WASHINGTON TAX UPDATE

Transcription

1 WASHINGTON TAX UPDATE FEBRUARY 22, 2012 Welcome to Washington Tax Update, where you will find useful information about taxes, including current events in our nation s capital, as well as informed opinions and predictions about what is expected to happen. Tax Look Inside What s New from the IRS IRS Courts Congress What s New from the Oval Office Tax Planning Tip of the Week What Else Is New from the IRS What s New from the Courts It Bears Repeating Tax Laughs

2 what s new from the IRS Guard your refunds Identity theft lurks You have plenty of reasons to speed up the process of filing your individual tax return. The primary reason has always been that, if you re expecting a refund, you shouldn t wait any longer than necessary to receive it. Add identity theft to your reasoning this year. Identity thieves have found ways to fraudulently prepare tax returns and steal refunds from taxpayers and they re doing it at exponential rates. In 2010, the Internal Revenue Service identified 49,000 returns that involved $247 million in refunds attributable to identity theft. In 2011, the numbers grew to 262,000 returns and almost $1.5 billion in fraudulent refunds. Identity thieves haven t limited their victims to the living. Many families have suffered the loss of a loved one only to find that identity thieves had stolen the decedent s tax refund. Ironically, identity thieves obtain much of the information they use from the federal government.

3 Every year, when the Social Security Administration learns of individuals deaths, it releases their names and Social Security numbers in a Death Master File. The file is meant to be confidential, but it has proven to be easily accessible. The good news is that the IRS has been actively attacking tax frauds and identity thefts. It should be made clear also that the IRS will ultimately refund any tax refund stolen from a taxpayer once the agency is convinced of the taxpayer s identity. But how long and how arduous is the process? The better news is that the IRS has recently issued Form 14039, which essentially puts the IRS on notice of your identity (or a decedent s identity, if you re an executor). It s available to taxpayers who have been or may be victims of identity theft. The taxpayer files Form with appropriate photocopies of identification. After someone files the form, the IRS will not send refunds, etc., to the addresses of others who make the same claims.

4 To lessen the chance of stolen refunds, the following actions are recommended: File individual returns, especially those with large anticipated refunds, as soon as practicable. Don t ignore an IRS notice that indicates you ve received wages from a job you ve never held. File Form if you have been an actual victim of identity theft. File Form if you feel you re a potential victim of identity theft, e.g., if you ve had a lost or stolen purse or wallet, questionable credit card activity, etc. File Form if you re the executor for a decedent with a potential refund and recommend that others file for friends and loved ones who have recently died.

5 When clients fall victim to identity theft, they may feel that their IRS information is safe and that refunds are not at risk. And if clients don t feel the need to share identity theft issues with their accountant, they may miss an opportunity to protect their refunds. In addition to helping identity theft victims clear up problems with their IRS accounts, the IRS works proactively to help ensure that these taxpayers do not encounter delays in processing their future returns. In January 2011, the IRS launched a pilot program for Identity Protection Personal Identification Numbers (IP PIN). The IP PIN is a unique identifier that establishes that a particular taxpayer is the rightful filer of the return. This program continues to be in place. In December 2011, the IRS mailed IP PINs to identity theft victims for them to use in filing their 2011 tax returns. If you have been a victim of identity theft, let your tax adviser know as soon as possible. Written by co-authors Christopher P. Anderson, CPA, of Testone, Marshall & Discenza, LLP, the Syracuse, N.Y., member of CPAmerica International, and CPAmerica Tax Director Linda Harding, CPA what s new from the IRS

6 what s new from the Oval Office Budget proposals could affect businesses, individuals Last week President Obama released his federal budget proposals for fiscal year On the same day, the Treasury released its General Explanations of the Administration s Fiscal Year 2013 Revenue Proposals (the so-called Green Book ). The proposals include more than 130 proposed tax changes for businesses and individuals, including new incentives to insource jobs, higher taxes for upper-income taxpayers and extension of key tax breaks. Given that 2012 is an election year and the two major political parties have found little common ground in recent tax debates, it remains to be seen whether any of these proposals with the exception of the extension of the payroll tax cuts already passed by Congress will actually become law prior to the election. Following is a summary of some of the president s key tax proposals.

7 Business tax proposals The payroll tax cut currently in place for January and February of this year has been extended for the rest of 2012 pending the president s signature. The president proposes a tax credit for qualified employers who increase their wage expense whether driven by new hires, increased wages or both. The president would also like to extend through 2012 the 100 percent bonus first-year depreciation deduction. Proposed tax increases include repeal of the last-in, first-out (LIFO) accounting method and the lower-of-cost-or-market and subnormal-goods methods of inventory accounting, beginning in A new general business tax credit equal to 20 percent of the eligible expenses paid or incurred in connection with insourcing a U.S. trade or business would encourage companies to bring jobs back to the United States, while deductions for expenses paid or incurred in connection with outsourcing a U.S. trade or business would be disallowed. Effective retroactively to Jan. 1, 2012, the president proposes to make the research credit permanent and increase the rate of the alternative simplified research credit.

