TaxEsqBlog -by Ronald J. Cappuccio, J.D., LL.M.(Tax)

On January 1, 2013 income tax rates are set to dramatically increase . Taxes on wages, investment interest, and other types of ordinary income, the top rates will rise from 35% to 39.6% . In addition, the 3.8% Obamacare Medicare surtax will start January 1, 2013. The total rate that a top-bracket taxpayer will face will be 43.4% . In addition there is a .9% increase in the Medicare Tax on Wages above $200k ($250k for married joint returns.) The total jump from 35% to 43.4% is the largest tax increase in decades. Investors will really suffer. The 2013 tax law will eliminate the maximum rates on dividends of 15% and instead treat dividends as ordinary income. The result would be dividends with taxes at the same top 43.4% rate that applies to ordinary income. The effect is dividend income tax would almost triple from 15% to 43.4%. As of December 28, 2013, Congress and the President keep playing "chicken" with our tax laws and economy.

In the case of  Romano-Murphy, TC Memo 2012-330, Thompson/Reuters reports: The Tax Court has ruled that a corporate officer should be held liable for the trust fund recovery penalty. It didn't buy her contention that she had made a reasonable effort to pay the delinquent employment taxes. Background on trust fund recovery penalty. Code Sec. 6672 imposes the trust fund recovery penalty on any person who: (1) is responsible for collecting, accounting for, and paying over payroll taxes; and (2) willfully fails to perform this responsibility. The amount of the penalty is equal to the amount of the tax that was not collected and paid. The penalty is imposed on a “responsible person,” i.e., anyone in a business entity who has the duty to collect, account for, or pay over the tax. In determining whether there is “willfulness,” the courts have focused on whether a taxpayer had knowledge about the non-payment of the payroll taxes, or showed reckless disregard with respect to whether t...

The 2013 standard mileage rates are set at 56.5 cents per mile for business transportation or travel, 24 cents per mile for medical care, and 14 cents per mile for charity purposes. The 2012 rates are 55.5 cents per mile for business transportation or travel, 23 cents per mile for medical care, and the rate for charity purposes stayed the same at 14 cents per mile. See IRS announcement... The new rates will take effect on January 1, 2013. These rates don’t necessarily reflect what a company has to pay their employees for these types of errands. However, employees and self-employed workers can use these numbers to calculate their approximate transportation costs and deduct them for tax purposes. As always, taxpayers can choose to calculate the actual costs of using their vehicle for these purposes and deduct that amount rather than using the IRS’s standard mileage rates. For businesses that reimburse their employees for transportation costs, rates can be lower than th...

Interest Rates Remain the Same for the First Quarter of 2013 The Internal Revenue Service announced that interest rates will remain the same for the calendar quarter beginning Jan. 1, 2013.  The rates will be:  • three (3) percent for overpayments [two (2) percent in the case of a corporation]; • three (3) percent for underpayments; • five (5) percent for large corporate underpayments; and • one-half (0.5) percent for the portion of a corporate overpayment exceeding $10,000. Under the Internal Revenue Code, the rate of interest is determined on a quarterly basis.  For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points.  Generally, in the case of a corporation, the underpayment rate is the federal short-term rate plus 3 percentage points and the overpayment rate is the federal short-term rate plus 2 percentage points. The rate for large corporate underpayments is...

The US Supreme Court determined that IRS Appeals Officers do not serve judicial functions. Therefore, they are expected to be biased IRS employees rather than independent judges. This decision is not surprising because Appeals Officers are just IRS employees with additional authority to settle matters. If the taxpayer does not agree, they can spend the money and time to go to Tax Court or the US Court of Federal Claims. Unfortunately, the judicial process is expensive and is only cost-effective for larger cases. See: Tucker v. Comm., (CA DC 4/20/2012) 109 AFTR 2d 2012-1856, cert denied 11/26/2012 Thompson- Reuters full synopsis of decision: The Supreme Court has declined to review a decision of the Court of Appeals for the District of Columbia Circuit which, affirming the Tax Court, rejected a taxpayer's contention that under the Appointments Clause of Article II, Section 2, of the U.S. Constitution, the “appeals officer” who handled his collection due process (CDP) h...

