Earned Income Credit is a Victim of Tax Fraud

The Earned Income Credit (EIC) was designed to aid needy families but unfortunately is being used by those who are using it fraudulently. Last year, the IRS paid more than $13 billion in tax credits to people who may not be eligible.

 

This abuse of this program is hurting anti-poverty programs and those who truly need its benefits.

 

J. Russell George, the Treasury Inspector General remarked, “The IRS can and must do more to protect taxpayers from waste, fraud and abuse.”

 

The IRS has begun fighting this abuse and is improving its efforts to oversee EITC payments. It has expressed concern and is preparing a major review to find better ways to discern valid claims from excessive ones. Kevin Thompson, owner of Action Tax (www.action-tax.com) attended a conference in Long Beach this year. At that conference the big buzz was “EIC is the largest fraudulent program ever in existence.” Thompson goes on to say “the spokesperson said the IRS does not know how to stop this abuse and we are going to look to you (tax preparers), our Partners, to help reduce and ultimately eliminate the fraud being perpetrated.”

 

The Earned Income Tax Credit is one of the country’s most extensive anti-poverty programs. More than 27 million families received almost $62 billion in credits in 2011.

 

Families must work to earn the credits but there are limits on income. The amount of the credit depends on the amount of income and number of children in the household.

 

For example:  A husband and wife with 3 or more children can earn up to $52,427 and still qualify. A family with 2 children can earn up to $49,186.

 

The maximum credit this year is $6,143 for a family with 3 or more children. For 2 children it will be $5,460.

 

Original Article

 

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

 

Billion Dollar Business Marketing Strategies That May Work for Your Business

“I get the immediate question” says Kevin E. Thompson, CPA; “what does a CPA know about Marketing?” “A great question” says Thompson and replies  “I know very, very little and it is still worthwhile to share these small, low-cost opportunities to grow business.”

 

Facebook, Mint.com and AppSumo.com have collectively reached almost 1.5 billion people due to their remarkable marketing strategies. An insider relates what he’s learned from working with all three companies.

 

Give your audience something they want as an incentive. – Think about offering targeted promotions, partnerships, special access that’s compelling enough for them to want to have. Mint.com launched their online site with more traffic than their competitors because they incentivized people who opted in early by offering them a badge they could place on their own websites that read, “I want Mint,” or “My money’s on Mint.”  Bloggers from all over the Internet who were in personal finance began to promote the site. They wrote positive reviews and created the buzz.

 

AppSumo became known for their giveaways. One offered 10 free Dropbox pro accounts for life. If they shared the giveaway on social media, they earned more entries. This strategy earned them over 50,000 email opt-ins.  Dropbox had a similar audience so it was a match made in heaven.

 

Tips to incentivize:

  • Offer special access or a giveaway that includes entries for sharing.
  • Be clear to your readers what they will be receiving and emphasize that there is limited time or the incentive is scarce.
  • Work with other businesses to do cross promotions.  This allows you to access their audiences. “This is a great and easy” says Thompson. “My wife owns and operates a bridal salon. On Saturday, the busiest day of the week, she has the local bakery bring in cake samples for brides and family. This allows the bakery to get in front of the bride before they make the decision on the cake for the wedding.”

 

Ask to Sponsor a website - Up and coming sites rather than the most popular ones give you a better chance of developing a strong relationship.  You can find sites that resonate with your customers by checking out the website Buzzsumo and enter in your niche topic or your website address.

 

Contact the creators and influencers sharing your posts about sponsoring their site.

 

Survey your current readers to find out what other sites they visit in your niche.

 

Email sites with the subject line “Sponsoring Your site” and see what response you get.

 

Focus on listening to your audience and create content to educate them. – Add a blog to your site with articles that provide valuable content to gain trust with potential customers.  Mint.com, a website that requires its readers to enter their banking and credit card info, was able to gain trust by providing a blog that educated readers about personal finance issues.  The blog receives high traffic and interest.

 

Learn from failures by listening and deciphering your audience’s fears and desires and then tweak your strategy for better results.