8 Tax changes proposed for individuals The president would like to reinstate the upper-income taxpayers reduction of itemized deductions and the phaseout of personal exemptions beginning in In addition, he would allow the so-called Bush era tax cuts to expire after 2012 for those with household income over $250,000 a year for joint filers and $200,000 for single taxpayers. For dividends received after Dec. 31, 2012, the current reduced tax rates on qualified dividends would be eliminated for income that would be taxable in the 36 percent or 39.6 percent brackets. For upper-income taxpayers, the result would be taxation of dividends as ordinary income. Beginning in 2013, the maximum tax rate on long-term capital gains would increase to 20 percent for those in the 36 percent and 39.6 percent brackets. The 15 percent rate would continue for those in lower tax brackets.

9 Also beginning in 2013, the tax value of specified deductions or exclusions and all itemized deductions would be limited. The limit would apply to: Tax-exempt state and local bond interest Employer-sponsored health insurance paid for by employers or with before-tax employee dollars Health insurance costs of self-employed individuals Employee contributions to defined contribution retirement plans and individual retirement arrangements The deduction for income attributable to domestic production activities Certain trade and business deductions of employees Moving expenses Contributions to health savings accounts and Archer medical savings accounts Interest on education loans and certain higher education expenses The change would apply to itemized deductions after they have been reduced by the proposed statutory limit on certain itemized deductions for higher income taxpayers. The administration s description of the president s FY 2013 budget (but not the Treasury s Green Book ) also calls for imposition of the Buffett Rule, under which those making more than $1 million would pay no less than 30 percent of their income in taxes. The Buffett Rule would replace the alternative minimum tax.

10 Estate and gift tax proposals The estate, generation-skipping transfer (GST) and gift tax parameters as they applied during 2009 would be made permanent. The top tax rate would be 45 percent, and the exclusion amount would be $3.5 million for estate and GST taxes and $1 million for gift taxes. These changes would apply for estates of people who die, and for transfers made, after Dec. 31, The provision allowing a surviving spouse to use the deceased spouse s unused estate tax exclusion, which expires for people who die after Dec. 31, 2012, would be made permanent. In addition, rules regarding valuation discount would be modified, and the use of an intentionally defective grantor trust as an estate planning tool would be severely limited.

11 Other proposals Many expiring provisions would be extended. For example, the optional deduction for state and local general sales taxes, the deduction for qualified out-of-pocket classroom expenses and the deduction for qualified tuition and related expenses would be extended through Dec. 31, The president s budget also calls for increases in the IRS s tax enforcement and compliance budget to enable the IRS more effectively to crack down on tax cheats and delinquents, resulting in more revenue, and to implement many recent tax law changes. The plan also includes a host of measures to expand information reporting and improve compliance by businesses (e.g., require more forms to be filed electronically) and specific changes to step up collection of taxes. Read more about the budget proposals here.

12 tax planning tip of the week Remember your children at tax time You love your children. You d fling yourself in front of a speeding locomotive to protect them. Here are eight reasons to appreciate them even more when you re preparing your tax return: 1. Dependents In most cases, you can claim a child as a dependent from the year of birth until the year the child turns age 19 (age 24, if a full-time student). Each dependent reduces your taxable income by $3,700 in Child Tax Credit You may be able to take this credit of up to $1,000 for each of your children under age Child and Dependent Care Credit You may be able to claim this credit if you pay someone to care for your child or children under age 13 so that you can work, look for work or, in some cases, attend school. 4. Earned Income Tax Credit (EITC) The EITC is a tax benefit for lower-income people who work and have earned income from wages, self-employment or farming. EITC reduces the amount of tax they owe and may give them a refund.

13 5. Adoption Credit You may be able to take a tax credit for qualifying expenses paid to adopt an eligible child. 6. Higher education credits The American Opportunity and the Lifetime Learning credits are education credits that can reduce your federal income tax dollar for dollar. 7. Student loan interest You may be able to deduct interest paid on a qualified student loan, even if you do not itemize your deductions. 8. Self-employed health insurance deduction If you were self-employed and paid for health insurance, you may be able to deduct any premiums you paid for coverage for any child of yours who was under age 27 at the end of the year, even if the child was not your dependent.

