Best for Spouses to Have a Meeting of the Minds Before Filing

Keeping up to date with the tax law is more than waiting for actual law changes. The numerous court cases issued each week often include reminders about due diligence, reminders for clients, and planning considerations. Of course, some of the court cases, such as regular Tax Court decisions, have new interpretations of the law. One recent case includes a reminder about the need for spouses to coordinate filing to optimize the combined tax result.

In Bruce, TC Summary Opinion 2014-46 (5/12/14), husband (H) and wife (W) were married in 2008. They had two children (including a child of W from a prior relationship). H worked for the Navy and sometimes worked away from home. In 2009, the couple mostly lived in Navy housing. W moved out in 2010, as did H and they sometimes lived with one of their parents. Divorce proceedings began in early 2010 and were complete in February 2011. H moved out of home where he lived with W in December 2010. H e-filed their MFJ 2010 return in February 2011 and told W he’d split the $4,581 refund with her. W provided H with her bank account information. W also told H she would talk to a friend of hers who did tax work. Before 4/15/11, W filed a return as head-of-household, claiming the children as dependents. H did not know.

The IRS sent a deficiency notice to H changing his filing status to MFS and denying him the child credit, dependency exemption and EITC. The Tax Court agreed with IRS. Per §1.6013-1(a)(1), it is permissible to change from joint to separate filing status if done before the due date of the return. W filed her HH return in March 2011.

The court held that W was entitled to the dependency exemptions because the children lived longer with her because H moved out in December 2010. The court also noted that the time H was away for military service does not affect this residency test. Once it was determined that W was entitled to claim the children, H did not qualify for the child credit, dependency exemption or EITC. The court did not uphold accuracy-related penalties against him though because it seemed reasonable for H to assume W was fine with the MFJ return and W even gave H her bank account information so he could give half of the refund to her.

Lesson learned – Most likely, the couple would have had a combined benefit from joint filing status… Joint income was low enough to qualify for the EITC. Also, since it does not appear that H lived out of the home for the last six months of 2010, W should have filed as MFS, not as HH (see IRC 7703(b)). With both H and W using MFS, no one can claim the EITC. Of course, divorcing spouses have additional factors to consider and to avoid joint liability, separate filing is sometimes warranted.

This and other updates of summer will be covered in the Quarterly Tax Update scheduled for August 26.

This post was written by CPE Link Instructor Annette Nellen for her upcoming Live Webcast on August 26, 2014 , Summer Quarterly Tax Update.

Supporting eCommerce Clients in Your Practice

As most companies at least have some sort of eCommerce presence now, it is imperative that accountants and consultants be able to support their clients and understand all of the components of eCommerce including:

  • Hosting
  • Web Site Design
  • Shopping Carts
  • Accounting System Integration
  • Marketplaces
  • Payment Gateways
  • Merchant Processors
  • Sales Tax Implications
  • Shipping Providers/Software
  • Supply Chain/Logistics Providers
  • EDI

While you don’t need to be an expert in each of these subjects, we will try to give you a framework to put together the pieces for your client so that you can assist them or at least know where to turn to for assistance. Learn who the vendors are in each of the categories, find out what the best practices are and be able to put together requirements for an eCommerce project.

Join us on June 30 and come away with the tools you’ll need to support your customers more effectively.

This post was written by CPE Link Instructor Jim Savage for his upcoming Live Webcast on June 30, Supporting eCommerce Clients in your Practice

 

The Excel Automation Feature You’re Likely Not Using

By David Ringstrom, CPA

Although Excel 2007 brought us the new ribbon interface, which replaced the traditional drop-down menus, it also gave us a great automation tool known as the Table feature. I find that most Excel users either aren’t aware of this feature, or aren’t fully aware of its capability. Read on to get a high level overview of what’s possible with the Table feature.
The Table feature is actually an update to the List feature that was buried on the Data menu in Excel 2003 and earlier. This feature appears both on the Home tab and Insert tabs of Excel 2007 and later, and is designed to simplify working with lists of data in Excel. Once you make a list into a table in Excel, the dataset takes on special characteristics:

  • Every other row will be shaded.
  • Filtering arrows appear at the top of each column.
  • If your list is too long to appear on a single screen, the headings in the first row replace the column letters in the worksheet frame when you scroll down.
  • A Design tab appears when you click any cell within a table, and from there you can toggle a total row on or off. Click any cell within the Total row to reveal a drop-down list from which you can choose to sum, count, or display other statistics that update automatically as you filter the table.
  • Tables expand automatically when you add columns to the right, or rows below (assuming that the total row is turned off). Further, when you type a formula in cell within a table, Excel automatically copies the formula down the entire column, saving you from having to drag or copy and paste the formula.

To add all of these characteristics to a data set in Excel, carry out any of these steps in Excel 2007 and later:

  1. Select any cell within a list of data.
  2. Carry out one of these steps:
    • Press Ctrl-T.
    • Choose Insert, and then Table.
    • Choose Home, Format as Table, and then choose a style.
  3. At this point you’ll be presented with a dialog box from which you can confirm the cell coordinates for data. Make sure that My Table has Headers is clicked, and then click OK.
  4. All of the above features will now be added to your data.

If you don’t like the automatic formatting that gets applied to a table, click any cell within the table to make the Design tab appear. Click the arrow in the Table Styles section, and then choose another style or click Clear. This will preserve the other functionality but remove the formatting. At any point you can return a table back to a “normal” range of cells by choosing Convert to Range on the Design tab.

Making data into a table improves data integrity in your spreadsheets:

  • Charts based on a table expand automatically as you add new months of data.
  • Pivot tables based on a table automatically “see” new rows and columns of data when you refresh the pivot table.
  • Other features, such as Sparklines in Excel 2010 and later, will automatically display additional data added to a table.

This is only a sampling of the automation features available with Excel’s Table feature.

This post was written by CPE Link Instructor David Ringstrom for his upcoming Live Webcast on June 11, Tackling Excel’s Table Feature.

About the author:
David H. Ringstrom, CPA, heads up Accounting Advisors, Inc., an Atlanta-based software and database consulting firm providing training and consulting services nationwide. Contact David at david@acctadv.com or follow him on Twitter. David speaks at conferences about Microsoft Excel, teaches webcasts for CPE Link, and writes freelance articles on Excel for AccountingWEB, Going Concern, et.al.

Important IRA and 401(k) Developments

In the past few months there have been a few interesting and important tax developments involving IRA and 401(k) distributions.

A regular Tax Court decision at the end of 2013 involved a wife forging her husband’s signature to withdraw about $37,000 from his IRA account. She used the funds for her personal benefit. Husband did not learn about it until the next year when he received the 1099-R – too late to roll it over. The court found that he was not the distributee as he received no direct or indirect benefit from the withdrawal. The court also excused him from the early distribution penalty. [Roberts, 141 TC No. 19 (12/30/13)]

Another IRA distribution case exposed an error in IRS Publication 590. The Tax Court held that an individual may have only one nontaxable rollover per year regardless of how many IRAs they have. [Bobrow, TC Memo 2014-21] The IRS subsequently issued Announcement 2014-15 providing relief, but only through 2014. The case also presents reminders of the value of an IRS publication in answering tax questions (not much) and whether status as a tax attorney is enough to waive a penalty for reasonable cause (no).

