Being Disabled and Taxed is a More Complicated Issue than Most People Know

It’s hard enough to be disabled, but even worse when the IRS slaps a steep bill on you.  A 66 year old man, whose wife became ill and during that time he lost his job.  Two months later his wife died.  While still grieving, he discovers that he has kidney cancer and his tumor is inoperable. The disease causes other problems including pulmonary embolism and heart rhythm disorder.

 

This happened in 2009, in the middle of the financial downturn making it difficult for the man to find work.  Bills started to pile up and he finally had to file for bankruptcy.  Unfortunately, he was still stuck with over $150,000 in Parent Plus Loans that he’d taken out for his three children.

 

His loan servicer suggested he apply for a disability discharge to cancel out the debts.  He applied and was eligible and his Parent Plus Loan debt was reduced to zero.

 

He felt like a weight had been lifted until he received a 1099 tax form from the IRS.  They claimed that the loan amount had to be treated as income.  The man calculated it was going to cost him $59,000 in taxes.

 

Of course, the man was bewildered.  He couldn’t work, so how could he pay off the $59,000?

 

Kevin Thompson, CPA of Thompson CPA in Santa Monica says “a significant number of disabled people have been able to have their debts discharged and that number is growing, but under the current tax rules, the amount of that debt is taxable and that leaves many disabled borrowers unable to pay their tax bills.”

 

In essence, the government gives with one hand and takes it back with the other.  Even though the tax debt is much less than the original debt, it’s still impossible for many disabled people to deal with.

 

Thompson added “an even larger looming issue is that because this amount, now considered income, has been added to adjusted gross income, some disabled people may lose public benefits that they sorely need.”

 

In some instances canceled debts are not taxable, including debts canceled in bankruptcy.  Student loans may not be taxable if the borrower worked for a certain time in specific professions.

 

If a borrower can prove insolvency, meaning that their total liabilities exceed the value of their assets, they could possibly lessen or eliminate their tax burden.  This might happen if a borrowers debts exceed assets by $25,000 but a $50,000 loan is forgiven.  Tax would still be owed on $25,000.  Insolvency still doesn’t protect borrowers who are in a vulnerable position.

 

Canceled debts must be treated as income in order to prevent people from using this as a loophole to get out of paying what they owe. Unfortunately, this affects people like the disabled or others who are equally vulnerable.

 

Not paying is a serious offense.  The IRS may garnish wages, bank accounts, and property such as autos or IRA’s. They can also garnish Social Security and pension benefits.  The IRS can file a tax lien and add penalties to the bill.

 

The IRS sends a bill and that starts the collection process. Once a borrower receives a “final notice” they have 30 days to comply and pay the bill.  The letter also contains a right to appeal.  If an individual files an appeal, this will stop the collection process.

 

A person in this situation can also request a monthly payment plan or they can file form 9465 to request a settlement amount.  This is called an “offer in compromise (OIC).” Thompson states “the OIC is a daunting and time consuming process that should not be undertaken without the guidance of an expert in this arena.”

 

Another tactic would be to attempt to prove that monthly income is being consumed by necessary living expenses.  This causes the IRS to deem the debt “currently not collectible.”  It’s like putting a hold button on paying the debt.

 

Organizations such as the National Council of Higher Education Resources, representing student loan servicers and other organizations has brought the tax issue to Congress but they have not made much progress yet.

 

It’s recommended that people in this position, seek the advice of a professional tax adviser Such as Kevin Thompson, CPA.  The IRS free tax preparation service for low and moderate income people is not in the position to handle more than just basic accounting services.

 

kevin@kevinthompsoncpa.com or call him @ (310) 450-4625.

 

 

Obama 2015 Budget Proposal May Change Your Social Security Claim Strategy

Obama’s 2015 budget proposal is certain to have an impact on how you strategize claiming Social Security.

 

Hidden on a page within the 214 page budget plan is a directive that will prevent excessive or duplicate benefit payments from disability and Social Security. The budget also seeks to get rid of Social Security claiming strategies that allow high income earning beneficiaries to time the collection of Social Security benefits for the purpose of maximizing delayed retirement credits.

 

John Reeve of John Reeve and Associates, a California Financial Adviser specializing in matters relative to Social Security and MediCare/MediCal, says “If the budget is actually passed by the Congress, which is divided, it will make it much harder for tax and financial advisers to craft retirement income plans for their clients.  Social Security is designed to provide retirees a lifelong stream of income for life without complication.”

 

The longer a person is able to delay taking Social Security benefits the more the benefits grow.  Waiting until the age of 70 will add 8% for the four years after 66, which is higher than what advisers can offer with other products. This has produced a new demand for Social Security income stream tactics to help maximize the benefits. John Reeve says “in the conservative arena where most retirees invest, 8% is unheard of as a ROI. Retirees planning for that event are foolish not to look at the possibilities this creates for them.”

