Don’t be Scammed by Tax Season Cyber Criminals

Now that tax season is upon us, so are the e-mail scammers pretending to be the IRS. Most of these scams fraudulently use the IRS name, logo, and/or website header as a lure to make the communication appear more authentic and enticing. They lead you to believe you had a refund of some sort coming and request personal information. The goal of these scams, known as phishing, is to trick you into revealing your personal and financial information. The scammers can then use your information¾like your Social Security number, bank account, or credit card numbers to commit identity theft or steal your money.

DON’T BE A VICTIM – THE IRS DOES NOT INITIATE E-MAIL CORRESPONDENCE

The Internal Revenue Service receives thousands of reports each year from taxpayers who receive suspicious e-mails, phone calls, faxes, or notices claiming to be from the IRS. If you find something suspicious, you should immediately call this office before responding. In fact, it is a good policy to check with this office before responding to any inquiry from the IRS or state or local tax agencies.

Here are some tips you should know about phishing scams.

1. The IRS never asks for detailed personal and financial information like PIN numbers, passwords, or similar secret access information for credit card, bank, or other financial accounts.

2. The IRS does not initiate contact with taxpayers by e-mail to request personal or financial information. If you receive an e-mail from someone claiming to be a representative of the IRS or directing you to an IRS site:

• Do not reply to the message.

• Do not open any attachments. Attachments may contain malicious code that will infect your computer.

• Do not click on any links. If you clicked on links in a suspicious e-mail or phishing website and entered confidential information, you may have compromised your financial information. If you entered your credit card number, contact the credit card company for guidance. If you entered your banking information, contact the bank for the appropriate steps to take. The IRS website provides additional resources that can help. Visit the IRS website and enter the search term “identity theft” for additional information.

3. The address of the official IRS website is http://www.irs.gov. Do not be confused or misled by sites claiming to be the IRS but ending in .com, .net, .org or other designations instead of .gov. If you discover a website that claims to be the IRS but you suspect it is bogus, do not provide any personal information on the suspicious site.

4. If you receive a phone call, fax, or letter in the mail from an individual claiming to be from the IRS but you suspect he or she is not an IRS employee, contact the IRS at 1-800-829-1040 to determine if the IRS has a legitimate need to contact you. Report any bogus correspondence. You can forward a suspicious e-mail to phishing@irs.gov.

If you have any questions or doubts related to a letter, phone call, or e-mail from the IRS or other taxing authorities, please call this office before responding or providing any financial or personal information. Better safe than sorry!

 

Those Gold Sales May Be Taxable

If you took advantage of the escalating gold and silver prices and made any sales of gold, silver, gems, jewelry, or the like during 2011, you are required to report the sales on your tax return. Whether or not the sales are subject to tax, and at what tax rate, depends upon the type of item sold and your tax basis for the item.

Determining Basis—Generally, your tax basis is what you originally paid for the item, assuming that you can recall the amount. It may be difficult to remember how much you paid for an item; however, if the cost was significant, you hopefully have documentation that can verify the price. Without documentation, you are at the mercy of the IRS should you be audited! Even more complicated is determining the value of an item acquired as a gift. Your tax basis for a gift generally is the same basis as it was for the item in the hands of the individual who gave you the gift. Meanwhile, the basis for an item acquired by inheritance is generally the fair market valueof the item on the date of the inheritance. As you can see, simply determining the basis for the items that you sold can be complicated.

Types of Items Sold—Not all items are taxed the same. The percentage depends on whether the item was held for personal use or for investment purposes and whether or not the item is classified as a collectible. A higher maximum tax rate applies to collectibles than to other capital assets.

• Jewelry—Generally, jewelry that is held for personal use is excluded from the definition of collectibles and is taxed the same as any other personal use property. Losses are thus not allowed, and gains are taxed as either short-term or long-term capital gains. For the most part, jewelry that an individual may choose to sell will have been owned for over a year, and the gain will be taxed at the long-term rate, which, for 2011, is a maximum of 15% (0% to the extent that the taxpayer is in the 15% regular tax bracket or lower). Beware, however, as some jewelry may include gold or silver coins that are considered collectible items and thus may be taxed at a higher rate, as explained below.

