Archive for the ‘IRS’ Category

Bozo Tax Tip #1a: They Shoot Jaywalkers, Don’t They? (Or Ignoring the FBAR!)

Friday, April 15th, 2016

I have, unfortunately, become quite competent in the Report of Foreign Bank and Financial Accounts. That form is better known as the FBAR. It used to have the form number TD F 90-22.1 (yes, it really did) but now goes by Form 114. The form must be filed online through the bsaefiling center of FINCEN, the Financial Crimes Enforcement Network.

You must file an FBAR if you have $10,000 aggregate at any time during the year. The report for 2015 is due June 30, 2016; there are no extensions.

The form is fairly simple and straightforward: Note every foreign financial account you have with name, address, account number, and maximum balance at any time during the past year. Let’s say you have one foreign account, a bank account at the Royal Bank of Canada. You would take your maximum balance and convert it to US dollars from Canadian dollars (you should use the year-end Treasury Department conversion rates no matter when the high balance was). The form must be electronically filed and is filed separately from your tax return.

The penalties for not filing it are quite high. Willful non-filing has a minimum penalty of $100,000 or half the balance in the account–and that’s per account! There’s also possible jail time.

So what must be reported:
– Foreign Bank accounts;
– Bank accounts outside the US of a US financial institution;
– Foreign financial accounts where all you have is signature authority;
– Foreign securities accounts;
– Foreign mutual funds;
– Foreign life insurance with a cash or annuity value; and
– Online gambling accounts if outside the US.

There are probably others, too.

The IRS does have a chart that lists most things that need reporting on the FBAR and Form 8938. Form 8938 is the “cousin” of the FBAR; this form needs to be filed if you have larger balances in foreign accounts.

Millions of FBARs are filed each year. When I started in tax, filing an FBAR was a huge audit red flag; that’s no longer the case. There are just too many FBARs filed. Do note that if you have an FBAR filing requirement you must note that in question 7 at the bottom of Schedule B.

To end this with some humor, one of my pet peeves in dealing with taxes is that there are three different sets of abbreviations for foreign counties used in tax. The FBAR has one set; question 7 at the bottom of Schedule B has another set, and Form 8938 has a third set. Some countries are noted identically while others are not. On one of of the abbreviations Curacao is “CU” while that means Cuba in another.

In any case, the FBAR is no laughing matter. The IRS’s mantra here is to shoot jaywalkers. Don’t become such a person: If you have an FBAR filing requirement, file it! Again, the FBAR is due June 30th this year and there are no extensions.

Now this is the real end of our Bozo Tax Tips for the 2016 Tax Season. I’ll be back no later than April 25th with new content.

Bozo Tax Tip #3: Let Your IRS Notice Age Like Fine Wine!

Wednesday, April 13th, 2016

My brother is a wine connoisseur. As all my friends know, I’m anything but a wine aficionado. But I have learned one difference between fine wine and a notice from the IRS: Wine can age very well but IRS notices don’t.

Almost all IRS notices come with deadlines. You need to act to stop the IRS. If you ignore the notice, you usually will get a second notice. After that, you may receive a Notice of Deficiency. If that ages the tax is assessed.

Yet most IRS notices are wrong in whole or in part! The last study I saw showed that two-thirds of IRS notices are wrong. That’s a shockingly high percentage. An obvious question is why doesn’t the IRS change its procedures so that the bad notices aren’t issued? The answer is simple: People pay those notices. The IRS’s Automated Underreporting Unit is a huge profit center for the agency.

What does this mean for you? Put simply, if you get an IRS notice read it carefully. Let your tax professional know about it when you receive it, not on the day a response is due. It’s a lot easier (and cheaper) to act earlier in the process than later.

My brother tells me that some of the best wine he’s tasted have been old varietals. I can tell you that I’ve never seen a tax notice get better with age.

Bozo Tax Tip #4: Honey, You Don’t Exist!

Tuesday, April 12th, 2016

Ah, Spring is in the air. And with that come the inevitable wedding invitations. I had an invitation to a wedding on April 9th. No, I didn’t attend.