 

An example is the “claim now and claim more later” strategy.  This is when an older spouse takes advantage of delaying retirement credits that increase his income by waiting until 70 to claim Social Security. The younger wife then claims a spousal benefits until she reaches 70.  She then claims her entitled income stream based on her own work history.

 

The Social Security Administration has become wise to strategies such as this and has eliminated the provision that allows “do-overs” where a 62 year old could claim and receive the income.  At 70, the person could change their mind, repay the benefits that they have received without interest and take the higher income stream they’d receive at 70 if they had not filed the claim previously.

 

The administration used an internal rule change to discourage “do-over” strategies and it can also do this for what it believes are more aggressive ones bypassing any edict put forth by Congress.

 

However, any change to the formula for spousal benefits required congressional approval.

 

Tax advisers are mixed wanting to provide better benefits for Baby Boomers, who need it now, but also believe in tax reform.

 

For now, it’s up in the air as to whether the new proposal will pass.  In the meantime single premium immediate annuities can be implemented if current claiming strategies are no longer allowed.

 

As Social Security is considered to be a “government giveaway,” an annuity is priced at an almost fair market rate.  Delaying Social Security gives you an above market rate.

 

If you need help designing your strategy for Social Security contact Kevin Thompson CPA.

 

310-729-0703
kevin@kevinthompsoncpa.com

 

If You Are Using Virtual Currency Here’s What You Need to Know

Have you wondered how the IRS treats the recently trending Bitcoin market?  So far, it’s been unclear whether Bitcoins should be classified as currency or property.  However, the IRS recently announced its guidelines which can be found HERE.

 

In short, the agency warns, “In general, the sale or exchange of convertible virtual currency, or the use of convertible virtual currency to pay for goods or services in a real-world economy transaction, has tax consequences that may result in a tax liability.”

 

It goes on to say that since virtual currencies such as Bitcoins do not operate like real currencies, they are to be treated as property.

 

When income is computed, a taxpayer who receives virtual currency as payment for goods or services is required to include the fair market value (FMV) of the virtual currency (measured in U.S. dollars) as of the date the virtual currency was received.

 

Since taxpayers have gains and losses on the exchange of virtual currency for other property the character of the gain or loss depends on whether it’s a capital asset for the taxpayer. Virtual currency is not treated as currency, so therefore it does not generate foreign currency gain or loss for U.S. federal tax purposes.

 

In the notice, it also talks about mining Bitcoins which is the process of obtaining them through solving difficult mathematic calculations.  If a taxpayer is successful in doing this, the IRS, considers the fair market value at the date of receipt as includible gross income.   If it results in a trade or business, and isn’t undertaken by the taxpayer as an employee, the net earnings from self-employment are subject to self-employment tax.

 

Virtual currency is also used as payment of wages or services. If an employee is paid using virtual currency, it must be reported on the employees W2 form and is subject to Federal withholding and payroll tax. Payments made to independent contractors and service provider must be reflected on 1099 forms and self- employment taxes apply.

 

According to the IRS, if you, the taxpayer, did not report income or payments using virtual currency before the notice was announced, you will not be free from receiving a penalty unless you can prove reasonable cause for any underpayment.

 

Get Tax Advice on these matters from Kevin Thompson CPA

 

kevin@kevinthompsoncpa.com or call him @ (310) 450-4625.

 

Tax Form 706 Opportunities Explained

Executive Summary

 

Since estate tax exclusion portability became available to taxpayers in 2011, the personal representative of the first dying spouse’s estate needed to file a Form 706 (the estate tax return) after the death of the first dying spouse in order to appropriately make the portability election for the surviving spouse. This Form 706 needed to be filed within nine (9) months following the date of death of the first dying spouse, unless the personal representative filed for and was granted an automatic six (6) month extension to this deadline.

 

However, a great number of personal representatives and surviving spouses were not aware of this deadline or otherwise did not file the Form 706 in order to take advantage of any unused estate tax exclusion amount that remained at the death of the first dying spouse. Revenue Procedure 2014-18 provides relief for taxpayers who neglected to timely a Form 706 for purposes of making a portability election.

 

Facts:

 

The IRS recently issued Revenue Procedure 2014-18, which provides for an extension of time for the personal representative of the first dying spouse to file a Form 706 with respect to the first dying spouse’s estate for the sole purpose of electing portability. This Rev. Proc. generally allows the personal representative until December 31, 2014 to file a Form 706 for the first dying spouse’s estate if the first dying spouse died after December 31, 2010 and on or before December 31, 2013, and if no estate tax return was required to be filed for the first dying spouse because the first dying spouse died with assets with a value less than their estate tax exclusion amount.