• Collectibles—Gold and silver coins and bullion are included on the IRS’s list of collectibles. Unlike jewelry, the sale of “collectibles” can result in either a taxable loss or a taxable gain. In addition, collectible gains are taxed at a maximum rate of 28%, as opposed to a maximum of 15% for other capital assets that are held long-term. The maximum rate does not imply that all collectible gains are taxed at 28%. A taxpayer in a lesser tax bracket will be taxed at that lesser rate.

Schedule Cs in the IRS’ Bull’s-eye

Schedule C is the form that unincorporated sole proprietor businesses use to report their income and expenses as part of their individual tax returns. Schedule Cs have been center stage in recent IRS “tax gap” estimates.

The tax gap is defined as the amount of tax liability faced by taxpayers that is not paid on time. This past January they released the tax gap figures for 2006. You might say that 2006 was quite a ways back, but you have to remember returns are filed in the subsequent year and then the information must be compiled and analyzed. Thus, most Treasury reports based on filed tax returns are based on information from several years back.

The 2006 report essentially mirrors the 2001 report, except the tax gap has increased from $345 billion to $450 billion. Of that $450 billion, approximately $372 billion is attributed to underreporting in the following categories:

• Non-business underreporting 73
• Schedule C underreporting 193
• Overstated deductions, exemptions & credits 42
• Payroll taxes 20
• Corporate income tax 39
• Estate tax 5

Since Schedule C underreporting represents the largest category, and over half of the underreporting, it is no wonder that the audit rate for Schedule C returns has increased substantially and is among the highest of the rates. Based on 2010 IRS figures, Schedule Cs have a 300% higher chance of being audited than either a partnership or an S-Corporation. Of the Schedule Cs audited in 2010, the average adjustment exceeded $9,000.

Among the areas of underreporting are:

• Personal Expenses – Over-deductions attributable to the inclusion of non-deductible personal expenses and the failure to allocate for personal use of a vehicle.

• Underreporting Income – Failure to include all income. To counter this problem, the IRS has initiated merchant card and third-party reporting that will provide the IRS with all income from credit card sales.

• Worker Misclassification  Misclassifying workers as independent contractors instead of treating them as W-2 employees, and thereby avoiding the employer’s share of payroll, unemployment, and other taxes. The IRS currently has a Voluntary Classification Settlement Program in effect that allows eligible taxpayers to voluntarily reclassify their workers for federal employment tax purposes. Voluntary programs usually precede more aggressive compliance measures.

• Failing to Issue Information Returns – Generally, businesses are required to issue 1099s for fees they pay to individuals other than employees or to corporations. This is a huge area of non-compliance and denies the IRS the ability to ensure the payees are properly reporting their income. In an audit where a 1099 should have been issued and was not, the IRS will generally disallow the deduction for those services. The 2011 Schedule C asks two catch-22 questions: “Did you make payments that would require you to file a Form 1099?” followed by “If yes, did you or will you file all required Forms 1099?”

• Hobby Losses – Some businesses are actually hobbies where there is no real intention of ever making a profit. Businesses deemed to be hobbies have special rules that limit the expense deductions to the income and require the deductions to be taken as an itemized deduction on Schedule A. Watch for a future article on hobby losses that will appear in my blog.

 

New Reporting Requirement for Individuals with Foreign Financial Assets

 

New for 2011 is a requirement for any individual who, during the tax year, holds any interest in a “specified foreign financial asset” to complete and attach Form 8938 to his or her income tax return if a reporting threshold is met. The reporting threshold varies depending on whether the individual lives in the U.S. and files a joint return with his or her spouse. For example, someone who is not married and doesn’t live abroad will need to file Form 8938 for 2011 if the total value of his or her specified foreign financial assets was more than $50,000 as of December 31, 2011, or more than $75,000 at any time during 2011. For married taxpayers filing a joint return and living in the U.S., the threshold amounts are doubled. The thresholds also are higher for taxpayers residing abroad.

Specified foreign financial assets include financial accounts maintained by foreign financial institutions and other investment assets not held in accounts maintained by financial institutions, such as stock or securities issued by non-U.S. persons, financial instruments or contracts with issuers or counterparties that are non-U.S. persons, and interests in certain foreign entities. However, no disclosure is required for interests that are held in a custodial account with a U.S. financial institution.

