Alimony Mis-match Getting IRS Audit Attention
Alimony Mis-match Getting IRS Audit Attention
If the alimony you paid does not match the alimony income reported by the person who received the funds you can expect more attention from the IRS. A lot more attention. Here is what is happening.
The U.S. Treasury Department recently released an audit report revealing a disturbing level of non-compliance in alimony reporting on tax returns. This non-compliance will result in a vast increase in tax return reviews now and in the years to come. Here is what you need to know.
The study
The Treasury Inspector General for Tax Administration (TIGTA) recently conducted an Audit of 2010 tax returns that claimed an alimony deduction. What they found:
- Over 560,000 taxpayers reduced their income for alimony paid in 2010.
- 47% of the claimed alimony deduction tax returns did not match required income reporting from those who received the alimony.
- The discrepancy was more than $2.3 billion in unreported 2010 income.
Please note: You may reduce your income for qualified alimony payments. Those that receive alimony must include the payments as income on their tax return. As a clarification, in most cases, spousal maintenance is considered alimony by the IRS while child support is not considered alimony.
Further, the audit determined that the IRS does not adequately track this non-compliance. Nor are proper penalties being assessed when the person paying alimony does not correctly report the Social Security Number (SSN) or Tax Identification Number (TIN) of the person receiving the funds.
Things to consider
If you receive alimony. You must report this income on your tax return. If you are receiving income from an ex-spouse that you believe is child support, have documentation to support this claim.
Mis-match audits will rise this year. The IRS has corrected their audit filters to capture major alimony mis-matches for the 2013 tax year. Given this, you should expect a notice or audit if there is a major alimony discrepancy.
Penalties are coming. If you do not correctly report the SSN or TIN of the person receiving alimony you will now start to see penalty notices. The programming error in the IRS system has been corrected. So get a correct identification number for the person who receives your alimony payments and report it on your tax return.
Keep documentation close. Since you know the risk of audit in this area is high, keep your documentation handy. If paying alimony, having it automatically deducted from your paycheck will help you accurately report your payment amounts.
File a tax return. In 2010, $937.2 million of the claimed alimony deductions had no corresponding income tax returns filed reporting the income. This non-reporting area is a highly recommended audit target for the IRS.
Talk to your ex. While possibly an unpleasant task, a quick discussion regarding claimed alimony can identify whether you have a reporting problem. Hopefully, this communication can solve any potential problems prior to the involvement of the IRS.
Source: TIGTA 2014-09 report released 5/15/2014
Hallmark CPA Group LLC Receives 2014 Best of Tampa Award for 4 Consecutive Years
Press Release
FOR IMMEDIATE RELEASE
Hallmark CPA Group LLC Receives 2014 Best of Tampa Award for 4 Consecutive Years
Upgrading the award to a Business Hall of Fame
Tampa Award Program Honors the Achievement
TAMPA April 23, 2014 — Hallmark CPA Group LLC has been awarded the 2014 Best of Tampa Award in the Certified Public Accountants category by the Tampa Award Program.
Each year, the Tampa Award Program recognizes local companies that enhance the positive image of small business through service to their customers and our community. These exceptional companies help make the Tampa area a great place to live, work and play.
Various sources of information were gathered and analyzed to choose the winners in each category. The 2014 Tampa Award Program focuses on quality, not quantity. Winners are determined based on the information gathered both internally by the Tampa Award Program and data provided by third parties.
About Hallmark CPA Group LLC
The Firm is focused on Client Satisfaction and the highest standards as Business Advisors in the Tampa Community and has maintained this for the past 4 years.
With Business Advisory services including;
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Business Tax Preparation and planning
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Personal Tax Preparation and planning
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Payroll and Human Resource services
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Bookkeeping and QuickBooks support and training
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Financial Audit Preparation
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Business Analysis and Valuation Services
Hallmark CPA Group LLC have maintained the highest rating in ALL categories for their clients and have continued to grow through this time.
I am very proud of this Award and the recognition it provides for the focus we have every day on providing the best service we can to our clients. What makes Hallmark CPA Group LLC different is that we are true Business Partners to our clients and not only for the Accounting services we provide but also, how to make connections for our clients to help their businesses grow.
This method has meant our clients have grown into valuable businesses in the Tampa Bay Community – Andrew J. Hall (Partner).
Mr. Hall is also member of the Board of Directors for South Tampa Chamber and a member of the Network Professionals Inc.
