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Your Rights As A Taxpayer

August 1, 2011

You probably don't think of the phrase "taxpayer rights" in conjunction with the IRS. But income tax obligations are not a one-way street. The IRS itself spells out your rights, and it is charged with reminding you of them during any interaction.

You have the right to:

  • Privacy. Unless authorized by law, the IRS will not disclose your personal/financial information.
  • Representation. You can represent yourself, or be represented by an authorized individual (CPA, attorney, enrolled agent, etc.). You can even record a meeting (with ten days' notice).
  • Pay only the tax due under the law. No more, no less. You might be allowed to make monthly installment payments.
  • Ask for help in resolving disputes. Write this number down and file it: 877-777-4778. It's the phone number for the Taxpayer Advocate Service. If you cannot see eye-to-eye with a representative of the IRS on a tax issue, call this number or write to the Taxpayer Advocate at the office that last engaged you. If a tax bill is causing you exceptional hardship, you can also work with this office.
  • Be relieved of certain penalties and interest. Yes, you do have that right -- in some specific cases. If an IRS employee has given you erroneous information, or if you acted, "…reasonably and in good faith," the agency will waive penalties when allowed by law. The same holds true for interest, if an IRS employee causes, "certain errors or delays".
  • Appeal. Don't think you owe the amount stated? Or feel that, "certain collection actions" were unwarranted? You can request a review of your case by the IRS Appeals Office – or a U.S. court. This step should only be taken if you kept accurate records and cooperated with the IRS.

Make sure the IRS does not violate your rights as a taxpayer. If you have any questions or would like to discuss this further, please give us a call at the office. Remember that dealing with the IRS can be a daunting process, but we are here to help.

Update on Items affecting business for all tax laws passed in 2010

January 21, 2011

Business Deductions
Self-Employed Health Insurance Premiums: Self-employed individuals are allowed to claim 100% of the amount paid during the taxable year for insurance that constitutes medical care for themselves, their spouses and dependents as an above-the-line deduction, without regard to the 7.5% of AGI floor. New for 2010, the deduction can be taken into account in computing self-employment taxes.

Equipment Purchases: If you are in business and purchase equipment, you may make a "Section 179 Election," which allows you to expense (i.e., currently deduct) otherwise depreciable business property. For 2010 and 2011, under a new law just enacted, you may elect to expense up to $500,000 of equipment costs (with a phase-out for purchases in excess of $2,000,000) if the asset was placed in service during 2010. Former law had the numbers at $250,000 for 2010 and $25,000 for 2011. Therefore, between now and the end of the year, if you previously maxed out the old $250,000 amount for 2010, you now have an additional $250,000 you can invest in your business and deduct. Also, new for 2010 and 2011, certain real property can qualify for the expense deduction, but of the $500,000 limitation, only $250,000 can be attributed to qualified real property.

Under another piece of legislation, enacted in December, for purchases after September 8, 2010, and through December 31, 2011, taxpayers can expense all of their business equipment purchases under a provision giving taxpayers 100% bonus depreciation.

In addition, careful timing of equipment purchases can result in favorable depreciation deductions in 2010. In general, under the "half-year convention," you may deduct six months worth of depreciation for equipment that is placed in service on or before the last day of the tax year. (If more than 40% of the cost of all personal property placed in service occurs during the last quarter of the year, however, a "mid-quarter convention" applies, which lowers your depreciation deduction.)

A popular strategy in recent years is to purchase a vehicle for business purposes that exceeds the depreciation limits set by statute (i.e., a vehicle rated over 6,000 pounds). Doing so would not subject the purchase to the statutory dollar limit, $3,060 for 2010; $3,160 in the case of vans and trucks. Therefore, the vehicle would qualify for the full equipment expensing dollar amount. However, for SUVs (rated between 6,000 and 14,000 pounds gross vehicle weight) the expensing amount is limited to $25,000. Note that new legislation enacted in September, revives the additional $8,000 depreciation amount for qualified 50% bonus depreciation property. Such amount is added to the dollar amounts stated above.

NOL Carryback Period: If your business suffers net operating losses for 2010, you generally apply those losses against taxable income going back two tax years. Thus, for example, the loss could be used to reduce taxable income—and thus generate tax refunds—for tax years as far back as 2008. Certain "eligible losses" can be carried back three years; farming losses and qualified disaster losses (for losses arising in taxable years beginning after 2007 in connection with disasters declared after December 31, 2007) can be carried back five years.

Bonus Depreciation: Although originally not in effect for 2010, new legislation enacted in September, for 2010, taxpayers meeting certain criteria can claim a 50% bonus depreciation allowance. This law was made more favorable in December as taxpayers can claim 100% bonus depreciation for assets placed in service after September 8, 2010, and before January 1, 2012. Bonus depreciation is also allowed for machinery and equipment used exclusively to collect, distribute, or recycle qualified reuse and recyclable materials and qualified disaster assistance property. Because bonus depreciation was just extended into 2010 by the new laws, you can take advantage of this for the remainder of 2010.

