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Feb 02 2017
Changes in tax Law

Posted in General

IRS Changes Position on Claiming Childless EIC; Amended Returns May be in Order
The IRS issued proposed regulations which reflect a change in the IRS's position on the interaction of the Code Sec. 152(c)(4) tiebreaker rules, which goes into effect when two or more people can claim a child as a qualifying child for tax purposes, with the Code Sec. 32 earned income credit rules. Under the revised position, if an individual is not treated as a qualifying child of a taxpayer after applying the tiebreaker rules in Code Sec. 152(c)(4), then the individual will not prevent that taxpayer from qualifying for the childless earned income credit. REG-137604-07 (1/19/17).
Background
Under Code Sec. 32, a taxpayer may claim an earned income credit (EIC) if the taxpayer:
(1) has earned income,
(2) has adjusted gross income not in excess of certain limits,
(3) does not have more than a specified amount of investment income,
(4) is a U.S. citizen or resident for the entire year,
(5) does not file as married filing separately,
(6) has a valid social security number, and
(7) does not claim the foreign earned income exclusion or the foreign housing exclusion or deduction.
The credit is available to taxpayers with a qualifying child or qualifying children, as well as taxpayers without a qualifying child, although different sets of rules apply.
Sometimes an individual meets the tests to be a qualifying child of more than one person. However, only one of these persons can treat the child as a qualifying child for EIC and other child-related tax benefit purposes (such as the child tax credit and the credit for child and dependent care expenses). The other person(s) cannot claim any of these benefits based on the qualifying child. A tiebreaker rules in Code Sec. 152(c)(4) determine who, if anyone, can claim the EIC when an individual is a qualifying child of more than one person.
A taxpayer who does not have a qualifying child for the tax year, but who meets the general requirements to claim the EIC, can claim the "childless EIC" under Code Sec. 32(c)(1)(A) and (B) if the taxpayer (1) is age 25 through 64, or files jointly with someone who meets this age test; (2) lives in the U.S. for more than half the tax year; (3) cannot be claimed as a dependent on another taxpayer's return for the year; and (4) is not a qualifying child of another taxpayer for the year.

Last Updated by Admin on 2017-02-02 19:57:34.0

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Jan 17 2017
Steep Penalties Put a Premium on Timely, Accurate 1099 Reporting

Posted in General

With sharply increased information reporting penalties in their second year (as high as $260 per late Form 1099), timely issuance of Form 1099s has become a critical imperative for many businesses. The urgency for timely reporting is compounded by the continued presence of questions on Forms 1065, 1120, 1120S, and 1040, asking whether the taxpayer made any payments in 2016 that would require the taxpayer to file Form(s) 1099. Starting this year, taxpayers also face earlier deadlines for reporting W-2 and 1099 information to the Social Security Administration and the IRS.

Practice Aid: See ¶320,690 for a client letter that explains the requirement to file Form 1099 and the significance of the Form 1099 question on the various returns.

Penalties for Failing to File Correct 1099s

Information reporting penalties apply if a payer fails to timely file an information return, fails to include all information required to be shown on the return, or includes incorrect information on the return. The penalties apply to all variations of Form 1099.

The amount of the penalty is based on when the correct information return is filed. For returns required to be filed for the 2016 tax year, the penalty is:

  • $50 per information return for returns filed correctly within 30 days after the due date, with a maximum penalty of $532,000 a year ($186,000 for certain small businesses);
  • $100 per information return for returns filed more than 30 days after the due date but by August 1, with a maximum penalty of $1,596,500 a year ($532,000 for certain small businesses); and
  • $260 per information return for returns filed after August 1 or not filed at all, with a maximum penalty of $3,193,000 a year for most businesses, but $1,064,000 for certain small businesses.

For purposes of the lower penalty, a business is a small business for any calendar year if its average annual gross receipts for the three most recent tax years (or for the period it was in existence, if shorter) ending before the calendar year do not exceed $5 million.

Observation: Last year's increase in information return penalties represents the second time in just a few years that Congress has enacted sharp increases. For Form 1099s filed after August 1 or not filed at all, taxpayers face a 500% increase in the per-item penalty compared with the pre-2010 amount.

 

Last Updated by Admin on 2017-01-17 13:20:13.0

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Jan 12 2017
Republican Victory in November Sets the Stage for Major Tax Changes in 2017

Posted in General

By winning the White House and holding on to their majorities in the House and Senate, Republicans put themselves in a position to fulfill campaign promises to reduce individual and corporate tax rates, repeal healthcare taxes, repeal the estate tax, and possibly implement broad, substantive tax reform.

With a Republican government seated for the first time in a decade, it's anticipated that 2017 will bring extensive tax changes. Among the most likely to pass:  

  • reductions in most individual income tax rates;
  • reduction in the top corporate income tax rate;
  • repeal of healthcare taxes and credits enacted under the Affordable Care Act (Obamacare); and
  • repeal of the estate tax.

 

A large increase in standard deduction amounts and a sharp curtailment of itemized deductions will also be on the table, along with broad corporate tax reform.

The proposed changes were centerpieces of the Trump campaign and were also featured in a tax reform plan put forward last summer by House Speaker Paul Ryan and Ways and Means Chairman Kevin Brady ("Ryan-Brady plan").

Last Updated by Admin on 2017-01-12 13:54:20.0

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Dec 23 2016
Combat-Injured Veterans Tax Fairness Act of 2016 Extends Statute for Veterans to Collect Refunds