The following are the latest items the IRS focuses on for Tax Audits: 1. Company Cars -  Employers frequently don't report the taxable benefit that employees receive from their personal use of company-owned cars. The IRS plans to focus on the use of company cars, especially "luxury" models, in its next series of audits.   2.   High Income Taxpayers -   The IRS will aggressively pursue self-employed taxpayers with gross income of more than $1 million. In 2011, the IRS audited 12.5 percent of all individuals with incomes of more than $1 million (up from 8.4 percent in 2010). These audits are frequently performed by the LB&I audit groups and are much more invasive than typical audits. These audits should always be fought with a tax attorney. 3.   Form 1099-K Matching -  Form 1099-K (credit card) matching payee statements with receipts will be the focus of small business auditing. This is the new "cash audit" program and will focus on restaurants and...

Expiring Tax Cuts Here are some of the tax cuts that are scheduled to expire on December 31, 2012 if Congress does not take action before then: The maximum federal income tax rate on most   2013   long-term gains from real property sales is scheduled rise from the current 15 to 20 percent. The top rate on most long-term gains from selling properties acquired after December 31, 2000 and held for more than five years is scheduled to rise from the current 15 to 18 percent. If you sell a rental property for a gain in 2013, a 25 percent maximum rate will apply to the gain amount attributable to the cumulative depreciation write-offs you've taken on the property. The same 25 percent rate also applies to depreciation-caused gains from 2012 sales. (Depreciation can cause a taxable gain even if you sell a rental property for somewhat less than the amount you invested -- because your basis in the property for tax gain/loss purposes is reduced by depreciation deductions...

NY, NJ and Connecticut are leading in a massive State Government effort to attack retail businesses. They use the reports from debit and credit card sales mined from individual's data to attempt to match the sales shown on the business tax returns. Reuters reports : By checking customer data against retailer tax returns, wholesaler records and other sources, the state hopes to find retailers who either fail to collect or remit the sales taxes due. New York has been "data mining" for more than 10 years to collect more information and tax from businesses and individuals. This intrusive attack is part of the State's desperate attempt to collect more tax. The article reports: NEARLY A DECADE OF MINING DATA New York's approach to mining data began in 2003 with a goal of improving tax return audits. In the near-decade since, its systems have saved the state more than $2 billion, of which $442 million came in during 2011, the Taxation Department said. Ov...

Tax Implications of High Salaries and Benefits       Rather than have perks come under scrutiny by shareholders, or in some other public forum, some organizations decide to simply pay higher salaries to executives.      However, different entities must be careful about paying salary and providing benefits that are considered "excessive" by the IRS because it can trigger an audit:      Not-for-profit organizations -  In recent years, the tax agency has focused auditors on tax-exempt organizations that pay excessive compensation and perks to officers and other insiders.     The IRS has also revised its tax form filing procedures to ask more questions about financial arrangements with officers, directors, trustees, highly compensated employees, and highly compensated independent contractors (including certain related parties). The questions, according to the IRS, "capture information about potentially abusi...

I t has been estimated that  in the next five years or so, more than $5 trillion in value of small businesses will be changing hands. In the next 10 to 15 years, the estimate rises to $14 trillion. The main reason driving this is, of course, the aging of the Baby Boomer population in the United States.  Call us now to discuss planning for your business sale and succession! Ronald J Cappuccio 856 665-2121 As the Boomers hit their mid-sixties and beyond, they will begin retiring in droves. Many will want to transfer their businesses to family members while others will want to sell and use the funds to finance their retirement years. The owners of those businesses want to maximize their value (if they are going to sell) or find the most cost efficient method of transferring the entities to their heirs. Either way, the value of a business being transferred is an important element for the owners to consider. The recession tha...

Gay/Lesbian Married Couples may get same Estate Tax Treatment as Heterosexual Couples Edith Schlain Windsor v. U.S. (DC NY 6/6/2012)   A Federal District Court in New York ruled in favor of a surviving same-sex spouse's constitutional challenge to section 3 of the Defense of Marriage Act, which denies recognition of same-sex marriages for purposes of administering Federal law. The court found that this provision violates the equal protection clause of the Constitution. As a result, it allowed a marital deduction to the estate of the deceased same-sex spouse for the amount she left to the spouse who brought this suit. This case, which was not defended by the Obama Administration, held a NY lesbian couple that got married in Canada were entitled to the spousal estate tax deduction. Ultimately, until it is decided by the US Supreme Court, planning for same-sex married couples is still difficult. Stay tuned...