 

Create an email drip campaign using an auto responder system to further educate your audience and build a relationship with them.

 

Expand Internationally – Facebook reported in 2013 that less than 20% of its audience came from the US and Canada.  The company localized language for countries where the social network was available.  Use Facebook ads or other affordable options, targeted at various countries to build international presence. “One of our three primary focuses for growth in 2014-2015 is international tax compliance. Look for us to be using FB to assist in that growth” says Thompson. “My Marketing Director, Hillary, with Top Hat Marketing, has been testing our results with FB for several months. We look forward to an emerging campaign that will drive new international customers to our offices.”

 

Be clear on what your niche is and make sure it is marketable. –

 

 

A successful niche must be able to solve other people’s problems. “For years” says Kevin, “my experts would tell me it was all about niche marketing. Although I listened to what they said, I never heard nor acted on the advice. We have always had a niche in the entertainment business but never really marketed to it. With FB and other social sites, we can get in front of potential customers very efficiently.”

 

Invest in an attractive design for your online presence.  This includes your website and landing pages. Consider how your design communicates your brand’s trustworthiness.

 

Before invest heavily in design, make sure your niche idea is marketable enough and that you can provide a solution for your customers that will make you a profit.

 

Use your knowledge to create content – Find out what readers are looking for on the Internet that relates to your niche. Facebook, for example, has trending topics.  Build content and products based on those trends.  Be willing to show how you may have been wrong, how you changed your mind about something or how you came up with your solution.

 

If something is working, run with it. – Facebook realized that importing address books and emailing those people built their audience significantly. They began to add a variety of address books. They eventually bought a company that imported addresses.  Mint.com was very successful in providing infographics.  AppSumo found that spending money for ads was making them money.  They increased their ad budget.

 

It’s important to track what is giving you results in your business. “My friend Dave Williams, may he rest in peace, always said you get what you measure. So track where customers come from and do more of that.”

 

Focus on the actions that bring you results. “In our Action Tax division, little cards attached to tax returns that said WE LIKE REFERRALS gave us new customers every year.”

 

Survey your customers regularly to find out where they found you and what their experience has been with your company.

 

Find a way to get your customers to give you permission to talk to them.

 

The most important business building tool is to collect email addresses from customers who have opted in to receive your content.  Install an opt-in box with a compelling incentive to get potential customers to opt-in.  It is illegal to communicate with them without permission.

 

Realize that what works for others in your niche may not work for you. – You may read tons of marketing strategy but that doesn’t mean it will work for your particular business.  For example, Facebook never did content marketing.  They relied on word of mouth, SEO and address book importing.  Mint grew from SEO and by targeting small blogs in the personal finance space.  AppSumo didn’t get any bang from using SEO at all.  Their subscribers came from product promotion, free incentives and ads.

 

Summary

Each company must create a marketing plan that works for their own individual needs.

 

Focus on analyzing trends and results to come up with a marketing plan that fits your business.

 

Take other successful companies strategies and only take away what would actually work for your company.  Don’t try to force a strategy that is clearly not a fit. “I call that R & D “ says Thompson “Rob and Duplicate.”

 

Original Article

 

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

 

The Truth About the IRS Compromise Program as Heard in Radio Ads

Have you been listening to radio ads that promise to get you out of paying your taxes?  They claim that a taxpayer can settle their tax balances that are owed to the IRS with an Offer in Compromise (OIC).   Many taxpayers who are unable to pay outstanding amounts are eager to listen to anything that would possibly give them a break.  However, the truth is; most of these claims are over-hyped and have little chance of being accepted.

 

In 2013, the IRS only approved 31,000 applications for OIC.  The IRS, on the other hand, allowed 4 million installment agreements in 2013 to enable taxpayer to repay what they owe. Kevin Thompson, CPA, President of Action Tax (WWW.ACTION-TAX.COM) says “my experience with this process is there is much hullaballoo and not much action. Most taxpayers either do not qualify or cannot navigate the very difficult process that the IRS has created. I cannot imagine entering this trek without experienced, knowledgeable counsel.”