If you need CPA Firm Services in the Tampa area, then you need to contact Hallmark CPA Group LLC. The award winning CPA Firm.
CONTACT:
Hallmark CPA Group LLC
T: (813) 283-0642
Email: ajhall@hcpagrp.com
URL: http://www.HCPAGRP.com
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Small Businesses: Plan for Lower Section 179 Expense
Small Businesses: Plan for Lower Section 179 Expense
Effective in 2014, the amount of capital purchases that can be expensed versus depreciated over time is much lower. Here are some things to consider.
Top-line: In 2014, the annual expense limit for Section 179 is now $25,000, down from $500,000 in 2013. You will need to plan accordingly.
Background
Section 179 of the tax code allows businesses to immediately expense qualified capital purchases versus depreciating (recovering) their cost over time. Qualified purchases can be new or used equipment and certain software placed in service during the year. This benefit can be maximized as long as total qualified asset purchases by your business do not exceed $200,000 (formerly $2 million) during your 2014 tax year.
What’s the Problem?
For years the threshold for qualified purchases was much higher than the lower Section 179 amount in 2014. The old Section 179 provision allowed for small businesses to upgrade equipment while lowering their current year tax obligation. Many small businesses like dentist offices, veterinarians, chiropractors and others used this provision in the tax code to help manage their cash flows through reduced taxes while purchasing needed equipment.
Time to Plan
Users of Section 179. If your business currently uses Section 179 as a tax planning strategy, you need to review your anticipated capital purchases for the year. Consider prioritizing your needs to ensure the most important capital purchases are at the top of your list.
Delay your Purchases? There is a slight possibility that Congress will act during the year to increase the Section 179 limits once again. This retroactive nature in Congress has been in place for the past number of years, so this is not out of the question. Consider delaying purchases until later in the year if you think this might happen.
Is Section 179 for you? Please remember that taking advantage of this provision in the tax code only changes the timing of expensing your capital purchases and not the over all deduction of your purchase. If you think Congress will continue to raise taxes to help balance the budget, your future income could be exposed to a higher tax rate. By using standard recovery periods for your capital purchases (typically three, five, or seven years), you are saving some expense for later (higher tax) years. In this case using Section 179 expensing may not be the right decision for your business.
Feel free to call (813) 283-0642 for help to review your situation, especially if you are planning major capital purchases in the near future.
Annual Tax-Exempt Filing Due May 15th
Annual Tax-Exempt Filing Due May 15th
Too many small tax-exempt organizations are having their charitable tax status revoked simply because they failed to file their annual form with the IRS. Don’t let this happen to you or your favorite charity.
If you are involved in a tax-exempt organization or know someone who is, this is a reminder that the annual filing requirement is quickly approaching.
The rule: Every tax-exempt organization must file an annual return (990 series) on the 15th day of the fifth month following their year end. That means calendar based charitable groups have until May 15th to file.
The penalty: If the organization does not file their annual return for three consecutive years, they automatically have their tax-exempt status revoked.
Who should worry: Any tax exempt organization except churches and church related organizations. So soccer booster clubs, PTAs, youth sports organizations, community organizations and more need to do this every year.
The small organizations: If your average annual receipts are $50,000 or less, you can simply file Form 990-N (e-postcard).
Privacy: Remember not to include your Social Security number with any filings. Often these tax Forms are in public domain. So any private information is available for identity thieves.
What’s Your Status? The IRS offers an online tool to check the status of your organization. Here is the link. A quick check of organizations you are members of can lead to a quick phone call to ensure they get their filings done.
Please feel free to call for help.
Indirect IRA Rollovers. Change is Coming
Indirect IRA Rollovers. Change is Coming
A recent Tax Court ruling makes the use of indirect rollovers from one IRA to another a risky proposition. To ensure no trouble with the IRS, rollovers of this type should probably be handled directly by financial trustees. Here is what you need to know.
Topline: When rolling over funds from one IRA to another (typically Traditional IRAs, Roth IRAs, SEP IRAs and Simple IRAs), it is best to use a direct rollover versus an indirect rollover. As confirmed in a recent tax court ruling, taxpayers are limited to ONE INDIRECT rollover per 12 months. This limit applies no matter how many IRA accounts you own.
