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2011-2012 Tax Alerts

Index

FBAR Letters sent to taxpayers filing Amended or Past Due FBARS: Ignorance or IRS Abuse of Power

IRS Announces Third Voluntary Offshore Reporting Initiative

New Foreign Investment Account Reporting Requirements

NYS Audits and Alerts

2011 IRS Standard Mileage

Tax Alert-IRS Still focusing on Unreasonable Compensation of Sub S Shareholders

Gift Tax Alert

2011 Special Tax Break for Purchasing Passenger Trucks and SUVs

IRS Steps Up Audit Enforcement

Special Tax Break for Buying Small Businesses Before 01/01/12 Exempts Gain on Sale

President Obama Proposes Hefty Tax Increases and Increased Audits

New Foreign Investment Account Reporting Requirements

As part of the Foreign Account Tax Compliance Act (FATCA) Certain U.S. taxpayers are now required to include with their income tax returns Form 8938, Statement of Specified Foreign Financial Assets, for which the minimum penalty for failure to file (if required) is $10,000 plus 40% of the unreported value of the account and if notified of a requirement to file by the IRS the penalty could increase to $50,000 plus the additional 40% tax on unreported income. Criminal penalties could apply as well under certain circumstances.

This new requirement is in ADDITION to the FBAR Form TDF-90-22.1 filing requirement

Failure to report foreign income could result in fraud penalties of 75% plus criminal penalties.

There are specific exclusions and some not so specific issues that need to be addressed. First this requirement only pertains to U.S. taxpayers with assets not held by U.S. banks either in the U.S. or overseas branches or in U.S. branches of foreign banks. Second it only applies to persons living in the U.S. if the value is $50,000 as of the last  day of the year or $75,000 at any time of the year (twice that if married filing a joint tax return). US persons living abroad (if they are bona fide residents of a foreign country or spend at least 330 days out of a consecutive 365 period outside the U.S.) have an increased thresh hold which is $200,000 on the last day of the year and $300,000 during any time of the year for single filers (or married filing separate returns) and $400.000 and $600.000 for married filers filing a joint return.

This requirement pertains to anyone who's tax year begins after March 18, 2010 (for most individuals this means their 2011 tax return).

Specified assets include vested ownership in foreign pension plans and trusts however it does not include social security insurance programs of a foreign government. This can affect both U.S. expatriates who is working or has worked for a foreign company as well as foreign nationals who are now living in the U.S. but have a vested interest in a foreign pension plan from previous employment.

If you are required to file a Form 8938 and have specified foreign assets that are already reported on Form(s) 5471, 3820, 8621, 8865, 8891, etc. which already includes the required information, it need not be reported a second tome on Form 8938. HOWEVER you MUST file Form 8938 which and how many of these forms report the specified foreign assets.

Certain issue need to be addressed as how to value ownership in securities held directly if they are not publically traded, or ownership of your own business as well as the treatment of life insurance contracts and some other issue. Return to Top

Tax Alert-IRS Still focusing on Unreasonable Compensation of Sub S Shareholders

Often owners of Subchapter S corporations, even though making a heft profit with the owner and Chief Officer contributing to those profits, take an unreasonably low salary in order to avoid social security self employment tax on the profits had they treated it as compensation. The IRS has been on the lookout for this for many years however one tax payer took his case to District Court and lost. The Court agreed with the IRS that his compensation was unreasonably low for the amount of profit generated by the business and ruled that the Sub S dividend should be reclassified as compensation paid to officers thus being subject to social security tax for both the corporation and the owner. All the more reason to review your year end P&L forecast in early December in order to inform your payroll administrator or service provider that you need to take a year end bonus. Companies such as Paychex will not issues year end bonuses without sufficient advance notice so plan early. Return to Top

Gift Tax Alert

The IRS is looking to raise revenue by finding people who transfer ownership of homes and real estate to family members for little or no cash or other property consideration without filing a Gift Tax return Form 709 to report the gift, which it is estimated that 60%-90% do not file to report the gift. Even if there is no gift tax due with the return because of lifetime exemptions or exclusion allowances, a Form 709 IS required to be filed during any year in which a person makes a gift or is deemed to make a gift with a value in excess of $13,000.

This is relatively "new" program being implemented by the IRS in an effort to catch tax cheats; however far less affluent people, especially those who are confused due to the flip flopping the the gift and estate tax laws during the past ten years, are being caught in the dragnet. Although nationally there are only 500 people who have been or are under IRS examination, there will be a substantial number of audits in the future. One of the means that the IRS is using to identify unfiled gift tax returns is through state property transfer records, and is beginning with 15 states including New York, Connecticut, Hawaii, Florida, New Jersey,  New Hampshire, Pennsylvania, Washington, Wisconsin, Ohio and Texas. Expect more states to join in the information exchange program in their attempt to catch tax cheats as this program expands. The IRS is so serious about this that when California refused to cooperate the IRS went to the courts to try to get them to comply.  Return to Top

