Our Taxing Times

Livestock Deferment Extended

Attention farmers: if you have deferred the gain on livestock sales because of the recent drought conditions, the IRS has extended the replacement period due to the continuing drought.

When a farmer or rancher has to sell more livestock than usual because of drought conditions they can elect to defer reporting the gain on the extra sales for up to 4 years. The livestock has to be held for breeding, draft or dairy purposes. Poultry and animals raised for slaughter or sporting purposes are not eligible for the deferment. The extra livestock need to be replaced within the 4 years also. However, when the drought continues, as it has this year, the IRS has the ability to extend the replacement period. Which they are doing now.

Farmers and ranchers whose farm is in a county, parish, city or district which has been listed as suffering drought conditions by the National Drought Mitigation Center from September 1, 2011 to August 31, 2012 are eligible for the extra year. This covers all or part of 43 states. A farm can also qualify if they are next to a county that does qualify. So, farmers and ranchers whose sale replacement period was set to expire on December 31, 2012 will get another year. Generally, these are drought sales which took place in 2008 but may also be available for some sales before 2008.

Info about drought sales can be found in Publication 225.

IR-2012-72

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Out of Pocket Charity Deduction

With Gov. Romney’s charitable deductions in the news, it might not hurt to look at the deductions many taxpayers miss, those they pay out of pocket volunteering for a charity.

 Few people miss the ability to deduct the money, in the form of cash or check they give to a qualified charity. The organization must have 501(c) (3) and the taxpayer must have proof of the deduction in a receipt, check or credit card statement. If the contribution is over $250, the taxpayer must have a contemporary receipt from the organization. Most taxpayers also know they can get a deduction for goods they give to an eligible organization. This could be clothes and household goods or it could be a car, art or stocks. If the value of the contribution is over $500, the IRS requires form 8283 to be completed. There are also special requirements for certain contributions that the taxpayer must meet to take the deduction. Just check the Form 8283 instructions or your tax pro for all the details. And don't forget the documentation here also.

However, most taxpayers don’t realize that they can take out of pocket expenses they incur when volunteering. You can’t take the value of your time for volunteer work but you can use what you actually pay while participating. Expenses could be the actual cost of gas or mileage expense for driving your car; supplies you purchase, the cost of attending a convention or the cost of maintain a required uniform.

Some examples: you drive your own car to deliver meals on wheels for your church. If you track the miles you drive, you can use that expense as a charitable contribution. For 2011, the mileage rate was $0.14 a mile. If you teach a class for a charity and buy materials and supplies for the class (and are not reimbursed), you have a charitable contribution. If you attend a convention as a representative for the organization, you could take travel, meals and lodging expenses. You do have to be a little careful with this deduction. You have to be a representative for the organization and there can be no significant personal benefit like a vacation or recreation. A mission trip for your church might qualify for this deduction. Costs of maintaining a required uniform (like a hospital Pink Lady) is also a potential deduction.

The organization must be a qualified organization (501(c)(3)) and only expenses not reimbursed will count as a deduction. Out of pocket deductions are reported on the Schedule A as a cash contribution (line 16 in 2011) and you need to keep receipts and mileage logs like any other deduction. If you have questions about your particular situation, talk to your tax pro.

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New EIN?

Business owners there is a phishing scam targeting you. The e-mail states that you have to renewal/reaffirm your Employer ID Number within 14 days.

You don't need to renewal, so don't click on the link.

Remember if the IRS needs you do do something they will send you a letter. They don't initiate contact by e-mail.

Shorting Deductions

Dear Client – I know what you’re thinking. Since Gov. Romney didn’t claim all his charitable deductions so that he could hit his target tax rate, you’re thinking about not taking all your business (farm) deductions so that you can manipulate your income tax. I’m sorry to break the news to you but you can’t do that. Business deductions are not the same as charitable deductions.

If you spent the money on your business and have the documentation to prove it, you are required to take the expense off against your business income. I understand that you need to show a higher income for a bank loan or for Social Security but shorting your legitimate deductions is not a good idea. And don’t even think about manipulating your expenses for Earned Income Credit purposes. That is a good way to find yourself in deep trouble with the IRS. So don’t even try!

All taxpayers have to option to take their standard deduction (based on their filing status) or itemized deduction which includes their charitable deductions. Generally they will take the one that results in the least amount of tax. But it’s their choice. Not so with business income and deductions. The IRS expects a business to report all their income and take the ordinary and necessary expenses they paid.

Taking charitable deductions are a taxpayer decision. Correctly reporting your business income is the law.

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e-Services and TIGTA

One of the better services that the IRS provides to the tax pro community is e-Services. e-Services is a web based suite of tools that can help tax pros resolve problems their clients are having with the IRS. It allows the preparer to file forms 2848 (Power of Attorney and Declaration of Representation) and 8821 (Tax Information Authorization) with the IRS, get transcripts of their clients returns or accounts,  resolve account issues by secure e-mail, match TIN with names and create or modify their e-File Applications. Recently, the Treasury Inspector General for Tax Administration (TIGTA) has looked at e-Services and found some concerns.