Electronic funds transfer (EFT) rules now in place. Beginning Jan. 1, 2011, employers must use EFT to make all federal tax deposits (such as deposits of employment tax, excise tax, and corporate income tax). Forms 8109 and 8109-B, Federal Tax Deposit Coupon, cannot be used after Dec. 31, 2010. Payments sent via mail will not qualify as valid payments for payroll tax deposits. This is very important as now the IRS will be assessing many penalties and interest fees where companies do not use an outside payroll service to report the payroll taxes and pay them. Our experience is that Quickbooks when used as an outside payroll service is that often they do not back up their work by paying interest and penalties where things go wrong. Good payroll services will provide this guarantee.

Standard mileage rates up. The optional mileage allowance for owned or leased autos (including vans, pickups or panel trucks) is 51¢ per each business mile traveled after 2010. That's 1¢ more than the 50¢ allowance for business mileage during 2010. Further, the 2011 rate for using a car to get medical care or in connection with a move that qualifies for the moving expense deduction is 19¢ per mile, 2.5¢ more per mile than the 16.5¢ for 2010.

Basis overstatement can trigger 6-year limitations period under new regulations. The IRS has issued final regulations under which an understated amount of gross income reported on a return resulting from an overstatement of unrecovered cost or other basis is an omission of gross income for purposes of the 6-year period for assessing tax and the minimum period for assessment of tax attributable to partnership items. The 6-year limitations period applies when a taxpayer omits from gross income an amount that's greater than 25% of the amount of gross income stated in the return. Several courts had held that a basis overstatement is not an omission of gross income for this purpose. In response to these decisions, the IRS issued the new regulations to clarify that an omission can arise in tha t fashion. After it initially issued these regulations as temporary ones, the Tax Court found them to be invalid. How other courts will react to the clarification remains to be seen.

Withholding on government payments delayed. For payments made after Dec. 31, 2011, governments at the federal, state and local levels will have to deduct and withhold tax in an amount equal to 3% of any payments they, the government, make to a person providing property or services. However, the IRS has announced that withholding and reporting requirements will not apply to any payment made by payment card, including credit cards, debit cards, and stored value cards, for any calendar year beginning earlier than at least 18 months from the date further guidance on this subject is finalized. Thus, the new requirements will not apply to payment card payments for the 2012 calendar year.

A district court has concluded that an S corporation shareholder-employee's $24,000 salary in 2002 and 2003 was unreasonably low, and allowed IRS to reclassify as salary over $67,000 in dividend payments to the officer during each of those years. The corporation will also owe employment taxes on the reclassified dividend payments.

This is a long standing compliance issue with IRS, which feels that many service professionals try to minimize Medicare and Social Security taxes by routing what would otherwise be self-employment income through an S corporation and then paying themselves a nominal salary. Since the amount of compensation that an S corporation pays its employee-shareholder is within the employee-shareholder's discretion, he may have an incentive to claim less than a reasonable salary and take from the S corporation other payments (e.g., dividends) that aren't subject to employment taxes.

Unusual opportunity for businesses
tax-related economic stimulus incentives in the 2010 Tax Relief Act. These incentives consist of extended bonus first-year depreciation, a 100% first-year depreciation deduction for qualifying property placed in service after Sept. 8, 2010 and before Jan. 1, 2012, liberalized Code Sec. 179 expensing for 2012, and a one-year "payroll tax holiday" for 2012—a two-percentage-point reduction in payroll/self-employment tax for employees and self-employed individuals.

Bonus Depreciation Extended; Temporary 100% Deduction in Placed-in-Service Year
Under pre-Act law, the Code Sec. 168(k) additional first-year depreciation deduction (also called bonus first-year depreciation) is allowed equal to 50% of the adjusted basis of qualified property acquired and placed in service before Jan. 1, 2011 (before Jan. 1, 2012 for certain longer-lived and transportation property). The additional first-year depreciation deduction is allowed for both regular tax and alternative minimum tax purposes (AMT), but is not allowed for purposes of computing earnings and profits. The basis of the property and the depreciation allowances in the year of purchase and later years are appropriately adjusted to reflect the additional first-year depreciation deduction. A taxpayer may elect out of additional first-year depreciation for any class of property for any taxable year.

In general, an asset qualifies for the bonus depreciation allowance if: • It falls into one of the following categories: property to which the modified accelerated cost recovery system (MACRS) rules apply with a recovery period of 20 years or less; computer software other than computer software covered by Code Sec. 197 ; qualified leasehold improvement property; or certain water utility property.
• It is placed in service before Jan. 1, 2011. (Certain long-production-period property and certain transportation property may be placed in service before Jan. 1, 2012.)
• Its original use commences with the taxpayer. Original use is the first use to which the property is put, whether or not that use corresponds to the taxpayer's use of the property. observation: In other words, the property must be new property in the hands of the taxpayer.

New law. The 2010 Tax Relief Act extends and expands additional first-year depreciation to equal:
• 100% of the cost of qualified property placed in service after Sept. 8, 2010 and before Jan. 1, 2012 (before Jan. 1, 2013 for certain longer-lived and transportation property); and
• 50% of the cost of qualified property placed in service after Dec. 31, 2011 and before Jan. 1, 2013 (after Dec. 31, 2012 and before Jan. 1, 2014 for certain longer-lived and transportation property). (Code Sec. 168(k)(5), as amended by Act Sec. 401(a)) observation: Thus, for example, under the temporary 100% first-year write off, a calendar-year business that buys $1 million-worth of new bonus-depreciation-eligible property this month will be able to claim a $1 million depreciation deduction for it—that is, completely write it off—on its 2010 return.