 

Under Rev. Proc. 2014-18, the taxpayer is entitled to relief under Treasury Regulation §301.9100-3, which allows the personal representative to file a Form 706 for the first dying spouse in order to take advantage of such spouse’s unused estate tax exclusion amount. This Rev. Proc. only applies if the taxpayer is the personal representative of the estate of a decedent who (1) has a surviving spouse; (2) died after December 31, 2010 and on or before December 31, 2013; and (3) was a citizen or resident of the United States on the date of death. Further, this Rev. Proc. only applies if the personal representative is not required to file an estate tax return because the first dying spouse’s assets were less than his or her estate tax exclusion amount upon his or her death or if the taxpayer did not timely file an estate tax return to elect portability.

 

When filing Forms 706 pursuant to this Rev. Proc., the Form 706 must be complete and properly prepared in accordance with Treasury Regulation §20.2010-2T(a)(7) (i.e., it must be prepared in accordance with the instructions to the Form 706), and it must be filed on or before December 31, 2014. Additionally, the following language must be included at the top of the Form 706 in capital letters: “FILED PURSUANT TO REV. PROC. 2014-18 TO ELECT PORTABILITY UNDER §2010(c)(5)(A)”.

 

If the above requirements are satisfied, then the personal representative will be considered to have timely filed the Form 706 to elect for portability to apply, and the personal representative will receive an estate tax closing letter acknowledging receipt of the decedent’s Form 706.

 

Comment:

 

The impetus for this Rev. Proc. is the recent Supreme Court case of United States v. Windsor, in which the Supreme Court struck down Section 3 of the Defense of Marriage Act to provide that a law defining “marriage” as a legal union between one man and one woman as unconstitutional. After the Windsor decision, the IRS released Revenue Ruling 2013-17 to provide the IRS’ interpretation of the Internal Revenue Code vis-a-vis taxpayers’ marital status in light of the Windsor decision. This Revenue Ruling held that for federal tax purposes the terms “spouse,” “husband and wife,” “husband,” and “wife,” include an individual married to a person of the same sex if the individuals were lawfully married under state law, and the term “marriage” includes such a marriage between individuals of the same sex.

 

Rev. Proc. 2014-18 provides a good analysis of the legal effect of Windsor and Revenue Ruling 2013-17 on the tax law, and indicates that this Rev. Proc. is significantly based upon the outcome in the Windsor decision and the IRS’ interpretation of the Internal Revenue Code as a result thereof.

 

Nevertheless, the benefits afforded by this Rev. Proc. are available to provide relief for late portability elections for opposite sex surviving spouses, as well as same sex surviving spouses.

 

This Rev. Proc. did not address the situation where a surviving spouse has previously filed a Form 706 late, and the Form 706 was not accepted for the purposes of electing portability due to the late filing. It seems that in this case the surviving spouse would simply need to re-file the Form 706 (assuming that it was properly completed and appropriately prepared) with the magic capitalized words on top of the first page in order to take advantage of the relief provided by this Rev. Proc.

 

Conclusion

 

For some personal representatives and surviving spouses who neglected to timely file a Form 706 to take advantage of portability, Rev. Proc. 2014-18 provides taxpayers with a second chance. The relatively new concept of estate tax exclusion portability is still being understood by many taxpayers, and this Rev. Proc. provides another opportunity for taxpayers who were not aware or certain of the benefits afforded by portability.

 

If you would like tax assistance, make sure to contact:

Kevin Thompson CPA at

kevin@kevinthompsoncpa.com or call him @ (310) 450-4625.

What is Reasonable Compensation for S Corporations?

When it comes to setting compensation, it’s common for the shareholder –employee to want to minimize compensation in favor of distributions.  The reason is: to reduce payroll taxes.  The problem lies in the fact that the IRS will not S Corp taxpayers to forgo “reasonable” compensation.  Until lately, the IRS did not offer much clarification on how to determine “reasonable compensation.

 

However, 3 cases, in the last few years, came forth and provided some insight on the subject.

 

S Corporations usually don’t pay entity-level tax on their taxable income. Rather, taxable income and other attributes are divided among shareholders who, then, report the items and pay a corresponding tax on their personal returns.

 

S Corporations have enjoyed an employment tax advantage over sole proprietorships, partnerships and LLC’s for quite some time. That’s because a shareholder’s undistributed share of S Corp income is not treated as self –employment income like the other entities mentioned.

 

The IRS has increase payroll taxes for employers, employees and the self- employed.  The first #117,000 of an employee’s wages cost employers 6.2% towards Social Security tax.  Employees pay an additional 6.2% through wage withholding.  Employers and employees split the 2.9% on Medicare on all wages.