The penalty for failing to report specified foreign financial assets for a tax year is $10,000. However, if this failure continues for more than 90 days after the day on which the IRS mails notice of the failure to the individual, additional penalties of $10,000 for each 30-day period (or fraction of the 30-day period) during which the failure continues after the expiration of the 90-day period, with a maximum penalty of $50,000.

To the extent the IRS determines that the individual has an interest in one or more foreign financial assets but he or she doesn’t provide enough information to enable the IRS to determine the aggregate value of those assets, the aggregate value of those assets will be presumed to have exceeded $50,000 (or other applicable reporting threshold amount) for purposes of assessing the penalty.

No penalty will be imposed if the failure to file the 8938 is due to reasonable cause and not due to willful neglect. The fact that a foreign jurisdiction would impose a civil or criminal penalty on the taxpayer (or any other person) for disclosing the required information isn’t reasonable cause.

In addition, if it is shown that the individual failed to report the income from the foreign financial account on his or her income tax return, a 40% accuracy-related penalty is imposed for underpayment of tax that is attributable to an undisclosed foreign financial asset.

If you have questions related to this issue or are uncertain if you are required to file Form 8938, please give this office a call to discuss your particular situation.

 

For Form 8938 and instructions from Stuart Rohatiner, CPA, JD click here

Need additional information about this article? Please contact my office at 305-868-3600 ext 3105

Should We Cut Corporate Taxes By Raising Rates on Investors?

Howard Gleckman | Posted on March 29, 2011, 5:35 pm

 

While there seems to be growing agreement in Washington that the U.S. needs to cut its tax rate on corporations, there is (surprise) no consensus at all on how to pay for this. One way: Raise taxes on capital gains and dividends.

This idea was one element of the broad tax reforms proposed last year by the chairs of President Obama’s deficit reduction commission, Alan Simpson and Erskine Bowles, and by the Bipartisan Policy Center’s deficit panel, chaired by Alice Rivlin and Pete Domenici. Both panels relied in part on analysis in a paper by my Tax Policy Center colleagues Eric Toder, Ben Harris, and Rosanne Altshuler.  The plan has so far received little attention. It deserves more.

The plan would tax dividends and long-term capital gains at ordinary income rates, with a maximum rate on gains of 28 percent–compared to 15 percent today–and use the revenue to cut corporate tax rates. Those of you with long memories may remember these investment rates were the law back in 1997.

Eric, Ben, and Rosanne figure the revenue this idea would generate would allow Congress to cut the corporate rate from 35 percent to about 26 percent, assuming corporations and investors do not change behavior (by, say, reducing dividend payments). Since they almost certainly will adjust, a redesign would probably buy less of a rate cut. At a roundtable last Friday sponsored by Tax Analysts, Congressional Research Service economist Jane Gravelle suggested it might get rates down to just 30 or 31 percent. Still, that ain’t nothing.

Here’s a bit of background to help explain what this is all about: Economists believe that all income should be taxed once but only once. By that standard, the current taxation of corporations is a mess. In theory, corporate income is double-taxed—once at the firm level and again when income is distributed to shareholders through dividends or capital gains. In reality, some is taxed repeatedly while some is not taxed at all.

To avoid this, many economists have argued for a fully integrated system where corporate income is paid either entirely at the business level or fully by shareholders. In fact, the vast majority of U.S. firms already do this by organizing themselves as pass-through entities such as S corporations and partnerships. In this model, owners pay tax on their individual returns but their business is not taxed at all.

Matters are much more complicated for other corporations, however. Some profits are double-taxed. But others are never taxed at the business level, largely thanks to the ability of multinationals to shift income to low-tax countries and deductible expenses to the U.S. Worse, in that environment, high corporate rates discourage investment in the U.S.

Similarly, foreign investors and tax-exempt shareholders (such as pensions) pay no tax on a big chunk of corporate profits. Another slug of capital gains goes untaxed because investors die and their unrealized gains pass tax-free to their heirs.