Observation: Those businesses that bought qualifying property after Sept. 8, 2010, and before the enactment date of the 2010 Tax Relief Act have been handed what is in effect a windfall tax break.

observation: The 2010 Tax Relief Act also extends through 2011 the Code Sec. 168(e)(3)(E)(iv) rule treating qualified leasehold improvement property as 15-year property. Thus, such property is eligible for a 100% first-year write off if placed in service after Sept. 8, 2010 and before Jan. 1, 2012.

caution: The 2010 Tax Relief Act also extends through 2011 the Code Sec. 168(e)(3)(E)(v) rule treating qualified restaurant property as 15-year property and the Code Sec. 168(e)(3)(E)(ix) rule treating qualified retail improvement property as 15-year property. However, under Code Sec. 168(e)(7)(B) and Code Sec. 168(e)(8)(D), these types of property are not treated as qualified property for purposes of the bonus depreciation rules in Code Sec. 168(k) and thus aren't eligible for the new 100% first-year write off.

caution: The 2010 Tax Relief Act refers to the new 100% depreciation deduction in the placed-in-service year as "100% expensing," but the tax break is not to be confused with expensing under Code Sec. 179 , which is subject to entirely separate rules (see below).

observation: Property may be expensed under Code Sec. 179 whether bought new or used. By contrast, property is eligible for the new 100% first-year write off only if it's new.

Rules similar to those in Code Sec. 168(k)(2)(A)(ii) and Code Sec. 168(k)(2)(A)(iii), which provide that qualified property does not include property acquired under to a written binding contract that was in effect prior to Jan. 1, 2008, apply for purposes of determining whether property is eligible for the 100% additional first-year depreciation deduction. Thus under the provision, property acquired under a written binding contract entered into after Dec. 31, 2007 is qualified property for purposes of the 100% additional first-year depreciation deduction assuming all other requirements of Code Sec. 168(k)(2) are met.

First-Year Depreciation Cap for 2011/2012 Autos and Trucks Boosted by $8,000
Under the luxury auto dollar limits of Code Sec. 280F, depreciation deductions (including Code Sec. 179 expensing) that can be claimed for passenger autos are subject to dollar limits that are annually adjusted for inflation. For passenger automobiles placed in service in 2010, the adjusted first-year limit is $3,060. For light trucks or vans, the adjusted first year limit is $3,160 to 11,160. Light trucks or vans are passenger automobiles built on a truck chassis, including minivans and sport-utility vehicles (SUVs) built on a truck chassis that are subject to the Code Sec. 280F limits because they are rated at 6,000 points gross (loaded) vehicle weight or less. The applicable first-year depreciation limit is increased by $8,000 (not indexed for inflation) for any passenger automobile that is "qualified property" under the bonus depreciation rules of Code Sec. 168(k) and which isn't subject to a taxpayer election to decline bonus depreciation. Under pre-Act law, qualified property didn't include property placed in service after Dec. 31, 2010 (except for certain aircraft and certain long-production-period property that had, instead, a Dec. 31, 2011 placed-in-service deadline).

New law. The 2010 Tax Relief Act provides that the placed-in-service deadline for "qualified property" is Dec. 31, 2013 (Dec. 31, 2014 for the aircraft and long-production-period property). (Code Sec. 168(k)(2)(A)(iv), as amended by Act Sec. 401(a))

observation: Thus, for a passenger auto that is qualified property under Code Sec. 168(k), (and isn't subject to the election to decline bonus depreciation and AMT depreciation relief), the Act extends the placed-in-service deadline for the $8,000 increase in the first-year depreciation limit from Dec, 31, 2010 to Dec. 31, 2012. illustration: T, a calendar year taxpayer, places a new $40,000 vehicle into service in his business on Jan. 5, 2011. Assume that: (1) the vehicle is an auto that is "qualified property" (and an election to decline bonus depreciation and AMT depreciation relief doesn't apply to the vehicle); and (2) the passenger auto first year allowances remain unchanged for 2011. T is allowed first-year depreciation for 2011 of $11,060 ($3,060 general first year allowance for 2011 plus $8,000). If the vehicle were instead a light truck or van, T is allowed first-year depreciation for 2011 of $11,160 (the $3,160 general first year allowance for 2011 plus $8,000).

Boosted Expensing Amounts for 2012
Under Code Sec. 179, a taxpayer, other than an estate, trust, and certain noncorporate lessors, can elect to deduct as an expense, rather than to depreciate, up to a specified amount of the cost of new or used tangible personal property placed in service during the tax year in the taxpayer's trade or business. The maximum annual expensing amount generally is reduced dollar-for-dollar by the amount of Code Sec. 179 property placed in service during the tax year in excess of a specified investment ceiling. The amount eligible to be expensed for a tax year can't exceed the taxable income derived from the taxpayer's active conduct of a trade or business. And any amount that is not allowed as a deduction because of the taxable income limitation may be carried forward to succeeding tax years.