Posted in General

In early December, Congress voted unanimously to approve the Combat-Injured Veterans Tax Fairness Act of 2016, which was signed into law by President Obama on December 16. The Act extends the time that veterans, who were separated from service for combat-related injuries and that had taxes improperly withheld from their severance pay, have to file amended returns and claims refunds for such taxes. H.R. 5015 (12/16/2016).
Approximately 10,000 to 11,000 individuals are retired from the Armed Forces for medical reasons each year. Some of these individuals are separated from service as a result of combat-related injuries. In recognition of the tremendous personal sacrifice of veterans with combat-related injuries, severance pay received for combat-related injuries is excludible from income under Code Sec. 104.
It came to Congress's attention that, since 1991, the Secretary of Defense had improperly withheld taxes from severance pay for wounded veterans, thus denying them their due compensation and a significant benefit intended by Congress. Congress recognized that many veterans owed redress were beyond the statutory period to file an amended tax return because they were not aware that taxes had been improperly withheld.
The Combat-Injured Veterans Tax Fairness Act of 2016 directs the Department of Defense (DOD) to identify certain severance payments to veterans with combat-related injuries paid after January 17, 1991, from which DOD withheld amounts for tax purposes. Once such veterans are identified, the DOD must provide the identified veteran with a notice of the amount of improperly withheld severance payments, and instructions for filing amended tax returns to recover such amount.
While the statute of limitations for filing a refund claim is generally three years from the date the return is due or the date the return is filed, the Veterans Tax Fairness Act of 2016 extends the period of time for filing a severance-related claim to the date that is one year after DOD provides the veteran with the relevant information to file an amended return. The Act further requires that, in the future, the DOD ensure that amounts are not withheld for tax purposes from DOD severance payments to individuals when such payments are not considered gross income.

Last Updated by Admin on 2016-12-23 18:21:53.0

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Dec 09 2016
IRS's Own Evidence Supports Taxpayer's Mortgage Interest Deductions; Home Office Deduction Denied

Posted in General

The Tax Court determined that a taxpayer was entitled to a mortgage interest deduction for his residence, but denied his home office expense deductions. The court noted that a Form 1098 obtained by the IRS from the mortgage company, was sufficient evidence that the taxpayer paid the interest, despite the fact that the mortgage company had also issued a Form 1099-C in the same year, reporting that a substantial amount of interest on the debt had been forgiven. Alexander v. Comm'r, T.C. Memo. 2016-214.

Malcom Alexander owned two houses during 2010. The first house was in Washington, D.C., and the second was his principal residence in Gaithersburg, Maryland (Gaithersburg house). According to Alexander, he purchased the Gaithersburg house primarily for use in his multilevel network marketing business, and three of its 11 rooms - a first-floor office, a second-floor office, and a "presentation room" - regularly and exclusively for his business.

In 2010 Alexander paid to American Star Financial, Inc. (American Star), mortgage interest of $57,220 in connection with the Gaithersburg house. Also in 2010, American Star issued him a Form 1099-C, Cancellation of Debt, reporting that the company canceled $100,665 of debt relating to the Gaithersburg house, including $52,746 of interest.

On his 2010 income tax return, Alexander claimed a $57,220 deduction for the interest paid on the Gaithersburg house, and claimed he was entitled to a home office expense deduction for the use of 27.27 percent of the house. The IRS audited the return, and denied the deductions.

Code Sec. 163(h) generally allows taxpayers to deduct "qualified residence interest," which includes amounts paid or accrued during the taxable year on acquisition indebtedness (such as a mortgage).

Under Code Sec. 280A(c)(1), taxpayers can deduct expenses attributable to a home office if the expenses are allocable to a portion of the dwelling unit which is exclusively used on a regular basis as the principal place of business for the taxpayer's trade or business.

The Tax Court stated that at trial Alexander testified credibly that he paid $57,220 in mortgage interest to American Star in 2010, noting that a Form 1098, Mortgage Interest Statement, the IRS subpoenaed from the company showed that it received $57,220 of mortgage interest from Alexander in 2010 in connection with the Gaithersburg house.

The IRS argued that American Star canceled Alexander's mortgage interest for 2010 and therefore he did not pay the interest reported as received by American Star on the Form 1098. The court stated it was not persuaded by the IRS's argument for several reasons. First, the court said, the IRS presented no evidence that the reported cancellation of indebtedness was connected to the interest payments American Star reported having received. Second, the court noted the amount of interest reported as canceled on the Form 1099-C ($52,746) was not the same as the amount of interest reported as received by American Star on the Form 1098 ($57,220). Furthermore, the court observed, the IRS conceded before trial that Alexander wasn't liable for the cancellation of indebtedness income reported on the Form 1099-C. Accordingly, the court held that Alexander was entitled to his claimed $57,220 mortgage interest deduction.

With regard to Alexander's claimed home office expense deductions, the court noted that in order to substantiate that he used 3 of 11 rooms (i.e., 27.27 percent) of the Gaithersburg house regularly and exclusively for business purposes, Alexander offered into evidence copies of photographs depicting rooms, folding chairs, and social gatherings. However, the court stated, the copies of photographs did not establish whether the rooms were used regularly and exclusively for the network marketing business. In addition, the court stated that even if Alexander established that he used certain rooms regularly and exclusively for business purposes, he provided no testimony or documentation concerning the size of the house and rooms which would allow it to properly allocate costs. Accordingly, the court sustained the IRS's disallowance of a home office expense deduction.

Last Updated by Admin on 2016-12-09 20:57:20.0

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Nov 16 2016
De Minimis Safe Harbor

Posted in General

The tangible property regulations allow taxpayers that pay or incur amounts to acquire, produce, or improve tangible or personal property to elect to apply a de minimis safe-harbor expensing for amounts that they also expense for financial accounting purposes.  The amounts allowable under the de minimis safe harbor are $2,500 or $5,000, depending on whether the taxpayer has an applicable financial statement (AFS).  Taxpayers with an AFS may use this safe harbor to deduct amounts paid for purchases and/or improvements of tangible property for up to $5,000 per invoice or item, provided that this accounting procedure is in writing.  Non-AFS taxpayers may use the safe harbor to deduct up to $2,500 per invoice or item.  Non-AFS taxpayers are not required to have written accounting procedures, but they must expense amounts on books and records in accordance with accounting procedures existing at the beginning of the tax year.

If a taxpayer's policy is to expense items above the $2,500 threshold for non-AFS taxpayers, it should still elect the de minimis safe harbor on the federal return because this will ensure that the IRS will not question the deduction of the items costing $2,500 or less.

Taxpayers must apply their applicable threshold to their books and records to benefit from this election and eliminate any book-to-tax differences when deducting assets or improvements that fall under their applicable threshold.

To elect the de mnimis safe harbor, the taxpayer should attach a statement titled "Section 1.263(a)-1(f) de minimis safe harbor election" to the timely filed federal tax return including extensions for the tax year in which the de minimis amounts are actually paid.  The annual election does not require the filing of Form 3115, Application for Change in Accounting Method. 

