IRS employees can help you with a payment issue if you owe taxes.
- If you know you don’t owe taxes or don’t think that you owe any taxes, then call and report the incident to TIGTA at 800-366-4484.
- If scammers have tried this scam on you, you should also contact the Federal Trade Commission and use their “FTC Complaint Assistant” at FTC.gov. Please add "IRS Telephone Scam" to the comments of your complaint.
If you get a phone call from someone claiming to be from the IRS, here’s what you should do:
The IRS encourages you to be vigilant against phone and email scams that use the IRS as a lure. Visit the genuine IRS website, IRS.gov, to learn how to report tax fraud and for more information on what you can do to avoid becoming a victim.
While most people get a refund from the IRS when they file their taxes, some do not. If you owe federal taxes, the IRS has several ways for you to pay. Here are six tips for people who owe taxes:
- Pay your tax bill. If you get a bill from the IRS, you’ll save money by paying it as soon as you can. If you can’t pay it in full, you should pay as much as you can. That will reduce the interest and penalties charged for late payment. You should think about using a credit card or getting a loan to pay the amount you owe.
- Use IRS Direct Pay. The best way to pay your taxes is with the IRS Direct Pay tool. It’s the safe, easy and free way to pay from your checking or savings account. The tool walks you through five simple steps to pay your tax in one online session. Just click on the ‘Pay Your Tax Bill’ icon on the IRS home page.
- Get a short-term extension to pay. You may qualify for extra time to pay your taxes if you can pay in full in 120 days or less. You can apply online at IRS.gov. If you received a bill from the IRS you can also call the phone number listed on it. If you don’t have a bill, call 800-829-1040 for help. There is usually no set-up fee for a short-term extension.
- Apply for a monthly payment plan. If you owe $50,000 or less and need more time to pay, you can apply for an Online Payment Agreement on IRS.gov. A direct debit payment plan is your best option. This plan is the lower-cost, hassle-free way to pay. The set-up fee is less than other plans. There are no reminders, no missed payments and no checks to write and mail. You can also use Form 9465, Installment Agreement Request, to apply. For more about payment plan options visit IRS.gov.
- Consider an Offer in Compromise. An Offer in Compromise lets you settle your tax debt for less than the full amount that you owe. An OIC may be an option if you can’t pay your tax in full. It may also apply if full payment will cause a financial hardship. You can use the OIC Pre-Qualifier tool to see if you qualify. It will also tell you what a reasonable offer might be.
- Change your withholding or estimated tax. You may be able to avoid owing the IRS in the future by having more taxes withheld from your pay. Do this by filing a new Form W-4, Employee’s Withholding Allowance Certificate, with your employer. The IRS Withholding Calculator on IRS.gov can help you fill out a new W-4. If you have income that’s not subject to withholding you may need to make estimated tax payments. See Form 1040-ES, Estimated Tax for Individuals for more on this topic.
You may be able to deduct certain miscellaneous costs you pay during the year. Examples include employee expenses and fees you pay for tax advice. If you itemize, these deductions could lower your tax bill.
Here are some things the IRS wants you to know about miscellaneous deductions:
Deductions Subject to the Two Percent Limit. You can deduct most miscellaneous costs only if their total is more than two percent of your adjusted gross income. These include expenses such as:
- Unreimbursed employee expenses.
- Expenses related to searching for a new job in the same line of work.
- Certain work clothes and uniforms.
- Tools needed for your job.
- Union dues.
- Work-related travel and transportation.
Deductions Not Subject to the Two Percent Limit. Some deductions are not subject to the two percent limit. They include:
- Certain casualty and theft losses. Generally, this applies to damaged or stolen property that you held for investment. This includes items such as stocks, bonds and works of art.
- Gambling losses up to the amount of your gambling winnings.
- Losses from Ponzi-type investment schemes.
There are many expenses that you can’t deduct. For example, you can’t deduct personal living or family expenses. You claim allowable miscellaneous deductions on Schedule A, Itemized Deductions.