For tax years beginning in 2010 or 2011: (1) the dollar limitation on the expense deduction is $500,000; and (2) the investment-based reduction in the dollar limitation starts to take effect when property placed in service in a tax year exceeds $2,000,000 (beginning-of-phaseout amount). Amounts ineligible for expensing due to excess investments in expensing-eligible property can't be carried forward and expensed in a subsequent year. Rather, they can only be recovered through depreciation. Under pre-Act law, for tax years beginning after 2011, there's a $25,000 dollar limit on expensing and a $200,000 beginning-of-phaseout amount. In general, property is eligible for Code Sec. 179 expensing if it is:

• tangible property that's Code Sec. 1245 property (generally, machinery and equipment), depreciated under the MACRS rules of Code Sec. 168 , regardless of its depreciation recovery period;

• for any tax year beginning in 2010 or 2011, up to $250,000 of qualified real property (qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property); and

• off-the-shelf computer software, but under pre-Act law, only if placed in service in a tax year beginning before 2012. (Code Sec. 179(d)(1)) Under pre-Act law, for tax years beginning before 2012, an expensing election or specification of property to be expensed may be revoked without IRS's consent, but, if revoked, can't be re-elected.

New law. For tax years beginning in 2012, the 2010 Tax Relief Act increases the maximum expensing amount under Code Sec. 179 from $25,000 to $125,000 and increases the investment-based phaseout amount from $200,000 to $500,000. The $125,000/$500,000 amounts will be indexed for inflation. However, for tax years beginning after 2012, the maximum expensing amount drops to $25,000 and the investment-based phaseout amount drops to $200,000. (Code Sec. 179(b), as amended by Act Sec. 402)

The Act also provides that off-the-shelf computer software is expensing eligible property if placed in service in a tax year beginning before 2013 (a one-year extension). (Code Sec. 179(d)(1)(A)(ii) Finally, it provides that for tax years beginning before 2013 (also a one-year extension), an expensing election or specification of property to be expensed may be revoked without IRS's consent, but, if revoked, can't be re-elected. (Code Sec. 179(c)(2))

Earned Income Credit

December 17, 2010

The maximum amount of the credit has increased. The most you can receive for 2010 is:

• $3,050 with one qualifying child
• $5,036 with two qualifying children
• $5,666 with three or more qualifying children
• $457 if you donot have a qualifying child

Earned income amount increased. The maximum amount of income you can ear & still receive the cedit has increased also. You may qualify for this credit if:

• You have three or more qualifying children & you earn less than $43,352 ($48,362 if married filing jointly)
• You have two qualifying children & earn less than $40,363 ($45,373 if married filing jointly)
• You have one qualifying child and you earn less than $35,535 ($40,545 if married filing jointly)
• You do not have a qualifying child & you earn less than $13,460 ($18,470 if married filing jointly)

The maximum amount of investment income you can have and still receive the credit remains at $3,100 for 2010. If you get the advance payments of the credit from your employer with you pay, the total <#> advance payments you get during 2010 can be as much as $1,830

Economic Recovery Payment

If you receive any economic recovery payment during 2010 it is not taxable. These $250 payments were made in 2010 to people who:

• Received social security benefits, supplements security income (SSI), railroad retirement benefits, or veterans disability compensation or pension benefits in November 2008, December 2008, or January 2009.
• Live in the U.S. States, the District of Columbia , Puerto Rico, Guam, the U.S. Virgin Islands, American Samoa, or the Northern Mariana Islands
• Did not receive an economic recovery payment in 2009

If your married an you and your spouse both meet these requirements, each of you may get a $250 payment. If you are entitled to a payment, you will automatically receive it, you do not apply for it. However, any payment you receive will reduce your making work payment credit.

Residential Energy Credits

Nonbusiness energy property credit. This credit, which expired after 2007, has been reinstated. You may be able to claim a nonbusiness energy property credit of 30% of the cost of certain energy-efficient property or improvements you placed in service in 2010. This property can include high-efficiency heat pumps, air conditioners <#> , & water heaters. It also may include energy-efficient windows, doors, insulation materials, and certain roofs. The credit has expanded to include certain asphalt roofs and stoves that burn biomass fuel.

Limitation. The total amount of credit you can claim is limited to $1,500.

Residential energy efficient property credit. Beginning in 2009, there is no limitation on the credit amount for qualified solar electric property costs, qualified solar water heating property costs, qualified small wind energy property costs, & qualified geothermal heat pump property costs. The limitation on the credit amount for qualified fuel cell property costs remains the same.

Itemized Deductions

The limit on Itemized deductions expired in 2010. However, under current law, the limit on itemized deductions will resume in 2011 at pre-2006 levels.

Unequal Sub S distributions not invalidating a Corporate Sub S company and ROTH Conversions update

 

S corporations and second classes of stock. If you have disproportionate distributions, you have a second class of stock, right? No. Not necessarily. The IRS regulations specifically say that disproportionate distributions do not create a second class of stock, unless there is a contractual obligation to make those disproportionate distributions. IRA Conversions to a ROTH IRA The basic rules for 2010, essentially, are that anyone can convert. This is a change from prior Roth conversions, where you had to have an AGI of $100,000 or below. If you were above $100,000, there was no conversion. If you were married filing separately, there was no conversion. For this 2010 conversion, anybody can convert. If you convert, 50 percent of the amount converted will be taxable in 2011, and 50 percent will be taxable in 2012, unless the taxpayer elects otherwise. If an election is made, then the entire amount is taxed in 2010. The election not to defer the taxation must be made by the deadline for filing the tax return, plus extensions. Those are the basic rules. Another thing to keep in mind, however, is that these conversions can be unwound. If we decide, after we listen to this program today, wow that sounds really great. I am going to go out and convert my IRA. Immediately I convert, various circumstances occur, we get down to the wire, and it was not such a good idea. The whole transaction can be unwound by making another election. You have to unwind the conversion before the deadline for filing your tax return for 2010, plus extensions. Remember; You do not roll; you just convert to the Roth or transfer it out.

