Refunds Delayed Till Summer?

According to a recent report, the IRS risks issuing $26 Billion in fraudulent tax returns over the next 5 years.  In 2011 alone, the IRS received 2.2 Million fraudulent returns, costing taxpayers $6.5 Billion.  True to form, a “quick fix” idea has gained the most traction with the IRS & members of congress, and naturally it is at the expense of the taxpayer.  Rather than investigate the root of the problem, the IRS wants more time–i.e. YOUR time–to review tax returns to combat fraud.  Thus, the IRS would like to delay all refunds until the Summer time.

The rational is that the IRS would be able to “compare returns” to combat fraud. According to National Taxpayer Advocate Nina E. Olson. 

“Such a shift would allow the IRS sufficient time to review every suspicious return. More importantly, the IRS would have at its disposal the full arsenal of information reporting databases- including complete data on wages and withholding, interest income, dividends, capital gains and partnership income – and could better detect and resolve discrepancies and questionable returns…”

Ms. Olson also noted that this would be a huge “cultural shift” and could potentially hurt early filers; specifically those that depend on their refunds simply to pay the rent or put food on the table.

“Alternatively, if we prefer not to delay the processing of refunds for six months but still insist on greater fraud detection than the IRS is currently able to manage, then Congress would need to authorize significantly more funding for the IRS,” Olson said. “It is unrealistic to expect the IRS to keep up with its increasing workload without either allocating a corresponding increase in resources or extending the timeframe in which to conduct the necessary wage and withholding verification.”

It does not bode well for the average taxpayer if the National Taxpayer advocate is already on record essentially saying give more funds to the IRS or we’ll have to delay refunds for everyone.  Something that neither the IRS, Congress nor Ms. Olsen mentions is the huge amount of interest revenue delaying refunds would generate.  The IRS & various states have instituted delays before, but never on a scale this large.  For example, in 2011 the IRS issued over $193 Billion in refunds.  Using that figure even at 1% A.P.R., (prorated to 6 months) would equate to over $965 Million in interest.  Taking this into account, the only surprise is why Congress & the IRS haven’t tried to implement something like this sooner.

Source: NBC

Banks Get 1 Year Delay For Basis Reporting

The Internal Revenue Service is delaying a requirement that brokers report their customers’ cost basis in options and debt instruments.

The decision was made in response to requests from brokers and custodial banks including the Bank of New York Mellon Corp. (BK), State Street Corp. (STT) and Northern Trust Corp. (NTRS)

The rules will be delayed one year and will take effect for options granted or acquired or debt instruments purchased beginning in 2014, the IRS said today.

In a Jan. 31 letter, BNY Mellon, State Street and Northern Trust asked the U.S. government to delay the effective date for debt until 2015 and for options until 2014.

“Due to the substantial complexities associated with obtaining adequate data, developing compliant systems and perfecting the ability to make cost basis adjustments for debt instruments and options, we believe that Treasury should exercise its authority to delay implementation,” they wrote.

The American Bankers Association, the Securities Industry and Financial Markets Association and Janney Montgomery Scott LLC were among other organizations requesting a delay.

Reporting Taxable Profits

Congress created the cost basis requirement in 2008 in the same law that authorized the Troubled Asset Relief Program. It is designed to make sure that taxpayers don’t overstate their basis and thus underreport taxable profits.

The requirement is part of the government’s effort to reduce the estimated $385 billion annual net gap between taxes owed and taxes paid. When enacted, the provision was estimated to raise $6.7 billion over a decade, according to the congressional Joint Committee on Taxation.

The rules took effect for stocks purchased and sold in 2011, and taxpayers filing returns this year encountered new forms and instructions. The basis-reporting regime expands in 2012 to cover mutual funds and many exchange-traded funds.

Susan Rivers, a spokeswoman for BNY Mellon, declined to comment.