Last Updated by Admin on 2016-11-16 13:43:58.0

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Oct 27 2016
IRS Updates Per Diem Rates for Travel Away From Home

Posted in General

The IRS has provided the 2016-2017 special per diem rates for taxpayers to use in substantiating the amount of ordinary and necessary business expenses incurred while traveling away from home. Notice 2016-58.

In Notice 2016-58, the IRS issued the annual update on special per diem rates used in substantiating the amount of ordinary and necessary business expenses incurred while traveling away from home. Specifically, the notice provides: (1) the special transportation industry meal and incidental expenses rates (M&IE rates), (2) the rate for the incidental expenses only deduction, and (3) the rates and lists of high-cost localities for purposes of the high-low substantiation method.

Taxpayers using the rates and the list of high-cost localities provided in Notice 2016-58 must comply with Rev. Proc. 2011-47, which provides rules for using a per diem rate to substantiate, under Code Sec. 274(d) and Reg. Sec. 1.274-5, the amount of ordinary and necessary business expenses paid or incurred while traveling away from home.

For purposes of the high-low substantiation method, the per diem rates are $282 for travel to any high-cost locality and $189 for travel to any other locality within the continental U.S. (up from $275 and $185, respectively). The amount of the $282 high rate and $189 low rate that is treated as paid for meals for purposes of Code Sec. 274(n) is $68 for travel to any high-cost locality and $57 for travel to any other locality within the continental U.S.

The per diem rates for the meal and incidental expenses only substantiation method are $68 for travel to any high-cost locality and $57 for travel to any other locality within the continental U.S. (same as last year).

Notice 2016-58 is effective for per diem allowances for lodging, meal and incidental expenses, or for meal and incidental expenses only that are paid to any employee on or after October 1, 2016, for travel away from home on or after October 1, 2016. Rates for the period of October 1, 2015 through September 30, 2016, can be found in Notice 2015-63.

 

Last Updated by Admin on 2016-10-27 13:11:02.0

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Oct 17 2016
IRS Gives Expanded Tax Relief to Victims of Hurricane Matthew; Parts of Four States Eligible; Extension Filers Have Until March 15 to File

Posted in General


Hurricane Matthew victims in much of North Carolina and parts of South Carolina, Georgia and Florida have until March 15, 2017, to file certain individual and business tax returns and make certain tax payments, the Internal Revenue Service announced today. This includes an additional filing extension for those with valid extensions that run out at midnight tonight, Oct. 17.


The IRS is now offering this expanded relief to any area designated by the Federal Emergency Management Agency (FEMA), as qualifying for either individual assistance or public assistance. Moreover, taxpayers in counties added later to the disaster area will automatically receive the same filing and payment relief.


The IRS is taking this step due to the unusual factors involving Hurricane Matthew and the interaction with the Oct. 17 extension deadline.


The tax relief postpones various tax filing and payment deadlines that occurred starting on Oct. 4, 2016. As a result, affected individuals and businesses will have until March 15, 2017, to file returns and pay any taxes that were originally due during this period. This includes the Jan. 17 deadline for making quarterly estimated tax payments. For individual tax filers, it also includes 2015 income tax returns that received a tax-filing extension until today, Oct. 17, 2016. The IRS noted, however, that because tax payments related to these 2015 returns were originally due on April 18, 2016, those are not eligible for this relief.


A variety of business tax deadlines are also affected including the Oct. 31 and Jan. 31 deadlines for quarterly payroll and excise tax returns. It also includes the special March 1 deadline that applies to farmers and fishermen who choose to forgo making quarterly estimated tax payments.


In addition, the IRS is waiving late-deposit penalties for federal payroll and excise tax deposits normally due on or after Oct. 4 and before Oct. 19 if the deposits are made by Oct. 19, 2016. Details on available relief can be found on the disaster reliefpage on IRS.gov.


The IRS automatically provides filing and penalty relief to any taxpayer with an IRS address of record located in the disaster area. Thus, taxpayers need not contact the IRS to get this relief. However, if an affected taxpayer receives a late filing or late payment penalty notice from the IRS that has an original or extended filing, payment or deposit due date falling within the postponement period, the taxpayer should call the number on the notice to have the penalty abated.


In addition,the IRS will work with any taxpayer who lives outside the disaster area but whose records necessary to meet a deadline occurring during the postponement period are located in the affected area. Taxpayers qualifying for relief who live outside the disaster area need to contact the IRS at 866-562-5227. This also includes workers assisting the relief activities who are affiliated with a recognized government or philanthropic organization.


Individuals and businesses who suffered uninsured or unreimbursed disaster-related losses can choose to claim them on either the return for the year the loss occurred (in this instance, the 2016 return normally filed next year), or the return for the prior year (2015). See Publication 547 for details.


Currently, the following areas are eligible for relief:


North Carolina: Beaufort, Bertie, Bladen, Brunswick, Camden, Carteret, Chowan, Columbus, Craven, Cumberland, Currituck, Dare, Duplin, Edgecombe, Gates, Greene, Harnett, Hoke, Hyde, Johnston, Jones, Lenoir, Martin, Nash, New Hanover, Onslow, Pamlico, Pasquotank, Pender, Perquimans, Pitt, Robeson, Sampson, Tyrrell, Washington, Wayne and Wilson counties.
 
South Carolina: Beaufort, Berkeley, Charleston, Colleton, Darlington, Dillon, Dorchester, Florence, Georgetown, Horry, Jasper, Marion, Orangeburg and Williamsburg counties.
 
Georgia: Bryan, Camden, Chatham, Glynn, Liberty and McIntosh counties.
 
Florida: Brevard, Duval, Flagler, Indian River, Nassau, St. Johns, St. Lucie and Volusia counties.

 

Last Updated by Admin on 2016-11-16 13:57:35.0

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Oct 06 2016
New Private Debt Collection Program to Begin Next Spring; IRS to Contract with Four Agencies; Taxpayer Rights Protected

Posted in General

The Internal Revenue Service announced today that it plans to begin private collection of certain overdue federal tax debts next spring and has selected four contractors to implement the new program.