 

The self- employed are responsible for the entire 12.4 Social Security tax limited to the first $117,000 of self-employment income.

 

As employment taxes rise, S Corps look much more favorable.  They’re not subject to self-employment tax and so shareholder-employees are choosing to minimize salary in favor of distributions.

 

The IRS is aware of this and has challenged these attempts and has attacked these abuses in Revenue Ruling 74-44.  The Ninth Circuit Court of Appeals, in a recent court case, maintained that “salary arrangements between closely help corporations and its shareholders warrant close scrutiny.  The case established the principle that a shareholder/employee who provides substantial services may not take distributions in lieu of compensation.

Other similar court cases have followed with identical rulings.

Shareholders wanting to prove that services provided to the corporation are not substantial  have a loophole.  A 1994 court case in Colorado rejected the IRS’s attempt to re-characterize distributions made to a shareholder of an S Corp as “arbitrary and capricious.”  This confirms that a shareholder does not have to draw a salary as long as they have only rendered minimal services to the S Corp.

 

The IRS has issued a Fact Sheet to remind S Corps of the importance of paying reasonable compensation to its shareholder-employees.

 

  1. Employee qualifications
  2. The nature, extent and scope of the employees work
  3. The size and complexity of the business
  4. Prevailing general economic conditions
  5. The employee’s compensations as a percentage of gross and net income
  6. The employee-shareholder’s compensation compared with distributions to shareholders
  7. The employee-shareholder’s compensation compared with that to non shareholder employees or paid in prior years
  8. Prevailing rates of compensation for comparable positions in comparable concerns
  9. Comparison of compensation paid to a particular shareholder-employee in previous years where the corporation has a limited number of officers.

 

Other court cases followed.

In summary:

S Corp shareholders who provide substantial services should be treated as an employee and compensated accordingly.

 

The recent court cases involved professional services corporations such as law, accounting and real estate activities.  The IRS determined that profits generated from these businesses were generated by the personal efforts of the employees, and as a result, a significant portion of the profit should be paid out in compensation rather than distributions.

 

In the case of a manufacturing or distribution business, for example, revenue is driven less by shareholder’s personal efforts and more by the capital and assets of the corporation.  Therefore, a lower salary can be justified for shareholder-employees.

 

The shareholder-employee’s services must be fully understood before determining reasonable compensation.  Comparisons to prior years should also be considered. If the corporation has seen rising revenues but the shareholder-employee’s salary has remained the same, this may be an indication that compensation is too low.  If the corporation recently elected “S” status and reduced its amount of shareholder compensation, this may raise questions with the IRS about the motivation behind the reduction in salary and may be seen as a way to avoid payroll taxes.

 

It’s a good idea to compare shareholder-employee compensation with industry norms.

 

Your tax advisor can analyze the overall profitability of the corporation and the shareholder-employee’s compensation as a percentage of sales and profits.  If the S Corp is more profitable than its peers, but paying less salary to the shareholder-employee, your tax advisor will be able to tell you if this is justified or not and whether or not it will raise red flags with the IRS.

 

Is it possible to forego both salary and distributions in an S Corp?

 

Although there’s not requirement that compensation be paid to a shareholder-employee provided the shareholder also foregoes distributions, it’s  a good idea to start making reasonable salary payments to its shareholder-employees as soon as it has the means to do so.

 

Original Article

 

If you would like tax assistance, make sure to contact:

Kevin Thompson CPA at

kevin@kevinthompsoncpa.com or call him @ (310) 450-4625.

Why You Should Never Hold Real Estate in a Corporation

While it’s true that you can put real estate into a corporation without a tax fee, you can’t withdraw it without giving the government its due.

Here’s why:

Section 1001, under general tax principles states that the transfer of appreciated property with show gain for the difference between the amount entered on the transfer minus the adjusted tax basis of the property.  In a case where an individual owns a building with a basis of $400,000, and a fair market value of $1,000,000, there would be a $600,000 gain.

 

The exception would be if the owner were to transfer the building to a corporation in exchange for its stock. This is provided that you “control” the corporation immediately after the transfer.

 

Control is defined as 80% of the vote and value of the corporation.  However, you don’t have to acquire 80% of the corporation, you simply must own 80% immediately after.  If you already own 85% of a corporation you can continue to transfer appreciated property to the corporation and the gain will be deferred under Section 351.

 

Section 351 also allows for a group of transferors. If you contribute appreciated property to a corporation in exchange for 20%, for example, but at the same time as the transfer, another couple of people transfer cash or property to the corporation for 65% more of the stock, all three transfers will be recognized by Section 251.  The transferor group would control the corporation immediately after the transfer.