Form 8938 - Foreign Financial Asset Reporting The IRS has released new information about assets that must be reported on Form 8938 , Statement of Specified Foreign Financial Assets, This form is part of the Obama Administration' attack on taxpayers with undisclosed foreign assets. Individuals with an interest in a foreign financial assets during the tax year must attach a disclosure statement, Form 8938 to their income tax return for any year in which the aggregate value of all such assets is greater than $50,000 (or a dollar amount higher than $50,000 as IRS may prescribe).  Specified foreign financial assets are:  (1) depository or custodial accounts at foreign financial institutions, and  (2) to the extent not held in an account at a financial institution,               (a) stocks or securities issued by foreign persons,              (b) any other financial inst...

Consulting Fees Paid to C Corporation Shareholders Were Disguised Dividends The 7th Cir. affirmed Tax Court  disallowance of a C corporation deduction of consulting fees paid to corporations entities owned by its shareholders. The Court agreed with the IRS that the fees were disguised dividends. The Tax Court rejected the claim that the fees were deductible salary expenses. The IRS argued if  the fees were salary expenses there would be no return to equity. This is know as the "independent-investor" test. Also hurting the taxpayer was the lack of evidence that payments were compensation for services. The Corporation did not withhold payroll taxes or report the payments as compensation on its Form 1120. The corporation also failed to keep time records matching the fees to the actual work performed by each shareholder. Please see: Mulcahy, Pauritsch, Salvador & Co., Ltd., CA-7

Criminals Mine Data from Social Media Sites to Prey on Grandparents Have you heard of this recent scam? Criminals scour publicly available data on Facebook, Twitter and other social media sites. Then, they locate a vulnerable relative -- generally a grandparent -- and call them pretending to be a grandchild traveling abroad. Here's a typical "grandparent scam" phone call using information gleaned from the Internet:   "Hi Grandma, it's Tom. I'm in Mexico on break from (the name of the university he attends). I got into a car accident and need some money to pay for the damage (or emergency medical treatment). Can you wire me $2,000 right away? Please don't tell my parents because they'll just get upset." In some cases, the scammers pretend the grandchild was arrested and is in jail. If money is wired, the grandparents may be contacted again, and told additional money is needed. Meanwhile, the victims' grandchildren are actually...

US Tax Court the ports collection agency tactic of filing IRS form 1099-C for cancellation of indebtedness income. One technique used by many collection agencies is to threaten a debtor that if they do not make a payment the debt will be reported as "canceled". This means the person will have to pay taxes to the IRS and their state income taxes on the alleged amount of money due. In the case of Stewart v. Commissioner  an astute taxpayer fought this 1099-C technique.The taxpayer owed a credit card debt to MBNA bank and stop paying on it in 1994. The bank charged off this debt in 1996. In 2007, the bank sold the debt to a collection agency called Portfolio Recovery Associates. When the taxpayer said the debt was charged off and refuse to pay anything, the collection agency threatened him with filing a cancellation of debt with the IRS. The taxpayer fought this case in Tax Court and won. The Tax Court determined that the debt had been written off long before the collection ...

Loans to Inject Capital into a C Corp When you borrow to inject capital into your own C corporation (or buy shares in a closely held C corp), the related interest expense falls into the investment interest category, regardless how active you are in the business. It doesn't matter if you use the borrowed funds to make a loan to the company, contribute additional capital, or receive additional stock in return for your cash injection. Your ability to deduct the investment interest expense depends on how much investment income you generate. For this reason, you may be better off making a "back-to-back" loan to your C corporation and charging interest at least equal to what you pay the lender. With this method, you are assured of being able to currently deduct the interest expense under the investment interest rules, thanks to the investment income generated by the corporation's interest payments to you. At the corporate level, your company gets a deduction for the interes...

Employment laws usually favor employees. This is especially true in dealing with overtime. Employees are presumably "non-exempt" and get overtime pay for working more than 40 hours in a single work week. The pay rate for overtime work must be at least 1.5 times the regular pay. This overtime must be in wages, not benefits such as stock options, company vehicle use, or meals. "Exempt" employees must be salaried and have direct managerial oversight over other employees. They must be able to make significant decisions for the company. Hiring and firing employees, disciplining employees, authority to buy and sell company equipment are typical signs of an exempt employees.  Without these attributes, the employee is "non-exempt." The definitions are not clear. For example, a salaried confidential assistant to a company president, depending on the circumstances, may be exempt. But, a similar assistant may be non-exempt and entitled to overtime. Note: Even i...