With weddings comes changes in tax status. Your marital status on December 31st determines your marital status for the year. If you are married, you file as Married Filing Jointly or Married Filing Separately. (In some rare cases, if you’re married you can file as Head of Household.) But you can’t file as single. Likewise, if you’re single you can’t file as married.

Perhaps it’s something in the water, but this year I have seen multiple cases of individuals who have ignored that marriage license and filed as single if married. There’s a good reason for that, of course: They save on taxes. A big issue is rental real estate: If you’re actively involved in rental real estate you get to take losses of up to $25,000. But there’s an income cap (the deduction begins to phase out at an income of $100,000 and completely phases out at $150,000). This particular deduction is neither indexed for inflation nor does it vary if you are single or married.

There’s a problem taking deductions you’re not entitled to: tax evasion. It’s a Bozo act to claim things you’re not entitled to.

Marriage has its ups and downs. Claiming you’re single on your tax return when you’re married will in the long-run cause you nothing but downs.

Bozo Tax Tip #5: Procrastinate

Monday, April 11th, 2016

You may have noticed that Bozo Tax Tip #1 appeared last week. Never fear, there’s another #1 Bozo Tax Tip that will appear on Friday. Now on with the countdown:

Today is April 11th. The tax deadline is just seven days away.

What happens if you wake up and it’s April 18, 2016, and you can’t file your tax? File an extension. Download Form 4868, make an estimate of what you owe, pay that, and mail the voucher and check to the address noted for your state. Use certified mail, return receipt, of course. And don’t forget your state income tax. Some states have automatic extensions (California does), some don’t (Pennsylvania is one of those), while others have deadlines that don’t match the federal tax deadline (Hawaii state taxes are due on April 20th, for example). Automatic extensions are of time to file, not pay, so download and mail off a payment to your state, too. If you mail your extension, make sure you mail it certified mail, return receipt requested. (You can do that from most Automated Postal Centers, too.)

By the way, I strongly suggest you electronically file the extension. The IRS will happily take your extension electronically; many (but not all) states will, too.

But what do you do if you wait until April 19th? (If you reside in Maine or Massachusetts, April 19th is your Tax Day this year.) Well, get your paperwork together so you can file as quickly as possible and avoid even more penalties. Penalties escalate, so unless you want 25% penalties, get everything ready and see your tax professional next week. He’ll have time for you, and you can leisurely complete your return and only pay one week of interest, one month of the Failure to Pay penalty (0.5% of the tax due), and one month of the Failure to File Penalty (5% of the tax due).

There is a silver lining in all of this. If you are owed a refund and haven’t filed, you will likely receive interest from the IRS. Yes, interest works both ways: The IRS must pay interest on late-filed returns owed refunds. Just one note about that: the interest is taxable.

Bozo Tax Tip #6: The Shell

Friday, April 8th, 2016

I was talking with a friend who is an attorney in the Midwest. She told me about an individual who decided to use ten layers of shell companies to hide his income. It worked so well that the Bozo had trouble accessing his income.

He was using the usual foreign shelter countries: the Cayman Islands (in the Caribbean), the Channel Islands (in the English Channel), the Isle of Man (in the Irish Sea), and Vanuatu (in the South Pacific). There was a land-based country in there, too: Panama. In any case, somehow the ownership got so messed up that one of the shells refused to deal with another.

My friend didn’t get involved to get the money situation resolved. No, she got involved because her client ended up going through a messy divorce, and her client happened to find one of the papers dealing with one of the shell companies. My friend’s a divorce attorney, and a good one, and she was able, with some help, find a lot of the hidden money. The judge was not as amused as I was hearing about the difficulties the man was having getting his money out. And neither was the IRS because he had “forgotten” to pay tax on a lot of income.

There are lots of good strategies for businesses to use to lower their taxes. Income balancing to C corporations can be a good strategy. Maximizing Section 179 depreciation is another. So is my least favorite deduction, the Domestic Production Activities Deduction (Section 199). There are many, many others. But hiding income in foreign jurisdictions is a very bad one, and if you get caught you are likely looking at a lengthy term at ClubFed.