 

2011 Special Tax Break for Purchasing Passenger Trucks and SUVs

For business that require the use of SUVs, vans or pickup trucks you may be entitled to deduct the full price assuming it is used entirely for business thanks to the 100% bonus depreciation. The deduction applies to SUVs provided that they are new at the time of purchase as new pickup trucks again provided the un-laden weight is at least 6,000 pounds. The special deduction does not apply for used SUVs, however it will apply to a pick up truck if the cargo bed is at least 6 feet in length. IMPORTANT.. the vehicles have to be placed in service in 2011 to qualify for the deduction so don't wait until the last minute to make your purchase if you need to add another truck.   This special tax allowance expires after 2011. Also the Section 179 depreciation deduction reverts back to a maximum of $25,000.  Return to Top

IRS Steps Up Audit Enforcement

In an effort to close the federal budget deficit the IRS has changed its tax return audit strategies. As a result the percentage of individual tax returns being audited has risen to 1.1%, the highest since 1997. High profile returns include income greater than $1 Million, which received the most scrutiny with 1 of every 12 tax returns showing income in excess of $1 Million being audited. However taxpayers with income of between $200,000 and $1 Million  are twice as likely to be examined.

Two other major IRS targets are sole proprietors, including temporary workers who receive Form 1099 instead of Form W-2 as an employee and report their "business" income on Schedule C of Form 1040 with gross receipts of $25,000 or more. Also high on the hit list are taxpayers who claim the earned income credit, as this is a subsidy, otherwise known as a refundable credit that depending on your income and the number of dependant children that you have, could mean an "entitlement" in the form of a government of several thousand dollars. Return to Top

Special Tax Break for Buying Small Businesses Before 01/01/12 Exempts Gain on Sale

The tax break for buying a small business with assets of less than $50 Million between September 27, 2010 and December 31, 2011 and waiting at least five years before selling WITHOUT PAYING ANY TAX ON THE GAIN FROM THE SALE it has been extended for another year. Companies in certain industries are not entitled to this benefit, which include hotels, farming, insurance, leasing, banking, restaurants, oil and gas and personal services. In my personal humble opinion, while the nation is struggling to recover, and faces a second economic meltdown, I would think that some of these industries, being the bread and butter of small business economies such as restaurants, farming and services, should receive more of an incentive, not less. But then again we elected the people who write these laws, denied the first meltdown and deny the possibility of a future gloomy economy while using our money to bail out those very banks that contributed to the meltdown in the first place. But that is just my opinion and what do I know, I am just another middle income taxpayer who worked hard all my life like most of my readers. Return to Top

President Obama Proposes Hefty Tax Increases and Increased Audits

As an integral part of his 2012 campaign strategy, President Obama is targeting independent voters, hoping that they will support his claims that part of any major deficit reduction must include tax hikes, including taxes disguised as fees. Overlooking the regional cost of living factor, meaning that people living in a state such as New York which pays the second highest income tax in the country, second only to California (which is broke-go figure), with middle income New Yorkers living 50 miles north of Manhattan paying $10-15 thousand annually in property and school taxes, the President (who makes millions himself selling his books) thinks that a family in these high cost of living areas should bear an even greater burden by paying higher income taxes beginning in 2013, raising their rates back to the 36%-39% that they used to pay when the cost of living was half of what it is today. I ask, how will being backed into a corner, not being able to afford to live and having to sell your home or have it foreclosed going to benefit the economy? But what do I know, I am just a 60 year old simple kind of guy with 38 years of business experience. Oh, and if you want to live in NYC proper, where a cup of coffee at Starbucks is $5, you need to take home $250,000 a year just to live a modest life.

One of the worst things (for us but good for government) in my opinion is when the tax code was revamped during the 1980s and the 1954 Internal Revenue Code replaced with the 1986 Internal Revenue Code. Sure it lowered tax rates, but also reduced deductions with a basically neutral effect. So all the federal government needs to do to raise revenues is to make a slight increase in the rates.  But now President Obama wants to take it a step further, not only does he want to increase tax rates on the so called affluent people (gee how many of these people are lucky enough to be able to write books and sell them for millions of dollars) he wants to lower the value of the already reduced deductions to cap these deductions to 28% while imposing a surcharge on interest from municipal bonds used to rebuild infrastructure (causing investors to not buy government bonds), increasing employment taxes, increasing inheritance taxes (so the government can take what they did not take when the people were alive) so on and so forth.

Oh, and he wants to boost the IRS's budget to hire more IRS agents thinking it would bring in $6 for every $1 spent on enforcement. Well as a former tax executive myself, I have seen IRS agents with their permanent corporate offices (with their locked file cabinets and doors) who wrote music, did crossword puzzles, read the newspaper, and field agents who sent oil and gas specialists to audit entertainment companies. Maybe they will spend $6 for every $1 they collect.  Return to Top

2011 IRS Standard Mileage

For 2011 the standard mileage is broken into two calculations for the first and last six months of the year.