 

The Government Accountability Office (GAO) reported in 2010 that more than 16 million taxpayers owed money to the IRS.  “These taxpayers are under great risk of liens and levies and other devices the IRS can use to collect taxes owed.” As discussed above it takes highly experienced professionals to assist these taxpayers in these circumstances. “It’s the main reason we recently acquired Cool Tax Services into the Action Tax family of services. I see 31,000,000 taxpayers that need our assistance. Matthew Cooling, EA, Founder of Cool Tax Services says “I have been involved with and preparing OIC’s for more than five years. Joining the Action Tax family will allow me the opportunity to apply this experience to clients of Action Tax, both existing and prospective.”

 

In order to be eligible for the OIC qualification, they take into account a computation of your ability to pay before the IRS runs out of time to collect the debt. This is called the collection statute expiration date.   You can use this OIC Pre-qualifier toolto see if you qualify.

 

Cooling says “you will need to be able to prove that you can’t pay the total balance owed before the collection statute expires, using net equity in assets plus any future income. The IRS will then calculate your future income as the amount it can collect on a monthly basis.”

 

Once your ability to pay is determined, the IRS will determine if you qualify for an OIC or if you have to pay the taxes owed to the IRS.

 

Qualifying for an OIC does not mean you will obtain one. To obtain one, you must be able to pay the offer amount, which is the computed amount required to be paid to the IRS to settle the debt.  The formula used to compute the offer is different than the formula used to determine your qualification.

 

In order to calculate the offer amount, you must complete your due diligence. You may at first find that the offer amount is too high to consider an OIC as an option.  You may also discover that your computed net equity and assets and monthly income were miscalculated, which resulted in an offer amount that is larger than you expected and too much to pay.

 

A tax professional will be more accurate in computing the OIC’s financial requirements and help you avoid a long and costly investigational process or find you a better alternative.

 

Although the number of OICs accepted is small, compared with the number of taxpayers applying, more taxpayers are qualifying and obtaining OICs due to the 2011 IRS Fresh Start Initiative, which has made it easier to qualify.  In 2014, the IRS received 30% more OIC applications compared with 2010 and the acceptance rate increased to 42% up from 25% in 2010. Matthew says “The Fresh Start Initiative is the first real effort by the IRS to assist taxpayers in need. Although not salvation for the needy taxpayers, it is a step in the right direction.”

 

If you definitely have a financial hardship, you may want to consider qualifying for an OIC.  However, the process is complicated and it is recommended that you consult your tax professional to make sure you qualify and to expedite the process.

 

Action Tax is here to help.  Contact us at:

 

Kevin Thompson, CPA kevin@action-tax.com or call him @ (310) 450-4625 x102.

Matthew Cooling, EA matthew@action-tax.com or call him @ (310) 450-4625 x109.

 

Legal Tricks to Maximize your Business Tax Opportunities

Tax BillBusiness tax preparation can be just as daunting for a business owner as it is for an individual taxpayer. Business tax laws are complex, and it’s often wise to consult with a tax attorney or tax accountant. With several taxes to take into consideration, a business can easily find itself in a financial bind if not properly prepared. Luckily, there are ways to lower business tax and ensure that your business is pulling all the possible (and, most importantly, legal) stops to enter tax season with a clear mind.

 

Here are 3 tricks to securing the money your business deserves

 

1. Retirement/Health Account Contributions
Maximizing your use of 401k/IRA’s will allow you to deduct from your taxable income the amount paid into the account, thus reducing your total taxable income (for more information on your retirement plan options, please review IRS Publication 560, Retirement Plans for Small Business www.irs.gov/pub/irs-pdf/p560.pdf. “These retirement contributions can be done often times with and without employees” says Kevin E. Thompson, CPA, Santa Monica, CA.

