Saturday, January 14, 2017

Trust Fund Recovery: Penalties & Pitfalls

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I for one am glad that 2016 finally ended. Coming out of a contentious election with a boat load of vitriol thrown around, I don't know about you, but I was swinging between the need for relief for it all to be over and the fear of who would take over the presidency and if it would go into capable hands. I am so glad tax season started so I can get to the business of preparing returns! 

Every year I get a mix of audits my way, but in Tax Year 2016 it seemed as if I saw more than my share of Trust Fund Recovery audits fall into my lap. Some of these small businesses had a tax preparer assisting them and some were on their own. 

Trust Funds are those payroll taxes that are withheld from employees' salaries and are to be deposited into the Employer's account with the IRS on a timely basis. To help ensure that taxpayers remit these taxes properly and on time, § 6672(a) imposes a penalty on any person who is responsible for paying and willfully fails to do so. This penalty is known as the Trust Fund Recovery Penalty or TFRP for short. 

These funds are considered to be held by the business "in trust" for the government. The responsible person in the business needs to deposit these taxes on a timely basis. 

The timeliness of the deposits is determined by the amount of the withholdings. This could be every week/ semi-weekly/ monthly. Businesses are also liable to pay the Federal Unemployment Tax (FUTA) once a year. FUTA is discounted if the employer is signed up for the State Unemployment taxes (SUTA). The SUTA liability is based on the state where the employee is located. So if an employer has employees in various states, they have to keep track of the state unemployment insurance liability in each of those states. 

The failure to pay trust fund taxes and/ or the failure to deposit these taxes on time means that either the business or the responsible person is subject to very heavy penalties. Typically, The amount of the penalty is equal to the unpaid balance of the trust fund tax (e.g., Social Security, Medicare, and income taxes)

The penalty is computed based on:

  • The unpaid income taxes withheld, plus
  • The employee's portion of the withheld FICA taxes.

For collected taxes, the penalty is based on the unpaid amount of collected excise taxes.

Generally, assuming Forms 941, Employer’s Quarterly Federal Tax Return , or comparable returns were timely filed, the IRS has three years to assess the TFRP from the April 15 that succeeded the return’s due date (IRM §5.7.3.5). If the business’s return was filed after the due date, the statute of limitation begins to run from either the April 15 that succeeded the return’s due date or three years from when the return was actually filed, whichever is later. However, false or fraudulent returns or substitute returns prepared by the IRS under Sec. 6020(b)(1) do not start the running of the statute. 

Many employers outsource their payroll and related tax duties to third-party payroll service providers. They can help assure filing deadlines and deposit requirements are met and streamline business operations to a large extent. But remember, employers are ultimately responsible for the payment of income tax withheld and both the employer and employee portions of social security and Medicare taxes.

New Deadlines: The PATH Act, enacted in December 2015, includes a new requirement for employers: They have to now file their copies of Form W-2, with the Social Security Administration, by January 31st. The new January 31st filing deadline also applies to certain Forms 1099-MISC reporting non-employee compensation such as payments to independent contractors.

One 30-day extension may be filed by January 31st via Form 8809, Application of Extension to File Information Returns. 

I always recommend that a small or medium business hire an Enrolled Agent to oversee their Payroll Taxes payment and filing even if the process has been outsourced to a payroll provider. This ensures 2 sets of eyes on the trust funds. Please call your tax professional immediately if you believe that there may be mistakes on your payroll returns. 
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As always, read my disclaimer here. Please consult a qualified tax professional for your unique tax needs. More of my contact information is on my website, www.mntaxbiz.com






Monday, November 28, 2016

Foreign Asset Reporting For Entities: New for 2016!



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There is a lot of attention these days on big companies (Apple, Google, General Electric, Facebook and others) stashing their earnings overseas in what are considered tax havens to avoid paying US taxes on their corporate income. Some international tax reform proposals have been suggested as to how to get the corporation to either bring this stash back into the US by way of a "repatriation holiday" or "deemed repatriation" or ending the system of tax deferrals. 