The challenge in this environment is to figure out how to reduce the corporate rate so it is competitive with the rest of the world, make sure that profits are somehow taxed, and not increase the deficit by tens of billions of dollars annually.  The Congressional Budget Office figures that over the next decade corporations will pay about $400 billion-a-year in income taxes.

That brings us to the option of raising taxes on investors. Shifting some taxes on corporate profits from firms to shareholders has some obvious advantages. The biggest may be that it would reduce those disincentives for companies to invest at home. A tax on shareholders is based on where they live, rather than where their profits are earned. Thus, a lower corporate tax and a higher shareholder tax may, on balance, help keep investment in the U.S.

The TPC paper also figures it would be more progressive than the current regime. Since some share of corporate taxes is paid by workers (just how much is a matter of theological debate among economists), lowering the corporate rate would raise their after-tax earnings. At the same time, TPC figures 70 percent of the higher individual investment taxes would be paid by the top one percent of earners.

There are lots of issues to sort out with such a shift. But it is certainly worth considering.

Draft of Form 8938, Statement of Foreign Financial Assets

Attached IRS draft Form 8938 released July 2010

Reporting by U.S. Persons Holding Foreign Financial Assets

FATCA requires any U.S. person holding foreign financial assets with an aggregate value exceeding $50,000 to report certain information about those assets on a new form (Form 8938) that must be attached to the taxpayer’s annual tax return.  Reporting applies for assets held in taxable years beginning on or after January 1, 2011.  Failure to report foreign financial assets on Form 8938 will result in a penalty of $10,000 (and a penalty up to $50,000 for continued failure after IRS notification).  Further, underpayments of tax attributable to non-disclosed foreign financial assets will be subject to an additional substantial understatement penalty of 40 percent.

DOWNLOAD THIS FORM AS A PDF

DOWNLOAD THIS FORM AS A PDF

Proposed International Standards Seek to Help Financial Market Infrastructures Withstand Financial Shocks

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The SEC, the Commodity Futures Trading Commission (CFTC) and the Federal Reserve are drawing attention to the release of a consultative report on Principles for financial market infrastructures, which contains new and more demanding international standards for payment, clearing and settlement systems, the Bank for International Settlements (BIS) said on its website.

The Committee on Payment and Settlement Systems (CPSS) and the Technical Committee of the International Organization of Securities Commissions (IOSCO) released the report for comment on Thursday. The CPSS and IOSCO expect these principles to play an important role in the future regulation of financial market infrastructures (FMIs) around the world.

The SEC and CFTC are members of the Technical Committee of IOSCO. The Federal Reserve is a member of the CPSS.

The consultative report contains updated and new proposed international principles for systemically important payment systems, central securities depositories, securities settlement systems, central counterparties and trade repositories (collectively FMIs). These FMIs collectively record, clear and settle transactions in financial markets.

Principles outlined in the report are “designed to ensure that the essential infrastructure supporting global financial markets is even more robust and thus even better placed to withstand financial shocks than at present,” the BIS said.

The 24 proposed principles would replace existing CPSS and CPSS-IOSCO standards for payment, clearing and settlement systems previously published in the Core principles for systemically important payment systems, Recommendations for securities settlement systems and Recommendations for central counterparties and introduce principles for trade repositories for the first time.

The BIS said the new principles introduce more demanding requirements in many important areas including:

• The financial resources and risk management procedures an FMI uses to cope with the default of participants;
• The mitigation of operational risk; and
• The links and other interdependencies between FMIs through which operational and financial risks can spread.

Taxes Overseas? Fess up without going to jail

NEW YORK — Tax payers with money offshore have until the end of August to fess up if they want Uncle Sam to take it easy on them.

The IRS announced on Tuesday that it would give taxpayers a reduction in penalties — and no jail time — if they fess up to any undisclosed overseas accounts by Aug. 31.

“This new effort gives those hiding money in foreign accounts a tough, fair way to resolve their tax problems once and for all,” said IRS Commissioner Doug Shulman in a prepared statement. “And it gives people a chance to come in before we find them.”

Tax payers will face a penalty of up to 25% of the highest annual account balance going back to 2003, though some taxpayers will be able to receive a penalty of as little as 5% depending on the size of the account.