The first time homebuyer credit time period has been extended. July 15, 2010

 

The Code Sec. 36 first-time homebuyer credit generally is equal to the lesser of $8,000 ($4,000 for a married individual filing separately) or 10% of the principal residence's purchase price. However, for purchases after Nov. 6, 2009, a taxpayer (i.e., a “long-time resident”) may claim the homebuyer credit if he (and, if married, his spouse) maintained the same principal residence for any 5-consecutive year period during the 8-years ending on the date that the taxpayer buys the subsequent principal residence. The maximum allowable homebuyer credit for such taxpayers, who are treated as first time homebuyers for purposes of the first-time homebuyer credit, is $6,500 ($3,250 for a married individual filing separately), or 10% of the purchase price of the subsequent principal residence, whichever is less.

For purchases after Nov. 6, 2009:

    ... the first-time homebuyer credit phaseout range is between $125,000 and $145,000, and for those filing a joint return, it's between $225,000 and $245,000.
    ... the first-time homebuyer credit cannot be claimed for a home if its purchase price exceeds $800,000; and
    ... a number of anti-abuse provisions apply. For example, dependents can't claim the first-time homebuyer credit; a purchaser must be at least 18 years of age on the date of purchase; and the definition of a qualifying purchase for first-time homebuyer credit purposes is amended to exclude property acquired from a person related to the person acquiring the property or the spouse of the person acquiring the property, if married.

The first-time homebuyer credit applied to a principal residence bought before May 1, 2010 and, under pre-Act law, to a principal residence bought before July 1, 2010, by a person who entered into a written binding contract before May 1, 2010, if the purchase closed before July 1, 2010. (Certain service members on qualified official extended duty service outside of the U.S. get an extra year to buy a qualifying home and get the credit.)

New law. The Act provides that if a written binding contract to purchase a principal residence was entered into before May 1, 2010, to close on the purchase of a principal residence before July 1, 2010, the credit may be claimed if the purchase is closed before Oct. 1, 2010. (Code Sec. 36(h)(2), as amended by Act Sec. 2(a)) Thus, this extension allows homebuyers who signed a contract no later than the April 30th deadline, intending to close before July 1, 2010, to complete their closing by the end of September and still qualify for the credit. Conforming amendments are made for purposes of the longer periods for those service members on qualified official extended duty service outside of the U.S. (Code Sec. 36(h)(3)(B))

Required documentation. In IR 2010-80, IRS reminds taxpayers that special filing and documentation requirements apply to anyone claiming the homebuyer credit. To avoid refund delays, those who entered into a purchase contract on or before April 30, but closed after that date, should attach to their return a copy of the pages from the signed contract showing all parties' names and signatures if required by local law, the property address, the purchase price, and the date of the contract.

Besides filling out Form 5405, First-Time Homebuyer Credit and Repayment of the Credit, all eligible homebuyers must also include with their return one of the following documents:

    ... A copy of the settlement statement showing all parties' names and signatures, property address, sales price, and date of purchase. Normally, this is the properly executed Form HUD-1, Settlement Statement. While the Form 5405 instructions indicate that a properly executed settlement statement should show the signatures of all parties, IRS recognizes that the elements of the settlement document may vary from jurisdiction to jurisdiction and may not reflect the signatures of the buyer and seller. The settlement statement that must be attached to the return is considered to be properly executed if it is complete and valid according to local law. In locations where signatures aren't required, IRS encourages the buyer to sign the settlement statement prior to attaching it to the tax return even in cases where the settlement form does not include a signature line.
    ... For mobile home purchasers who are unable to get a settlement statement, a copy of the executed retail sales contract showing all parties' names and signatures, property address, purchase price and date of purchase.
    ... For a newly constructed home where a settlement statement is not available, a copy of the certificate of occupancy showing the owner's name, property address and date of the certificate.
    ... A taxpayer who entered into a binding contract before May 1, 2010 (and who closes by July 1, 2010) must also attach pages from the signed contract showing all parties names and signatures, the property address, the purchase price, and the date of the contract.
    ... A taxpayer claiming the credit as a long-term resident of the same main home must attach copies of one of the following: Form 1098, Mortgage Interest Statement (or substitute statement), property tax records, or homeowner's insurance records. These records should be for 5 consecutive years of the 8-year period ending on the purchase date of the new main home.

Options for claiming the credit. IR 2010-80 also reminds taxpayers that there are three options for claiming the credit on a qualifying 2010 purchase:

    ... If a 2009 return hasn't yet been filed, a taxpayer can claim the credit on Form 1040 for the 2009 tax yea. Though such a return cannot be filed electronically, taxpayers can still use IRS Free File to prepare their return. The returns must be printed out and sent to IRS, along with all required documentation. (Taxpayers can use direct deposit for their refunds.)
    ... If a 2009 return has already been filed, a taxpayer can claim the credit on an amended return using Form 1040X.
    ... Whether or not a 2009 return has been filed, a taxpayer can wait until next year and claim the credit on a 2010 Form 1040.