The new program, authorized under a federal law enacted by Congress last December, enables these designated contractors to collect, on the government's behalf, outstanding inactive tax receivables.  As a condition of receiving a contract, these agencies must respect taxpayer rights including, among other things, abiding by the consumer protection provisions of the Fair Debt Collection Practices Act.  The IRS has selected the following contractors to carry out this program.

  • CBE Group 

1309 Technology Pkwy

Cedar Falls, IA 50613

 

  • Conserve

200 CrossKeys Office park

Fairport, NY 14450          

                                                                                   

  • Performant

333 N Canyons Pkwy

Livermore, CA 94551          

                                                                             

  • Pioneer

325 Daniel Zenker Dr. 

Horseheads, NY 14845 

 

These private collection agencies will work on accounts where taxpayers owe money, but the IRS is no longer actively working their accounts.  Several factors contribute to the IRS assigning these accounts to private collection agencies, including older, overdue tax accounts or lack of resources preventing the IRS from working the cases.

The IRS will give each taxpayer and their representative written notice that their account is being transferred to a private collection agency.  The agency will then send a second letter to the taxpayer and their representative confirming this transfer.

Private collection agencies will be able to identify themselves as contractors of the IRS collecting taxes.  Employees of these collection agencies must follow the provisions of the Fair Debt Collection Practices Act and must be courteous and respect taxpayer rights.

The IRS will do everything it can to help taxpayers avoid confusion and understand their rights and tax responsibilities, particularly in light of continual phone scams where callers impersonate IRS agents and request immediate payment.

Private collection agencies will not ask for payment on a prepaid debit card. Taxpayers will be informed about electronic payment options for taxpayers on IRS.gov/Pay Your Tax Bill.  Payment by check should be payable to the U.S. Treasury and sent directly to the IRS, not the private collection agency.

 

 

Last Updated by Admin on 2016-11-16 13:46:30.0

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Oct 03 2016
Teacher Entitled to Deductions for Home Office Used for Administrative Assignments

Posted in General

 

The Tax Court held that a physical education teacher, who taught at multiple schools each day, was entitled to deductions for the use of her home office. The court determined that the nature of the taxpayer's work required her to use portions of her home as her principle place of business in order to complete administrative and management activities, and found she did so for the convenience of her employer. The court disallowed the taxpayer's claimed deductions for unreimbursed vehicle and travel expenses, finding that she was not able to substantiate those expenses. Czekalski v Comm'r, T.C. Summary 2016-56.

Background

Diana Czekalski has been employed by the Hayward Unified School District (Hayward USD), part of the California public school system, for 31 years as an adapted physical education teacher. Her primary responsibilities include planning, developing, and implementing physical education programs for students with special needs.

On an average day, Czekalski drove her personal vehicle from her home to several schools where she used specialized physical education equipment, portable sound systems, and other devices (which she transported in her car) to engage students with special needs in appropriate physical education activities. At the end of the day, Czekalski returned home where she prepared various reports (e.g., progress and time and attendance reports) that she submitted to Hayward USD. In 2011 Czekalski was the sole adapted physical education teacher in school district, and she instructed as many as 96 students weekly.

Czekalski lives in a two-story residence with a two-car garage comprising a total of approximately 1,462 square feet of space. In 2011 Czekalski used an upstairs bedroom (80 square feet of space) as an office where she prepared routine reports and performed other administrative tasks related to her work for Hayward USD, and she devoted approximately one-half of her garage (144 square feet of space) to storing physical education equipment owned by Hayward USD.

In November 2011 Czekalski traveled to Long Beach, California, to attend a conference for educators working with children with disabilities. Before the trip, she had been informed by a Hayward USD representative that she would not be reimbursed for her travel expenses because of budget constraints.

On her 2011 income tax return, Czekalski claimed deductions for real estate taxes, home mortgage interest, depreciation, and the business use of her home. In addition, she claimed deductions for unreimbursed employee expenses, including vehicle and travel expenses. Following examination, the IRS disallowed the majority of Czekalski's deductions for lack of substantiation, determining a deficiency of $7,147 in her income tax for 2011 and an accuracy-related penalty of $1,429 pursuant to Code Sec. 6662(a).

Analysis

Under Code Sec. 280A(c)(1), taxpayers can deduct expenses attributable to a home office if the expenses are allocable to a portion of the dwelling unit which is exclusively used on a regular basis as the principal place of business for the taxpayer's trade or business. A taxpayer's home office may qualify as her principal place of business if she uses it exclusively and regularly for administrative or management activities of her business and if there is no other fixed location suitable for the taxpayer to conduct those activities. If the taxpayer is an employee, the deduction is allowed only if the exclusive use of the space is for the convenience of the taxpayer's employer.

Code Sec. 274(d) prescribes strict substantiation requirements for deductions for expenses related to travel, including meals and lodging. To satisfy these requirements, a taxpayer generally must maintain adequate records and documentary evidence which, in combination, are sufficient to establish the amount, date, and business purpose for the expenditure (Reg. Sec. 1.274-5T(b)(6)).

The Tax Court determined that Czekalski used the bedroom office and a portion of her garage (together, approximately 15 percent of her living space) on a regular and exclusive basis to conduct administrative and management activities for her work, and did so for the convenience of her employer. The court found that there was no fixed location other than those locations where Czekalski was able to conduct these activities, because the nature of her employment required her to consistently travel to multiple schools within the district during the work day and she was required to provide storage space for specialized equipment owned by Hayward USD.

Finding that Czekalski had established that she paid approximately $3,420, $876, and $888 annually for home owner's association dues, utility charges, and trash collection fees, respectively, the court held that she was entitled to a deduction of $778 for the business use of her home (i.e., 15 percent of the total of the expenses listed above). The court also disallowed her claimed depreciation deductions because she failed to identify the underlying property. The court did not include in its calculations the property taxes and mortgage interest Czekalski paid in 2011, noting that the IRS had already allowed deductions for those expenses.

With regard to Czekalski's claims for unreimbursed employee business expenses, the court observed that she did not produce any records of her vehicle expenses (including parking fees and tolls) that would satisfy the strict substantiation requirements of Code Sec. 274(d), concluding that she was not entitled to deductions for those expenses. In addition, the court noted that other than her hotel charges, Czekalski failed to substantiate any expenses, such as airfare and meal expenses, relating to her attendance of the educators conference in November 2011 for which she was not reimbursed by Hayward USD.