Background
Many taxpayers have numerous Individual Retirement Accounts (IRAs). You can move funds from one qualifying account to another without paying taxes on the rollover as long as you follow the rollover rules. If the rules are not followed, the funds are deemed a distribution and taxes plus a potential early withdrawal penalty may be owed. There are two primary methods for rolling over the funds from one account to another:
Direct Rollover. Using this method, the taxpayer never takes possession of the rollover funds. Instead, one institution transfers the funds out of one account and sends them directly to the institution that has the receiving account. Since the taxpayer never takes possession of the funds, there is little chance the IRS would see the transfer as a distribution.
Indirect Rollover. In this case, the funds are withdrawn from the IRA and sent to the account holder. The account holder then deposits the same amount into the new account. As long as the transfer takes place within 60 days, it is a valid transfer and no taxes are owed. The taxpayer bears the burden of proof that the transfer was completed within the required timeframe.
Aggregate once per year rule
In a recent court case, the IRS put their foot down on unlimited INDIRECT transfers of funds.* In their ruling they stated that a taxpayer is entitled to make one indirect transfer per 12-month period regardless of the number of IRA accounts. Any additional transfers are not valid and will be deemed a distribution from your IRA.
Why the rule?
Some taxpayers were using a number of rollovers of the same dollar amount from account to account to give themselves a short-term loan. In the tax case, the defendant removed funds from one IRA. He used the money for a couple of months. He then took the same amount from a second IRA and replaced the money originally removed from the first IRA. He then took the same amount from a third IRA to replace the funds in the second IRA. Finally, the last IRA had its funds replaced. Effectively giving him use of the funds for up to 120 days. The court ruling effectively eliminated the ability to make these kinds of transfers.
Effective change
The court ruling creates a change in the IRA indirect rollover rules beginning on January 1, 2015. Effective that date, you may only conduct one indirect IRA rollover per 12 month period. IRS publications will be revised to reflect this change.
Because of this, it is best to employ a direct rollover of funds from one IRA to another using a qualified financial trustee to avoid any potential problems. This ruling does not apply to all conversions and rollovers. Please contact the financial institution receiving the rolled over funds for details on their process to ensure it is handled correctly.
*Source: T.C. Memo 2014-21 Bobrow vs Commissioner IRS
Keeping the Tax Underpayment Penalty at Bay
Keeping the Tax Underpayment Penalty at Bay
If you underpay your Federal Tax obligation throughout the year you could be in for a tax penalty when you file next year’s tax return. Outlined here are steps to take to avoid this underpayment penalty.
With the 2013 tax year behind you, now is the time to plan appropriately to make sufficient estimated tax payments. An underpayment of estimated tax may apply if you still owe $1,000 or more in additional tax after accounting for withholdings and estimated payments made throughout the year. Remember, to avoid underpayment penalties you are required to prepay either;
- 100% of last year’s tax obligation* OR
- 90% of next year’s tax obligation
* If your income is over $150,000 ($75,000 if married filing separate), you must pay 110% of last year’s tax obligation to be safe from an underpayment penalty.
If you think you will need to make periodic payments to the IRS over the year to avoid the penalty, here are some pointers:
- Payments are due quarterly. The payment dates are:
- 1st Quarter: 4/15
- 2nd Quarter: 6/15
- 3rd Quarter: 9/15
- 4th Quarter: 1/15 of the following year.
Should any of these dates fall on a weekend, the Form 1040 ES payment is due on the next business day.
- Add to withholdings. If it looks like your paycheck withholdings will be too low, adjust the amount withheld. One of the benefits of this approach, is that withholdings deducted from a paycheck are not date sensitive, while quarterly estimated payments made late can still cause an underpayment penalty.
- Front load payments. Often it is hard to project your income if you own a small business. If possible, pay a little extra in the first or second quarter to avoid the underpayment penalty exposure by paying the estimated payments later in the year.
If you have not already done so, please call (813) 283-0642 to help assess your situation.
Virtual Currency…Every Bit Counts
Virtual Currency…Every Bit Counts
A recent IRS ruling on virtual currencies like Bitcoin classify them as property. This ruling has far reaching consequences on this new concept. Here is what you need to know.
In recent Internal Revenue Service Notice 2014-21, virtual currencies like Bitcoin have been classified as property. The IRS is aware of the growing popularity of this medium of exchange and that it is not considered legal tender by any government. The IRS notice hopes to clarify how you must treat your use of this new technology. The outcome for users is not good. Here is what you need to know;
- As property. Property is subject to gains and loses. So if you use a virtual currency like Bitcoin, you must keep track of the original cost of the coin and its value when you use it. As a capital asset you must also know whether your gain or loss on use of the virtual currency is a short-term or long-term.