These rules and proposed tax reforms are for the big players, in the mean time, what is happening with the little guys?

For those of us tax professionals who specialize in international tax and compliance with FATCA, Form 8938 has played a big role since 2011. I wrote in detail about this Form and its filing requirements in my widely read blog post here. The Form 8938 had applied to individuals alone and entities had not been considered as falling under the law to report their Specified Foreign Financial Assets {SFFA}. 

What changed in 2016? 
The Treasury Department and the Internal Revenue Service {IRS} adopted § 1.6038D-6 (REG-144339-14) early this year as final. As per the new regs, for tax years beginning after December 31, 2015, certain domestic corporations,partnerships, and trusts that are
considered formed or availed of for the purpose of holding, directly or indirectly, specified foreign financial assets must file Form 8938 if the total value of those assets exceeds $50,000 on the last day of the tax year or $75,000 at any time during the tax year. 

What is a Specified Domestic Entity {SDE}?
§ 6038D(f) defines an SDE as "any domestic entity which is formed or availed of for purposes of holding, directly or indirectly, specified foreign financial assets, in the same manner as if such entity were an individual". 

An entity can be a corporation, partnership or a disregarded entity. 

In order to be classified as an SDE, the entity has to make a determination every year 
under Treasury Regulation § 1.6038D-6(b)(2) if: 
  • At least 50% of the corporation or partnership’s gross income or assets is passive; 
                                                                   OR
  • At least 80% of the corporation or partnership’s gross income or assets is closely held directly, indirectly or constructively by a specified individual on the last day of the corporation's or partnership's tax year. 

Is A Trust a Specified Domestic Entity?:
A trust could be broadly considered an SDE under the new rules if it has one or more specified individuals as current beneficiaries. A "current beneficiary" is generally any person who at any time during the tax year is entitled to, or at the discretion of any person may receive, a distribution from the principal or income of the trust (determined without regard to any power of appointment to the extent that such power remains un-exercised at the end of the tax year).

There are many exceptions to a trust being considered an SDE. One can determine this only after careful reading of the regulations. Some of the excepted trusts include REITs, IRA accounts, § 403(b) or § 457(g) plans. A Grantor Trust is also exempt from reporting SFFAs under the new regs.

The above rules are in effect for Tax Year 2016 that is the coming 2017 tax season. If the above rules effect you and you do not take any action, the penalty for non-disclosure is $10,000 for failure to file the Form 8938 up to a maximum of $50,000. 

The tricky and complicated part of tax compliance here is determining if the SDE passes the passive income test; the 80% closely held test; and the total income from all sources. 

Please contact your Enrolled Agent or other tax professional if you think you may be impacted by the above changes. 


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As always, read my disclaimer here. Please consult a qualified tax professional for your unique tax needs. More of my contact information is on my website, www.mntaxbiz.com




Thursday, November 17, 2016

2016 Year End And Tax Planning: What To Expect?

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When that first leaf changes color, there's a nip in the air, and the sunshine starts to fall into corners it did not before, you know the year is coming to an end. Typically that is when I start getting phone calls for year end tax planning. 

This year has been tumultuous, to say the least, as we recover from all the pre and post election trauma or elation depending on which candidate you favored, we need to put our tax plans in place based on what we know about likely tax changes for 2017 and 2018.

Most tax planning usually starts with identifying the need to either postpone income & accelerate deductions if you think you are going to be in a lower tax bracket in the coming years OR to accelerate income & postpone deductions if your income is going to increase. And then we look into your withholding and taxes, your employer retirement contributions etc. 

Filers who claim itemized deductions on their taxes are the ones who have the flexibility in shifting deductions. For example, one can send in the last estimated tax check before December 31st to claim the deduction in the current year. A mortgage payment for January can be made in December and your charitable contributions for 2017 can be moved back as well. 

If your total medical expense for any reason is over 10% of your AGI, you can have any elective procedures before December 31st so you will be eligible for the tax write-off as well. This is especially very important if you are 65 years of age or older since the special 7.5% medical cost threshold is gone for the Tax Year 2017 and you get the same 10% medical cost threshold as the rest.