Contact an R&G professional today

Source: Bloomberg

Supreme Court: 3 Year Limit

The Supreme Court has ruled that the Internal Revenue Service has only three years to impose additional taxes in a tax shelter case, instead of six years like the government wanted.

The high court on Wednesday ruled for Home Concrete & Supply, LLC, of Salisbury, N.C., in a fight over a tax shelter scheme.

The argument centered in part on “cost basis,” or the amount paid for an investment, which is the starting point for calculating the capital gain after selling the investment. The question is whether a large overstatement that then lowers taxes is grounds for extending the three-year limit to six years.

The court, in an opinion written by Justice Stephen Breyer, said taxpayer overstatements do not give the government extra time to audit and levy penalties.

Source: Washington Post

What Happens If I Filed Late?

This year, your federal income tax return was due on Tuesday, April 17. That’s because the usual deadline, April 15, fell on a Sunday, and a federal holiday, Emancipation Day, fell on April 16. If you didn’t file your return on time despite the extra two days, here’s what to expect. 

Interest and Penalties
When you file and pay your taxes late, the Internal Revenue Service (IRS) will charge you interest, compounded daily, on your unpaid tax. Interest accrues from the April 17 deadline until the date when you actually pay. The IRS’s annual interest rate on late payments is the federal short-term rate (currently 0%) plus 3%. The rate changes quarterly; taxpayers can find current rates at the IRS’s news release web page.

In addition to interest, you’ll be responsible for a late payment penalty of 0.5% plus a late filing penalty of 4.5%. Both penalties are charged on the amount of tax you owe for each month or partial month that you don’t pay your tax bill. The penalty maxes out at 47.5% – that’s 22.5% for filing late and 25% for paying late. The late filing penalty increases to 15% per month with a maximum of 75% for fraudulent failure to file.

The IRS will reduce or even eliminate the late filing and payment penalties if you can show “reasonable cause,” but the IRS may not interpret those words in the same way you would. Also, members of the armed forces who are currently serving in combat zones may qualify for an exception to the filing and payment deadlines. So will some taxpayers affected by recent natural disasters.

The good news is that you don’t have to worry about going to jail for filing or paying late or for making a mistake on your return. The IRS says it reserves criminal prosecution for “flagrant cases involving criminal violations of tax laws.”

Willful Neglect
If you don’t file a return, the IRS may prepare a return for you using the information it has about your income from W2s, 1099s and other forms it collects from third parties like your employer and financial institutions. An IRS-prepared return is unlikely to give you credit for all the deductions and exemptions you’re allowed, so an IRS-prepared return (also called a substitute return) is likely to result in your owing more tax than you were actually required to pay. If the IRS does file a substitute return, you’ll have the opportunity to correct it and receive the exemptions, credits and deductions you’re owed if you file your own return.

If you intentionally don’t pay your taxes or make any effort to pay them, the IRS can force you to pay them. It can levy your bank accounts, garnish your wages and/or seize your assets. It can also file liens against your assets, including your home. If you aren’t intentionally evading your tax liability but you can’t pay, your best bet is to file on time and work out a repayment plan with the IRS. Under such a plan, the IRS may lower your late payment penalty to 0.25% per month, and you won’t owe the late filing penalty of 4.5% per month.

What Is Considered on Time?
If you file your tax return electronically, your return transmission will have an electronic postmark. This electronic postmark determines whether you filed on time.

The IRS considers paper returns to be filed on time if they are “mailed in an envelope that is properly addressed, has enough postage and is postmarked by the due date.” If you use a private delivery service such as DHL, UPS or FedEx to send your tax return, the postmark date is considered to be “the date the private delivery service records in its database or marks on the mailing label.”

Tax Return Extensions
If you need more time to prepare your return, filing an automatic extension request is simple and straightforward. Filing form 4868 gives you an extra six months to prepare your return. Be aware that if you file an automatic extension, your filing deadline becomes October 15, not October 17. This extension does not, however, extend the amount of time you have to pay any tax you owe. 