N avigating the IRS bureaucracy  can be challenging for many taxpayers. The agency processes more than 141 million individual income tax returns annually and deals with a constantly changing Internal Revenue Code. There were approximately 4,430 changes to the tax code from 2001 through 2010 -- an average of more than one a day, including an estimated 579 changes in 2010 alone. Here are Q&As that explain some of the workings of the IRS.

The IRS has a 3 year statute of limitations to conduct an audit. This can be extended to 6 years for the under-reporting more than 25% of gross income. In an attempt to extend the statute of limitations, a taxpayer that correctly reported gross income, but overstated the basis in assets sold as part of the "Son of BOSS" tax shelter. the IRS claimed it had a 6 year period to audit. The Supreme Court said the IRS was wrong and the taxpayer could not be audited more than 3 years after filing the tax return. Please see:  United States v. Home Concrete & Supply LLC

The IRS keeps hiring "Revenue Agents" (the IRS term for Auditor). In the last few years, there has been a massive increase of auditors for Large Businesses (the is is called the LB&I - Large Business and International group). Now the IRS is going after Small Businesses. The Small and Mid-Sized Business section ("SMSB") is growing rapidly. More auditors means not only increases in the numbers of audits, it is resulting in more intense and longer audits. Revenue Agents now want to see practically every document - not just bank statements and a sample of bills. They are locating at every invoice, calendars, credit card statements and anything to show an under-reporting of gross income. Revenue Agents are also attacking independent contractors, especially if they are not given 1099's. For more information see Tax Audits and Collections .

US Tax Court - Interesting and Different Most people have not heard of the US Tax Court. It was founded in 1969 and is the only Court that will hear tax case prior to payment of tax. It has strict rules - you must file within 90 days of the date of an IRS Notice of Deficiency or you lose your right to Tax Court. You then have to pay the tax, file a Claim for Refund and go to the Court of Federal Claims or US District Court, a much more expensive process. Here is a good article on the history of the US Tax Court .

Engineers Going to Jail - Not Paying Employment Taxes In U.S. v. DeMuro   the Federal 3rd Circuit Court of Appeals upheld the conviction of husband and wife engineers for the failure to pay employment taxes. The business owners failed to pay $500k in taxes and penalties and the IRS attacked. They were found guilty and sentenced to more than 4 years prison. The Appeals Court confirmed the conviction. The sentence will be reviewed by the District Court. Once again, this shows the exceptionally aggressive position by the IRS in attacking small business owners that cannot pay all of the payroll taxes. Many States are also criminally prosecuting business owners for payroll tax claims.

Suppose you made a mistake on your income tax return? For example, if you excluded income from a 1099 or K-1 that arrived after you filed your return, it is usually not necessary to file an amended return. Usually the IRS matching system catches these errors and the IRS will automatically adjust the amount of tax due and send you a computerized notice. Similarly, if you notice that there was a mathematical error and is also going to be adjusted by the IRS and is not reason for filing an amended return. If you reviewed your return and noticed that a substantial amount of income was excluded, or was mistakenly left off your return, you should file an amended return as soon as possible. If you do file a 1040 X, you must file this within 3 years of the date of filing your original return, or within 2 years of the date of payment, whichever is later. The return must be filed as a paper return rather than E-filed.

New Tax changes hurts rental real estate For tax years beginning after Dec. 31, 2012, a  3.8%     Medicare tax will be charged on  net investment income. This applies to individuals with modified adjusted gross income in excess of $200,000 ($250,000 in the case of married persons filing jointly). Net investment income includes interest, dividends, annuities, royalties, rents , other income from a passive activity. This tax also applies to any gain from selling investment property. Because rental income is generally considered passive income, rental income could be subject to the 3.8 percent tax. This could significantly decrease the rate of return for rental real estate. This 3.8% tax on top of Pres. Obama's planned increase in Capital Gains rates after the election will force a further decline in business property values.