And a decision in late April involving a 401(k) distribution and divorce serves as a reminder that source of funds often matter for tax purposes. As part of a Qualified Domestic Relations Order (QDRO), wife was named an alternative payee of her husband’s 401(k) plan. Husband owed money to the wife and the 401(k) was used to repay her. Wife did not report the distribution on her return (for which she did receive a 1099-R) because it was money husband owed her. No surprise with the court’s conclusion – it’s taxable. Even with application of §1041, husband had no basis in the 401(k) funds and the debt owed to wife did not create any. [Weaver-Adams, TC Memo 2014-73]

Lesson learned – source of funds does matter. Husband should have taken the distribution and used the funds to repay his wife. Wife tried to get the understatement penalty waived saying she relied on her tax professional, that did not work. That also leaves a lesson for tax professionals. Remind clients that 1099s are also reported to the IRS and when they show them to you, you may want to make a copy for your file if you don’t already do so.

These and other tax updates of the past few months will be covered in the spring quarterly update on May 13 (repeated on June 4).

This post was written by CPE Link Instructor Annette Nellen for her upcoming Live Webcast on May 13, Spring Quarterly Tax Update.

 

The Tax Reform Act of 2014?

As tax season started this year and individuals and tax practitioners had to address the complexity that exists in many parts of the income tax liability formula, House Ways and Means Committee Chairman introduced the Tax Reform Act of 2014. He believes his plan would make the system fairer and simpler. Is that possible?

He also says his plan “spurs stronger economic growth, greater job creation and puts more money in the pockets of hardworking taxpayers.” He will close “loopholes,” make the law more accountable and lower double taxation. Is that possible?

Congressman Camp has gone beyond just making these statements.. His proposal consists of 979 pages of legislative language. So, you can see exactly what his plan is.

Tax reform could happen this year before one of its most avid proponents – Congressman Camp, retires. Reform could also happen in smaller pieces. In addition to Congressman Camp’s plan, the Senate Finance Committee and President Obama also have ideas and goals.

A tax reform update webinar on April 29 will provide details on the Camp proposal and those from other elected officials and others. Information will also be provided on how to analyze the proposals and help explain them to your clients. The relevance to other tax legislation this year, including actions on expired provisions, will be covered as well.

This article is written by CPE Link instructor Annette Nellen as a follow up to her Live Webcast Tax Reform Update.

Real Estate Professionals – Section 469(c)(7) – Getting it right

This article is written by CPE Link instructor Annette Nellen as a follow up to her Live Webcast Passive Loss Rules and Real Estate Professionals.

We continue to see cases involving Code §469(c)(7) on real estate professionals.  One commonality is that the taxpayers lose because they clearly do not meet the definition of a real estate professional, often because they have full-time employment outside of the real estate industry and have few rental properties.  A recent case involved a couple with three rental properties located out of state. This case has lessons both for taxpayers and their preparers.

Ballesteros, TC Summary Opinion 2013-108, involved a working couple. The wife (W) was a full-time nurse and the husband (H) was a full-time employee of an aerospace company. The couple lived in California and owned three rental properties in Georgia and Florida. They deducted approximately $12,000 loss per year for these grouped properties. They had logs showing time spent for phone calls, paying bills, going to the Post Office, and social events. Most tasks were reported in block of 2 or 4 hours.  The hours reported were as follows:

Wife

Husband

2008

2,199

901

2009

3,025

1,005

2010

2,248

851

 

W indicated that both she and her husband were real estate professionals. The IRS and court questioned the logs and time spent. Per the court:

“We need not accept petitioner’s testimony and may and do reject it because of the many indicia of unreliability. … Petitioner’s logs are unreliable because the hours she recorded for specific tasks, such as telephone calls and writing and mailing checks, were improbable in that they were excessive, apparently duplicative (charging the same hours to each rental property), and always the same. The total hours recorded are unrealistic in view of petitioners’ full-time employment.”

The court upheld a substantial understatement of tax penalty. Per the court, “exaggerated logs negate the good faith” of H and W. W stated that their return preparer provided a checklist of questions which confirmed that she was a real estate professional. The preparer did not testify, but the court noted that the preparer likely only had erroneous information from the couple.