If you need more time to pay and you owe $50,000 or less in combined taxes, penalties and interest, try using the IRS’s online payment agreement to automatically set up a payment plan. You can do this even before you receive any notices from the IRS. Another option is to request a payment agreement by filing form 9465-FS. If you’re having trouble paying your taxes because you lost your job or your self-employment income has declined by 25% or more, you might qualify for penalty relief and a six-month payment extension under the IRS’s Fresh Start program.

The Bottom Line
In the future, if you know you won’t be able to file your return on time, file an automatic extension using form 4868. You can do this online through the Free File link at IRS.gov, through a tax software program or through a professional R&G Brenner tax preparer. The form asks you to estimate your tax liability and pay what you think you will owe. Even if your estimate turns out to be incorrect, it could reduce any late payment penalties you might owe, and you won’t be subject to late filing penalties.

Source: Investopedia

Who's Responsible For Tax?

This question seems simple but is important. After all, if you’re a U.S. citizen or permanent resident, you must report your worldwide income to the IRS even if you’re paying tax on it somewhere else. See Expats Lobby For Tax on Residence, Not Worldwide Income. Moreover, you must file an FBAR every year disclosing your bank accounts if their aggregate value exceeds $10,000 at any time during the year…The penalties for either failure are big, potentially even criminal. See Can Foreign Account Nondisclosure Be A Conspiracy?

For all of those reasons, it’s important to know if you are a mere signatory on an account without a beneficial interest in it. That could mean you have FBAR filing obligations but that you don’t have income when the account earns interest.  That could mean, for example, that you might need to file some back FBARs and disclose the account to the IRS, but might not need to go into the IRS voluntary disclosure program (since you don’t owe any tax)…

How do you know if you meet this fact pattern or how these accounts are evaluated? If A and B have a joint interest-earning bank account producing $100 of income, who pays tax on it? Perhaps it only seems fair for each person to have $50 of income, but it is often not that simple.

If A’s Social Security number is linked to the account, won’t A receive a Form 1099-INT from the bank for all the interest? If so, A may feel forced to pay all the tax. Yet some taxpayers finesse the situation by reflecting the Form 1099 on their return but showing a deduction for the interest paid to their co-account holder.

With foreign accounts the stakes are particularly high. With a foreign bank, there will be no IRS Form 1099 to alert the holders about the income and its reporting. Moreover, nettlesome questions about FBARs and tax return reporting are likely to arise. If you are a signatory, you should file an FBAR.

But do you also have income from the account that must be reported to the IRS? You may have a formal or informal power of attorney or other signature authority without beneficial ownership. With informal family dealings, each person may not be certain what he has.

Often, who owns the account under prevailing local law should control. But the IRS and the courts will generally evaluate the facts and the conduct of the parties and look for beneficial ownership. That means the local law owner may be different from the beneficial owner.

The facts and documents are important. Whatever you do, be careful and get some advice about your situation.

Source:  Forbes

Amending Tips

The April 17th deadline has come and gone, however if you made a mistake or omission, you’ll need to file an amended return.  The following are 5 tips to consider when filing your 1040x.

1. Amend each year separately. If you are amending more than one tax return, prepare a separate Form 1040X for each. Mail each amended return in a separate envelope to the IRS “campus”—they used to be called “IRS Service Centers”—for the area where you live. The Form 1040X instructions list the addresses for these IRS campuses.

2. Amended returns are more likely to be audited. Few tax returns are actually audited, but tax lawyers must advise clients based on the assumption every tax return will be examined…Understandably, taxpayers hope their returns will not be examined! However, amended returns are more likely to be examined than original returns. That should factor into your thinking.

3. Refunds can be applied to estimated taxes. If you file an amended return asking for considerable money back, the IRS may review the situation even more carefully. As an alternative, consider applying all or part of your refund to your current year’s tax. That can be lower profile.