Problems that can occur:

If the property contributed to the corporation is subject to a liability.  Under Section 357, if the corporation you transfer property to is subject to a liability and the corporation assumes that liability, the transfer will show a gain to the extent the liability exceeds the tax basis of the property.  This is especially true for real estate.

 

When Section 351 applies a transfer of property status to a corporation, the gain not excluded, but is, instead, deferred.

 

Under Section 358, you must take a basis in the stock received equal to the basis in the property you transferred to the corporation.  Also, Section 362 requires the corporation to take a basis in the building equal to your basis in the building.

Here’s where the problem comes:

Selling the property – If the corporation sells the building, the sale generates gain.  This gain gets taxed at the “corporate level”-maximum federal rate of 35%.  This tax is only wiped out if the seller wants to own the rest of the purchase price.  (value of the property minus the tax liability)

 

If the seller has second thoughts about transferring the property to a corporation, and decides to reverse the transaction, in a non-liquidating  distribution, Section 311 (b) the corporation shows the gain as it it had sold the property for its fair market value.  It would show the gain just as it would if it had been a sale, taxed at the corporate level of 35%.

 

In addition, under Section 301, the seller must treat the fair market value of the distributed property as dividend income where it will be taxed at the maximum rate of 23.8%.

 

If the corporation distributes the property to the seller in a liquidating distribution, the corporation will show gain as if the property were sold at fair market value. The corporation would again show gain as it did in the sale and again pay corporate level tax.

 

Under Section 331, the seller is treated as having received payment for his corporate stock equal to the fair market value of the distributed property, less the corporate tax liability he assumed in the liquidation.  He receives X amount of payment in exchange for his stock with a basis that results in a long term capital gain, that’s taxes at a maximum of 23.8%.  These are the same tax penalties that would happen if the corporation had simply sold the building for cash and distributed the after tax proceeds.

 

For this reason a C Corporation is not the ideal entity choice.

S Corps

Section 351 applies equally to C and S Corporations.  However, Sections 311 (b) and 336 also apply equally to an S Corp.  If the S Corp distributes the property to the seller in either a non-liquidating or liquidating distribution, the S Corp would be treated as if it sold the property for its fair market value showing a corporate level gain.

 

S Corps do not generally pay tax at the corporate level.  The gain would flow to the seller who would then pay tax on the income at the individual level. And the gain would increase his basis to the value of the property. The distribution wouldn’t be taxed a second time at the shareholder level.  If the distribution was non-liquidating, the seller would reduce his stock basis by the value of the building. If the property was distributed in a liquidating distribution, under Section 331 the seller would be taxed as having received property at its property value in exchange for stock at that value resulting in no further gain or loss.

 

However, even with an S Corp, the seller cannot take the property out of the corporation without being taxed for flow-through gain at the 23.8% rate.

Partnerships

Partnerships offer a better choice when it comes to real estate. Appreciated property can be contributed to a partnership in exchange for partnership interest without recognition of gain.  The individual can transfer appreciated property to a partnership in exchange for as little as 1% interest without showing gain.  It’s less likely that transferring property to a partnership will create gain,  The transferor of a property to a partnership must apply the principles of Sections 731 and 752 to determine if gain is shown on the transfer and it can be avoided in the partnership context.

 

Section 752 provides that a partner increase his basis in the partnership interest for his share of the partnership liabilities.  However, if a partner’s share of the partnership’s liability decreases, the reduction is treated as a distribution of cash to the partner.Partnership law, provides deferral rules that govern both the contribution of property to a partnership as well as the distribution of appreciated property from a partnership.

Partnerships is the most ideal choice for holding real estate.Are you confused about what entity to choose when considering transferring real estate?  Kevin Thompson CPA will be able to answer your questions.  Please contact him for a consultation to discuss your options.

 

Original Article

 

If you would like tax assistance, make sure to contact:

Kevin Thompson CPA at

kevin@kevinthompsoncpa.com or call him @ (310) 450-4625.

Don’t Get Penalized by the IRS by Omitting Your Required Minimum Distribution

If you fail to report your “Required Minimum Distribution” (RMD) in your tax return, you can get stuck with as much as a 50% penalty.  However, there’s a way to obtain IRS permission to skip that penalty and it would be a good idea to consult your tax advisor to find out how rather than make a pricey mistake.

 

IRA owners generally must take annual RMD’s, per IRS tables, once they reach the age of 70 1/2.  The RMD rules apply to traditional IRA’s, SEP IRAs, and SIMPLE IRAs, as well as to employer-sponsored retirement plans. Roth IRA beneficiaries have RMDs, as do all IRA beneficiaries and any shortfall (even for tax-free Roth IRAs) are subject to a 50% fine.

 

If you’re an IRA account owner, you should receive a notice from your IRA provider, as required by law, to withdraw an RMD during the year, but beneficiaries do not receive this notice.