 TIGTA’s concerns are centered on Disclosure Authorizations (Forms 2848 and 8821). They have found that some IRS employees are accessing information through e-Services that they shouldn’t access, some preparers do not have signed copies of Forms 2848 and 8821 before they file the forms online, that some preparers are using Form 2848 to access transcripts and some preparers are using Form 2848 when they shouldn’t.

As an Enrolled Agent (EA), I have the ability to represent clients before the IRS. To do that, I need a completed Form 2848 (Power of Attorney) on file with the IRS. If possible, I want to be able to file that form through e-service. If I mail or fax the form, there is a processing delay before I can access the information I need. What TIGTA found was that about 8.3% of the taxpayers they surveyed didn’t sign a completed Form 4828 before the tax preparer filed it through e-Services.

TIGTA is also concerned that Form 2848 is being used just to get transcripts. From reading the report, if I just need to get a transcript of a client’s wage and income for a year so I can prepare a return, TIGTA would say I need to use Form 8821 instead of the Form 2848. If I need the same transcript to deal with a CP2000 notice where I will be representing the client, then I can use the Form 2848.

Only EAs, CPAs and Attorneys can represent any client. An un-enrolled preparer or a RTRP can only represent a client (with a Form 2848) when they signed the return and they’re limited what they can do then. TIGTA found that many were fling Form 2848 when they were not eligible to file the form.

Finally, some IRS employees are accessing e-Service to get taxpayer info (from transcripts and disclosure authorizations) that they normally wouldn’t be able to get.

The IRS generally agreed with TIGTA that there are changes that can be made to the e-Service program that will lessen the issues TIGTA found. They will work to educate tax pros as to who is allowed to use the Power of Attorney (Form 2848) and having a completed and signed copy on file at all times. They didn’t go as far as agreeing to create the compliance verification program TIGTA suggested. The IRS also agreed their employees shouldn’t have access e-Services and requested TITGAs supporting info to further investigate each case.

The big issue is that the IRS doesn’t have a problem with tax pros using a form 2848 to get transcripts but TIGTA does. My thinking is that I don’t know what I will find on the transcripts I request and if I don’t start with the Form 2848 (the most expansive) then I may need to bring the client back in and get it signed later. (As long as you are eligible to use Form 2848.)

It seems that the tax pro issues are based in the recent changes in licensing, Circular 230, and the business of preparing taxes. Too many preparers need to acknowledge that the rules have changed and follow the current rules.

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Stoning Glass Houses - Again

This is a post I wrote last year. Based on Gov. Romney’s recent remarks, I thought it should be brought back.

Talk about tax reform is everywhere. "Taxes aren't fair!" and "need to go". And key to the arguments of the Tea Party, other reformers and pot stirrers everywhere is the Tax Policy Center's report that in 2011, about 47% of all taxpayers paid no Federal income tax. That has a lot of taxpayers mad because what they heard and has been repeated is that 47% didn't pay Federal income any tax. And in order to fuel the anti-tax fire and win elections, the anger has been shifted from the tax code to pointing fingers at classes and types of people. "He didn't pay any taxes!" That's not fair! Get a rope! "Those People" should be stoned!

Before you throw anything, I have a question. Do you really know who you are stoning?

Are you sure that you aren't in that 47%? Do you really know what tax you paid and not just what your refund or balance due was? Before you start hollering about the tax credits "those people" used to pay no tax, check your return. Did you take advantage of those credits too? How much would you be paying in tax without that credit? Are you living in a glass tax house?

So now you're sure that you really did pay some federal income tax, but before you pick up that stone to throw at those awful people who paid no taxes, I would suggest you check your target. You could be aiming at your children or grandchildren or parent. There is that nice young man who picks up your trash, or the teacher's aide in your son's classe, or your favorite greeter at Wal-Mart. It could also be your boss or the owner of a business. If you want to take out your tax frustrations on the 47%, it's only fair to include everyone who benefited not just the ones you don't like.

Look at the facts. That Tax Policy Center report covered Federal income tax only. That 47% still paid into Social Security and Medicare, paid sales taxes, local property taxes and in most cases paid state income taxes. And the report found taxpayers in every income level and filing status who didn't pay any Federal income tax. Most of those taxpayers simply took advantage of current tax laws and legally paid no tax.

We need Federal tax reform. What we don't need to do is target taxpayers who are taking advantage of deductions and credits we don't qualify for. Let's face it; if you could qualify you would be using those same credits and deductions. Put your frustration and anger to solving the tax code problem and not throwing stones.

FYI-The link to the Tax Policy Center includes a nice pie chart that breaks down the credits and deductions being used to reduce taxes for the 47%.

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Birther and Frivolous Argument

It’s hard being a Kansan. There are all the Dorothy and Toto jokes, tornados and severe thunderstorms. And the whole state is not flat no matter what you have been told. Misconceptions aside, I love Kansas. The people, history, landscape, and the nature, it’s really a good place to live. But sometimes our elected officials do some really questionable stuff. Like the State Board of Education requiring creationism be taught in schools and the Governor shutting down the Kansas Arts Commission.