- As income. Wages paid in virtual currency are taxable to the employee, must be reported on a W-2, and are subject to employment taxes. Income received as an independent contractor has self-employment rules applied and must follow Form 1099 reporting requirements.
- A currency? Per the IRS, no. Businesses have the ability to calculate foreign currency gains and losses on their financial statements. This foreign currency gain or loss calculation is not available for virtual currencies like Bitcoin.
- Determining value. If you purchase or sell something using a virtual currency, you need to determine the fair market value of the transaction using a valid virtual currency exchange and translating it into U.S. dollars.
- Miners have income. Miners are those who receive Bitcoins and other virtual currencies by validating transactions and maintaining public Bitcoin ledgers. If you are someone who “mines” virtual currency, you create income upon receipt of the currency. This is a taxable event.
As the technology of alternative methods to exchange goods and services evolves, so will your need to understand it. Should someone offer to provide you with Bitcoins for products and services, you will now know there are tax implications to saying yes.
Leaving a Job? Don’t Take a Tax Surprise with You
Leaving a Job? Don’t Take a Tax Surprise with You
A recent Supreme Court decision could impact the taxes you pay when you leave a job. Being aware of this new change could save you plenty if you pay attention to your severance…
An inevitable part of life is a changing jobs. Now a recent Supreme Court decision clarifies that severance payments you receive when you leave your job are wages and subject to employment taxes. So how might this impact you?
Background
All employees and employers pay FICA taxes. There are two components;
Social Security. Social Security tax rates are 6.2% for the employee and 6.2% for the employer (total 12.4%) on the first $117,000 of wages in 2014.
Medicare. Medicare tax is 1.45% for the employee and another 1.45% for the employer (total 2.9%). There is also a potential Obamacare surcharge if your wages exceed $200,000 single and $250,000 married.
Many employers who pay a severance check to employees when they leave have classified these checks as other, non-wage, income. This allows both the employer and employee to save on paying these FICA taxes.
What you should know
In a recent Supreme Court ruling, these severance checks are now deemed to be wages and subject to employment taxes. The IRS estimates there are currently over $1 billion in potential wages that are impacted by this decision. Knowing this, here are some tips to consider.
- Check withholdings. If you leave your job ensure all payments to you are wages on a W-2. Check your last payroll check to see that the correct Social Security and Medicare taxes have been withheld.
- The 1099 warning flag. If you receive a check without a payroll stub, you will probably be receiving a 1099 in the future. In this case, you could be picking up the employer’s Social Security and Medicare tax responsibility as well as your own. To avoid this unpleasant surprise, ask for clarification from your former employer. Get the payment reissued as wages, if appropriate.
- Other things to check. While you are at it, review that final employer payment to ensure your unused vacation is also paid to you per their employee policy. When you check for withholdings on your last paycheck also ensure the level of withholding is at the level you requested on your normal paycheck. Often these last checks use withholding defaults versus the level you requested on your W-4.
- Other benefits. While this tax tip deals with severance check taxability, don’t forget to plan for the transition of your other benefits as well. These include things like health insurance, dental/vision, retirement plans, Health Savings Accounts, and pensions.
Tax-Free Roth IRA Withdrawal Options
Tax-Free Roth IRA Withdrawal Options – What every Roth IRA account holder should know
While Roth IRAs are funded in after-tax dollars, making a mistake on fund withdrawal could still subject you to tax and penalties on withdrawal of earnings. Here are some tips.
You must take care to plan your retirement plan withdrawals to avoid a potential 10% early withdrawal penalty. Unfortunately, each retirement account type has different rules. Here are some tips for Roth IRAs.
Roth IRA basics
Roth IRA accounts differ from other IRAs in that your contributions are made in after-tax dollars. If you follow the Roth IRA rules, your withdrawals of any earnings in the account can be tax-free. Generally, to take advantage of the tax-free distribution from a Roth IRA:
- You must be age 59 ½ or older.
- You must have had funds in the Roth IRA account for more than 5 years.
- You must understand what is being distributed (contributions, converted funds or account earnings).
- You must know your possible tax-free distribution options.
If you do not comply with these rules you could be subject to income tax and a 10% early withdrawal (distribution) penalty. But wait! There are ways to avoid income tax and the early withdrawal penalty.
Roth IRA distribution tips
- Remember contributions have been taxed. What many forget is that your initial contributions have already been taxed. The portion of your early distribution from a Roth IRA account subject to income tax is only the untaxed earnings on your contributions.