The program also requires tax payers to fork over back taxes, interest and late charges for up to eight years.

IRS: Itemizers can file on Feb. 14

This is the IRS’s second voluntary attempt at this program. In 2009 it reeled in 15,000 taxpayers with undisclosed overseas accounts at banks in more than 60 countries.

Penalties under the new initiative are higher than they were during the 2009 program so that people who waited to fess up aren’t rewarded. However, Schulman said that as the IRS continues to invest more resources in cracking down on these illegal offshore accounts, this is the time to come forward.

“The situation will just get worse in the months ahead for those hiding assets and income offshore,” he said. “This new disclosure initiative is the last, best chance for people to get back into the system.” 

revised from CNN Money Online

Distinguished Colleague Leads FBAR Seminar Tuesday March 1

You are cordially invited to attend…

 

Register Online

Filing FBARs in 2011:
What are the Rules? How to Resolve Noncompliance?

With the IRS focusing on taxpayers with unreported offshore accounts, it is never too early to begin thinking about filing 2011 FBARs to report foreign accounts held in 2010. Final regulations were issued on February 23, 2011, to amend the regulations under the Bank Secrecy Act provisions that apply to the FBAR.

Holland & Knight International Tax Partner Kevin E. Packman will review the state of the FBAR filing in 2011 – who needs to file, which accounts must be reported and what to do about signature authority.

Mr. Packman will also discuss the implications of the new IRS Offshore Voluntary Disclosure program, which was announced on February 8, 2011, and how taxpayers can benefit from it. He will explain the eligibility requirements, penalty structure and compare it to the 2009 voluntary disclosure program.

The Speaker

Kevin Packman, Esq

Kevin E. Packman, a partner in the Private Wealth Services Section, chairs the firm’s Offshore Tax Compliance Team and focuses his practice on IRS tax controversies. He also assists clients with estate and gift tax planning for domestic and international clients as well as on pre-immigration planning for international clients.

WEBINAR DETAILS

Date/Time

Tuesday, March 1, 2011
3:00 p.m. EST

Continuing Legal Education

Holland & Knight will make all reasonable efforts to seek CLE credits for this online program. In certain instances, some programs may not be awarded CLE credits because of either content, jurisdictional restrictions, or the online platform. For New York attorneys, this program’s format does not qualify for CLE credit for transitional (newly admitted) attorneys. It is appropriate for experienced attorneys.

Continuing Professional Education (CPE) for CPAs

Attendance verification forms will be provided for CPAs who can claim self-study CPE credit for attending this webinar.

Register Online

For more information contact Holland & Knight: Kevin Packman 305-349-2261/ kevin.packman@hklaw.com

Tax Breaks to Take Before They Go

Part of what lies at the heart of the heated debate in state capitals and Washington over the last couple of weeks is a legitimate concern about a pretty simple question: have governments made too many promises about what they should provide without collecting enough money to fulfill them all?

The discussion of this question often leads to a look at income tax rates. Not enough of it, however, focuses on income tax breaks.

So amid all the hubbub, it’s worth stopping to consider how many of these deals you are eligible for (and if you’re old enough, recalling how many of them didn’t exist a few decades ago). On the state level, for instance, it’s possible that a tax deduction or credit for your child’s college savings account is contributing to a shortfall.

At the federal level, the money from 529 savings accounts can come out tax-free as long as they are used for education expenses. Then there’s the $5,000 or $10,000 you might have managed to shield from the tax man in health care, dependent care and commuter accounts, if you’re lucky enough to work for an employer that offers them.

And if President Obama gets his way, the income tax deduction for mortgage interest and charitable contributions for people in the highest tax brackets may get smaller.

If you’re upper middle class and above, take a look at your tax return and consider just how many deductions, set-asides and other breaks you took advantage of. I added up mine and found tens of thousands of dollars, leading to many thousands in tax savings.

Then look at the income figure on your tax forms and ask yourself this: Isn’t it likely that a bunch of legislators are going to figure out how much this is costing and take some of the benefits away? And if so, shouldn’t you be trying to take advantage of them before they disappear?

