THOMAS, HEAD & GREISEN, Pc

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1 THOMAS, HEAD & GREISEN, Pc CERTIFIED PUBLIC ACCOUNTANTS Kevin E. Branson, CPA John A. Letourneau, CPA Debra K. Mason, CPAICFF, CFE Erich R. Lamirand, CPA Cindy L. Hulquist, CPA Ronald E. Greisen, CPA/ABV/CFF 2012 March 2012 IRS Releases the Dirty Dozen Tax Scams for 2012 Dear Clients & Friends: The Internal Revenue Service issued its annual "Dirty Dozen" ranking of tax scams, reminding taxpayers to use caution during tax season to protect themselves against a wide range of schemes ranging from identity theft to return preparer fraud. The Dirty Dozen listing, compiled by the Ins each year, lists a variety of common scams taxpayers can encounter at any point during the year. But many of these schemes peak during filing season as people prepare their tax returns. The following are a few of the Dirty Dozen tax scams for 2012: Identity Theft Topping this year s list Dirty Dozen list is identity theft. In response to growing identity theft concerns, the Ins has embarked on a comprehensive strategy that is focused on preventing, detecting and resolving identity theft cases as soon as possible. In addition to the law-enforcement crackdown, the Ins has stepped up its internal reviews to spot false tax returns before tax refunds are issued as well as working to help victims of the identity theft refund schemes. Identity theft cases are among the most complex ones the Ins handles, but the agency is committed to working with taxpayers who have become victims of identity theft. The Ins is increasingly seeing identity thieves looking for ways to use a legitimate taxpayer s identity and personal information to file a tax return and claim a fraudulent refund. An Ins notice informing a taxpayer that more than one return was filed in the taxpayer s name or that the taxpayer received wages from an unknown employer may be the first tip off the individual receives that he or she has been victimized. The Ins has a robust screening process with measures in place to stop fraudulent returns. While the Ins is continuing to address taxrelated identity theft aggressively, the agency is also seeing an increase in identity crimes, including more complex schemes. In 2011, the Ins protected more than $1.4 billion of taxpayer funds from getting into the wrong hands due to identity theft. In January, the Ins announced the results of a massive, national sweep cracking down on suspected identity theft perpetrators as part of a stepped-up effort against refund fraud and identity theft. Working with the Justice Department s Tax Division and local U.S. Attorneys offices, the nationwide effort targeted 105 people in 23 states. Anyone who believes his or her personal information has been stolen and used for tax purposes should immediately contact the InS Identity Protection Specialized Unit. For more T. (907) F. (907) West Benson Blvd. Suite 400, Anchorage, Alaska I

2 information, visit the special identity theft page at Phishing Phishing is a scam typically carried out with the help of unsolicited or a fake website that poses as a legitimate site to lure in potential victims and prompt them to provide valuable personal and financial information. Armed with this information, a criminal can commit identity theft or financial theft. If you receive an unsolicited that appears to be from either the IRS or an organization closely linked to the IRS, such as the Electronic Federal Tax Payment System (EFTPS), report it by sending it to ~hishin~..irs.~ov. It is important to keep in mind the IRS does not initiate contact with taxpayers by to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels. The IRS has information that can help you protect yourself from scams. Return Preparer Fraud About 60 percent of taxpayers will use tax professionals this year to prepare and file their tax returns. Most return preparers provide honest service to their clients. But as in any other business, there are also some who prey on unsuspecting taxpayers. Questionable return preparers have been known to skim off their clients refunds, charge inflated fees for return preparation services and attract new clients by promising guaranteed or inflated refunds. Taxpayers should choose carefully when hiring a tax preparer. Federal courts have issued hundreds of injunctions ordering individuals to cease preparing returns, and the Department of Justice has pending complaints against many others. In 2012, every paid preparer needs to have a Preparer Tax Identification Number (PTIN) and enter it on the returns he or she prepares. Falsely Claiming Zero Wages Filing a phony information return is an illegal way to lower the amount of taxes an individual owes. Typically, a Form 4852 (Substitute Form W-2) or a "corrected" Form 1099 is used as a way to improperly reduce taxable income to zero. The taxpayer may also submit a statement rebutting wages and taxes reported by a payer to the IRS Sometimes, fraudsters even include an explanation on their Form 4852 that cites statutory language on the definition of wages or may include some reference to a paying company that refuses to issue a corrected Form W-2 for fear of IRS retaliation. Taxpayers should resist any temptation to participate in any variations of this scheme. Filing this type of return may result in a $5,000 penalty. Abuse of Charitable Organizations and Deductions IRS examiners continue to uncover the intentional abuse of 501(c)(3) organizations, including arrangements that improperly shield income or assets from taxation and attempts by donors to maintain control over donated assets or the income from donated property. The IRS is investigating schemes that involve the donation of non-cash assets -- including situations in which several organizations claim the full value of the same non-cash contribution. Often these donations are highly overvalued or the organization receiving the donation promises that the donor can repurchase the items later at a price set by the donor. The Pension Protection Act of 2006 imposed increased penalties for inaccurate appraisals and set new standards for qualified appraisals. Members of Western Association of Accounting Firms Associate Offices in: Boise, Chico, Denver, Eugene, Fresno, Klamath Falls, LaJolla, Medford, Ogden, Oroville, Ca., Pasadena, Phoenix, Pleasanton, Portland, Rancho Cucamonga, Redding, San Francisco, San Jose, San Mateo, and Seattle