The court affirmed the accuracy related penalties, finding that Czekalski did not have reasonable cause with respect to the understatements.

Last Updated by Admin on 2016-10-03 16:28:00.0

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Sept 23 2016
Pastor's Vow of Poverty Didn't Insulate Him from Federal Income Taxes

Posted in General

 

The Tax Court held that although a pastor took a vow of poverty, payments for his well-being and living expenses made by his church on his behalf were included in his income. The court noted that poverty vows only exempt ministers from federal income tax liability where the minister remits money received from third parties to his church, not where the minister seeks to exclude payments received from the church itself. White v. Comm'r, T.C. Memo. 2016-168.

Background

Ronald White has been a pastor for over 30 years. In 1983, he established the World Evangelism Outreach Church (WEOC) in DeFuniak Springs, Florida. As WEOC's pastor, White ministered from the pulpit and at nursing homes, helped build churches on foreign soil, established a feeding program for children, and supported widows and orphanages.

In 2001, White recommended to WEOC's board of advisers that the church be restructured to include a corporation sole as an office of the church. The board of advisers unanimously agreed with the recommendation, and later that year a domestic nonprofit corporation sole of WEOC registered as "The Office of Presiding Head Apostle, of Ronald Wayne White" was created.

In November 2001, White signed a document entitled "Vow of Poverty" detailing that he agreed to divest his property and future income to WEOC and in turn WEOC would provide for his physical, financial, and personal needs. WEOC then established an apostolic bank account, and granted White signatory authority over the account for his use.

White did not file an income tax return for 2006, 2007, 2008, and 2009. The IRS prepared a substitute for return for each year and determined that White had unreported income for payments various entities made directly to him or on his behalf.

Analysis

Before the Tax Court, White acknowledged that for the years at issue WEOC or its related entities made payments on his behalf for his personal expenses, but argued that his vow of poverty insulated him from being taxed on the compensation he received for his services to WEOC.

It appeared to the court that White was relying on the IRS's original official public pronouncement regarding the vow of poverty, O.D. 119, which was published in 1919. In part, the court said, O.D. 119 stated that "A clergyman is not liable for any income tax on the amount received by him during the year from the parish of which he is in charge, provided that he turns over to the religious order of which he is a member, all the money received in excess of his actual living expenses, on account of the vow of poverty which he has taken." The court observed that Rev. Rul. 77-290 had superseded O.D. 119 and provides that income earned by a member of a religious order on account of services performed directly for the order or for the church with which the order is affiliated and remitted back to the order in conformity with the member's vow of poverty is not includible in the member's gross income.

The court also noted that it had previously held - in Cortes v. Comm'r, T.C. Memo. 2014-181, Rogers v. Comm'r, T.C. Memo. 2013-177, and Gunkle v. Comm'r, T.C. Memo. 2012-305 - that a vow of poverty does not insulate a pastor from tax liability when the pastor receives funds directly from his church in exchange for services rendered if the pastor does not remit those funds to the church in accordance with his vow of poverty, has control over the funds, and uses the funds for personal expenditures.

The court stated that the critical element in the instant case was that White did not remit his income to WEOC pursuant to his vow of poverty. The court observed that White had signatory authority over the church's apostolic bank account and the payments made on his behalf served only to benefit White in meeting his living expenses. The court found that White's reliance on O.D. 119 was misguided, and that his case was not distinguishable from its holdings in Cortes, Rogers, and Gunkle. Accordingly, the court determined that White's vow of poverty did not exempt him from federal income taxes.

For a discussion of ministers' employment tax reporting obligations, including the vow of poverty exception, see Parker Tax ¶15,560.

Last Updated by Admin on 2016-09-23 16:58:41.0

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Sept 16 2016
Proposed Regs Increase User Fees for Installment Agreements

Posted in General

The IRS has issued proposed regulations, effective beginning January 1, 2017, that would increase the fee taxpayers are required to pay in order to enter into an installment agreement with the IRS. The regulations also establish new fees for taxpayers entering into such agreements online. REG-108792-16 (8/22/16).

Background

Code Sec. 6159 authorizes the IRS to enter into an agreement with any taxpayer for the payment of tax in installments, if the IRS determines that the installment agreement will facilitate the full or partial collection of the tax. Installment agreements are voluntary, and taxpayers may request an installment agreement in person, by completing the appropriate forms and mailing them to the IRS, online, or over the telephone. The terms of an installment agreement generally require the taxpayer to timely pay a minimum monthly payment, file all required tax returns, and pay all taxes in-full.

Since the enactment of the installment agreement program, the IRS periodically develops new ways for taxpayers to enter into and pay for installment agreements, such as through online payment agreements and direct debit online payment agreements. These installment agreement types have not had their own separate user fee, but instead have been included in the existing user fee structure.

To bring user fee rates for installment agreements in line with the current costs to the IRS, proposed regulations would increase the user fee for the existing installment agreement types and introduce new fees for online payment agreements and direct debit online payment agreements. Five of these proposed user fee rates are based on the full cost of establishing and monitoring installment agreements, while the sixth rate is for low-income taxpayers.

New and Increased User Fees for Installment Agreements

For regular installment agreements, taxpayers contact the IRS in person, by phone, or by mail and sets up an agreement to make manual payments over a period of time either by mailing a check or electronically through the Electronic Federal Tax Payment System (EFTPS). The proposed fee for entering into a regular installment agreement is $225 (increased from $120).

For direct debit installment agreements, taxpayers contact the IRS by phone or mail and sets up an agreement to make automatic payments over a period of time through a direct debit from a bank account. The proposed fee for entering into a direct debit installment agreement is $107 (increased from $52).

For online payment agreements, taxpayers set up an installment agreement through the IRS website and agree to make manual payments over a period of time either by mailing a check or electronically through the EFTPS. The proposed fee for entering into an online payment agreement is $149 (new for 2017).

For direct debit online payment agreements, taxpayers set up an installment agreement through the IRS website and agree to make automatic payments over a period of time through a direct debit from a bank account. The proposed fee for entering into a direct debit online payment agreement is $31 (new for 2017).

For restructured or reinstated installment agreements, taxpayers modify a previously established installment agreement or reinstate an installment agreement on which the taxpayer has defaulted. The proposed fee for restructuring or reinstating an installment agreement is $89 (increased from $50).