If you are going to have a spike in income and that is going to put you into the Alternative Minimum Tax category, the planning of deductions will change. 

Now would also be a good idea to visit Capital Loss Harvesting or Tax Loss Harvesting and see if that will be a right strategy for you. The basic premise of this fancy term is that you sell off your low-yield investments or those that have lost value to off-set the gain(s) from the sale of those that increased in value. There are downside risks to this strategy that you should have your tax professional or financial advisor weigh in for you. 

Speaking of tax planning for the coming years, we must take into reckoning some important points from President-Elect Trump's proposed tax plan. These proposals stand a very high chance of passing since both the House and the Senate are in Republican hands & they have been itching for tax reform. From many accounts and experts weighing in, these plans if implemented will reduce revenue by an estimated $7.2 trillion in the first decade and as a result deficit is expected to increase as well. 

Proposed Tax Plan from President-Elect Trump:

  • Tax brackets reduced to three: 12%, 25% and 33%.
  • Elimination of:
         a. Alternative Minimum Tax.
         b. Head of Household filing status.
         c. Net Investment Income Tax.
         d. Personal Exemptions.
         e. Estate Tax
  • Business tax rate lowered to 15%.
  • Cap on itemized deductions at $100,000 for single filers and $200,000 for married filing joint. 
  • Standard deduction $15,000 for single filers and $30,000 for married filing joint. 
  • Low-income families get a credit up to $1200 a year for child-care costs. 
  • Carried interest is taxed at ordinary tax rates instead of capital gains rates. 

Based on the above, 2016 would probably be a good year to accelerate your charitable contributions. This is especially true if you are in a higher income tax bracket, the percentage of savings is higher as well. Donating appreciated stock to a tax-exempt charity is also a good way to increase your itemized deductions. 

We do not know yet how the GOP will go with the proposals, please check with your Enrolled Agents and make sure advice is tailored to your unique situation. 

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As always, read my disclaimer here. Please consult a qualified tax professional for your unique tax needs. More of my contact information is on my website, www.mntaxbiz.com.









Monday, October 17, 2016

Running A Gig or Two? What You Need to Know!


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A Gig I thought always had a kind of 1950's/ 1960's hipster vibe. This was something you did on the side while waiting for real life to catch up! The Gig is gaining more legitimacy these days I believe. It means a free-lance or a side job you hold down out of interest or necessity. It is also called a "Gig Economy" or a "Shared Economy" and sometimes people hold down more than one or two gigs. 

Just this morning, the USA TODAY said that the number of multiple job holders hit an eight-year high this September. They say that the burgeoning gig economy is putting a premium on free-lance work and short-term projects. So what is a "Gig Economy"? It is defined as "An environment in which temporary positions are common and organizations contract with independent workers for short-term engagements."

Tax Obligations: If you participate in the Gig or the Shared Economy, there are certain tax obligations you have to fulfill. Income to you from participating in this activity may be reported to the IRS via Form 1099-MISC, Miscellaneous Income, Form 1099-K, Payment Card and Third Party Network Transactions, Form W-2, Wage and Tax Statement, or some other income statement. 

In order to correctly report the income received, one has to first determine if one is an employee or an independent contractor. More about that in my post here. There are related tax issues here: payments received may be in forms of money, goods, property or services. You may be able to deduct gig expenses if you are an independent contractor or a self-employed individual, subject to the normal tax limitations and rules.
 
Airbnb and temporary rentals: If you participate with Airbnb and rent your home out, in most cases the rental income must be reported, unless the rental is for less than 15 days in a year. The total expenses should be divided between rental use and personal use, there are other restrictions on the total amount of expenses allowed. 

Etsy & Others: If you sell items on sites like Etsy, or other online platforms that cater to artists selling their own creations, your income is taxable. Etsy and such other sites will report your income through them to the IRS via Form 1099-K of which you will be given a copy. You will be able to deduct certain expenses from your income. You may also have a sales tax obligation if selling on Etsy. If your Etsy store is a hobby then you are restricted from claiming more expenses than income. 