14 what else is new from the IRS Foreign financial institutions must report U.S. accounts The Treasury Department and the IRS have issued proposed regulations for implementing the next major phase of the Foreign Account Tax Compliance Act. Enacted in 2010 as part of the Hiring Incentives to Restore Employment Act, the Foreign Account Tax Compliance Act (FATCA) requires foreign financial institutions to report to the IRS information about financial accounts held by U.S. taxpayers or foreign entities in which U.S. taxpayers hold a substantial ownership interest. The proposed regulations lay out a step-by-step process for U.S. account identification, information reporting and withholding requirements for foreign financial institutions (FFIs), other foreign entities and U.S. withholding agents.

15 To avoid withholding under FATCA, a participating FFI will have to enter into an agreement with the IRS to: Identify U.S. accounts Report certain information to the IRS regarding U.S. accounts Verify its compliance with its obligations pursuant to the agreement Ensure that a 30 percent tax on certain payments of U.S. source income is withheld when paid to nonparticipating FFIs and account holders who are unwilling to provide the required information Registration will take place through an online system, which will become available by Jan. 1, FFIs that do not register and enter into an agreement with the IRS will be subject to withholding on certain types of payments relating to U.S. investments. Read more about the proposed regulations here.

16 what s new from the courts Taxpayers making charitable gift escape accuracy penalty In a recent Tax Court case about a charitable contribution deduction for a conservation easement, the IRS challenged the taxpayers valuation and assessed an accuracy-related penalty. After wading through the evidence, the court agreed that the charitable deduction had been overstated. However, the court refused to uphold the accuracy-related penalty (Esgar Corporation, et al. v. Commissioner, TC Memo , Feb. 6, 2012).

17 According to the court, taxpayers have reasonably relied on professional advice to negate an accuracy-related penalty if they met three requirements: 1. The adviser was a competent professional who had sufficient expertise to justify reliance. 2. The taxpayers provided necessary and accurate information to the adviser. 3. The taxpayers actually relied in good faith on the adviser s judgment. The court found that the appraiser was a competent professional whom the taxpayers had worked with for more than 25 years. The taxpayers had provided the appraiser with all relevant information, and they relied on his advice in good faith.

18 it bears repeating More time allowed to claim tax credits for hiring veterans Employers will have more time to file the required certification form for employees hired on or after Nov. 22, 2011, and before May 22, The IRS has released the guidance and forms that employers can use to claim the newly expanded tax credit for hiring veterans. The VOW to Hire Heroes Act of 2011, enacted Nov. 21, 2011, provides an expanded Work Opportunity Tax Credit to businesses that hire eligible unemployed veterans. And it makes the credit available to certain tax-exempt organizations. The credit can be as high as $9,600 per veteran for for-profit employers or up to $6,240 for tax-exempt organizations. The amount of the credit depends on a number of factors, including the length of the veteran s unemployment before hire, hours a veteran works and the amount of first-year wages paid. Employers who hire veterans with service-related disabilities may be eligible for the maximum credit.

19 Normally, an eligible employer must file Form 8850 with the state work force agency within 28 days after the eligible worker begins work. But according to the new guidance, employers have until June 19, 2012, to complete and file this newly revised form for veterans hired on or after Nov. 22, 2011, and before May 22, The 28-day rule will also apply to eligible veterans hired on or after May 22, To streamline the certification requirements, the IRS clarified and expanded upon earlier guidance to facilitate employers use of electronic signatures when gathering the Form 8850 for transmission to state work force agencies. The guidance confirms that employers can transmit the form electronically and allows employers to transmit it by fax, subject to the ability of the state work force agencies to accept submissions in those formats. The IRS expects the Department of Labor to issue further guidance to the state work force agencies to provide clarification. Read more in Notice

20 tax laughs Tax Court doesn t buy lurid excuse As April 15 approaches, many people scurry to file their income tax returns on time. Such was not the case for Steven and Lori Esrig. As described in a recent Tax Court case (Steven A. and Lori S. Esrig v. Commissioner, TC Memo , Feb. 7, 2012), the best the Esrigs were able to do between 1998 and 2003 was to file their 2002 return almost 1½ years late. That was much better than 1998, when they were more than 4½ years late in filing their return. But the Esrigs had an excuse for the court. It seems the problem was with the Esrigs tax preparer. Steven testified that his accountant missed all the deadlines because she had to serve a long prison sentence for murdering her husband. The court was not convinced, stating, The Esrigs had no evidence to corroborate this lurid tale, and we therefore find that they had no reasonable cause for failing to timely file. Using a convicted felon as your tax preparer may work in The Shawshank Redemption, but it s probably not a good idea in the real world. It is a good thing that we do not get as much government as we pay for. Will Rogers

21 Courts Tax IRS Congress The technical information in this newsletter is necessarily brief. No final conclusion on these topics should be drawn without further review and consultation. Please be advised that, based on current IRS rules and standards, the information contained herein is not intended to be used, nor can it be used, for the avoidance of any tax penalty assessed by the IRS CPAmerica International