Observation: The three-month extension of the closing date is intended to provide tax relief for those who couldn't close on time because of backlogs at lenders and federal programs involved in homebuyer loans. In the words of the Act's supporters, the three-month extension “will give time for all the new mortgages to be processed and not punish those homeowners who have been delayed through no fault of their own.”

 

Construction company's workers were employees, not independent contractors July 12, 2010

 

Bruecher Foundation Services Inc v. U.S. (CA 5 06/18/2010) 105 AFTR 2d 2010-997

The Fifth Circuit has upheld a district court's finding that a construction company's workers were employees rather than independent contractors. The company's late filing of Forms 1099 for the affected workers didn't meet the reporting consistency requirement for Section 530 relief and its workers were employees under the common law tests. Although IRS failed to provide statutory notice of Section 530 relief before or at the start of its audit, the company didn't try to obtain administrative relief on this ground.

Background. Whether a worker is an independent contractor or employee generally is determined by whether the enterprise he works for has the right to control and direct him regarding the job he is to do and how he is to do it. Under the common-law rules (so-called because they originate from court cases rather than from the Code), factors used to determine if an individual is a common law employee are:

  • · The degree of control exercised by the principal;
  • · which party invests in work facilities used by the individual;
  • · the opportunity of the individual for profit or loss;
  • · whether the principal can discharge the individual;
  • · whether the work is part of the principal's regular business;
  • · the permanency of the relationship;
  • · the relationship the parties believed they were creating; and
  • · the provision of employee benefits.

However, Section 530 of the '78 Revenue Act (as amended) provides retroactive and prospective relief from employment tax liability for employers who misclassified workers as independent contractors using the common-law facts and circumstances standards. Section 530 applies only if:

  1. The taxpayer does not treat an individual as an employee for any period, and does not treat any other individual holding a substantially similar position as an employee for purposes of employment tax for any period—the substantive consistency requirement;
  2. for post-'78 periods, “all federal returns (including information returns) required to be filed by the taxpayer” with respect to the individual for such period “are filed on a basis consistent with the taxpayer's treatment” of the individual as a nonemployee—the reporting consistency requirement; and
  3. the taxpayer had a “reasonable basis” for not treating the worker as an employee (judicial precedent or IRS rulings, a past IRS audit, or a long-standing practice of a significant segment of the relevant industry)—the reasonable basis requirement.

IRS must provide a taxpayer with written notice of the provisions of Section 530 before or at the start of any audit relating to the employment status of one or more individuals who perform services for the taxpayer. (Sec. 530(e)(1), P.L. 95-600, as amended by Sec. 1122(a), P.L. 104-188) However, where the portion of an audit involving worker classification issues doesn't arise until after the examination of the taxpayer has begun, IRS does not have to give the notice until the time the worker classification issue is first raised with the taxpayer. (Conf Rept No. 104-737 ( P.L. 104-188 ), p. 204)

 

Facts. Bruecher Foundation Services, Inc. (BFS), performed residential foundation repair and grading projects, and treated the workers who did the manual labor on its projects as independent contractors. An IRS audit found that, for the tax years ending Mar. 31, 2000 and Mar. 31, '99, BFS had claimed substantial deductions for “contract labor” on its Form 1120 income tax returns but had not filed any corresponding Form 1099s for particular contractors. The auditor referred the matter to IRS's employment tax group, which commenced an employment tax audit of BFS without telling the company it was doing so. IRS did not provide BFS with notice of the statutory worker classification safe harbor as it was required to do by law. The audit summary also carried IRS's conclusion that BFS was not entitled to the Section 530 safe harbor because it failed to file Form 1099s for the workers at issue.

Following various administrative proceedings, IRS issued a tax lien against BFS on Dec. 13, 2005, and executed a levy against its bank account on Mar. 23, 2006. On May 17, 2006, BFS filed Form 1099s for the workers at issue for calendar years '99 and 2000, then took its dispute to a district court, which found that the workers were employees. BFS then appealed to the Fifth Circuit. It argued that: (1) the district court erred in concluding that BFS was not entitled to rely on the Section 530 safe harbor to avoid liability for any misclassification of its employees; (2) if it is not entitled to Section 530 relief, then the district court should have assigned the burden of proof at trial to the government because IRS failed to comply with the advance-notice procedures of Section 530; and (3) failing other grounds for reversal, its workers were not employees.

 

Fifth Circuit rules for IRS. The Fifth Circuit rejected each of BFS's arguments, as follows:

· Section 530 relief. BFS raised the interesting argument that there was no time limit specified for when it could file Form 1099 for the workers at issue and thus satisfy the second test for Section 530 relief. The Fifth Circuit concluded that BFS couldn't meet its threshold burden of showing that the assessment was erroneous under Section 530. BFS conceded that it was not entitled to Section 530 protection until it filed the relevant Form 1099s. When the tax was assessed, it had not done so and the assessment was therefore correct when made. While the appellate court declined to address the question of whether Section 530 requires the timely filing of the relevant Form 1099s to obtain the benefit of the safe harbor, it held that the practical effect of waiting until after the conclusion of the IRS's administrative process and the concomitant assessment of the tax was to preclude BFS from successfully raising Section 530 as a defense in this subsequent judicial proceeding.