 

If an IRA owner does not withdraw the full RMD amount for any calendar year, the shortfall is subject to the 50% penalty.

 

Example:

 

A person’s RMD for 2013 is $23,000 and he only withdraws $3,000.  This will give him a $20,000 shortfall and he will owe a penalty of $10,000.

 

Fortunately, however, the IRS may waive the penalty if the account owner can show the shortfall was due to “reasonable error “and then steps have been taken to fix it.

 

In order to qualify for this waiver, clients must file IRS FORM 5329 -Additional Taxes on Qualified Plans (including IRAs and Other Tax-Favored Accounts and, in addition, attach a letter of explanation.

 

RMD’s are required for Inherited IRA’s also. Kevin Thompson, CPA says “we were contacted recently by a client that had inherited her Father’s IRA. The brokerage never calculated the RMD for 2013 and when it was discovered they were unaware as to what should be done. Fortunately, this case ended favorably as the client took two RMD’s in one year as the catch up and the IRS was very forgiving as to the potential penalty.”

 

Even better:

 

As of 2007, a client who requests a penalty waiver on Form 5329 does not have to pay the penalty first and then request a refund. 

 

Below are tips to avoid the 50% penalty:

 

Make up any shortfalls if you’ve missed one or more RMDs.

 

  • Ask the IRA custodian to send you distribution checks without having taxes withheld to create a paper trail.  Make copies of the checks and deposit them in a taxable bank account.
  • File form 5329 for every relevant year.  For example: If you have an extension to file your tax return until haven’t filed yet, you can attach your Form 5329 for that year to your tax return.
  • Attach copies of the relevant check to each Form 5329. Example: If your shortfall for a previous year was $13,000, you can attach a copy of the $13,000 IRA distribution check to your Form 5329 for that year.

 

Do not file an amended tax return as part of this penalty waiver request as money that wasn’t withdrawn from an IRA in past years can’t be retroactively withdrawn

 

Make sure to properly fill out form 5329. File a separate form for each year.

 

  • On line 50, enter the amount of the RMD that you’re required to take.
  • On line 51, enter the total distributions that you actually took during that year.
  • On line 52, enter “zero” (VERY IMPORTANT) and write “RC” (reasonable cause) and the amount you want waived in parentheses on the dotted line next to line 52. DO NOT ENTER THE AMOUNT OF THE SHORTFALL!

 

Submit a letter explaining the shortfall with EACH form 5329.  Attach a statement to each form 5329 stating that you’ve remedied the shortfall, as shown by the attached copy of the distribution check.  Spell out the reasonable cause of the shortfall.  (Illness, death in the family, problems with a tax preparer, the required notification of the RMD wasn’t received, stress etc.)  You want the IRS to realize the RMD was overlooked and that you’re doing everything you can to make it right.

 

Once form 5329 is complete, sign and date it.   Then mail your paperwork to the appropriate IRS office.  A separate cover letter for each year in question should be included.  The cover letter should list the contents of your submission such as Form 5329, a photocopy of the late distribution check, the reasonable cause explanation and any other materials.

 

If you follow these steps expect a notice from the IRS in a few months.

 

If you would like assistance with this process, make sure to contact:

Kevin Thompson CPA at

kevin@kevinthompsoncpa.com or call him @ (310) 450-4625.

 

Taxpayer Advocate Asks the IRS to Adopt a New Plan to Renew Trust in the Agency

The IRS has been in the dog house in the eyes of the American people for some time now.  In an effort to renew trust in the agency, Taxpayer Advocate Nina E. Olson is calling for the IRS to adopt a new Taxpayer Bill of Rights in order to serve taxpayers better and collect taxes owed.  She’s also urging the IRS to allow voluntary certification of tax preparers who are currently not enrolled if the IRS does not win it’s court appeal to invalidate testing requirements for tax preparers.

 

She pointed out several concerns about the fact that the IRS is short of funds and that it hasn’t been able to keep up with phone calls from confused taxpayers seeking help from customer service reps.  This is partially blamed on the sequester that cut IRS funding.  This reduced trust in the IRS.  The government shutdown, which lasted 16 days, delayed the date that taxpayers could file returns and get refunds for the upcoming tax season. Kevin Thompson, CPA tells us “the sequester was to happen in early 2013. It was postponed until later in the year and we have cases still mired in the confusion caused by the shutdown of the IRS. One in particular has been delivered to the Taxpayer Advocates office because it has wallowed in the IRS for more than two years.” “As a professional, it is embarrassing not to be able to move these projects through the IRS timely. We have many frustrated taxpayers as a result. I think a Bill of Rights will go a long way in assisting Taxpayers when their rights are violated.”