A Bad Day for the IRS in Court

Tuesday, March 22nd, 2016

An appeals court decision today should end speculation on Democrats’ claims that the IRS scandal is a non-event. The Sixth Circuit Court of Appeals heard an appeal last week. The NorCal Tea Party Patriots had filed a class action suit regarding the IRS’s conduct in dealing with applications for non-profit status as a 501(c)(4) organization. The District Court had ordered the IRS to comply with discovery requests. The IRS asked for a “writ of mandamus;” basically, an order to stop the discovery. The first two paragraphs of the decision get to the crux of the matter:

Among the most serious allegations a federal court can address are that an Executive agency has targeted citizens for mistreatment based on their political views. No citizen—Republican or Democrat, socialist or libertarian—should be targeted or even have to fear being targeted on those grounds. Yet those are the grounds on which the plaintiffs allege they were mistreated by the IRS here. The allegations are substantial: most are drawn from findings made by the Treasury Department’s own Inspector General for Tax Administration. Those findings include that the IRS used political criteria to round up applications for tax-exempt status filed by so-called tea-party groups; that the IRS often took four times as long to process tea-party applications as other applications; and that the IRS served tea-party applicants with crushing demands for what the Inspector General called “unnecessary information.”

Yet in this lawsuit the IRS has only compounded the conduct that gave rise to it. The plaintiffs seek damages on behalf of themselves and other groups whose applications the IRS treated in the manner described by the Inspector General. The lawsuit has progressed as slowly as the underlying applications themselves: at every turn the IRS has resisted the plaintiffs’ requests for information regarding the IRS’s treatment of the plaintiff class, eventually to the open frustration of the district court. At issue here are IRS “Be On the Lookout” lists of organizations allegedly targeted for unfavorable treatment because of their political beliefs. Those organizations in turn make up the plaintiff class. The district court ordered production of those lists, and did so again over an IRS motion to reconsider. Yet, almost a year later, the IRS still has not complied with the court’s orders. Instead the IRS now seeks from this court a writ of mandamus, an extraordinary remedy reserved to correct only the clearest abuses of power by a district court. We deny the petition.

Oh, but hasn’t the IRS cooperated with the lawsuit? Hardly. “On the record before us here, the IRS’s response has been one of continuous resistance.” The Court is also making a point by the speed of the decision. This case was heard on March 16th; the decision was released on March 22nd. The Court is sending a message to the IRS: Stop the delaying tactics!

There’s a lot more in this decision, and I hope some tax blogger with far more free time than I do opines on the decision. I’ll end with the Court’s conclusion:

In closing, we echo the district court’s observations about this case. The lawyers in the Department of Justice have a long and storied tradition of defending the nation’s interests and enforcing its laws—all of them, not just selective ones—in a manner worthy of the Department’s name. The conduct of the IRS’s attorneys in the district court falls outside that tradition. We expect that the IRS will do better going forward. And we order that the IRS comply with the district court’s discovery orders of April 1 and June 16, 2015—without redactions, and without further delay.

Case: United States v. NorCal Tea Party Patriots, et al

March 15th Tax Deadlines

Monday, March 14th, 2016

There are a number of tax deadlines tomorrow, March 15th. Here’s what you need to know.

Calendar Year Corporations: If you have a calendar year corporation, your Form 1120 or Form 1120S is due tomorrow. If you’re not ready to file, simply file Form 7004. That can be electronically filed, or mail it. If you mail it, use certified mail, return receipt requested.

State Corporate Returns: Calendar year state returns are mostly due tomorrow, though not every state shares the March 15th deadline. (For example, Florida uses April 1st as its deadline.) Most, but not all, states allow a federal extension to apply for their state. If in doubt, check! For example, Pennsylvania requires a separate extension.

Form 3520-A: This is one of the forms for foreign trusts, and it has a due date of March 15th. (The other main form, Form 3520, is due on the same date as your personal tax return including extensions.) You can file an extension for Form 3520-A using Form 7004. This extension must be mailed to the IRS, so use certified mail, return receipt requested. The IRS does currently accept foreign postmarks so if you’re outside of the US go to your post office and mail it. Or use an approved private delivery service.