Tax Season Relevance:

If an individual has a full-time job outside of real property trades or businesses, they are unlikely to be a real estate professional.  A full-time job is likely 2,080 hours per year (perhaps more). So, to be a real estate professional, the person would have to work more than 2,080 hours in real property trades or businesses.  If the person only has rental properties (not a real estate broker or developer, for example), they would need many rental properties to possibly be spending over 40 hours per week on all of them.

If a person’s answer to the question – what is your profession, is something outside of real property trade or businesses, they likely are not a real estate profession. One of the actions IRS examiners are to take in auditing a §469(c)(7) issue is to look at the occupation noted on the signature line of the taxpayer’s return to see if it indicates a real estate profession (IRS audit guide page 2.5).

Ask questions of clients with rental properties who tell you they are real estate professionals – what is there profession, how many rental properties do they have, do they have legitimate logs noting realistic time spent on the rentals?  Share the Ballesteros case (or other similar cases) with them, highlighting the penalty imposed upon the taxpayer.

 

Offer-in-Compromise – Fundamental Concepts

Our U.S. tax system is built on the premise that all taxpayers are expected to report their tax liabilities accurately and pay them on time. However, the Internal Revenue Code (§7122) gives the IRS the authority to “compromise” (i.e., settle based on a taxpayer’s adverse economic circumstances) a tax liability for less than its stated amount at certain times when 1) Doubt exists as to the liability; 2) Doubt exists as to the liability’s collectibility; or 3) It would advance effective tax administration to settle the liability.

Defining the 3 OIC Fundamental Concepts

  1.  “Doubt as to liability”—Doubt as to liability exists when there is a real dispute about the existence or amount of the correct tax liability of a taxpayer.

    Such doubt doesn’t exist, though, if the liability has been settled by a final court decision or judgment concerning the genuineness or amount of the liability. But an offer under the “doubt as to liability” category can’t be rejected just because the IRS can’t locate the taxpayer’s return or information to verify the liability (IRC 7122(c)(3)(B)). The IRS indicates it will consider an offer based on doubt as to liability if it reasonably reflects the amount the IRS could expect to get by going to court. Since trying to predict the outcome of a court case is far from an exact science, the IRS relies on “discretion” in determining what it will consider as a reasonable offer (Rev. Proc. 2003-71, 2003-2 C.B. 517).

  2. “Doubt as to Collectibility”—Doubt as to Collectibility may be present in any case when a taxpayer’s assets and income are less than the full amount of the assessed liability. To determine doubt as to Collectibility, the IRS considers the taxpayer’s ability to pay. In settling such a case, the taxpayer must be allowed to preserve sufficient funds to pay for his/her basic living expenses. To determine settlement, IRS considers expenses only to the extent they are necessary for health and welfare of the taxpayer and family or are needed to produce income (Rev. Proc. 2003-71).

    In general, the IRS won’t consider an offer based on doubt as to Collectibility if the ability of the government to collect the tax is not in doubt. This kind of offer is considered appropriate when liquidation of assets or maximum levy of income isn’t enough to pay the tax. The assets of a non-liable spouse generally aren’t considered to determine a taxpayer’s ability to pay unless those assets have been conveyed to the spouse in order to defraud creditors (or unless state law makes the spouse’s assets available to creditors, such as in community property states). However, action against the spouse’s assets must be weighed against how such action will affect the standard of living of the taxpayer and family.

    The IRS publishes schedules of national and local living expense standards to help evaluate family needs (Publication 1854, How to Prepare a Collection Information Statement (Form 433-A)). They use these standards based on the individual facts and circumstances of each individual case. The standards aren’t used if the amounts they prescribe would deprive a taxpayer of adequate support for basic living needs.

  3.  “To promote effective tax administration”—If the IRS finds no grounds to compromise based on the two previously described categories, they may enter into a compromise to promote effective tax administration. This could happen when collection of a full tax liability creates economic hardship. Alternatively, it could result where detrimental public policy or unfairness to the taxpayer provide basis for a compromise. Although acceptance of a compromise under this standard may occur where full collection would undermine public confidence in the tax law, a compromise would not be accepted if it would undermine compliance with the tax laws by taxpayers.