 

The new Taxpayer Bill of Rights purpose is to meet taxpayer needs and encourage voluntary tax compliance.

 

She said, ““If taxpayers believe they are treated, or can be treated, in an arbitrary and capricious manner, they will mistrust the tax system and be less likely to comply with the laws voluntarily. If taxpayers have confidence in the fairness and integrity of the system, they will be more likely to comply.”

 

Only 2 percent of taxpayers are subject to IRS enforcement.  98% of all tax revenue is collected on a timely and voluntary basis.  Voluntary compliance is much cheaper for the IRS than spending funds to track down those who have not voluntarily reported or paid.

 

Still, a survey of US Taxpayers noted that less than ½ of the respondents believe they have rights with regard to the IRS and only 11 percent knew what their rights were.  According to Ms. Olson, it comes down to the fact that even though taxpayer rights already exist, the public is unclear on what they mean because they haven’t been presented in a coherent way.  She is proposing 10 rights that are detailed in her report.

 

Ms. Olsen pointed out the requirement of US citizens to pay taxes is the biggest burden the government imposes on its citizens and that it needs to make the process as simple and easy as possible. She also believes that federal spending cuts, designed to reduce the deficit, actually increases the deficit when enforcement of tax paying needs to be put into play.

 

In recent years IRS service has been diminished due to a lack of resources.  This includes answering calls, long wait times, less assistance for low income and disabled taxpayers, etc.   Ms. Olsen remarked:

 

“It is a sad state of affairs when the government writes tax laws as complex as ours – and then is unable to answer any questions beyond ‘basic’ ones from baffled citizens who are doing their best to comply.”

 

Since 2010, the IRS training budget has been cut substantially.  This has affected its customer service immensely and has often been attributed to taxpayers getting incorrect information and advice.

 

Olson also stated that IRS funding is shortchanged and that the federal budget treats the IRS as it does all other spending programs, with no “credit” given for the revenue it collects, which makes very little sense when applied to the IRS. She recommends that congressional committees, addressing the problem, work together to find new ways to fund the IRS in order to maximize voluntary tax compliance and to protect taxpayer rights and to minimize taxpayer burden.

 

Olsen’s report identifies 25 problems with the IRS, makes dozens of recommendations for changes in administration, 5 changes for legislative change, and analyzes 10 tax issues that end up frequently in court.

 

Some of the problems include:

 

The Need for Return Preparer Oversight – In 2013, the US District Court invalidated regulations that dealt with IRS testing and education for unenrolled tax preparers that had been in place since 2003.  The Advocate is urging the IRS to protect taxpayers by finding other educational and enforcement options that do not exceed the authority of the Treasury Dept.  One recommendation was to allow unenrolled preparers to earn a continuing education certification and to limit tax preparers who do not earn the certificate to represent taxpayers in audits of returns they’ve prepared.

 

The IRS Approach to Collection of Delinquent Taxes – The Advocate recommends that the IRS re-access its traditional approach toward tax collection.  She urges the use of more flexible payment options for people who are struggling financially rather than increasing levies and liens that are often filed using automation.

 

Impact of Offshore Voluntary Disclosure Programs on Taxpayers who Have Made Honest Mistakes – The IRS has offered a series of offshore voluntary disclosure programs (OVD) and has also been trying to increase the enforcement of Foreign Bank and Financial Accounts. (FBAR)  The problem is that the programs attempt to issue excessive penalties on taxpayers who did not file because of honest mistakes. The average penalty added up to about 381 percent of the amount owed for taxpayers with average balances.  They were  580 percent for taxpayers with the smallest balances.  (average of $44,855)  Those who opted out of OVD tended to fare better but still faced penalties that added up to nearly 70% interest.

 

For More Info on the Report go to http://www.taxpayeradvocate.irs.gov/2013AnnualReport

 

Original Article

 

How to Avoid End of Life Planning Mistakes

Financial planners know that when their clients don’t talk about end of life planning with their family members, disputes and other unpleasantness will happen.  It’s important to hold family meetings to discuss how your assets will be distributed and to whom.

 

Take the example of a divorced daughter who moved in with her elderly mother.  She convinced her mother that she needed access to her bank account in order to pay bills, and that she wanted her mother to make her the beneficiary of her retirement accounts.  When the mother passed away, everything went to the daughter leaving the deceased woman’s 3 sons with nothing.  Family members were hurt and became estranged, which is not what the mother would have wanted at all.

 

These types of problems happen all the time when someone dies.  It’s a good idea to meet with your loved ones while they’re still alive and healthy, rather than wait until it’s too late.

