Our Taxing Times

Tax Preparer Fraud Bill

Accounting Today ran a story today about a new bill that increases tax preparer penalties for defrauding taxpayers and the IRS. The Fighting Tax Fraud Act of 2012 (H.R. 5630.IH) has been introduced in the House Ways and Means Committee. It would increase the preparer penalties for fraudulent conduct to the greater of $5000 or the amount of understated liability. This is on top of any other penalties the preparer is hit with. What is fraudulent conduct? From the bill:

 

FRAUDULENT CONDUCT- Conduct is described in this paragraph if such conduct consists of--

` (A) a willful modification of any return or claim for refund which--

`(i) creates an understatement of liability, and

`(ii) is made by the tax return preparer after such return or claim has been signed by the taxpayer, and

`(B) a willful attempt by the tax return preparer to receive the proceeds of a refund any portion of which is attributable to such understatement of liability.'

A good start but…

The penalties are based on the preparer changing the return after the taxpayer signs it. But what about the preparer who files a return without the taxpayer’s signature or knowledge?  I’m thinking about the stories that came out in the Instant Tax Service court documents. Many taxpayers went in to get a loan and later learned that their return had been filed without their knowledge.

Say Jane comes in and I prepare a return for her. She signs the return or Form 8879 and leaves expecting to get back $750 dollars. Then I change the return so the refund is $1750 and I have the refund come to me not Jane. Once the money comes in, I call Jane to come pick up her refund of $750 and I pocket the rest. Under the proposed law, I could be hit with the higher penalties. But if I don’t have Jane sign anything, I could argue against any of these proposed penalties being applied to me because Jane didn’t sign the return. The new bill is very specific about the signing. Maybe a line about filing a return based on the taxpayer’s info without the taxpayer’s permission to file the return will solve that problem.

I also hope that the bill’s sponsors understand that the extra penalties of this bill won’t apply to a pure identity theft case where the returns are based on made up income and deductions and the real taxpayer doesn’t sign anything.

I understand the concept behind H.R. 5630.IH but it needs some tweaking to resolve the issues it’s tackling.

McIntire Tax Center - on Facebook - on Google+ - or Twitter @ mactax.

Flipbook and Instapaper

Part of writing a blog is finding stuff to write about. I get inspiration from other bloggers, the news, e-mails, clients, the IRS and workshops I attend. But I’m always looking for new sources for info to include and ways to keep track of what I find. So, this is a non-tax post about a couple of tools I’m using. One is new to my blogging toolbox but the other I can’t imaging not having.

Twitter has been a little frustrating recently. My problem is that so much of the content of the people I follow includes a link, photo or video. When I read Twitter in Twitterific or in a browser, I have to click through to see the content. But since finding Flipboard for my iPad, I don’t have to. When I open my Twitter account through Flipbook, it looks like a newspaper with several stories on a page and you flip through the pages like a book.  If the tweet includes a link, I see an excerpt of the linked info. If it’s a re-tweeted link, I see an excerpt of the original article. The excerpt can give me enough information to decide if I want to read more or go to the next tweet. Tapping on the tweet opens up a new page in Flipbook with the excerpt at the top, the web page for the link in the middle and the original tweet on the bottom. A graphic, if there is one, is pulled from the article and posted with the excerpt. The tweets without a link or graphic are also shown so I miss no content. My Facebook account is handled the same way in its own section. Not bad for a free app.

In addition to the formatting of my accounts in Flipbook, I like the amount of other content that is available. Besides being able to add my accounts from Google Reader, Linkedin, Soundcloud, Flickr or other social network sites, Flipbook provides content I can add to my reading. They have feeds in a wide variety of topics (news, business, travel, etc.) and sources (NY Times, NPR, National Geographic) and all can be checked out before you actually add them to your account. It’s easy to add, drop topics or move topics in the index. And once I find an article I’m interested in studying more, I can mark it to read later and, in my case, it is added to my Instapaper account.

Instapaper has become my most important tool for blogging. When I find an interesting article, I can save it to my Instapaper account and read it at my convenience. Both the browsers I use (Mac and PC) have “Read Later” buttons on their toolbar. A click and the article is saved until I delete it from my account. It can also be archived, filed in a folder or marked as a favorite. In a browser, I can read the actual page or a text only version. Instapaper also has an iPad app which syncs and downloads new content and lets me read the stories I’ve saved offline in text format.

There is no charge for an Instapaper account unless you want to pay for a search option. ($1 a month paid 3 months at the time.) The iPad/iPhone app for Instapaper is $4.99.

Both these apps let me use the info on the Web without it overwhelming me.

McIntire Tax Center - on Facebook - on Google+ - or Twitter @ mactax.

Summer Camp and Day Care

On today's to do list was to write a blog post about how summer day camps might qualify for the child care credit. But before I got it written, I found that Robert Flach at The Wandering Tax Pro covered that topic today. So I am linking to his post and I will write about something else.