January 1-June 30: Business: 51 cents per mile; July 1-December 31: 55.5 cents

January 1-June 30: Medical Moving: 19cents:  July 1-December 31: 23.5 cents

Jan 1 to June 30: Charitable: 16 cents:  July 1-December 31: 14 cents

Return to Top

NYS Audits and Alerts

NYS has been selecting tax returns with itemized deductions for a comprehensive audit. This means that instead of being notified that the IRS had examined your return and notifying them of changes (which you are required to report voluntarily before the IRS does), they are notifying taxpayers selected at random, either immediately after the return is filed or shortly thereafter (after a refund is issued) that they will need ALL documentation to support itemized deductions claimed on your federal tax return, plus support for any tax credits claimed.

The really bad thing is that should they make an adjustment to your return following this desk examination, which it seems that they are not required to discuss before posting the adjustment, they will immediately arbitrarily assume that the same adjustment should be made for the prior two years tax returns. Whether or not this will be an arbitrary charge or they will review the prior year returns to determine if a similar deduction exists, is unknown at this time. Nor have they indicated if they will request additional information if anything is missing or merely assume that it does not exist. In addition, they have the right to further audit any items on the return once it is opened for audit. If you have business mileage or meals and entertainment it is always strongly recommended that you keep a diary r journal for each day, showing who you met with, where you traveled from and to, what your spent, etc.

The bottom line is keep all your receipts and cancelled checks, and don't deduct anything that cannot be readily substantiated. Return to Top

IRS Offshore Programs Produce $4.4 Billion To Date for Nation’s Taxpayers; Offshore Voluntary Disclosure Program Reopens

 
IR-2012-5, Jan. 9, 2012

WASHINGTON — The Internal Revenue Service today reopened the offshore voluntary disclosure program to help people hiding offshore accounts get current with their taxes and announced the collection of more than $4.4 billion so far from the two previous international programs.

The IRS reopened the Offshore Voluntary Disclosure Program (OVDP) following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs. The third offshore program comes as the IRS continues working on a wide range of international tax issues and follows ongoing efforts with the Justice Department to pursue criminal prosecution of international tax evasion. This program will be open for an indefinite period until otherwise announced.

“Our focus on offshore tax evasion continues to produce strong, substantial results for the nation’s taxpayers,” said IRS Commissioner Doug Shulman. “We have billions of dollars in hand from our previous efforts, and we have more people wanting to come in and get right with the government. This new program makes good sense for taxpayers still hiding assets overseas and for the nation’s tax system.”

The program is similar to the 2011 program in many ways, but with a few key differences. Unlike last year, there is no set deadline for people to apply. However, the terms of the program could change at any time going forward. For example, the IRS may increase penalties in the program for all or some taxpayers or defined classes of taxpayers – or decide to end the program entirely at any point.

“As we’ve said all along, people need to come in and get right with us before we find you,” Shulman said. “We are following more leads and the risk for people who do not come in continues to increase.”

The third offshore effort comes as Shulman also announced today the IRS has collected $3.4 billion so far from people who participated in the 2009 offshore program, reflecting closures of about 95 percent of the cases from the 2009 program. On top of that, the IRS has collected an additional $1 billion from up front payments required under the 2011 program. That number will grow as the IRS processes the 2011 cases.

In all, the IRS has seen 33,000 voluntary disclosures from the 2009 and 2011 offshore initiatives. Since the 2011 program closed last September, hundreds of taxpayers have come forward to make voluntary disclosures. Those who have come in since the 2011 program closed last year will be able to be treated under the provisions of the new OVDP program.

The overall penalty structure for the new program is the same for 2011, except for taxpayers in the highest penalty category.

For the new program, the penalty framework requires individuals to pay a penalty of 27.5 percent of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the eight full tax years prior to the disclosure. That is up from 25 percent in the 2011 program. Some taxpayers will be eligible for 5 or 12.5 percent penalties; these remain the same in the new program as in 2011.

Participants must file all original and amended tax returns and include payment for back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties.

Participants face a 27.5 percent penalty, but taxpayers in limited situations can qualify for a 5 percent penalty. Smaller offshore accounts will face a 12.5 percent penalty. People whose offshore accounts or assets did not surpass $75,000 in any calendar year covered by the new OVDP will qualify for this lower rate. As under the prior programs, taxpayers who feel that the penalty is disproportionate may opt instead to be examined.

The IRS recognizes that its success in offshore enforcement and in the disclosure programs has raised awareness related to tax filing obligations. This includes awareness by dual citizens and others who may be delinquent in filing, but owe no U.S. tax. The IRS is currently developing procedures by which these taxpayers may come into compliance with U.S. tax law. The IRS is also committed to educating all taxpayers so that they understand their U.S. tax responsibilities.

More details will be available within the next month on IRS.gov. In addition, the IRS will be updating key Frequently Asked Questions and providing additional specifics on the offshore program. Return to Top

 

 

 

 

 

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