The low-income rate is a rate that applies when a low-income taxpayer enters into any type of installment agreement, other than a direct debit online payment agreement, and when a low-income taxpayer restructures or reinstates any installment agreement. The proposed low-income rate is $43 (no change, but would now apply to restructured or reinstated agreements).

The proposed regulations provide that the increased fees are set to take effect for tax years after January 1, 2017.

Last Updated by Admin on 2016-09-16 17:23:29.0

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Sept 02 2016
A Look at the Impact of New Federal Filing Deadlines

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In an effort to minimize taxpayers' timing difficulties with filing dates for several common types of returns and reporting forms, Congress included provisions in the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015, P.L. 114-41, revising original and extended due dates for tax years starting after Dec. 31, 2015 (e.g., 2016 returns prepared during 2017).

 

Form 1065, U.S. Return of Partnership Income (calendar year end)

  • Original due date - March 15
  • Extended due date - Sept. 15

 

Form 1041, U.S. Income Tax Return for Estates and Trusts (calendar year end)

  • Original due date - April 15
  • Extended due date - Sept. 15

 

Form 990, Return of Organization Exempt From Income Tax (calendar year end)

  • Orginal due date - May 15
  • Extended due date - Nov. 15

 

Regarding Forms 1120 filed for corporations using June 30 as their tax year, corresponding changes are made for taxpayers that use a fiscal year as their tax year. Thus, partnerships and S corporations with a noncalendar fiscal year have a return date of the 15th day of the third month following the close of the fiscal year. C Corporations with a noncalendar fiscal year ending on any day other than June 30 have a due date of the 15th day of the fourth month following the close the fiscal year.

 

Form 1120, U.S. Corporation Income Tax Return (calendar year end)

  • Original due date - April 15
  • Extended due date - Tax years beginning before Jan. 1, 2026: Sept 15; Tax years beginning after Dec. 31, 2025: Oct. 15

 

Form 1120 (June 30 year end)

  • Original due date - Tax years beginning before Jan. 1, 2026: Sept. 15; Tax years beginning after Dec. 31, 2025: Oct. 15
  • Extended due date - Tax years beginning before Jan. 1, 2026: April 15; Tax years beginning after Dec. 31, 2025: April 15

 

Form 1120S, U.S. Income Tax Return for an S Corporation (calendar year end)

  • Original due date - March 15 (unchanged)
  • Extended due date - Sept. 15 (unchanged)

 

In addition, other important due date modifications for tax years beginning after Dec. 31, 2015, include:

1. FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), will be due on April 15 and may be extended until Oct. 15.

2. Information returns (e.g., Forms W-2 and 1099) must continue to be furnished to recipients by Jan. 31 and filed with the IRS and Social Security Administration (where required) by the last day of February for paper forms and March 31 if filed electronically.

 

Last Updated by Admin on 2016-11-16 13:47:03.0

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Aug 16 2016
Have A Household Employee? Be Sure To Follow The Tax Rules

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Many families hire people to work in their homes, such as nannies, housekeepers, cooks, gardeners and health care workers. If you employ a domestic worker, make sure you know the tax rules.


Important distinction


Not everyone who works at your home is considered a household employee for tax purposes. To understand your obligations, determine whether your workers are employees or independent contractors. Independent contractors are responsible for their own employment taxes, while household employers and employees share the responsibility.


Workers are generally considered employees if you control what they do and how they do it. It makes no difference whether you employ them full time or part time, or pay them a salary or an hourly wage.


Social Security and Medicare taxes


If a household worker’s cash wages exceed the domestic employee coverage threshold of $2,000 in 2016, you must pay Social Security and Medicare taxes — 15.3% of wages, which you can either pay entirely or split with the worker. (If you and the worker share the expense, you must withhold his or her share.) But don’t count wages you pay to:

 

  • Your spouse,
  • Your children under age 21,
  • Your parents (with some exceptions), and
  • Household workers under age 18 (unless working for you is their principal occupation).

 

The domestic employee coverage threshold is adjusted annually for inflation, and there’s a wage limit on Social Security tax ($118,500 for 2016, adjusted annually for inflation).


Social Security and Medicare taxes apply only to cash wages, which don’t include the value of food, clothing, lodging and other noncash benefits you provide to household employees. You can also exclude reimbursements to employees for certain parking or commuting costs. One way to provide a valuable benefit to household workers while minimizing employment taxes is to provide them with health insurance.


Unemployment and federal income taxes


If you pay total cash wages to household employees of $1,000 or more in any calendar quarter in the current or preceding calendar year, you must pay federal unemployment tax (FUTA). Wages you pay to your spouse, children under age 21 and parents are excluded.


The tax is 6% of each household employee’s cash wages up to $7,000 per year. You may also owe state unemployment contributions, but you’re entitled to a FUTA credit for those contributions, up to 5.4% of wages.


You don’t have to withhold federal income tax or, usually, state income tax unless the worker requests it and you agree. In these instances, you must withhold federal income taxes on both cash and noncash wages, except for meals you provide employees for your convenience, lodging you provide in your home for your convenience and as a condition of employment, and certain reimbursed commuting and parking costs (including transit passes, tokens, fare cards, qualifying vanpool transportation and qualified parking at or near the workplace).


Other obligations


As an employer, you have a variety of tax and other legal obligations. This includes obtaining a federal Employer Identification Number (EIN) and having each household employee complete Forms W-4 (for withholding) and I-9 (which documents that he or she is eligible to work in the United States).


After year end, you must file Form W-2 for each household employee to whom you paid more than $2,000 in Social Security and Medicare wages or for whom you withheld federal income tax. And you must comply with federal and state minimum wage and overtime requirements. In some states, you may also have to provide workers’ compensation or disability coverage and fulfill other tax, insurance and reporting requirements.


The details


Having a household employee can make family life easier. Unfortunately, it can also make your tax return a bit more complicated. Let us help you with the details.

Last Updated by Admin on 2016-11-16 14:02:36.0

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Aug 12 2016
How To Assess The Impact Of A Child's Investment Income

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When they’re old enough to understand the concepts, some children start investing in the markets. If you’re helping a child learn the risks and benefits of investments, be sure you learn about the tax impact first.