3 Misuse of Trusts For years, unscrupulous promoters have urged taxpayers to transfer assets into trusts. While there are legitimate uses of trusts in tax and estate planning, some highly questionable transactions promise reduction of income subject to tax, deductions for personal expenses and reduced estate or gift taxes. Such trusts rarely deliver the tax benefits promised and are used primarily as a means of avoiding income tax liability and hiding assets from creditors, including the IRS. IRS personnel have seen an increase in the improper use of private annuity trusts and foreign trusts to shift income and deduct personal expenses. As with other arrangements, taxpayers should seek the advice of a trusted professional before entering a trust arrangement. Please contact our office if you have any questions concerning the IRS Dirty Dozen scam list. INSIDE TH&G I, I, I,!, Ben Persingerjoined Thomas, Head & Greisen, PC in January 2012 as a staff accountant. Ben moved to Alaska in 2001 from Yukon Territory, Canada and spent the next several years working in construction throughout Alaska. Since then, he obtained a Bachelors degree in Accounting and an Associates degree in Small Business Administration from the University of Alaska Anchorage. Ben previously worked for another public accounting firm in Anchorage in their auditing department and is currently studying for the CPA exams. In his spare time, Ben enjoys spending time with his wife OIga and their hyper-active golden lab, along with friends and family doing all the things Alaska has to offer. We welcome Ben to our TH&G family! CCH s Knowledge-Based Audit Training, Attendees reviewed the risk assessment standards and how to adapt to meet these requirements utilizing the Knowledge-Based Audit (KBA) approach. They identified ways to test the operating effectiveness of internal controls and other considerations for small business audits. Staff gained additional understanding of the entity and its environment, including assessing risk and materiality utilizing the KBA. Attendees: Shane Baird, CPA; Debra Mason, CPA/CFF, CFE; Amelia Nazworth, CPA, MBA; and Meshel Tran AICPA s Annual Update for Corporations & Pass Through Entities. Attendees reviewed the latest federal tax law changes, court decisions and IRS pronouncements related to partnerships, LLCs, and C and S Corporations. Staff received information to utilize the latest planning ideas resulting from changes to tax statutes, regulations, cases and rulings. They increased their knowledge of property transactions; which included depreciation and amortization, and gains and losses. Attendees: Jon Brewer, CPA; Audrey Cuthill; Tiffany Heilman, CPA; Tami Holt, CPA; Cindy Hulquist, CPA; Erich Lamirand, CPA; Louanne Lum, CPA; Amelia Nazworth, CPA, MBA; and Olga van Tets, CPA Members of Western Association of Accounting Firms Associate Offices in: Boise, Chico, Denver, Eugene, Fresno, Klamath Falls, LaJol[a, Medfordr Ogden, Oroville, Ca., Pasadena, Phoenix, P[easanton, Poffiand, Rancho Cucamonga, Redding, San Francisco, San Jose, San Mateo, and Seattle T.(907) F.(907) I 1400 West Benson Blvd. Suite 400, Anchorage, Alaska ]

