What is the Real Value of a Benefit Plan Audit?
That depends on who you ask. If you ask an employer that takes their fiduciary obligations seriously, or one that has had problems with their plan in the past, then the audit is very valuable. However, if you ask an employer that is not so in-tune with their fiduciary obligations and views the audit as a commodity that goes to the lowest bidder, then the audit is a hassle and of little or no value.
For many, a benefit plan audit is not an option:
Once a retirement plan falls into the large plan category, an audited financial statement is Continue reading »
Employee or Independent Contractor? That’s the Question in California and Everywhere Else
A business owner’s hiring of a worker as an employee has real costs beyond the wages paid to the employee. Such costs range from hard costs (e.g., payroll taxes, unemployment, health and disability insurance, etc.) to costs such as compliance with the regulatory requirements of having an employee, along with the added administrative burdens of payroll and a human resource department. In a perceived cost savings measure, some business owners have been tempted to hire workers and treat them as independent contractors. Nonetheless, the decision to designate a worker an “independent contractor” as opposed to an “employee” is not one without consequences that demand careful Continue reading »
What are your chances of being selected for an IRS tax audit?
The 2011 IRS Data Book, a compilation of statistical data and IRS activities, is out. You can read the whole book here: http://www.irs.gov/pub/irs-soi/11databk.pdf or just skip to page 22 of the publication for the important stuff.
In summary, the average audit rate for individual tax returns is 1.1%. But what’s in your return can push you above the average. At the high end, those making more than $1 million have an audit instance of 12.5%. At the other end, returns for those making under $200,000 and without any business or rental activities have Continue reading »
To expense or not to expense – that is the question.
Capitalization or repair expense? IRS issues field memorandum to agents.
In December 2011, the IRS issued temporary regulations that offer guidance on capitalizing or expensing costs incurred in the acquisition, production, or improvement of tangible property. Recently, the IRS’ Large Business and International (LB&I) Division issued a memorandum to field agents concerning their examination of whether such costs have been properly treated Continue reading »
Home Mortgage Interest – Deduction is More Limited than You Think
The home mortgage interest deduction is, as you may know, limited to interest on a maximum of $1,100,000 loan principal ($1,000,000 of acquisition indebtedness plus $100,000 of home equity indebtedness) on your principal residence and a second home, combined.
In a recent case, an unmarried couple purchased two houses together and incurred debt of over $2.2 million. Each individual was on the titles and each individual was on the mortgages. As they were unmarried, they each filed their own tax return claiming a filing status of single, and each claiming interest on $1.1 million of loan principal.
The returns were selected for IRS examination Continue reading »
Form 1099 Reporting: Failure to Do It Can Be Costly!
The IRS has changed its 2011 tax forms and added the following new questions on all business tax returns (including Schedule C for sole proprietors as well as partnership, LLC, and corporate tax returns):
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- Did you make any payments in 2011 that would require you to file Form(s) 1099?
- If “Yes” did you or will you file all required Forms 1099?
Form 1099 is used to report certain payments to recipients and to the IRS. The most common 1099 type form is Form 1099-MISC which is used to report the payment by a business for services rendered to the business (there may also be Form 1099 reporting requirements if a business pays interest or dividends).
Burn down your house to get a tax deduction? May not be such a hot idea!
A property owner, wanting his lot cleared of the existing house so a new one could be built, donated the house to the fire department and claimed a charitable deduction. The fire department burned the house down as a training exercise.Using a valuation concept that has been around for years, the property owner obtained two appraisals – one valuing the property with the house, and one valuing the property without the house. The difference between the two is presumably the fair market value of the house itself. As this is the house that was given to the fire department, a charitable deduction was claimed for that value.
The IRS rejected this burnt offering. The Tax Court agreed. So did the 7th Circuit on appeal. The case hinged on whether the value of the donation was greater than the benefit the taxpayers received. The Court found that the fair market value of the property had to take into account the conditions the donor placed on the property and the benefit the donor received in return. Namely, the donor gave the house on the condition that it be burned down and, in return, the house was demolished.
Since there is no market for houses that must be destroyed, the Court instead looked at the salvage value of the house. It concluded the house was worth almost nothing. Further, the Court found that the owners received a substantial benefit in that the fire department demolished the house, and this benefit outweighed the nominal value of the house. Although in this case the taxpayer did not receive the charitable deduction as sought, under the right set of facts and circumstances, a taxpayer can still qualify for a charitable deduction.
See here for the Tax Court ruling and fact details: http://www.ustaxcourt.gov/InOpHistoric/rolfsgallagher.TC.WPD.pdf and here for the 7th Circuit ruling: http://www.ca7.uscourts.gov/tmp/FM0R1XBH.pdf
For further information, please contact an Aronson tax professional at 301.231.6200.
Major Family Gifting Faces Headwind if Obama’s Budget Proposal Passes
On February 13th, the Obama Administration released its fiscal year 2013 budget, including various estate tax proposals that, starting in 2013, would result in:
- Reducing the lifetime gift exemption back to $1M (the 2009 level)
- Reducing the overall estate tax exemption to $3.5M (the 2009 level)
- Increasing the top estate tax rate back to 45% (the 2009 level)
- Making the trust assets in the IDGTs (Intentionally Defective Grantor Trusts) includible in the grantor’s estate
- Modifying the rules on valuation discounts
- Requiring a minimum 10-year term on GRATs (Grantor Retained Annuity Trusts)
- Making permanent the portability (carryover) of unused estate tax exemption amounts between spouses.
- Limiting the duration of the GST exemption to 90 years
Among the Administration’s various proposals on estate tax law changes, the most damaging one is the proposed reduction of the Continue reading »
Need cash? Don’t borrow from the IRS!
Many businesses and individuals are experiencing cash flow difficulties in today’s economy. To ease the cash crunch, it may be tempting to delay payment of taxes in the hope that finances will improve soon. Unlike other creditors, the IRS moves relatively slowly, lulling the taxpayer into complacency. During this time, interest and penalties accrue which, in some situations, can even exceed the original tax due. When the IRS decides to act, they often file liens, levies, and other garnishments that can cause significant and sometimes permanent economic damage. In addition to these civil penalties and collection actions, the IRS can pursue criminal charges. The failure to truthfully account for or turn over taxes is a felony, with the potential of up to five years of jail time. This applies to all taxes under the Internal Revenue Code – income tax, payroll tax, gift tax, and excise tax, to name a few. Continue reading »
Opportunity for Maryland Taxpayers: Get Credit for Taxes Paid to Other States!
Maryland taxpayers who were not permitted to claim a credit for personal income taxes paid to other states against their local income tax (i.e., City, County or Town) may still claim such a credit on a timely filed protective claim for refund for a tax year with respect to which such opportunity is still available.
Last year, the Howard County Circuit Court ruled that Maryland’s current application of the credit for taxes paid to other states is unconstitutional in so far as the credit is not allowed to offset the Maryland local personal income tax. That decision is still working its way through the appeal process and is unlikely to get to a final determination anytime soon. Nonetheless, the decision presents an opportunity for Maryland taxpayers to amend prior years’ tax returns and claim credits Continue reading »