    Congressional intent with this provision was that the IRS would take into account factors like equity, hardship, and public policy in the tax administration process. Factors that may be considered in determining hardship might include serious illness that depletes a family’s financial resources (Reg. Section 301.7122-1(c)(3)(i)(A)). On the other hand, a compromise of a tax shelter liability would be one that could undermine rather than promote compliance within the tax system.

Excerpt from 2013 Taxes: Affordable Care Act and Other Special Circumstances by Lee T. Reams, Sr.

Affordable Care Act (ACA): Supreme Court Rules Health Care Bill Constitutional. Penalty for No Insurance Is Really a “Tax!”

On June 28, 2012, the Supreme Court, in a five to four decision, held the insurance mandate and, thus, the Affordable Care Act (ACA) to be constitutional. Although political rhetoric continues, this Supreme Court decision means that we must prepare for what the Treasury Inspector General calls the biggest tax act in 20 years. What does ACA mean to you and your clients?

Health Care Reform Impacts Most Businesses and Individuals
The Affordable Care Act (P.L. 111-148), signed by the President on March 23, 2010, as amended by the Health Care and Education Reconciliation Act of 2010 (P.L. 111-152) and signed by the President on March 30, 2010, implements fundamental health care reforms and requires many of the 32 million uninsured individuals to obtain health care coverage or pay penalties. Most lower-income individuals, along with some middle-class families, will receive government help to pay for health insurance purchased at state Exchanges.

ACA contains more than $400 billion in new taxes and revenue raisers on employers and individuals. Major changes you and your clients can expect include:

  1. Individuals without health insurance will owe a penalty (tax) starting in 2014;
  2. Employers with 50 or more full-time employees must offer affordable health insurance to their employees beginning in 2015 or pay a penalty;
  3. State insurance exchanges will be established to allow clients to shop for insurance;
  4. Employee Medicare tax increases by 0.9% (total of 2.35%) on annual wages for married couples with an AGI over $250,000 and singles with an AGI over $200,000 starting in 2013;
  5. A new Medicare tax of 3.8% applies on net investment income for married couples with AGI over $250,000 and singles with AGI over $200,000 starting in 2013;
  6. Extensive new penalties apply on tax shelters;
  7. The “haircut” to deduct medical expenses increases from 7.5% to 10% of AGI starting in 2013;
  8. FSA contributions for medical expenses are limited starting in 2013 to $2,500. and
  9. Children under age 27 may be insured under their parent’s health insurance policy.

This article is an excerpt from Vern Hoven’s Federal Tax Updates Series. 

Test Your Tax Treatment Knowledge

Tax Treatment of Individual Retirement Arrangements
Q: Helen, age 60, made total contributions of $60,000 to a Roth IRA she established 15 years ago. Five years ago she withdrew $10,000 tax-free. How much income must she recognize if she takes a complete distribution from the Roth IRA this year when its value is $90,000?

A. $0
B. $30,000
C. $40,000
D. $90,000

A: The correct answer is C Except in the case of a spousal IRA, a taxpayer may not contribute an amount to an IRA in excess of his or her earned income for the year. For purposes of the IRA rules, earned income includes salary, fees, tips, bonuses, commissions, and alimony. Since the taxpayer’s earned income, including alimony, exceeds the maximum IRA contribution, she may make a contribution not exceeding $5,500.

Tax Treatment of Life Insurance Proceeds
Q: Bob has owned his participating life insurance policy for many years and receives substantial policy dividends each year that he takes in cash. What tax treatment would be given to the dividend he receives  this year, if his total policy premiums were $10,000 and his total dividends were $12,000?