 

Increasing contribution to your employees’ health insurance costs can also help lower your business tax, as well as provide compensation and a money saving alternative to salary increases. This is because a contribution increase of “x” dollars to an employee’s medical insurance eliminates a number of taxes that an employee would otherwise have to pay if the increase was attributed to salary increase.

 

2. “Bunch” Deductions
Bunching itemized deductions can help reduce tax liability and increase a business’ tax benefits. Maximizing your business’ expenses at the end of the year, rather than the beginning of the next, will help ensure that these expenses fall within the necessary income thresholds for some deduction categories and will earn you a deduction in the current tax year for those expenses. For instance, if your business is planning on a major expenditure, your best option would be to making the purchase at end of year; or, if your business spends “x” amount of dollars in office supplies monthly, forecasting for the next few months and bunching this expense into one large purchase will help lower business tax. “This is a very common, oft overlooked opportunity for most small businesses” says Thompson. “In December, we are all crunched for time and forget to do our tax planning. By bunching our deductions in December instead of letting them fall into January, we miss thousands of dollars of deductions that can have a significant impact on the tax obligations.” Of course, this bunching does not help with City Business taxes like Los Angeles and Santa Monica that are based on gross receipts. https://latax.lacity.org/laweb/F-logon.jsp

 

It is also beneficial to consider all possible deductions for your business—travel expenses (i.e vehicle and business trips), employee training, equipment repairs and losses due to theft are a few areas to consider when reviewing tax deductions. “And remember” adds Thompson “by charging using a credit card BEFORE the end of the year, you can deduct the expense even if you do not use the travel item until next year.”

 

3. Give Back
Donating to charity is a sure way to lower your business tax bill. By first ensuring that the charity in question is qualified and all donations are tax deductible, donating unwanted equipment can earn you a tax incentive from the IRS. Keep in mind, however, that the IRS requires written acknowledgement from the organization for contributions of or valued up to $250. “When giving back,” Kevin Thompson CPA says “there is a difference between a pure contribution and advertising. When you write a check to the general fund at the YMCA, it is most likely a contribution. However, when you buy an ad or sponsor a hole at the annual golf tournament, that is most likely advertising expense.” Thompson says, “this is more than semantics. Advertising is always 100% deductible where charitable deductions have certain limitations.”

 

By implementing these simple tricks at tax time, your business can find itself drastically reducing taxable income in a safe and legal way. However, certain applicable tax deductions vary by business, so it is important to understand what your business can deduct from taxable income. For more information regarding your business taxes, and to learn about other beneficial tax deductions, call Acosta Tax and Advisory, PA for a free consultation.

 

*this is personal legal or tax advice – please consult with a CPA to discuss your personal situation.

 

**We offer Business Tax Preparation Services in Redondo Beach and Santa Monica, CA..

 

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

 

Reporting Alimony and Avoiding a Mismatch

If you are divorced and either receiving or paying alimony the IRS may start looking at how each of you reports on your tax return.  When one of you takes a deduction for alimony, the other should be reporting it as income. This gets tricky, if for example, a payment is made late and isn’t received until early January and there is overlap in reporting.

 

According to the TIGTA report, the IRS tracks this transaction because there is a line next to the alimony deduction on the tax return that requires the ex-spouse’s Social Security number.  The IRS is then able to match up each tax return and often will investigate if numbers look suspicious. Many times adjustments need to be made.

 

On a percentage basis, however, very few discrepancies are investigated. For example, in 2010, there were 567,887 returns deducting approx. $10 Billion in alimony. Almost half ex-spouse returns didn’t match. The net difference came to $2.3 Billion. Out of 266,190 unmatched returns, the IRS only audited 10,870.  Only 2,000 further examinations were held after that.  Only 4% of tax returns in which one of the pair was dead wrong were acted upon by the IRS. “This difference is significant” says Kevin Thompson, CPA, an expert in tax aspects of family law “and the IRS will find a way to close that gap.” If it is a simple mistake, than the service will offer adjustments and make the appropriate spouse make the corrections. “But, if this is a case of the paying spouse deducting more than they are provided by the agreement, this could get ugly. Even uglier than the divorce was initially.”