4 THOMAS, HEAD & GREISENo c TM March 2012 Many taxpayers are applying for social security retirement benefits earlier than they previously planned to supplement their income. But, continuing to work while receiving social security benefits may cause the benefit to be reduced below the anticipated amount. If you are a social security beneficiary under the full retirement age (currently 66), an earnings test determines whether your social security retirement benefits will be reduced because you earned more from a job or business than an annual exempt amount (discussed below). A different earnings test applies for individuals entitled to disability benefits. As a general rule, the earnings test is based on income earned during the year as a whole, without regard to the amount you earned each month. However, in the first year, benefits you How Working Impacts Social Security Benefits security retirement benefits. However, the earnings test still applies for the years and months before the month you reach the full benefit retirement age. Social security beneficiaries under the full benefit retirement age who have earnings in excess of the annual exempt amount are subject to a $1 reduction in benefits for each $2 earned over the exempt amount (currently $14,640) for each year before the year during which they receive are not reduced for any month in whichreach the full benefit retirement age (see the you earn less than one-twelfth of the annual exempt amount. example). However, in the year beneficiaries reach their full benefit retirement age, earnings above a different annual exempt amount The social security retirement earnings test is ($38,880 in 2012) are subject to a $1 reduction eliminated after you reach your full benefit in benefits for each $3 earned over the exempt retirement age for the month of, and months amount. Social security benefits are not affected after, such attainment. In other words, once youby earned income beginning with the month reach your full benefit retirement age, there is the beneficiary reaches full benefit retirement no longer an earnings test to reduce your socialage. (Continued on Page 2.) The information contained in this newsletter was not intended or written to be used and cannot be used for the purpose of (1) avoiding tax-related penalties prescribed by the Internal Revenue Code or (2) promoting or marketing any tax-related matter addressed herein.

5 Standard Mileage Rates for 2012 The 2012 standard mileage rates for use of an automobile are 55.5 cents per mile for business miles (the same rate in effect for the last half of 2011), 23 cents per mile for medical or moving purposes, and 14 cents per mile for Tax Planning Following a Job Loss Taxpayers dealing with a layoff or termination frequently overlook the tax consequences of events associated with their unexpected job loss. Yet, properly handling the tax aspects of this life-changing event could prevent a negative financial impact. Severance or dismissal pay, including an amount paid in lieu of a termination notice, is taxable income regardless of whether the employer is legally bound to make the payment, However, the value of job placement assistance provided rendering gratuitous services to a charitable organization. A taxpayer may not use the business standard mileage rate for any vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or claiming a Section 179 deduction for that vehicle, or for more than four vehicles used simultaneously. ~ by an employer to a terminated or laid-off employee generally may be excluded from income as a working condition fringe benefit. Qualified moving expense reimbursements are excluded from income. This includes any amount received, directly or indirectly, from an employer as a payment for, or a reimbursement of, expenses that would have been deductible as moving expenses on the taxpayer s personal tax return if directly paid or incurred by him or her. Finally, distributions from a qualified retirement plan (less any nondeductible employee contributions) are generally taxed as ordinary income. A 10% penalty tax applies to distributions before age 59½, unless they are part of a series of substantially equal payments or received due to separation from service after age 55, or due to death, disability, or other specific exception. ~ How Working Impacts Social Security Benefits (Continued from Page 1.) Example: Applying the annual earnings test. Edward, age 62, currently averages $2,000 per month in commissions ($24,000 per year). He has recently experienced a decrease in his income due to lower sales and is considering applying for social security benefits to supplement his reduced income. Edward s social security retirement benefit will be $1,400 per month, so he expects to receive benefits totaling $16,800 per year. However, since he will earn $9,360 over the $14,640 exempt amount ($24,000 - $14,640), his benefits will initially be reduced by half that amount, or $4,680. Therefore, he will receive only $12,120 in social security benefits ($16,800 $4,680). The results would be the same if Edward was self-employed, rather than an employee. As you plan your retirement, be mindful that, as the previous example indicates, working during retirement and prior to your full retirement age may reduce your anticipated social security benefits. This, in turn, could have a negative impact on your overall financial plans. ~