Summer Camp As Child Care

Moving Expenses

Memorial Day began as the day we remember those who have died in the service of our county. It has expanded to include all those we love who have passed away. It's also the start of summer and a time to celebrate school vacation. But it’s always seemed to me that Memorial Day is also the start of the moving season. Graduates moving to their first jobs, moms and dads who waited until school was out to follow a new job and people who decide it’s a good time to make a change in their life. Each weekend during late May and early June moving vans, neighbors with trucks and rental rigs are loading and hauling household goods to a new location.

Sometimes the cost of that move can be a deduction on the taxpayer’s tax return. Moving Expenses are a deduction. That is they reduce the amount of income which is taxed. The deduction begins on Form 3903 and is shown on the 1040 in the adjustment to income section on line 26.

As with any tax deduction there are some very specific requirements to meet to deduct moving expenses. First, the move must be related to the start of work. The move has to be within a year of starting a job in a new location. The move can be before or after you start the job. So, deciding to move after working at a job for 3 years is not an eligible move.

The move must also meet a distance tax. You’ll need to have the miles from your new job to your old home and from the old job to the old home. The difference must be over 50 mile. For example, you commuted 5 miles one way to your old job. The new job is 56 miles from your former home. You meet the distance test by one mile (56-5=51) but if the original commute was 10 miles one way your moving expenses won’t qualify (56-10=46 miles).

Finally, you have to work full time at the new location for 39 weeks of the first year (or 72 weeks of the first 2 years if you are self-employed). There are some exceptions to the work time requirement. Disability, transfer by your employer, a military move and being laid off (not fired). If you think these will apply to you, check with your tax pro.

What expenses are deductible? The costs to store and transport your household goods are deductible. Storage costs are limited to 30 days however. And one trip to move you. That could include mileage, lodging, train/plane/bus fare. It doesn’t include meals or any costs of house hunting. And these expenses must have been paid by you. If your employer is paying for the move, you can’t deduct the expenses they paid for. If you’re not sure, look at box 12 on your W-2. A “P” entry shows the amount of moving expenses your employer paid on your behalf.

If you are planning a work related move and you think you might qualify for the moving expense deduction, save your receipts and track your miles and talk to your tax pro to make sure you qualify.

McIntire Tax Center - on Facebook - on Google+ - or Twitter @ mactax.

Don't Become a S-Corp!

If you are a solo proprietor who has been thinking about changing you business entity to an S-Corp, this might not be a good time to do it. That is if the business is in Kansas.

The recent tax bill signed by Gov. Brownback, excludes from Kansas income profits from a business. If you are a sole proprietor, all of your Sch C or F income is Kansas and will be tax free. But if you change to an S-Corp, you are required to pay yourself a salary and issue a W-2. That income will be taxed in Kansas while the pass through income from the S-Corp isn't.  This brings up the issue of reasonable compensation. If you set your wages at a level acceptable to the IRS, you might find your overall income tax bill go up over if you had stayed a sole proprietor.

There are a lot of issues to consider in changing your business and taxes are just one of them. But you will need to weigh the overall tax savings of paying SE tax and not paying Kansas tax. The change doesn't go into effect until 2013 so don't make a mistake you could be paying in the future.

Worse Tax Bill

“Worse tax bill ever” is how one Kansas legislator described the tax reform bill signed by Gov. Brownback on Tuesday May 22, 2012. While not exactly all that he proposed in his State of the State address, the new law will cut taxes $3.7 billion dollars in 5 years. In true Kansas fashion, getting the bill to the Governor was not without controversy. Both the Kansas House and Senate passed their version of the bill which went to a conference committee. But then, both chambers raced to pass the other chamber’s version of the bill. The House won, passing the Senate version and sending the bill to the Governor to be signed.

The bill reduces Kansas individual income tax rates, increases some standard deductions and cuts many tax credits. Tax rates have been reduced from 3.5%, 6.25% and 6.45% to 3% and 4.9%. The standard deductions for Married Filing Joint and Head of Household have increased to $9000. But, from my reading, it looks like the single deduction stays the same. Gone are the adoption credit, child care credit and food sales tax refund. And the Homestead Refund is now limited to property owners. It looks like the Kansas Earned Income Credit is still alive (at least I found no mention in the bill or articles about the bill.) These changes will take effect January 1, 2013.

There are major changes to corporate returns too. The bill’s supporters argue that the tax reductions will create an additional 20,000 jobs annually (over regular job growth) in Kansas and draw new businesses to the state. One of most questionable changes is that exempts 191,000 businesses from income taxes by ending taxes on their profits. Starting in 2013, I won’t be paying any KS income taxes since almost all my income is from business profits (a sole proprietor) and what other income I have will be reduced by my standard deduction and exemption to $0.00.