Ebay, Amazon & Other E Stores: The same rules as Etsy sellers apply to sellers on Ebay, Amazon and other e-stores. The Internal Revenue Service has given "Tax Tips for Online Auction Sellers" on its website. Amazon has some stringent seller requirements which is different than that of Ebay. 

Working for Uber, Lyft, TaskRabbit, Doordash and many such service providers fall into the above categories.

Form 1099-K: The Form 1099-K was introduced in the year 2011, and regulations require that US payment processors file a Form 1099-K for sellers who exceed $20,000 in gross sales and the total number of transactions exceed 200. The same regulations also require that the payment processors have the sellers' tax identification numbers on file regardless of sales volume. 

It could be that you have not yet hit the $20,000 sales mark or have had more than 200 transactions. We would still recommend that you keep good accounting records and report income & expenses to the IRS whether you conduct this as a business full time or even if this is just a hobby for you. Sometimes being able to claim a business loss against higher income can turn into a "gain" as it reduces your other income from taxes. 

If you run a gig or two or three, do talk to your Enrolled Agent or tax professional. 

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As always, read my disclaimer here. Please consult a qualified tax professional for your unique tax needs. More of my contact information is on my website, www.mntaxbiz.com.


 



  







Wednesday, September 21, 2016

Corporations: Changes For 2016

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One of the most positive aspects of my job is to talk to people who come in with their start-up ideas. Whether those are tried & tested ideas or totally out of the box schemes, the excitement at starting something new is always palpable. It's like planning a baby's room or buying a new house. 

I always start off our consultation with the story behind an idea. Isn't it exciting to see these stories being played out, sometimes smoothly, sometimes with a few bumps on the road? So far almost every business we helped set up has continued their journey with us. 

Almost always a business set up begins with entity selection. There are Limited Liability Companies {LLCs}; Corporations {C-Corps}; and Sub Chapter S Corporations {S-Corps} that one can choose to form. 

How the entity is set up determines the taxation of the net profits of the business. The income of LLCs and S-Corps flows through to their owners and is taxed at individual rates. Subject to certain restrictions, owners of pass-through entities can also deduct their share of losses on their personal returns. The income of C Corps is taxed at corporate rates. 

My blog post here talks about LLCs versus S Corporations

In 2015, there were significant changes made to some aspects of S Corp taxation:
  • Literally the big changes in tax law was the Built-In Gains tax, aka the BIG tax. When a C corporation converts to an S corporation or an S corporation acquires assets from a C corporation in a tax-free transaction, it may be subject to a corporate-level “built-in gains” tax in addition to the tax imposed on its shareholders. This tax was 35% paid on profits from sales of assets owned before the switch. Under the new law, only assets sold within five years of conversion are subject to BIG tax. 

  • An S Corp can make donations as if it was an individual.  Generally, allowable deductions cover contributions to religious organizations, governments, non-profit schools and hospitals, war veterans’ groups, and any organization able to accept tax-deductible contributions. These donations have to be made through the S Corp's bank account or can be the S Corp's assets. The 2015 tax law changes permanently extended the provision that shareholders can reduce their stock basis by the cost of the asset donated, not the fair market value. 

The Internal Revenue Service also released the latest 2016 draft Form 1120, which is what we use to file tax returns for Corporations:

  • The Failure to File Penalty has been increased to smaller of the tax due or $205 if the return is over 60 days late. 

  • Beginning in 2016, if the US corporation was formed for purposes of holding directly or indirectly, specified foreign financial assets, the Corporation must attach a disclosure statement to their income tax return for any year in which the aggregate value of these assets were more than $50,000 on the last day of the year or $75,000 at any time of the year. More on specified foreign assets & form 8938 in my blog post here. 

  • There is a new question on the Schedule K asking if the corporation made payments during the year that would require it to file Forms 1042 & 1042-S. In general a withholding agent must file a Form 1042-S to report amounts paid to a foreign persons. 