6 New regulations designed to uncover information on foreign assets owned by U.S. taxpayers have been implemented by the IRS. Where taxpayers have an interest in one or more specified foreign financial assets (explained below) exceeding certain threshold amounts, additional inforn~ation must be included in their tax return. This required information includes, but is not limited to, the name and address of the financial institution, stock or financial instrument issuer, or foreign entity; account numbers; asset values; status of the account (open or closed); acquisition and disposal dates; and foreign currency rates. For taxpayers living in the United States, the thresholds are assets that have an aggregate fair market value (FMV) exceeding either $50,000 on the last day of the tax year or $75,000 at any time during the tax year or $100,000 and $150,000, respectively, for married taxpayers filing a joint annual return. Higher threshold amounts apply for U.S. taxpayers living abroad. Specified foreign financial assets are depository or custodial accounts at foreign financial institutions, and, to the extent not held in an account at a financial institution, include (a) stocks or securities issued by foreign persons, (b) any other financial instrument or contract held for investment that is issued by or has a counterparty that is not a U.S. person, and (c) any interest in a foreign entity. In general, a taxpayer has an interest in a specified foreign financial asset if any income, gains, losses, deductions, credits, gross proceeds, or distributions attributable to the holding or disposition of the specified foreign financial asset are or would be required to be reported, included, or otherwise reflected by the taxpayer on an annual return. However, to comply with the reporting reqnirements, a taxpayer has Reporting Foreign Financial Assets attributable to the holding or disposition of the specified foreign financial asset for the tax year. Example 1: Reporting requirement for an unmarried individual. Brenda is not married and does not live abroad. She sold her only specified foreign financial asset prior to year-end when its value was $125,000. Brenda has to provide information on the asset since she satisfies the reporting threshold. Even though she does not hold any specified foreign financial assets on the last day of the tax year, she did own specified foreign financial assets of more than $75,000 during the tax year. Example 2: Reporting requirement for joint tilers. Mark and Julie file a joint income tax return and do not live abroad. They jointly own a single specified foreign financial asset valued at $60,000. They do not have to provide information on the asset since they do not meet the reporting threshold for married taxpayers filing jointly of more than $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year. A taxpayer who fails to provide the required information is subject to significant penalties. an interest in a specified foreign financial assetplease call us to discuss the significance of this even if no income, gains, losses, deductions, credits, gross proceeds, or distributions are new reporting requirement or any other tax compliance or planning issue. O

7 Employing Children in an Unincorporated Business This tax-saving idea could help certain taxpayers reduce their federal taxes. If you operate a business as a sole proprietorship, a single-member LLC treated as a sole proprietorship for tax purposes, a husband-wife partnership, or a husband-wife LLC treated as a partnership for tax purposes, consider hiring your underage-18 child, either full-time or part-time, as a legitimate employee of your business. Your under-age-18 child s wages are exempt from Social Security, Medicare, and federal unemployment taxes. In addition, your chiid can use his or her standard deduction to shelter up to $5,950 of 2012 wages from federal income tax. Under this arrangement, your child will probably owe little or no federal income tax on the first $5,950 of wages. He or she can set aside some or all of the wages and invest the money. Hopefully, the cash stash will eventually be used to help pay for college, which means less stress for you. Meanwhile, as the employer, you can deduct the wages paid to your child as a business expense, as long as they are reasonable for the work performed. The write-off will cut your income tax liability and your self-employment tax bill (if applicable). The write-off will also lower your adjusted gross income, which will decrease the odds of getting hit with the unfavorable phase-out rules that can reduce or eliminate various tax breaks. After your child reaches age 18, Social Security and Medicare taxes will kick in; however, federal unemployment tax will not apply until age 21. The child s standard deduction will still shelter up to $5,950 (for 2012) from federal income tax. And, you can still deduct the wages and related employment taxes as business expenses. Even if your business is incorporated, hiring your child can still make tax-saving sense. In this scenario, the child s wages are subject to Social Security, Medicare, and federal unemployment taxes regardless of his or her age. Tlie good news is the child s standard deduction still provides an income tax shelter for the child, and the corporation can claim business deductions for the wages and the employer s share of the employment taxes. Please contact us if you have questions or want more information about this strategy. ~