- 10% early withdrawals. Early withdrawal penalties are subject to the five year account rule and how you use the funds when distributed. It also might depend on what funds you remove from your account. Prior to withdrawing funds, ask for help to ensure you know whether you will be subject to the early withdrawal penalty.
- Qualified early withdrawals. If you use the distributions for a qualified reason, you can avoid the early distribution penalties. Some of the more common qualified early withdrawals with Roth IRA’s are:
- College. If you withdraw Roth IRA earnings to pay for college expenses, you will pay tax on the earnings withdrawn, but you will not be subject to the 10% early withdrawal penalty.
- First-time home buyer. Even if you’ve had your Roth IRA for less than five years, you can withdraw up to $10,000 in Roth IRA earnings income tax-free and penalty tax-free if it is used to buy a first home.
- Account holder disability or death.
- Unreimbursed medical expenses that exceed your itemized deduction threshold.
- Substantially equal periodic payments. These must be made over the defined life-expectancy of the IRA holder using specific rules to avoid the early withdrawal penalty.
- No minimum withdrawal requirements. Unlike other IRAs, the Roth IRA does not require you to take money out when you reach a certain age. With Traditional IRAs this withdrawal requirement occurs when you reach age 70 ½. This means you can have a strategy to never withdraw the funds in your Roth IRA as an estate-planning device. While the funds would be considered part of your estate, your heirs could withdraw the funds tax and penalty-free during their lifetime.
- Keep separate accounts. The taxability of a withdrawal can be complicated. Are you withdrawing contributions, converted funds, or earnings? How long have the funds been in the Roth IRA? Because this can be complex, try to keep your Roth IRA accounts simple. If you convert funds from another retirement account into a Roth IRA, do so in a separate account. It will then be easier to understand the impact of a withdrawal from the account.
If you have questions regarding your situation, speak to a qualified planner prior to taking any withdrawals from a Roth IRA or other tax advantaged retirement plan. It could save you plenty in potential tax and penalties.
Save Those Receipts and Documentation! – A little organization now can save money during an audit
Save Those Receipts and Documentation! – A little organization now can save money during an audit
Too often during the course of an audit, the auditor throws out valid deductions. Not because they did not occur, but soley because you did not provide adequate documentation. Here are ideas to help solve this problem.
When it comes to taking qualified deductions on your Federal Tax return three things must happen.
First, you must recognize that an expense might be deductible on your tax return.
Second, you must keep a record of the expense in an organized fashion.
Third, you must have the proper (and timely) documentation to support your deduction.
While this may seem evident to most, here are some typical areas that taxpayers often fall short, costing them plenty during tax filing season and during IRS audits.
- Cash donations to charity. To deduct and support your deduction to a qualified charity you must have valid support. Donations of cash are no longer deductible if they are not supported by a canceled check or written acknowledgement from the charity. Donations of $250 or more MUST have a written acknowledgement at the time of the donation. A canceled check and bank statement are not sufficient. In addition, if you are audited at a later date you may not then have the charity issue you acknowledgement.
- Non-cash contributions. You need acknowledgement of these donations as well. This includes creating a detailed list of items donated, their condition, and estimated fair market value. While this level of detail in not required for small donations, it is always a good practice to take photos and create a detailed listing of items donated.
- Investment purchases and sales. If you bought or sold an investment you will need to know the cost. Today’s regulations require brokers to report the cost of sales to the IRS. Many of these historic costs are wrong. Please review your broker accounts and correct any errors. It is very difficult to defend yourself in an audit when records reported to the IRS are in error.
- Copies of Divorce Decrees, Alimony, and Child Support Agreements. There are often conflicts between two taxpayers taking the same child as a deduction. Do you have the necessary proof to defend your position? The same is true with alimony and child support. Keep these documents in a safe place and be ready to use them if necessary.
- Copies of Financial Transactions. Keep copies of documents from any major financial transaction. This includes real estate settlement statements, refinancing documents, and any records of major purchases. These documents are necessary to ensure your cost (basis) in the property is properly recorded. The documents will also help identify any tax related items like mortgage insurance, property taxes, points and possible sales tax paid.
- Mileage logs. Lack of tracking deductible miles is probably one of the most commonly overlooked documentation requirements. Properly recording charitable, medical and business miles can really add up to a large deduction. If the record is not available, the IRS is quick to disallow your deduction.
If you are not sure whether a document is needed, please retain it. If filed in an organized fashion, you can always retrieve it.