 

Unfortunately, this isn’t something that can be tracked accurately using just a computer. It can be argued in court that the payment qualifies as deductible alimony or not.  Part of this may be because there is a lack of provision that payments terminate on the death of the recipient.  Just because the agreement does not say that payments terminate at death, doesn’t mean that they will continue. It depends on state law.

 

Even though the computer may find the discrepancy, it usually involves a live person to sort out the mess. This usually involves arguments and appeals and court appearances. Thompson says “Caution must be taken and confirmations must be had. We have reached out to divorced people and asked for the confirmation of the alimony paid/received. When someone thinks the IRS is looking, they usually pay attention.”

 

The IRS is understaffed when it comes to enforcement personnel. They don’t always get to it right away if at all.

 

A tax professional will always take the position of what is most favorable for their client and point out risk factors. AICPA ethics forbid tax professionals from playing audit lottery.  You may get caught for a number of reasons:

 

  • Not reporting the interest and dividends you get a 1099 for.
  • Claiming payments to the IRS that you didn’t actually make.
  • Not picking up alimony that your ex deducted.

 

The IRS may not do anything about the above, but it’s better to be safe than sorry.  It’s better to do things right in the first place.

 

It’s important that attorneys draft reasonable and clear agreements between two divorcing spouses to avoid any chance of making tax reporting mistakes.

 

TIGTA has recommended that the IRS send out warning notices to let people know they may need to amend their returns.

 

As the laws are written now, mismatches in alimony reporting cannot be fixed without enough IRS staffing in that area and Congress is not providing that.  Until that happens, making sure you are compliant with the current laws is the safer way to go.

 

For help sorting out alimony reporting, consult Kevin Thompson, CPA.

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

 

Original Article

 

What Baby Boomers Need to Consider When They Are Ready to Retire

As Baby Boomers prepare to retire, they are facing tough financial decisions in order to make their finances last for the duration of their lives. These concerns include:

 

  • The best time to take Social Security benefits
  • When to tap into retirement assets
  • Health and long term care insurance
  • Income producing investments to consider before liquidating a retirement profile

 

The end result of these decisions carry even more weight than they did when they were accumulated. However, there is not as much room for error as there was when mistakes and risks could be smoothed over by market fluctuations from the past.

 

John Reeve, a Redondo Beach based Financial Advisor specializing in the area of Retirement and Aging says “Each person’s situation is unique and the entire history must be considered.” He continues “the trend toward robo-advisors has left many Baby Boomers in the hands of software systems that are not as apt to consider a person’s individuality and needs. A personal advisor is able to implement informed withdrawal strategies that can minimize the total taxes paid during retirement which will increase that person’s wealth and financial longevity.”

 

Boomers are finding that their investment portfolios are falling short. Traditional income producing investments often lag behind inflation and unseen expenses may diminish the return. This is leaving some Boomers to scratch their heads and wonder “What do I do next?” “This is scary” says Reeve. “As we age, we lose the ability and the opportunities to accumulate wealth.” Most Boomers believe that the assets they have accumulated will be the only assets available for retirement. “There is no Golden Parachute awaiting retirees as they enter the Golden Years.”

 

A proficient tax advisor teamed with a savvy financial advisor are able to present strategies that a client may not be aware of that will be best for their individual situation. They may include investments in stock, bonds, cash or cash equivalents. A real estate trust, for example, can provide additional income as other assets are de-accumulated. And annuities can be instrumental in replacing pensions or other monthly cash flow.

 

Reeve says “Kevin and I recently worked a case with a retired couple. If the husband passed first, the surviving wife would lose his pension benefits. We repurposed some assets and positioned them to handle the lost benefit in the event of that unfortunate loss.”

 

Baby Boomers should seek guidance from reliable tax and financial planning professionals to address any investment risks they may decide to take in retirement. Their advisor will help them choose suitable options that are both traditional as well as alternative to make sure their portfolio is balanced, diversified and income producing.