Watch Out for the Big Advertisers for Tax Matters They usually advertise on Cable Stations such as Sports and Home Shows. "If you owe more than $10,000 in taxes we can help." Or they inundate you with letters and calls after a Federal Tax Lien is filed. They promise relief and give glowing testimonials of clients paying "pennies on the dollar." Unfortunately, these companies frequently victimize the taxpayers who can least afford it. Whether it was "American Tax Relief, Roni Deutch, J.K. Harris, and now Tax Masters, each company has taken client money and left them in a lurch. Tax lawyers cannot advertise and make false promises like these fraudsters. Tax lawyers are not going to chase you for your business. New phony companies are popping-up all the time. Beware!

Government Forcing Small Business to convert independent contractors to employees The federal government is doing everything possible to convert true independent contractors and independent business owners into employees. Because there are significant tax and business advantages to both the small business and independent contractors to avoiding employee status, it makes good business sense. Nevertheless, the IRS and federal government wants mandatory withholding and all of the limitations that come with W–2 employee status. the government wants to collect more tax! In the disguise as a Bill to help small business, o n March 28, the House Ways and Means Committee by a vote of 21 to 14 approved the Chairman's Mark in the Nature of a Substitute to H.R.9, the “Small Business Tax Cut Act.” There were no amendments adopted during the committee process. H.R. 9, which was introduced by House Majority Leader Eric Cantor (R-VA), would allow qualified small businesses (those ...

General Results: Business Owners face a 4.5% chance of audit More audits are detailed audits with Revenue Agents rather than correspondence Audits Almost 1/3 of Individual Returns Audited were for the Earned Income Tax Credit IRS has issued its annual data book, which provides statistical data on its fiscal year (FY) 2011 activities. As this article explains, the data book provides valuable information about how many tax returns IRS examines (audits) and what categories of returns IRS is focusing resources on, as well as data on other enforcement activities such as collections. The figures and percentages in this article compare returns filed in calendar year 2010 and audited in FY 2011 to returns filed in calendar year 2009 and audited in FY 2010. What are the chances of being audited? Of the 140,837,499 total individual income tax returns with a filing requirement, 1,564,690 were audited. This works out to roughly 1.1%, the same as the rate for the previous ...

The Financial Accounting Standards Board  is continuing to enforce FIN 48. The rule requires    uncertain tax positions to be reported on financial statements. Under FIN 48, companies must disclose how much they have in reserve in case the Internal Revenue Service or state tax officials disagree with their use of tax treatments. This makes it easy for the IRS or State taxing agencies to look right at those sections to begin their audits!  For more information see: CFO Article

Cantor bill would give “small businesses” 20% domestic business income deduction On March 21, House Majority Leader Eric Cantor (R-VA) introduced the “Small Business Tax Cut Act,” which would allow qualified small businesses (those with fewer than 500 employees) to claim a new 20% deduction. In general, the deduction, which would be similar to the Code Sec. 199 domestic production activities deduction (and would be coordinated with that deduction), would be equal 20% of the lesser of: qualified domestic business income (generally, domestic business gross receipts less cost of goods sold allocable to such receipts, less other expenses, losses or deductions allocable to such receipts); or taxable income (without regard to the new deduction) for the tax year. The new small business deduction couldn't exceed 50% of the greater of: (a) W-2 wages paid to non-owners of the business; or (2) W-2 wages paid to non-owner family members of direct owners, plus W-2 wages...

GOP budget proposal would reduce top tax rate for businesses and individuals to 25% On March 20, Representative Paul Ryan (R-WI), chairman of the House Budget Committee, introduced his Chairman's Mark proposing a new budget for fiscal year (FY) 2013 and setting forth appropriate budgetary levels for fiscal years 2014 through 2022. Among other things, Ryan's budget would: a.consolidate the existing six individual income tax brackets to two (10% and 25%), b.reduce the corporate tax rate to 25%, c.repeal the alternative minimum tax, d.shift from a worldwide tax system to a territorial regime, e.drastically reform Medicare and Medicaid, and repeal the 2010 health care reform legislation. According to Ways and Means Committee Chairman Dave Camp (D-MI), Ryan's new budget “reforms our outdated and burdensome tax code to unleash innovation and investment.” However, Ways and Means Committee Ranking Member Sander Levin (D-MI) countered that the budget “would end up showering benefits...