Special tax benefits apply to members of the U. S. Armed Forces. For example, some types of pay are not taxable. And special rules may apply to some tax deductions, credits and deadlines. Here are ten of those benefits:
Deadline Extensions. Some members of the military, such as those who serve in a combat zone, can postpone some tax deadlines. If this applies to you, you can get automatic extensions of time to file your tax return and to pay your taxes.
Combat Pay Exclusion. If you serve in a combat zone, certain combat pay you get is not taxable. You won’t need to show the pay on your tax return because combat pay isn’t included in the wages reported on your Form W-2, Wage and Tax Statement. Service in support of a combat zone may qualify for this exclusion.
Earned Income Tax Credit. If you get nontaxable combat pay, you may choose to include it to figure your EITC. You would make this choice if it increases your credit. Even if you do, the combat pay stays nontaxable.
Moving Expense Deduction. You may be able to deduct some of your unreimbursed moving costs. This applies if the move is due to a permanent change of station.
Uniform Deduction. You can deduct the costs of certain uniforms that regulations prohibit you from wearing while off duty. This includes the costs of purchase and upkeep. You must reduce your deduction by any allowance you get for these costs.
Signing Joint Returns. Both spouses normally must sign a joint income tax return. If your spouse is absent due to certain military duty or conditions, you may be able to sign for your spouse. In other cases when your spouse is absent, you may need a power of attorney to file a joint return.
Reservists’ Travel Deduction. If you’re a member of the U.S. Armed Forces Reserves, you may deduct certain costs of travel on your tax return. This applies to the unreimbursed costs of travel to perform your reserve duties that are more than 100 miles away from home.
Nontaxable ROTC Allowances. Active duty ROTC pay, such as pay for summer advanced camp, is taxable. But some amounts paid to ROTC students in advanced training are not taxable. This applies to educational and subsistence allowances.
Civilian Life. If you leave the military and look for work, you may be able to deduct some job hunting expenses. You may be able to include the costs of travel, preparing a resume and job placement agency fees. Moving expenses may also qualify for a tax deduction.
Tax Help. Most military bases offer free tax preparation and filing assistance during the tax filing season. Some also offer free tax help after April 15.
Do you know that if you sell your home and make a profit, the gain may not be taxable? That’s just one key tax rule that you should know. Here are ten facts to keep in mind if you sell your home this year.
- If you have a capital gain on the sale of your home, you may be able to exclude your gain from tax. This rule may apply if you owned and used it as your main home for at least two out of the five years before the date of sale.
- There are exceptions to the ownership and use rules. Some exceptions apply to persons with a disability. Some apply to certain members of the military and certain government and Peace Corps workers. For details see Publication 523, Selling Your Home.
- The most gain you can exclude is $250,000. This limit is $500,000 for joint returns. The Net Investment Income Tax will not apply to the excluded gain.
- If the gain is not taxable, you may not need to report the sale to the IRS on your tax return.
- You must report the sale on your tax return if you can’t exclude all or part of the gain. And you must report the sale if you choose not to claim the exclusion. That’s also true if you get Form 1099-S, Proceeds From Real Estate Transactions. If you report the sale you should review the Questions and Answers on the Net Investment Income Tax on IRS.gov.
- Generally, you can exclude the gain from the sale of your main home only once every two years.
- If you own more than one home, you may only exclude the gain on the sale of your main home. Your main home usually is the home that you live in most of the time.
- If you claimed the first-time homebuyer credit when you bought the home, special rules apply to the sale. For more on those rules see Publication 523.
- If you sell your main home at a loss, you can’t deduct it.
- After you sell your home and move, be sure to give your new address to the IRS. You can send the IRS a completed Form 8822, Change of Address, to do this.
Important note about the Premium Tax Credit. If you receive advance payment of the Premium Tax Credit in 2014 it is important that you report changes in circumstances, such as changes in your income or family size, to your Health Insurance Marketplace. You should also notify the Marketplace when you move out of the area covered by your current Marketplace plan. Advance payments of the premium tax credit provide financial assistance to help you pay for the insurance you buy through the Health Insurance Marketplace. Reporting changes will help you get the proper type and amount of financial assistance so you can avoid getting too much or too little in advance.