 

John Reeve is a Financial Planner that is an expert in financial planning for Baby Boomers who are planning for retirement.

 

Kevin Thompson CPA is a tax professional that is an expert in tax planning for Baby Boomers who are planning for retirement.

 

Contact them here:

 

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

john@johnreeve.com  or call him @ (310) 353-2355

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 can 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.

 

If the budget is actually passed by the Congress, which is divided, it will make it much harder for tax advisors 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 advisors can offer with other products. This has produced a new demand for Social Security income stream tactics to help maximize the benefits.

 

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 hadn’t 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 advisors are mixed wanting to provide better benefits for Baby Boomers, who need it now, but also believe in tax reform. Kevin Thompson, CPA comments “I believe that Social Security will become needs based. This means that if your income falls within certain categories you will qualify for and receive your Social Security entitlement. Although EVERYONE pays into the system equally, some will arrive in retirement and earn too much income to qualify to receive the entitlement.” This is a concept that has been gathering support for some time. Expert articles include:

 

http://firstread.nbcnews.com/_news/2011/04/13/6464594-gop-senators-raise-retirement-age-means-test-social-security?

http://www.washingtonpost.com/blogs/wonkblog/wp/2012/12/11/everything-you-need-to-know-about-chained-cpi-in-one-post/

 

And then there are the age-old debates regarding wealthy vs. less-wealthy taxpayers. Peter Diamond writes http://www.washingtonpost.com/blogs/wonkblog/wp/2012/10/14/weekend-interview-peter-diamond-on-social-security-privatization-proposals-and-the-grand-bargain-hed-like-to-see/

 

“In a nutshell,” says Thompson, “Social Security as we have known it and know it today is unsustainable. Given our population shifts, Boomers will drain this program based on the premise of entitlement.” Thompson tells of a very wealthy taxpayers reveling on the day he was to apply for Social Security. “This taxpayer was nearly a billionaire back when being a billionaire meant something.” Anyway he came into the office one day and informed me he was off to the Social Security Administration office to apply for his entitlement. I must have had a puzzled look on my face and he cautioned me and said “Kevin, do not judge me. I paid into the program just as you do.”

 

For now, it’s up in the air as to whether the new proposal will pass.  In the meantime, John Reeve of John Reeve and Associates  (a Redondo Beach based financial planning firm specializing in the needs of aging taxpayers) says “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.

 

310-792-0819 x102
kevin@kevinthompsoncpa.com

Internet Fantasy Sports Taxation

As the Internet grows, online fantasy sports have grown as well. In 2013 approximately 33 million people in the US played in online fantasy leagues that include football, baseball, hockey and basketball.  Actual player’s performance stats are used to create these online fantasy games.

 

These leagues and contests operate under the Unlawful Internet Gambling Enforcement Act (UIGEA), which sets criteria that must be met in order for the game to not be considered illegal gambling.

 

Rules state:

  1. All prizes and awards offered to winning participants are established and made known to the participants in advance of the game or contest. The value of prizes or awards is not determined by the number of participants or the amount of any fees those participants paid;
  2. All winning outcomes reflect the relative knowledge and skill of the participants and are determined predominantly by accumulated statistical results of the performance of individuals (athletes in the case of sports events) in multiple real-world sporting or other events; and
  3. No winning outcome may be based:
    1. On the score, point spread, or any performance or performances of any single real-world team or any combination of such teams; or
    2. Solely on any single performance of an individual athlete in any single real-world sporting or other event.

 

US based Fantasy sports operators report prize winner’s income using Form 1099-MISC, Miscellaneous Income, typically in Box 3—Other Income. They do not report using Form W-2G, Certain Gambling Winnings.

 

This is done using the net payments method or the net earnings method.  If earnings are sent to winners using PayPal or another 3rd party processor, they may receive an additional report from that processor on Form 1099-K Payment Card and Third Party Network Transactions, if earnings are substantial.