· Burden of proof. BFS argued that IRS's admitted failure to comply with the Section 530 notice procedures reversed the usual burden of proof to put the burden on the government. BFS conceded that there was no authority for this proposition and asked the Fifth Circuit to create this remedy. The Fifth Circuit declined to do so, quoting the Supreme Court's holding in United States v. James Daniel Good Real Property, 510 U.S. 43, 63 (1993), that if “a statute does not specify a consequence for [the government's] noncompliance with statutory timing provisions, the federal courts will not in the ordinary course impose their own coercive sanction.” The Fifth Circuit said it didn't mean to suggest that there can never be a remedy for the IRS's failure to comply with the Section 530 notice procedures. It said the resolution might, for example, have been different had BFS asserted a violation of its due process rights stemming from the failure to provide notice. But that wasn't the case since BFS was apprised of IRS's determination as to the non-applicability of the Section 530 safe harbor at the conclusion of the audit, allowing BFS ample opportunity for administrative relief on those grounds.

· Workers were employees. The Fifth Circuit found that the workers had no risk of loss, virtually no investment in facilities, and were not in business for themselves, all indications of an employment relationship. BFS's moderate degree of control over the workers and the relatively low skill level required only weakly supported employment. The final criterion—the degree of permanence of the relationship, which varied from worker to worker—favored neither employment nor independent contractor status on the facts. Viewing all these factors together, the Fifth Circuit held that the district court did not err in finding that the workers were BFS's employees for federal employment tax purposes.

The significance of this is that the business owner had to pay not only the FICA and Medicare tax he should have paid originally, but the employees FICA and Medicare tax and the Federal withholding which should have been withheld plus penalties and interest. Frequently this will bankrupt the business and often the individuals who own the company and follow them for 10 years.

Upcoming changes to business payments June, 7, 2010

 

Dear Friends,
The 1099 changes attached to the health care reform bill are another kettle of fish. These massively expand the requirements for filing the "1099-Misc" form, which companies use for recording payments to freelance workers and other individual service providers. Until now, payments to corporations have been exempt from 1099 rules, as have payments for the purchase of goods. Starting in 2012, that changes. All business payments or purchases that exceed $600 in a calendar year will need to be accompanied by a 1099 filing. That means obtaining the taxpayer ID number of the individual or corporation you're making the payment to -- even if it's a giant retailer like Staples or Best Buy -- at the time of the transaction, or else facing IRS penalties. In essence, the 1099-Misc is having its role changed from a form for tracking off-payroll employment to one that must accompany virtually any sizable business transaction. Just with business travel it would include hotels, rental cars, phone service: 1099, computer services 1099, postage meter: 1099 advertising, yellow Pages 1099, your landlord 1099. You might as well just keep them in your pocket and hand them out as you go around every day.

Tucked away in the health-care overhaul bill that became law this year was a provision that will require small-business owners to keep better records of what they buy. They'll also have to report some purchases to the government. This will apply to any trade or business.

This new law requires small businesses to issue 1099 forms to people or companies that sell them more than $600 worth of goods or services. It takes the 1099 beyond its most common business use, which is to report money paid to independent contractors or freelancers.

The law doesn't take effect until Jan. 1, 2012, which means owners won't have to worry about the paperwork until early 2013, when they're compiling their 2012 returns. But owners whose books and finances are chaotic might want to get themselves organized in the meantime so keeping track of such payments and reporting them become routine.

Buried and not well disclosed in the “2010 Health Care Reconciliation Act” is a very new requirement that will cost each business owner a significant amount of time. It will also drive the IRS a little crazy because even if everyone complies they will not know what to do with the information. The new law: The law in Code section 6041(a) called a revenue provision will require a business is required to file a 1099 form for all payments aggregating $600 or more in a calendar year to a single payee.

This will require you to secure the name of each vendor, their address and their federal identification number and to issue a form 1099 to them regardless of whether you purchase labor, goods or services, rents, interest, royalties or other profits. This will be very cumbersome and burdensome to comply with and may yet be delayed.

We will have to comply with this law starting January 01, 2012. So for 2012 we will need to issue these form 1099’s.

There will be financial penalties for failure to comply assessed by the IRS. The law is hopes to stop businesses, in this case vendors, from evading taxes on their income. Owners whose accounting system is a pile of receipts jammed into file folders are going to have a miserable time. On the other hand if you are maintaining your records in Quickbooks or some other good program and start securing this information now, you should have it a little easier.

We are going to contact each business owner we deal with in the hopes, we can assure the business owner has the Quickbooks preferences set up correct and their administrative person starts securing the information as time goes along. If you get the information and log it into your software before you cut the vendor their check, then I think you will be ready. There will be electronic ways of sending this information into the IRS. And this is preferable, as creating all those paper forms will be a pain. You can set up recipients in your software to flag them for the end of the year.