Do have conversations with your Enrolled Agent or a tax professional if any of the above apply to you. 

Bibliography: Draft Form 2016; Form 1042; Form 1042-S; IRS News Release

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As always, read my disclaimer here. Please consult a qualified tax professional for your unique tax needs. More of my contact information is on my website, www.mntaxbiz.com.









Wednesday, August 10, 2016

The New ITIN Rules, PATH Act and My 100th Post!!

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Starting off on my 100th blog post is extremely exciting to say the least! From my first post nearly 3 and half years ago, I think I have come a long way indeed! My stat-counter this morning read 78,670 views and that to me friends is a definite thumbs-up to continue to do what I am doing! What do you think?

Learning the ropes of blogging on the fly, trying ins & outs of social media promotion as I moved along, there have been many pitfalls but it has definitely been an incredible journey! I am so thankful for all the loyal readers and "sharers" and commentators. I also have to thank Tax Connections for all they have done in promoting me and my blog on their fantastic website and to all their readers. 

So my 100th Blog Post will be about Individual Taxpayer Identification Numbers {ITIN}. I picked this topic because this year was a tumultuous year for ITIN Applications not only in our office but for everyone we heard from the buzz in the Tax World. Now that the ITINs are getting approved (or not), the birds are coming home to roost! 

What Are ITINs?: 
ITINs are generally used as an identifying number for those individuals who need to file a US Tax Return or may need to be included on one as a dependent but may not be eligible for a Social Security Number {SSN}. These are in the same nine digit format as an SSN, begin with the number 9 and have fourth & fifth digits in a particular range of numbers. You apply for an ITIN using the Form W-7, Application for IRS Individual Taxpayer Identification Number. 

Prior to the PATH Act, an individual applied for and received an ITIN only once, this remained in effect until the taxpayer became eligible for and obtained an SSN. 

The "Protecting Americans From Tax Hikes" or PATH Act, 2015:
U. S. Code § 6109 governs ITINs. There were some major changes that happened to § 6109 in the PATH Act enacted in 2015. Under these provisions, ITINs issued after 2012 expire on December 31st on the 3rd consecutive year of non-use, and those issued before 2013 will expire on a rolling schedule based on the year of issue. 

On August 4th, 2016, the Internal Revenue Service {IRS} issued instructions and explanations to the changes to § 6109 via Notice 2016-48 and News Release IR-2016-100; under the PATH Act. From now now on, any ITIN that is not used on a federal tax return for three consecutive years, either as the ITIN for the person filing the tax return or as the ITIN of a dependent included on the return, it will expire on December 31st of the 3rd year of consecutive non-use. 

For example: An ITIN is obtained and used on a taxpayer's 2014 tax return in the year 2015. If this individual does not file or is not claimed as a dependent on a tax return for 2016, 2017, and 2018-- the ITIN will expire on 12/31/2018. 

This rule applies to all ITINs regardless of when the ITIN was issued.

What Happens to the ITINs That Have Expired?
No, they do not go to the little ITIN yonder beyond the blue! If an ITIN has expired due to non-use in the last 3 consecutive years (2013, 2014, 2015), they may be renewed anytime starting October 1st, 2016. 

  • Filers have to use the most recent Form W-7 and check the box for "renewal".  
  • Filers do not have to attach this Form W-7 used for renewal to a Tax Return.
  • Filers can submit the Form W-7 along with their Tax Return if they chose to do so. 
  • This renewed ITIN will expire again if not used on Tax Returns for 3 consecutive years. 

What Happens to the ITINs issued before 2013 & Are Still In Use?:
These ITINs get special treatment since they are set to expire based on a multi-year schedule. The IRS will administer the PATH Act by a different method from what is specified in § 6109(i)(3)(C) in order to simplify the renewal process:

  • ITINs with the middle digits 78 or 79 will no longer be in effect starting January 1st, 2017.
  • Starting this summer (of 2016), the IRS will send out a Letter 5821 to ITIN holders with middle digits 78 or 79. 
  • The Letter 5821 will be sent to the most recent address on file with the IRS. 
  • If you get this letter, you will have to submit a Form W-7 with original or certified documents. This can be done only starting October 1st, 2016 with a current Form W-7. This need not be attached to a tax return but you can file it with your next tax return if you so wish. 
  • If there are multiple members in the family who have such ITINs, the IRS will accept a single family submission.
  • For ITINs other than those with middle digits 78 or 79, wait for future guidance from the IRS. 