 

Hillary Thompson, a California marketing expert  who recently chaired a panel at Gravity Summit  on the topic of Fantasy Sports commented “fantasy football has grown astronomically in popularity for many reasons, the least of which is the prospect of a prize. I doubt that leagues make their pay-offs IRS friendly.” Hillary says “many businesses offer Fantasy Football Leagues as a benefit just like bowling and softball leagues. Will HR soon have to have policies on these matters?” Kevin Thompson, CPA says “I agree with Hillary and wonder how the IRS will ever discover this underground gaming. I do believe Las Vegas is trying to cash in on the Fantasy phenomena and perhaps, with that will come some legitimate form of tracking and reporting.”

 

When reporting this on taxes, taxpayers and tax practitioners need to consider whether to report it as gambling on Schedule C, Profit and Loss from Business (Sole Proprietorship) or “Other Income” on line 21 of form 1040, US Individual Income Tax Return.

 

For lower amounts of income that do not rise to the level of trade or business, earnings can be reported as “other income.” The amount reported on the Form 1040 will probably need to be reconciled with the information reported on the Form 1099 MISC if the net payments method was used. Losses from the games would be reported on Schedule A, Itemized Deductions, as miscellaneous deductions, subject to the 2% of adjusted gross income floor and not deductible for alternative minimum tax purposes.

 

If online gaming is not a hobby, but rather a business venture total winnings, losses, and expenses would be reported on Schedule C, as a sole proprietor.  Net income, however, would be subject to self-employment tax, and net losses may not be deductible unless participation as a business can be substantiated.

 

Claiming winnings as gambling may implicate a taxpayer as being involved in illegal activities and is not consistent with the leagues interpretation of the activities.  Winnings as “gambling” also requires the taxpayer to provide all winnings and losses based on the correct interpretation of what “session” the taxpayer has participated in for each league. “Taxpayers have to be careful” says Kevin Thompson. “A simple disclosure on a tax return might lead to bigger and bigger challenges. Remember you do sign the tax return under the penalty of perjury. We could have entire wings of penitentiaries full of hardened tax evaders that did not claim their extensive winnings from Fantasy sports.” Hillary Thompson added “It might be worth prison. Being around other Fantasy Football addicts from January until September might make the pain of withdrawals easier to handle.”

 

It’s advised that anyone participating in online game income should track deposits, winnings and fees to enter on their tax returns.  Make corresponding adjustments to the amount reported on Form 1099-MISC and attach a statement on the return to disclose what method was used.

 

Consult Kevin Thompson CPA on how to best report income from online Fantasy Games.

 

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

Taxation for Individuals – Most Recent Developments Part 4

Continuing on Taxation for Individuals

 

Part 1

Part 2

Part 3

 

Joint returns between husband and wife

 

A taxpayer was married to her husband up until fall 2007.  After they separated, the husband was a full time student.  He was broke and couldn’t afford to move out of the house. He made the decision to withdraw retirement benefits he had earned before he became a full time student. He asked his wife to sign a required termination notice and she did.  He received almost $10,000 from his retirement account and used the funds to move out.

 

The couple was legally divorced in March 2009.  They filed a joint return for 2008 the same day their divorce came through.  Only the wife’s income appeared on the return and the retirement benefits were omitted. She received a refund in the amount of $3,390 and issued a check to her husband for $1039.68 as they had agreed upon.

 

The IRS later discovered that she was liable for $2847 because the retirement amount had been omitted. She filed a form for Request for Innocent Spouse Relief but was denied by the IRS. The agency had decided that she either knew or had reason to know about the understatement of tax and was responsible to pay the outstanding balance.  This was because she had signed the termination notice.  She contended that she was entitled to relief.  The court considered 8 factors.

 

  1. Marital Status
  2. Economic Hardship
  3. Knowledge of the error
  4. Legal obligation of nonrequesting spouse
  5. Significant benefit
  6. Compliance with tax laws
  7. Abuse and
  8. Mental or physical health

 

The courts ruled against relief due to factor’s 2 and 3.  She was aware of the retirement income and failed to show financial hardship. However the court concluded that factors 1,5, and 6 weighed in favor of relief because she was divorced when she made the request and didn’t receive any benefit from the retirement income.  She had also complied with income tax laws for 2008.  In the end, the court held it wouldn’t be fair to hold her liable for the 2008 tax liability and she received relief.