Form 1042-S (and Form 1042 series): This is a report of income paid to non-Americans. The filing due date (either electronic of mail) is March 15th. Other Form 1042s are also due tomorrow (the 1042 series of forms notes withholding on income paid to non-Americans).

If you are in doubt as to whether or not you will get your return done in time, simply file the extension now. There’s no harm with filing an extension today and filing your return tomorrow. There’s a big penalty if you don’t file your extension today or tomorrow and file your return on Wednesday.

Koskinen Wins Public Service Award; Chaffetz Gets It Right

Sunday, March 6th, 2016

IRS Commissioner John Koskinen was awarded the prestigious Elliot L Richardson Prize for Excellence in Public Service by the National Academy of Public Administration. According to the NAPA’s website,

Those individuals selected to receive the ELR Prize shall have demonstrated:

  • Achievement, by significantly advancing the public good;
  • Long-term dedication to public service, by serving the public interest in a public service capacity; and
  • Generosity of spirit, thoughtfulness in the pursuit of excellence in government, courage and integrity.

I have to ask the NAPA: What were you thinking? Yes, Mr. Koskinen has served for many years, and he may have generosity of spirit. But as Congressman Jason Chaffetz said, “If obstructing a congressional investigation and misleading Congress merits an award, then it seems like they have the right guy. I guess I define excellent public service differently.”

William Ruckelshaus, the former head of the EPA, also won the award. According to Government Executive, fund chair Michael C Rogers said, “[Koskinen and Ruckelshaus] are both strong role models for future generations of government leaders.”

I beg to disagree.

Math Is Hard, IRS Addition

Thursday, March 3rd, 2016

This time I couldn’t resist.

A client received an IRS CP2000 notice. This is an Automated Underreporting Unit (AUR) notice, designed to look for things such as matching errors. In this case, a client didn’t include his dividend income on his tax return. He was guilty as charged and was prepared to pay the tax due, but he ran the notice by me. The notice correctly noted that the ordinary dividend income from his brokerage hadn’t been included, but it said that the qualified dividends had been included.

Think about that for the moment if you’re a tax nerd. How can you have qualified dividends without having ordinary dividends?

For those of you who aren’t tax nerds or who haven’t figured this out, qualified dividends are a subset of ordinary dividends. The total of qualified dividends cannot exceed the total of ordinary dividends. If ordinary dividends are zero, qualified dividends must be zero, too.

So this IRS notice was wrong–I’m not sure if it’s a programming error (a systemic error) or not, but there were two other issues with this notice (both of which I expected). Somehow the notice ignored the one stock trade my client had. Could it be because my client lost money so that would decrease his tax? I’m sure my cynicism is misplaced, right? The client also paid foreign tax on his dividends; that, too, was left off the notice.

Does my client owe some additional tax? Absolutely. However, he owes about one-third less than what the IRS alleges, mostly because the IRS notice is plain wrong regarding qualified dividends.

To my clients and anyone else who receives an IRS notice: IRS statistics show that two-thirds of IRS notices are wrong in whole or in part. Do not blindly pay the notice without checking with your tax professional to see if the notice is accurate unless you like paying tax you don’t owe.

The Most Terrifying Words in the English Language Strike Again

Wednesday, March 2nd, 2016

One of my favorite quotes is from President Ronald Reagan:

The most terrifying words in the English language are: I’m from the government and I’m here to help.

Yet another instance of this appears to be striking with the IRS.

Kristy Maitre of the Iowa Center for Agricultural Law and Taxation (at Iowa State University) reports tonight that scammers have apparently been able to crash the IRS’s online IP PIN system. This shouldn’t be a shock; as Kristy notes a TIGTA report released in December (though not on their website) and a Tax Analysts analysis highlighted this vulnerability.

This new vulnerability hits taxpayers whose lives have already been thrown in disarray by one identity theft case. Now they may have a second identity theft case. (If they’re lucky, the first case has been resolved by now.)

The only solution is for the IRS to shut down this vulnerability immediately. I’m not holding my breath, though, on that happening soon.

It’s apparent that the IRS needs to go back to square one in regards to their information technology. After all, “I’m from the government and I’m here to help.”