 

Potential danger

For the 2016 tax year, if a child’s interest, dividends and other unearned income total more than $2,100, part of that income is taxed based on the parent’s tax rate. This is a critical point because, as joint filers, many married couples’ tax rate is much higher than the rate at which the child would be taxed.

Generally, a child’s $1,050 standard deduction for unearned income eliminates liability on the first half of that $2,100. Then, unearned income between $1,050 and $2,100 is taxed at the child’s lower rate.

But it’s here that potential danger sets in. A child’s unearned income exceeding $2,100 may be taxed at the parent’s higher tax rate if the child is under age 19 or a full-time student age 19–23, but not if the child is over age 17 and has earned income exceeding half of his support. (Other stipulations may apply.)

Simplified approach

In many cases, parents take a simplified approach to their child’s investment income. They choose to include their son’s or daughter’s investment income on their own return rather than have him or her file a return of their own.

Basically, if a child’s interest and dividend income (including capital gains distributions) total more than $1,500 and less than $10,500, parents may make this election. But a variety of other requirements apply. For example, the unearned income in question must come from only interest and dividends.

Many lessons

Investing can teach kids about the time value of money, the importance of patience, and the rise and fall of business success. But it can also deliver a harsh lesson to parents who aren’t fully prepared for the tax impact. We can help you determine how your child’s investment activities apply to your specific situation.

Last Updated by Admin on 2016-11-16 13:47:59.0

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Aug 02 2016
Are You Sure You Want To Take That 401(K) Loan?

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With summer headed toward its inevitable close, you may be tempted to splurge on a pricey “last hurrah” trip. Or perhaps you’d like to buy a brand new convertible to feel the warm breeze in your hair. Whatever the temptation may be, if you’ve pondered dipping into your 401(k) account for the money, make sure you’re aware of the consequences before you take out the loan.

Pros and cons

Many 401(k) plans allow participants to borrow as much as 50% of their vested account balances, up to $50,000. These loans are attractive because:

  • They’re easy to get (no income or credit score requirements),
  • There’s minimal paperwork,
  • Interest rates are low, and
  • You pay interest back into your 401(k) rather than to a bank.

 

Yet, despite their appeal, 401(k) loans present significant risks. Although you pay the interest to yourself, you lose the benefits of tax-deferred compounding on the money you borrow.

You may have to reduce or eliminate 401(k) contributions during the loan term, either because you can’t afford to contribute or because your plan prohibits contributions while a loan is outstanding. Either way, you lose any future earnings and employer matches you would have enjoyed on those contributions.

Loans, unless used for a personal residence, must be repaid within five years. Generally, the loan terms must include level amortization, which consists of principal and interest, and payments must be made no less frequently than quarterly.

Additionally, if you’re laid off, you’ll have to pay the outstanding balance quickly — typically within 30 to 90 days. Otherwise, the amount you owe will be treated as a distribution subject to income taxes and, if you’re under age 59½, a 10% early withdrawal penalty.

Hardship withdrawals

If you need the money for emergency purposes, rather than recreational ones, determine whether your plan offers a hardship withdrawal. Some plans allow these to pay certain expenses related to medical care, college, funerals and home ownership — such as first-time home purchase costs and expenses necessary to avoid eviction or mortgage foreclosure.

Even if your plan allows such withdrawals, you may have to show that you’ve exhausted all other resources. Also, the amounts you withdraw will be subject to income taxes and, except for certain medical expenses or if you’re over age 59½, a 10% early withdrawal penalty.

Like plan loans, hardship withdrawals are costly. In addition to owing taxes and possibly penalties, you lose future tax-deferred earnings on the withdrawn amounts. But, unlike a loan, hardship withdrawals need not be paid back. And you won’t risk any unpleasant tax surprises should you lose your job.

The right move

Generally, you should borrow or take hardship withdrawals from a 401(k) only in emergencies or when no other financing options exist (and your job is secure). For help deciding whether such a loan would be right for you, please call us.

Last Updated by Admin on 2016-11-16 13:45:29.0

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July 27 2016
Getting Married this Year? Here’s Your Tax Tip Sheet

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While most couples go to great lengths to ensure that their wedding day is perfect, far fewer think about how their nuptials will impact their tax liability. The truth is, the moment you get married, no matter what time of the year it is, in the eyes of the government you are considered to have been married for the entire tax year. With this in mind, here are some tax tips to consider as you prepare to walk down the aisle:

  • A prenuptial agreement may impact your filing status and complicate your tax filing, so you may wish to speak with a tax professional.
     
  • Once you combine incomes, you and your spouse may be subject to a higher tax bracket. This may eliminate tax benefits for which you were previously eligible.
     
  • If marriage involves a name change for either party, contact the Social Security Administration to advise them and to get your Social Security card and records updated. This helps avoid delays in the processing of your tax return or potential refund.
     
  • Review your current withholding and estimated tax payments in light of your new marital status. This will help you avoid any unexpected tax bills next tax season.
     
  • The Affordable Care Act (ACA) may complicate your tax filing if you and/or your new spouse purchased health insurance through the ACA marketplace because any premium tax credits you have received may be impacted.
     
  • If your new spouse owes child support or back taxes to either the IRS or the state, they may become your obligation unless you complete the IRS’ injured spouse allocation form.

Don’t let tax stress put a damper on your big day. Take a few moments to talk about taxes with your partner before your wedding, or schedule some time to consult with one of our professionals after the honeymoon.

Last Updated by Admin on 2016-11-16 13:48:33.0

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July 12 2016
Home Office Deduction

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Getting Comfortable With The Home Office Deduction

One of the great things about setting up a home office is that you can make it as comfy as possible.  Assuming you've done that, another good idea is getting comfortable with the home office deduction.

To qualify for the deduction, you generally must maintain a specific area in your home that you use regularly and exclusivelyin connection with your business.  What's more, you must use the area as your principal place of business or, if you also conduct business elsewhere, use the area to regularly conduct business, such as meeting clients and handling management and administrative functions.  If you're an employee, your use of the home office must be for your employer's benefit.