It was brought to my attention by Kay Bell that the State Objections Board headed by the Kansas Secretary of State, Kris Kobach is considering removing President Obama from the ballot in Kansas. Despite a long and short version of the President’s birth certificate, and contemporary newspaper announcements of his birth, Kobach wants more proof that the President is a U.S. citizen. The Objections Board is looking into the issue at the request of a taxpayer who has since withdrawn his request. The Board will meet on Monday to consider the withdrawal request and their next step.

The Birther issue is just another frivolous legal argument. At least it will make explaining frivolous tax arguments easier to explain to clients. And it's a sad example of our tax dollars at work.

UPDATE: The Objections Board has voted to allow President Obama on the November ballot.

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Gift Tax

Let’s talk about Gift Tax. I’ve received a number of calls this summer asking about how much they can give to a child or friend before tax will be paid on the gift. So here are some basic things to remember when you gift but since I won’t be covering all the exceptions do check with your tax pro about your specific situation. Also, the current rules for gifting are tied with the Estate Tax which Congress has said they will work on if when they get back to work after the election. If they do nothing, the current estate/gift rates will expire at the end of the year and revert to lower levels.

One thing that probably won’t change is that the gift tax and estate tax are tied together. For 2012, they have a combined exclusion from tax of $5,120,000. Yes, that is over $5 million. When you give a taxable gift, that amount is subtracted from the exclusion amount. No tax is due until you have gone over the exclusion. So if Joe gives $1 million to each of his 2 children in 2012, he has $3.1 million of his exclusion left. If he should then die in 2012, the $3.1 million exclusion will reduce the amount of his estate subject to tax. If he still has a $5 million estate at his death, the exclusion ($3.1 million) will be subtracted from the total value and leave the estate with $1.9 million that could be subject to tax.

The official definition of a gift is that it can be real or personal property that is tangible or intangible. Practically, that means cash, stock, collectables, land, buildings… pretty much anything. To be subject to the gift tax rules, the gift must be complete. The giver must give up any claim to the gift. Until the recipient has complete control over the gift, it’s not a gift.

There are a few transfers that are not considered to be gifts. Transfers between spouses are not gifts and  don’t have to be considered when preparing a gift tax return. Also gifts to pay tuition and medical expenses can be considered no gifts as long as they are paid directly to the school or medical organization. If they are given to the individual to reimburse or pay the expenses themselves, the payments are gifts.

Now to the nuts and bolts. An individual may (for 2012) give another person a gift valued, at the time of the gift, at up to $13,000 tax free. Only what they give over $13,000 is subject to gift tax. A return has to be filed but they may not be any actual tax depending on how much has been excluded before. Now that is for one giver and for each year. Jane can give each of her 6 kids $13,000 a year, every year (or that year’s maximum gift amount) and never have to pay gift tax. A married couple can each give $13,000 a year. So, Jane and John can give each of their 6 kids $13,000 (total of $26,000 each child) with no gift tax. But if Jane gives each child $16,000, she will have to file a Gift Tax Return (Form 709). There shouldn’t be any tax due but her total exclusion amount will be reduced by $3000 for each of the $16,000 gifts she made.

A gift is not reported on the recipient’s return nor do they pay the gift tax. The tax is the responsibility of the giver. It’s also their responsibility to keep track of prior gift returns and the remaining exclusion amount.

For most of us, we’ll never have to pay gift tax (or estate tax for that matter). And with a little planning we can avoid even having to file a Gift Tax Return. But the rules are a little complex and may be changing soon, so check with your tax pro before you make the gifts to insure you are following all the rules.

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Whistleblowing Taxes

Bradley Birkenfeld was a banker at UBS. That is until he spent some time in prison for helping a client evade income tax. But he’ll be even more famous for the $104 million he will be receiving from the IRS as part of the Whistleblower program. It’s the largest award that has been paid.

Mr. Birkenfeld provided the IRS with detailed info about how UBS helped Americans evade taxes. UBS paid $780 million to avoid criminal prosecution and gave the IRS account information on 4,700 of their American clients. It could be said that Birkenfeld’s actions led a major change in the Swiss banking system and resulted in 14,000 taxpayers taking advantage of the IRS’s tax amnesty program. That’s why he’s getting $104 million.

The IRS Whistleblower Office was established in 2006 under the Tax Relief and Health Care Act of 2006. It takes reports from individuals who spot a tax problem. The Whistleblower’s Office will investigate credible tips and if the IRS recovers money, the tipster could receive between 15 and 30% of the recovered tax. The recovered tax, penalties and interest must be over $2 million for the year and if the taxpayer is an individual they must have income of over $200,000 for the year.

If you think you have a tax cheat to report, you will need to fill out Form 211 (Application for Award for Original Information.) And if you do get an award, it will be subject to income tax (and withholding) like any other income.

IR 2007-201

NY Times Birkenfeld story.

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A Few Reminders

It's time for 3rd quarter estimates. The official due date is September 15th but since that is a Saturday you have until Monday the 17th.

Extensions for individual 1040 returns is a month away; October 15. If your return is on extension, this is the time to get your info to your tax pro. They need time to prepare the return.

 

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