Reading between the lines in President Obama’s introduction to the 2012 budget, it’s clear how he feels about the policy decisions that gave rise to this crazy quilt. “For too long,” he wrote, “we have tolerated a tax system that’s a complex, inefficient and loophole-riddled mess.”

In fairness, it’s not as if there was some master plan here. Who, after all, would have declared that there should be income caps on taking deductions for student loan interest but that the wealthy should still get all sorts of tax incentives to save for college?

Take those 529 plans, for example, because the tax breaks exist on the federal level and in many states. The tax rules here did not emerge fully formed from the head of some legislator either. Instead, they began mostly as a way to prepay tuition at state universities and evolved into investment accounts that anyone, of any income, could use for any higher education, public or private. Federal taxes on the growth in money that people deposited into these accounts were simply deferred at first; years later, the rules changed and families suddenly did not have to pay any taxes on the gains as long as they used the money for qualified educational expenses. And it didn’t matter how much the money had grown.

As of June 30, 2010, 529 plans contained about $135 billion, according to the College Savings Plans Network, with just $21 billion or so in prepaid plans. And according to the Joint Committee on Taxation, which took a careful look at the plans when it last addressed the rules governing them in 2006, the federal tax waiver on the gains was going to cause a nearly $1 billion annual hit to the federal budget by the middle of this decade.

That number may end up being lower because of the roller-coaster stock market of the last four years. But the amazing thing about 529 accounts is that they often offer tax benefits on the way in as well as on the way out.

How does this work? As of today, most of the states that levy an income tax offer a deduction or credit of varying size to families when they make deposits in their own state’s (and sometimes any state’s) 529 plan. While the deduction generally has an annual dollar cap, you can almost always take advantage of it no matter how much money you make.

In Indiana, for instance, the 48,167 taxpayers who took the credit on their 2009 returns saved about $33 million.

The more you make — or the more a kind grandparent has given to you for your child — the more you can save. That means more opportunities to max out the state tax deductions. Moreover, wealthier people who can save more money earlier in their children’s lives benefit from the compounding of earnings over 15 or 20 years before tuition bills come due. (And by the way, the 15 percent capital gains rate they don’t have to pay upon withdrawal today will probably be higher before too long.)

Joseph Hurley, who runs savingforcollege.com, the leading resource for people doing research on 529 plans, understood why many states offered tax deductions. They needed to increase total balances to get economies of scale so they could drive down the 529 program fees that state residents pay. “But states cannot afford to offer these deductions now,” he said. “It’s free money to people who can take advantage of it, and it is higher-income families who can.”

According to Joan Marshall, who runs Maryland’s 529 savings plans and is chairwoman of the College Savings Plans Network, the states can’t afford not to offer the deductions. Without them, she says, people wouldn’t save in the first place, as is evident from the fact that so many deposits arrive late in the year, near the tax deadline. “And if we have a culture of savings, there is less need for aid later,” she said. “There is a real gain to be had down the road as we help to change behavior. It’s not only a negative drain on state budgets.”

Ms. Marshall added that if 529 plans were truly a tax-free plaything for the well-to-do, it wouldn’t be the case that just 0.67 percent of accounts had more than $100,000 in them. (That said, it’s possible that some wealthy families have more than one account.)

Legislators in North Carolina may have a chance to debate all of this soon. The state once had income restrictions on who could take state tax deductions for contributions to its 529 plan. The cap went away but is scheduled to return in January if elected leaders do not act before then.

This is just one front in the larger battle, though. There has already been plenty of discussion about the possibility of reducing the amount of deductions that higher-income people can claim for charitable contributions and mortgage interest. This is where many of the big budget opportunities lie. In fact, the changes are already coming. One new one is in health care flexible spending accounts, where people can set aside money free of income taxes to pay for expenses that insurance does not. Starting in 2013, you’ll only be able to put $2,500 in those accounts each year. This will hurt middle-class people with chronic conditions; an income cap on who could participate would have made the change more progressive.

But at least this is one sign that legislators are taking government debt seriously. And until more changes arrive, I’d take advantage of every last break and max it out if you’re affluent enough to do so. Because pretty soon, many of them may no longer be available to you.

By RON LIEBER

New York Times