No time to go high-tech? Some owners who have resisted using software to keep their books say they don't have time to enter into the PC all their information on sales, invoices, expenses and bank accounts. That's a reality for an owner trying to focus on the core aspects of the business, including working with customers. We find that many owners who don't use software can lose money at tax time because it's hard to keep track of all of their tax information, especially their expenses. You risk losing some of your deductions unless you're very good at keeping paper files. There may be people who resist this law by keeping their books themselves, or not setting up for this change. While the IRS may be lenient for a while before they figure out how to handle this coming deluge of information, they have not had a history of much mercy.

Courtesy Jay West Accounting

Many ways to skin a cat April 28, 2010

The IRS often makes new law and changes enforcement of old law to suit their fancy – mostly for us to pay more. Seldom do they make a change to our benefit. And the following is one more example, but there are defenses we can use.The IRS has been particularly active of late in going after expenses that taxpayers have claimed in regards to Miscellaneous Income reported on box 3 of form 1099’s as opposed to box 7. Both boxes are for miscellaneous income.

 

Why is this important? Mostly because if the income is in box 7, the IRS must allow us the expenses and often it is the business expenses that they are most antagonistic with. They have often focused on salesmen and car salesman. This is a group which has many expenses, but which often do not keep good records of their expenses.   The have also focused on those with income on their form 1099 listed in box 3, saying those are not real business activities despite what legal explanations are clearly stated on the form 1099.   Whereas if the income was in box 7 of the form 1099's, then they would consider those expenses as related to the income. Their interpretation runs counter to the instructions on the form 1099 itself. Yet no amount of discussion has persuaded them. So this must be a recent policy decision made by them or in fact the IRS making law.   This has particular importance for those people who have large business expenses because if the expenses can be matched to the income then this lessens the audit risk as well as often times eliminating the alternative minimum tax which catches so many salesmen.

 

But there are many ways to skin a cat or deal with the IRS. Everyone knows they have more financial resources than us and can and often do assert a position that is blatantly unfair and incorrect. Once this happens many individuals feel they have no recourse but to cave in and just pay out of fear and intimidation. However there are other choices.   I have had two cases with the IRS last year over this particular form 1099 issue. Both cases were similar. In one case the individual got quite justifiably scared and took his records away before I could talk to him about the best strategy. After all the IRS is intimidating to many of us, as they have unparalleled power. The one person who got scared off took the case to a tax attorney who in my opinion did not seem to want to defend the taxpayer as strongly as I believed should be done.   I felt very strongly about the rightness of these two taxpayers cause, so after persuading the second salesman to fight the IRS. This second person chose a different tax attorney and his outcome is very different from the first. His case is being settled for about $600. The attorney fees paid on this case were about $850. This was much less than the IRS was going for. The tax attorney selected was the only difference.   Two very different outcomes to what appeared to be similar issues. The only difference was the strategy employed. So if you find yourself in a difficult situation, there are good alternatives to rolling over out of fear.

THE LSBDC IS A GODSEND February 9, 2010

All small businesses can use some help. Especially in the New Orleans market that is still not 100% back to normal after Hurricane Katrina. Help from people who know what they're doing is particularly important for start ups or potential start ups.

That's why the Louisiana Small Business Development Center has put together a plethora of information for those thinking they may be getting in to more than they can handle.

Here is just a sample of the training programs the LSBDC can offer your small business.

  1. Employment and Training Assistance Programs: Designed to help you navigate through all the government programs and services available to businesses seeking assistance as they hire employees.
  2. Employment Regulations: Designed to help you navigate through the federal and provincial government regulations on employment.
  3. Human Resources Management: Designed to help you manage people and build business skills.
  4. Human Resources and Skills Development: Designed for employers to deal with employment insurance programs, record of employment forms, and premium rates.
  5. Development of Training Programs: Designed to help owner-managers of small manufacturing firms set up a systematic program for training their employees.
  6. Taxation Info-Guide: Designed to help you navigate through the federal and provincial government programs, services, and regulations related to taxation that may apply to individuals starting or operating a business.
  7. Preventing Injuries and Illness in the Workplace: Designed to help you learn how to prevent injuries and illness in the workplace, how safety pays, and how the Workplace Safety and Insurance Board can help.

You can read more about what the LSBDC has to offer by visiting their website - http://www.lsbdc.org/

It's important for small businesses in our community to succeed, because without small businessees, we'd be out of work!

A SMALL BUSINESS RECOVERY January 6, 2010

As a small business owner myself, I realize the important impact of small business to the rebirth of New Orleans.

I just read a great piece from the New Rules Project about the impact that local business have on our economy. It's surprisingly more than 20% more than big box retailers like Walmart, Target, Home Depot, etc.

"[A] noteworthy finding of the study is that locally owned businesses require far less land to produce an equivalent amount of economic activity. The study found that a four-block stretch of Magazine Street provides 179,000 square feet of retail space, hosts about 100 individual businesses, and generates $105 million in sales, with $34 million remaining in the local economy. In contrast, a 179,000-square-foot SuperTarget generates $50 million in annual sales, with just $8 million remaining in the local economy, and requires an additional 300,000 square feet of space for its parking lot."

It's obvious that small businesses are the backbone of New Orleans and its recovery. That's why we're here to focus on the details while small business owners can focus on the big picture. The easier we make it for small business owners, the more money they can pump back into the recovery of a city we all love so much.

 

If we ever make an error on your taxes, we pay all penalties and interest!