This is a Tea Party bill. Their supporters have pushed the bill over the objections of moderate Republicans, Democrats and social activists. It’s a bill that increases the tax burden on lower and working class taxpayers while helping higher income taxpayers. Too much of the bill depends on the creation of jobs and new businesses that will bring in new income. If that doesn’t happen, projections indicate a $2.7 million dollar budget shortfall by 2017. Not good!

 

McIntire Tax Center - on Facebook - on Google+ - or Twitter @ mactax.

IRS Closing Offices

The IRS has announced (IR-2012-54) the closing of 43 smaller offices and the merging of larger offices over the next two years. The goal is to reduce the amount the service spends on rent. The projected savings will be over $40 million for the next two years and will result in a reduction of 1 million square feet of space (this included recent space reductions)

The 43 offices do not have Taxpayer Assistance Centers and do have less than 25 employees. The IRS is also looking at merging offices within commuting of each other, and more efficient use of the space they have. Little impact to taxpayers is expected from the changes.

I hope that the IRS is just reducing office space and employees are not “downsized” but moved to other offices and/or jobs. The IRS needs more manpower not less.

McIntire Tax Center - on Facebook - on Google+ - or Twitter @ mactax.

Mobile Worker's Income

The House has passed the Mobile Workforce State Income Tax Simplification Act of 2012. I discussed the bill last year here.

This bill doesn't apply to a taxpayer who takes a job in a non-resident state. It would only apply when an employer sends an employee to a non-resident state to work and the job lasts less than 30 days. It will be interesting to see what the Senate does and if it's passed the number of taxpayers who will hear part of the law and think it applies to them.

Energy Scam

Another scam is making the rounds that tells taxpayers they qualify for special Federal payments or credits towards their energy bill. In Kansas, Westar Energy is alerting customers to the scam that has been seen in several states around the country,

The scammers are using social media, text messages and flyers to get people to call them. Once they have the taxpayer on the phone, the scammers get personal info like social security numbers. Westar points out that they already have that info on file and would not need it again. The only time they might ask for personal info when the customer calls them and they use it to verify the caller’s identity.

Bottom line, any time you hear of a government program giving you a credit, talk to a tax pro. If it’s legitimate, we should know.

McIntire Tax Center - on Facebook - on Google+ - or Twitter @ mactax.

Limited Parnerships

They’re back, Limited Partnerships. They were popular in the 1980s but the Tax Reform Act of 1986 took away most of their benefits and I seldom saw them. But they are making resurgence and are hooking unwary investors again.

First, an example. Sally and Kurt form a partnership to manufacture widgets. Each year their tax pro prepares the business’s partnership return and gives both Sally and Kurt a K-1 showing their share of the income and deductions to be included on their personal returns. Sally and Kurt are general partners since they actually run the company and are responsible for the debts of the business. The company is doing well and they want to expand. Instead of borrowing money for new equipment, they decide to each give up 5% of the share of the business and sell shares to investors. For $5000, an investor will receive a 1% share of the partnership as a limited partner. When the partnership tax returns are prepared, each of the limited partners receives a K-1 breaking out their 1% share of income and deductions to be reported on their personal tax return.

Income and losses from limited partnerships are passive income. While this doesn’t affect reporting income, it can limit what losses a limited partner can deduct. A limited partner can only deduct their passive losses up to the amount of their passive income. If the only passive investment a taxpayer has is as a limited partner, they can’t take the loss and can only carry it forward until they have passive income or dispose of the activity. To further complicate matters; if the limited partnership is a Publicly Traded Partnership (PTP) they can only take losses against passive income from that partnership. To sum up, the losses from a limited partnership may have to be carried forward but the income is always reported. 

The income from a limited partnership can also cause state tax issues. If the partnership’s income is not from the taxpayer (investor’s) resident state, they may be required to file a tax return for an extra state or states.

Why would an investor put their money in a limited partnership if they may not be able to deduct the losses and may have to prepare extra state tax returns? Because sometimes they do make a good return on investment or because they look like they are making money. Some partnerships are set up to make regular distributions to the partner. So an investor in Sally and Kurt’s partnership might be told they will get a check for at least $100 a quarter. But if the partnership is not making enough money to cover the distribution, the money will come from the original investment. On the K-1, there is a section that breaks down the investor’s capital account. That section for the first year would show a $5000 investment and $400 in quarterly distributions along with any income and losses. If the net income for the year is -$245, the capital account will look like - $0 + $5000 investment - $245 net losses - $400 quarterly distributions (return of capital) = $4355. Since it’s a passive loss, the taxpayer won’t be able to use the loss against regular income.

Limited partnerships are not for most investors. They are tax complicated and too often the broker selling them really doesn’t understand what they’re selling. It’s easy to get drawn in by the guaranteed distribution and assume that your investment is increasing in value when it’s actually decreasing because you’re just getting your money back.

Investor Beware!

McIntire Tax Center - on Facebook - on Google+ - or Twitter @ mactax.