The only option to calculate this tax break used to be the actual expense mehod.  With this method, you deduct a percentage (proportionate to the percentage of square footage used for the home office) of indirect home office expenses, including mortgage interest, property taxes, association fees, insurance premiums, utilities (if you don't have a separate hookup), security system costs and depreciation (generally over a 39-year period).  In addtion, you deduct direct expenses, including business-only phone and fax lines, utilities (if you have a separate hookup), office supplies, painting and repairs, and depreciation on office furniture.

But now there's an easier way to claim the deduction.  Under the simplified method, you mulitply the square footage of your home office (up to a maximum of 300 square feet) by a fixed rate $5 per square foot.  You can claim up to $1500 per year using this method.  Of course, if your deduction will be larger using the actual expense method, that will save you more tax.  

Questions?  Please give us a call.

Last Updated by Admin on 2016-11-16 13:46:04.0

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July 06 2016
Key Lessons from the Financial Fallout of the ‘Brexit’ Vote

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It’s fair to say that the recent ‘Brexit’ vote by Britons to exit the European Union (EU) has shaken global financial markets to their core, at least in the short-term. Financial analysts say that it’s too early to tell what the long-term impact of this historic vote will be. But one thing is for certain, the Brexit offers several important lessons that individual investors and business owners can take to heart as they review their own situation at mid-year.

  1. Prepare for the unexpected. One of the reasons why the Brexit vote has people and the financial markets so on edge is that it was unexpected. No one really thought that the ‘Leave’ camp would actually win the referendum. Well, they did…and no one is prepared to handle the situation. This is not a pattern that you want to repeat with your own finances. If you do nothing else, plan ahead for unexpected shifts such as job losses or your child not getting a full-ride scholarship for college.
     
  2. Take a long-term view. Many experts agree that the Brexit is going to create some short-term financial pain. However, things are likely to stabilize and, hopefully, improve over time. This is an important tenet for any investor or business owner to follow for their own financial sanity and planning. Working with a financial professional who can offer guidance and an objective perspective based on their experience and market data can be invaluable in this regard.
     
  3. Seek the support of allies. In the days immediately after the Brexit vote, Britain no doubt felt somewhat ostracized by the rest of the EU. However, once the initial shock wore off, it rallied the support of its usual allies to determine what the next steps would be in the process. The parallel for individuals and businesses: having a financial advisor in your corner can help you work through difficult decisions and challenging circumstances to find the best solutions.

It is likely to be years before we know how the Brexit will affect the financial strength of our domestic and world markets. This makes it more important than ever to keep the above tips in mind, and to consider doing some proactive mid-year planning to protect your own individual and business finances this year, and in the years to come. Need help with your mid-year planning? Contact our firm today, we look forward to assisting you.

Last Updated by Admin on 2016-11-16 13:49:03.0

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June 29 2016
Smart Strategies to Handle the “Downfall” Problem 1 in 4 New Businesses Experience

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One of the most (if not the most) important indicators of business health is its cash flow. Even if your business is profitable and growing, if you don't have a consistent stream of cash coming in, you'll run into financial trouble. Lack of cash flow is the primary reason that more than one quarter of new businesses fail—29 percent to be exact. Here are some smart strategies that can help ease the cash flow crunch.

  1. Reduce your business overhead. While this may seem obvious, trimming fixed costs is something that many business owners overlook, getting stuck in a this-is-how-we've-always-done things rut. Take a fresh look at your operations with the goal of maximizing efficiency.
     
  2. Be proactive about securing credit. If you wait until you're financially strapped before you line up credit sources, you may be in for an unpleasant surprise (e.g., you can't get the credit you thought you could or the credit you can get is too expensive). Know how you can secure funding before you need it.
     
  3. Know your numbers. This is so important—you should have a dashboard of key performance indicators that you follow closely so that you can head-off any cash flow issues before they happen. You can use a DIY approach with business accounting software, or work with our firm to keep you on track.
     
  4. Encourage quick payments. An essential key to cash flow management is to keep the cash coming in from customers. Aside from keeping your invoicing current, consider incentives such as early payment discounts on large invoices or discounts for cash payments when appropriate.

With the stakes so high in today’s economy, it's not surprising that many new businesses struggle with cash flow issues. However, by implementing the strategies above and working with our professional team, you'll have a better chance to keep the cash coming in and your business going strong.

Last Updated by Admin on 2016-11-16 13:49:31.0

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June 20 2016
IRS Fights Scammers – Instructs Staff to Initiate All Future Audits by Mail; Never by Telephone

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With a rise in IRS phone scams, the Agency changed its policy on contacting taxpayers whose tax records are subject to an audit. The new policy instructs IRS agents to contact affected taxpayers only by mail—never by phone (which used to be the IRS’ go-to method of contact). As such, we urge all of our clients to adhere to the following guidelines should you receive a call from someone claiming to be from the IRS and you’ve NOT received a contact letter prior:

  • If you receive a phone call that you suspect to be a scam, hang up right away. If you receive multiple calls, try to record them and turn the recordings and any other related information that you have over to the IRS and local law enforcement.
     
  • If you receive emails claiming that the sender is from the IRS, save the emails, do NOT click on any links or open files contained within the email, and forward these emails to the IRS at: phishing@irs.gov.
     
  • Never share your personal information over the phone or by email with someone claiming to be from the IRS. The IRS will never e-mail or call you to ask for this type of information or to ask you to send money right away.
     
  • Protect your personal information. Any type of documentation that contains your sensitive data is a treasure trove for tax thieves and identity scammers. Keep documents containing your Social Security Number, bank account numbers, and other sensitive information in a secure location. Electronic forms should be stored on a password-protected or encrypted external drive or disk.

If you have any questions about the risks related to tax and financial scams, please contact our office.

Last Updated by Admin on 2016-11-16 13:49:58.0

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July 18 2013
Welcome to Our Blog!

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This is the home of our new blog. Check back often for updates!

Last Updated by Admin on 2016-11-16 13:50:19.0

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Richard Camp, CPA, PA blogs and all other multimedia content is provided for informational and educational purposes only and should not be construed as financial tax, accounting, legal, consulting or any other type of advice regarding any specific facts and circumstances, nor should they be construed as advertisements for financial services.  Because accounting standards, tax law, and technologies are constantly changing, content in this blog could contain outdated information.

 

IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this website (or in any attachment) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this website (or in any attachment).