4. Beware special statute of limitations rules. Normally the IRS has three years to audit a tax return…You might assume that filing an amended tax return would restart that three-year statute of limitations. Surprisingly, it doesn’t.

If your amended return shows an increase in tax, and you submit it within 60 days before the three-year statue runs, the IRS has only 60 days after it receives the amended return to make an assessment. See Internal Revenue Manual 25.6.1, Statute of Limitations Processes and Procedures. That means if the IRS doesn’t audit in that 60 day window, you’re home free.

Planning opportunities? Some people amend a return right before the statute expires. Plus, note that an amended return that does not report a net increase in tax does not trigger any extension of the statue of limitations. 

5. Don’t forget interest and penalties. If your amended return shows you owe more tax than you originally reported and paid, you’ll owe additional interest and probably penalties. Interest is charged on any tax not paid by the due date of the original return, without regard to extensions. The IRS will compute the interest and send you a bill if you don’t include it. If the IRS thinks you owe penalties it will send you a notice, which you can either pay or contest.

Conclusion. Amended tax returns are tricky. You should never take tax return filing obligations lightly, and your original return should be as accurate as you can make it. If you discover afterward that amendments are needed, make sure you think through the various ramifications of filing an amended return.  

R&G Brenner can help you file all amended returns.

Source: Forbes

April 30th Deadline

April 17 has come and gone, and New Yorkers have filed their returns, or at least filed for an extension. But for many New York businesses, April 30 is another key date.

The New York State Department of Taxation and Finance is reminding businesses to file Form NYS-45, Quarterly Combined Withholding, Wage Reporting, and Unemployment Insurance Return, by April 30, for the period running from Jan. 1 to March 31 of this year.

According to the instructions for the form:

• Employers who are subject to both unemployment insurance contributions and withholding tax must complete Parts A, B, and C each quarter.
• Employers subject only to unemployment insurance contributions must complete Part A and Part C, columns a, b, and c.
• Employers subject only to withholding tax must complete Part B for each quarter and Part C, columns a, b, d, and e, on the final quarterly return filed for the calendar year.

2008 Deadline Is This Sunday

The deadline to file 2008 tax returns for unclaimed refunds, and 2011 tax returns with balances due for is Tuesday, April 17th.  The statute of limitations to file returns for refunds is 4 years.  Any refunds that are not claimed become the property of the IRS and/or State(s).  The IRS has over $1 Billion in unclaimed refunds averaging approximately $637.  The primary reason for the majority of these unclaimed refunds is that while many taxpayers were under the minimum earned income requirement to file, their employers still took taxes out of their paycheck; taxes that should have been refunded to them.

Therefore, if you did not file a 2008 tax return because you didn’t have to, you may have cost your self hundreds of your hard earned dollars.  Contact an R&G Brenner professional today so we can review your 2008 tax situation for free before the deadline.  We will help you file a 2008 if we find you are entitled to a refund.  Don’t let the government keep your money!

Keep Your Tax Records For 3 Years

Managing Your Tax Records After You Have Filed

Keeping good records after you file your taxes is a good idea, as they will help you with documentation and substantiation if the IRS selects your return for an audit. Here are five tips from the IRS about keeping good records.

1. Normally, tax records should be kept for three years.

2. Some documents — such as records relating to a home purchase or sale, stock transactions, IRA and business or rental property — should be kept longer.

3. In most cases, the IRS does not require you to keep records in any special manner. Generally speaking, however, you should keep any and all documents that may have an impact on your federal tax return.

4. Records you should keep include bills, credit card and other receipts, invoices, mileage logs, canceled, imaged or substitute checks, proofs of payment, and any other records to support deductions or credits you claim on your return.

5. For more information on what kinds of records to keep, see IRS Publication 552, Recordkeeping for Individuals, which is available on the IRS website at www.irs.gov.