 

If you are not able or willing to meet with your family members, then consult an attorney and/or tax adviser to complete your estate planning documents. Kevin Thompson, CPA, a Trust and Estate expert for more than 30 years says “this meeting does not have to be painful. But like an annual physical, regular teeth cleaning or that daily walk, this meeting is important.” If there is some family dysfunction, tell your adviser. “We have held these meetings to discuss the plans for the estate, recommendations for the future and, for gifting meetings too.” “Once” Kevin said, “the parent with an extensive estate called the meeting to do his annual gifting, tell his beneficiaries about his charitable vein and then he invited everyone to attend the annual family cruise. That cruise went on for the remaining 12 years of his life.” But the great news, adds Kevin, “the family continued the tradition by setting aside a  portion of the estate to provide funding for the event for decades to come.”

 

Some elderly people feel they need to invest aggressively in order to add to the value of the trusts they want to leave their relatives. Aggressive investing may not be a wise move, in many cases, and it’s important to get advice from a professional you can trust to avoid making costly mistakes.

 

Check your beneficiary provisions regularly, especially if the primary beneficiary has already passed away. Kevin Thompson tells of a story out of New York; “a woman was married later in life. She lived with her husband for more than 25 years and when she passed, he thought he was to inherit her 401K. Unfortunately for him, she had named her Sister as she was unmarried at the time she became eligible for the plan.” The bad news was the Sister-in-Law did not like her Brother-in-law and she did not share the proceeds with him. Neglecting to update beneficiaries will cause problems with surviving family members. They may have to wait for funds to sit in a trust for a long period of time, or be subjected to dealing with other red tape that will cause more delays.

 

Funeral and cremation plans also need to be discussed as soon as possible.  One unfortunate man had planned every detail of his funeral, including which songs where to be sung.  He only told his wife about his wishes.  Both he and his wife were both killed in a car crash. No one found his plans, which he had hidden in his bible until his sister cleaned his house several weeks after he died.

 

Life insurance, legal directives, IRA beneficiary designations and final wishes all need to be planned out in advance.  This may even include how you would like your obituary to read.  Discuss all of this with everyone that may be potentially involved.  If you’re estranged from a family member, at least discuss plans with your primary executor.

 

Include details such as a list of lawyers, accountants, and other advisers.

 

You may even want to give the go ahead for your spouse to date, should you pass away before him or her.  Sometimes spouses feel tremendous guilt and never date or remarry.  Simply giving them permission to move forward may be the greatest gift you can bestow on them.

 

Original Article

 

For tax help and information please contact Kevin Thompson CPA at

kevin@kevinthompsoncpa.com or call him @ (310) 450-4625.

 

 

FFI with FATCA Agreements Guidance Explained

The latest guidance for the enactment of the Foreign Account Tax Compliance Act (FATCA) was issued by the IRS on October 28, 2013.   This will apply to foreign financial institutions (FFI) entering into an FFI agreement with the IRS or branches of FFI’s treated as reporting financial institutions under an applicable Model 2 intergovernmental agreement (IGA)

 

Under the terms of FATCA, withholding agents must withhold tax on payments to FFIs that refuse to report specific information to the IRS for their US accounts and also to some nonfinancial foreign entities.

 

Regulations issued in January integrated 2 types of model intergovernmental agreements (IGAs) into the reporting requirements.  These include reciprocal agreements and non- reciprocal agreements called Model 1 IGAs and Model 2 IGAs. Model 2’s require FFI’s to report required information directly to the IRS rather than the FFI’s government.

 

General responsibilities of participating FFIs and FFIs and their branches are described on the notice. This includes updates to the regulations under chapters 4, 61 and related forms.

 

According to the notice, a payer, other than a US payer or US middleman that is a participating FFI (Model 1 IGA) will satisfy its reporting obligations with respect to a US payee (or presumed US payee) that is a nonexempt recipient if that FFI reports the account holder pursuant to the FFI or the applicable Model 1 IGA.

 

Form 1099 reporting requirements clarify:

 

  • The definition of what is a passive NFFE
  • The definition of US person to include a foreign insurance company that elects to be treated as a domestic corporation under Sec 953d
  • The procedures for FFIs to register for participating FFI or reporting Model 2 FFI status
  • A draft Model 2 agreement which the IRS will finalize by Dec 31

 

Kevin Thompson, CPA said “the Department of Treasury through the Internal Revenue Service have aggressively pursued these Foreign Financial Institution agreements to ensure that the US Treasury knows everything about US Citizens accounts in foreign countries.” He went on to say “if you have an account in a foreign country that meets the reporting requirements, the IRS will be aware of it and will verify that taxpayers are reporting this information. It will be costly to not comply.”

 

Thompson CPA has worked closely with all of its clients to ensure they are in compliance with these regulations. If you have questions about compliance, please contact us.

 

Kevin Thompson CPA at

kevin@kevinthompsoncpa.com or call him @ (310) 450-4625.