A. The dividend would be tax-free as a return of premium
B. The dividend would be taxable at capital gains rates
C. The dividend would be considered ordinary income
D. Taxation of the dividend would be deferred until policy surrender

A: The correct answer is C. Bob’s dividend this year would be considered ordinary income. Dividends received under a life insurance policy are generally income tax-free until the total amount received or credited exceeds the aggregate premiums paid for the policy. Any dividends paid or credited in excess of the total gross premiums paid for the life insurance policy are considered taxable income in the year in which received.

Tax Treatment of Sickness & Injury Plans
Q: An Archer MSA rollover may be made no more frequently than once every _____ months.

A. 6
B. 12
C. 18
D. 24

A: The correct answer is B. An Archer MSA rollover may not be made more frequently than every 12 months. The applicable rollover rules are much like those that apply to IRA rollovers and rollovers from qualified plans. Accordingly, an Archer MSA rollover must follow the rules below:

  • The rollover must be made within 60 days of the individual’s receipt of the Archer MSA distribution; and
  • Only one MSA rollover may be made each year. (The “year” in the case of an Archer MSA rollover is a rolling 12-month period, rather than a calendar or tax year.)

Q: For which of the following individuals would qualified long term care insurance premiums NOT be deductible without reference to adjusted gross income?

A. A partner in a law firm
B. An owner of an S corporation
C. A sole owner of a regular corporation
D. An owner of a limited liability company

A: The correct answer is C. An owner of a regular corporation is not considered self-employed for purposes of long term care insurance premium deductibility. A self-employed person, for purposes of long term care insurance premium tax-deductibility, includes sole proprietors, partners, and owners of S corporations, limited liability partnerships and limited liability companies. Thus, a sole owner of a regular corporation could not deduct premiums for qualified long term care insurance premiums without reference to his or her adjusted gross income.

These questions were pulled from Paul Winn’s Tax Treatment of Health Plans, IRAs, and Life Insurance Proceeds courses.

Simplifying the Reporting Process

For many small business owners, the issuance of financial statements is nothing more than a necessity to satisfy the bank or other third party user. Although the small business client may be willing to pay higher fees to accountants for effective tax planning or management consulting, most owners are unwilling to pay for a high-priced compilation or review engagement that is perceived as a commodity rather than a value-added service.

An accountant may wish to consider existing reporting options that offer practitioners a means to reduce the time spent on completing an engagement. Here is a list that may be useful depending on the client’s needs and circumstances:

1. Compile OCBOA financial statements (e.g., cash or income tax basis)
2. Compile GAAP financial statements with no footnotes and statement of cash flows
3. Issue management-use financial statements in accordance with SSARS No. 19:

  • Compiled financial statements without a compilation report
  • Financial statements are not distributed to parties other than management (e.g., not issued to the bank)

4. Issue a compilation report with only selected footnotes:
SSARS No. 19 permits an accountant to report on financial statements under which a select few disclosures are included provided the notes are labeled:

“Selected Information-Substantially All Disclosures Required by Accounting
Principles Generally Accepted In the United States Are Not Included.”

5. Use a compilation report at interim periods that list the departures from GAAP.
Example: Assume that an accountant prepares monthly financial statements for a client, and these statements consistently have certain GAAP departures such as missing accruals, allowance for bad debts, etc. The accountant may prepare a standard compilation that makes reference to the GAAP departures and can use this report, without modification, from month to month.

At year-end, the accountant may adjust the departures to GAAP and issue a standard compilation or review report.

6. Compile only one financial statement (e.g., balance sheet), and not the full set of financial statements

7. Apply options that are excluded from SSARS No. 19 for which a compilation or review report is not required:

  • Provide selected monthly information requested by the client such as account balances (e.g., cash or accounts receivable) or operating information (e.g., number of meals served for the month)
  • Provide a client or other third party users with a copy of the client;s tax return.An accountant is not required to report on a tax return.

8. Issue financial statements with one or more GAAP departures.

This list was an excerpt pulled from Steven Fustolo’s course 2013 Practice Issues: Compilation & Review Update.