Other ITIN Stuff:
There is more information in the August 2016 IRS Releases for those ITIN holders who have become eligible for an SSN, or for those who did not renew their ITIN. We will go over those rules in a future blog post. In the meantime, if any of the above applies to you or your dependents, please do contact us or your Enrolled Agent for more information. 

Note: The News Release IR 2014-76 dated June 30,2014 and that I elaborated on in this blog post is now superseded by the above changes. 

Bibliography: § 6109; Notice 2016-48News Release IR-2016-100; Form W-7; Journal of Accountancy

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 Do not forget to read my disclaimer here. Please consult an Enrolled Agent for your unique tax needs. More of my contact information is on my website, www.mntaxbiz.com


 

Monday, August 1, 2016

US Citizen Living Abroad & The Foreign Housing Exclusion.

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Having moved around a lot growing up, I think I have had the most unique of experiences and have learnt to assimilate wherever I am and make connections with people. But of course, I never saw it as an advantage while I was still little. Having to say good-bye to friends more often than not and starting over in a new place was painful. Even with all the world-wide turmoil these days, travel continues to fascinate me. My husband & I would like to travel a lot when we are retired, which definitely differs from moving house from place to place, and that brings us to today's topic. 

If you are a regular on my blog, you know that US Citizens and Green Card holders no matter where they live, have to pay taxes on their world-wide income. But if they live outside the United States, they may however qualify to exclude some or all amounts from taxes by way of the Foreign Earned Income Exclusion {FEIE} and the Foreign Housing Exclusion. 

To be eligible to claim the foreign housing exclusion, first & foremost the taxpayer must be eligible to claim the FEIE. What that means is that he/ she should have a valid election in place for the year in question. For more information on the FEIE, please see my blog post here 

The foreign housing exclusion applies only to amounts that are considered paid for with employer-provided amounts for services provided in a foreign country. These are mostly wages and salaries, FMV of compensation provided in kind, amounts paid by employer as reimbursement for housing expense etc. 

Foreign Housing Exclusion Calculation: The maximum Foreign Earned Income Exclusion { FEIE } for 2015 was $100,800. The housing amount excludable would be calculated as the total housing expenses paid reduced by the base housing amount, which is 16% of max FEIE. Not only are the total housing costs incurred reduced by the base amount, they cannot exceed 30% of of the max FEIE.  

Notes of Caution: 
  • Not all overseas locations are "foreign countries", for example, U.S. possessions and territories, Antarctica, international air-space or waters. 
  • If a taxpayer is eligible under a tax treaty in the country of bonafide residence for a credit for the amounts excluded under the FEIE or the Foreign Housing Exclusion, he will have to choose one of the two methods to save on taxes--not both! 
  • Foreign earned income from self-employment is NOT eligible for the housing exclusion.

One has to be careful what one includes as housing expenses for the above calculation. Expenses considered "lavish or extravagant under the circumstance" are payments on a mortgage to buy foreign property, deductible interest and taxes paid on such property, cost of domestic labor, television subscriptions, expenses for more than one foreign property, etc. Taking excessive housing expense deduction is a definite audit red flag.

Like I always say, if any of the above apply to you, speak to an Enrolled Agent who specializes in cross-border taxation and/ or expatriation taxation. Most D-I-Y software do not handle these calculations correctly and you may leave a lot of money that you could have rightfully claimed as deductions on the table. 

Bibliography: IRC § 911; Form 2555; IRS Pub 54. 

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Please read my disclaimer here. Please consult an Enrolled Agent for your unique tax needs. More of my contact information is on my website, www.mntaxbiz.com