 

Since then several changes in the tax laws have resulted.

  • New time frame adopted
  • Presence of Abuse
  • Economic Hardship factor
  • Knowledge factor
  • Legal obligation factor
  • Significant benefit facto
  • Compliance with tax laws.

Click here for more details.

 

Failure to pay estimated tax penalties

 

A taxpayer did not file a federal return for 2006.  In 2007, he filed a 1040 with zeroes on each income line. He received two 2007 1099’s totaling $76,685 of nonemployee compensation.  Contrary to the income reported on the 1099 MISC he received, he attached to his 2007 form 1040 two corrected Forms 1099MISC showing no compensation.

 

Sec 6654 requires an annual payment of estimated taxes equal to the lesser of (1) 90% of the tax on the return for the tax year or (2) 100% of the tax shown on the return for the previous year.  Since he didn’t file a return in 2006, the prior year liability rule didn’t apply.

 

The court determined his 2007 1040 form to be frivolous and that he had a liability for 2007.

 

In another case, a taxpayer, who was incarcerated was held liable for failure to pay estimated tax penalties while in jail.  He had received taxable income from a false invoicing scheme while he was in jail.

 

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

Taxation for Individuals – Most Recent Developments Part 3

Continuing on Taxation for Individuals.  Please see:

Part 1

Part 2

Determining gain or loss after a foreclosure

A taxpayer who had her home foreclosed after she was unable to rent it claimed ordinary loss, but the IRS recognized capital gain.  The fair market value of the home was less than the outstanding mortgage balance at the time of the default and the lender foreclosed. The court ruled that the foreclosure of the mortgage loan was a “sale or exchange of property and that the difference between the taxpayer’s basis and the amount of the loan was capital gain.

Basis of Property – What is the cost?

A taxpayer neglected to present records of his basis for 20 sales of stock in one of his brokerage accounts. He calculated his basis using an “aggregate basis theory” based on the net result of withdrawal and deposit transactions for a bank account. It was rejected by the court because the 20 different sales could have different holding period and might require short-term or long-term capital gain treatment. In addition, the taxpayer failed to provide proof of the deposit and withdrawal transactions. The court argued that the taxpayer cannot rely on his own uncorroborated testimony to establish the basis. It upheld the IRS’s determination that the basis was zero. Kevin Thompson, CPA comments “in the post 2008 meltdown, many taxpayers faced circumstances where they were looking at short sales, foreclosures or debt restructuring. President Obama and Congress passed many laws to protect further damage to taxpayers caused by these tough economic conditions. Most taxpayers do not have gain or income on these transactions when they were reported properly.”

Involuntary Conversions

The IRS gave farmers and ranchers a 1 year extension to replace livestock that they had to sell because of drought conditions to defer tax on capital gains.  Normally, the replacement period is 4 years. Relief is given to farms that suffered exceptional circumstances from the drought.  If the livestock is sold for slaughter or sporting purposes, sellers are not eligible.

Exchanges of Insurance Policies

The exchange of annuity contracts was ruled by the IRS to be a tax-free exchange.  A taxpayer, was the beneficiary of 4 fixed annuity contracts and 1 variable annuity from her late mother. She wanted to increase the amount of her payouts to figure in her own life expectancy and transferred the ownership of 2 contracts with different companies to a 3rd company that issued a new annuity contract in the exchange.

Capital Assets

A taxpayer received income from a payment he received for his position in a lawsuit. The court decided it was his intention to acquire property, build a condominium complex and sell the units to customers in the ordinary course of business. The court ruled that the condo units were not capital assets. It also considered factors such as the taxpayer’s normal business as a developer and his efforts to develop the property. The taxpayer hired architects, printed promo products and advertised to increase sales.

To be continued.

 

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