Source: IRS.gov 

Foreign Income Is Taxablea

More than 6.32 million Americans (excluding military personnel) live abroad in over 160 countries, according to the Association of Americans Resident Overseas (AARO). In this article, we discuss the tax rules and regulations that affect U.S. citizens and resident aliens residing overseas:

Filing Requirements
The Internal Revenue Service (IRS) requires American citizens and resident aliens who live outside of the United States to file income tax returns if their gross income is greater than or equal to the applicable exemption and standard deductions. It is also recommended that those whose income is less than the applicable exemption and standard deduction also file for income tax return. According to the AARO, U.S. tax filing requirements apply equally to Americans regardless of the country in which they currently reside. Thus, citizens and resident aliens working overseas may be subject to double taxation (from both local and U.S. tax authorities), but individuals should check with a tax professional or the IRS because not all situations are the same.

Taxpayers are required to submit income tax returns, as well as estate and gift tax returns (if applicable). If you work abroad, you need to file a return if your gross income exceeds certain thresholds established by the IRS. Here are the amounts based on filing status (2011 figures): single ($9,500), 65 or older ($10,950), head of household ($12,200), 65 or older ($13,650), qualifying widow(er) ($15,300), 65 or older ($16,450), married filing jointly ($19,000), not living with spouse at end of year ($3,700), one spouse 65 or older ($20,150), both spouses 65 or older ($21,300), and married filing separately ($3,700).

Foreign Financial Assets
There is an additional reporting requirement beginning in 2012. Under the IRS’s “Offshore Voluntary Disclosure Program,” Americans who have foreign financial assets exceeding $50,000 for individuals and $100,000 for married couples filing jointly must report these assets. Qualifying assets include bank accounts, any stock, security or financial instrument issued by a non-U.S. entity/person, and any interest in a foreign entity. If you qualify, you’ll need to submit Form 8938 along with your tax return.

Physical Presence Test
You must live in a foreign country (or countries) for at least 330 full days in a 12-month period. According to the IRS, expatriates are allowed to reside and work in more than one foreign country. However, they must be physically present in those countries for at least 330 days over a calendar year.

Foreign-Earned Income Exclusion
The foreign-earned income exclusion is designed to reduce the effect of Uncle Sam’s double taxation policy. For 2012, Americans can exclude up to $95,100 annually in foreign wages. Taxpayers claiming this exclusion will pay tax at the rates that would have applied had they not claimed the foreign-earned income exclusion. This means that instead of applying the lowest possible rate, expatriates will be taxed starting at their normal tax bracket (had they not used the exclusion) after using up the initial $95,100.

Foreign Housing Exclusion
Expatriates can exclude amounts paid by their employer for housing-related expenses. These employer-paid benefits do not have to be reported as part of your foreign-sourced income. Americans cannot exclude the same amounts twice (i.e., sources rooted from both foreign wages and housing-related benefits). Additionally, self-employed individuals do not qualify for the foreign housing exclusion. To prevent abuses, expatriates can claim a maximum foreign housing exclusion up to 16% of the foreign-earned income exclusion. Also, independent contractors cannot claim the foreign housing exclusion. Instead, independent contractors must select the foreign housing deduction on Form 2555.

The IRS considers the following as qualifying amounts for the foreign housing conclusion: rent, repairs, utilities other than telephone, homeowners and renters insurance, occupancy taxes, nonrefundable security deposits or lease payments, furniture rental, residential parking fees and tax equalization payments paid by your employer.

Due Dates
Americans residing and working abroad have until April 16 to file and pay their taxes. However, the IRS provides an automatic extension for expatriates who have until June 15 to file their U.S. income tax returns. By filing Form 4868 by June 15, taxpayers can request an additional extension up to October 15. A letter request to the IRS can further push back the extension until December 15.

The Bottom Line
Finally, expatriates who renounce their U.S. citizenship won’t be off the hook from the IRS. They are still subject to U.S. tax laws for ten years after renunciation.

Tax ramifications for those living and working overseas are very complex.  It is highly recommended that you consult an R&G Brenner tax professional if you fall into this category.

Source: Investopedia