Sheboygan County adopts additional .5% Sales & Use Tax

Beginning January 1, 2017, the county sales and use tax will be in effect in Sheboygan County. This brings the number counties that have adopted the 0.5% county tax to 63.

Information about which sales and purchases are subject to the county sales or use tax and transitional provisions that apply to Sheboygan County sales can be found in Wisconsin Publication 201, Wisconsin Sales and Use Tax Information.

The IRS has reminded taxpayers who are earning income from selling goods and/or providing services that they may receive Form 1099-K, Payment Card and Third-Party Network Transactions, for payment card transactions and third-party payment network transactions of more than $600 for the year.

The IRS has reminded taxpayers who are earning income from selling goods and/or providing services that they may receive Form 1099-K, Payment Card and Third-Party Network Transactions, for payment card transactions and third-party payment network transactions of more than $600 for the year. Before 2022, Form 1099-K was issued for third party payment network transactions only if the total number of transactions exceeded 200 for the year and the aggregate amount of these transactions exceeded $20,000. However, now, a single transaction exceeding $600 can trigger a 1099-K The Service emphasized that money received through third-party payment applications from friends and relatives as personal gifts or reimbursements for personal expenses is not taxable. Taxpayers can access Form 1099-K, its instructions and a set of answers to frequently asked questions on the IRS web site.

In addition, the Service reminded taxpayers that they must pay income tax either through withholding or estimated tax payments. Taxpayers should use estimated tax payments to pay other taxes such as self-employment tax and the alternative minimum tax. IRS Publication 17, Your Federal Income Tax (for Individuals), provides general rules to help taxpayers pay the income taxes they owe. Additional helpful information is available in Chapter 5, Business Income, of Publication 334, Tax Guide for Small Business; Publication 525, Taxable and Nontaxable Income, and on the IRS website at Understanding Your Form 1099-K.

Many taxpayers may be surprised in early 2023 when they receive a Form 1099-K, Payment Card and Third-Party Network Transactions, to report income earned in the “gig economy” or in sales of goods and services through certain internet sites. The number of taxpayers receiving the forms is expected to skyrocket because the threshold for reporting payments made through third-party processors has plummeted.

Many taxpayers may be surprised in early 2023 when they receive a Form 1099-K, Payment Card and Third-Party Network Transactions, to report income earned in the “gig economy” or in sales of goods and services through certain internet sites. The number of taxpayers receiving the forms is expected to skyrocket because the threshold for reporting payments made through third-party processors has plummeted.

Before 2022, reporting was required only when a third-party settlement organization (TPSO) made more than 200 payments to a payee that totaled more than $20,000 for the year. However, beginning in 2022, a TPSO must report a payee’s payments once they total $600, regardless of their number.

The IRS recently updated its Form 1099-K Frequently Asked Questions (FAQs) to help taxpayers understand who files the form, who receives it, and what it means. The updated FAQs are divided into five sections.

1. General

The General section of the FAQs explains that the IRS will also use Forms 1099-K for systemic computer matching to tax returns to identify potential unreported income. The agency will also use the information to develop taxpayer education and outreach efforts, as well as new approaches to audits and collection.

2. Definition

The second section of the FAQs defines several relevant terms, including:

• Payment cards (credit cards, debit cards, gift cards, etc.)
• Merchant category code
• Third-party settlement organization (TPSO)
• Merchant acquiring entity
• Participating payee
• Gross amount of reportable transactions.

3. Individuals

The third section of the FAQs explains who will receive a Form 1099-K and who will not. An individual who receives a form should use the information to compute gross sales and receipts, and correctly calculate gross income.

An individual who has questions about the form, believes it was issued in error, or believes it includes incorrect information should generally contact the form’s issuer. The individual may also contact the payment settlement entity (PSE) whose name and phone number appear on the form.

4. Reporting

The reporting section of the FAQs explains due dates for filing Form 1099-K with the IRS and providing a copy to the payee. This section also reiterates that the form must report the gross amount of the payee’s reportable transactions, with no adjustments for fees, refunds, and other adjustments.

5. Filing Form 1099-K

Finally, the last section of the FAQs explains which party is responsible for filing which forms. For example, a merchant acquiring entity is responsible for filing some Forms 1099-K, while a third-party settlement organization is responsible for filing others.

Reportable payments include payments to a government unit or a foreign payee. However, they do not include payments that are reportable under Code provisions other than Code Sec. 6050W.

Beginning with their 2021 tax years, partnerships with "items of international tax relevance" must file Schedule K-2, Partners’ Distributive Share Items—International, and Schedule K-3, Partner’s Share of Income, Deductions, Credits, etc.—International.

Beginning with their 2021 tax years, partnerships with "items of international tax relevance" must file Schedule K-2, Partners’ Distributive Share Items—International, and Schedule K-3, Partner’s Share of Income, Deductions, Credits, etc.—International.

Draft partnership instructions for the 2022 Schedules K-2 and K-3 (Form 1065) and partner’s instructions for the 2022 Schedule K-3 were released October 25. The instructions add a “domestic filing exception” for a partnership that meets all four of the following requirements for its 2022 tax year:

• The partnership has:
  • no foreign activity, defined as foreign income taxes paid or accrued, foreign source income or loss, or an ownership interest in a foreign partnership, corporation, foreign branch, or foreign disregarded entity, or
  • foreign activity that is limited to passive category foreign income generating no more than $300 of taxes subject to the foreign tax credit (and shown on a payee statement);
• All of the partners are U.S. citizens or resident aliens, domestic decedent’s estates with only U.S.-citizen or resident-alien beneficiaries, domestic grantor trusts with only U.S.-citizen or resident-alien grantors and beneficiaries, or domestic non-grantor trusts with only U.S.-citizen resident-alien beneficiaries;
• The partners receive a notification from the partnership electronically or by mail, dated no later than two months before the due date of the partnership’s return, that the partners will not receive Schedules K-3 unless they request them; and
• The partnership does not receive a request from any partner for Schedule K-3 at least one month before the due date of the return (that is, a calendar-year partnership does not receive any requests by February 15, 2023).

A partnership that receives a timely request from a partner for a Schedule K-3 does not qualify for the domestic filing exception and must file Schedules K-2 and K-3 with the IRS and provide Schedule K-3 to the requesting partner. However, the partnership only needs to complete the parts of Schedules K-2 and K-3 that are relevant to that partner.

If a partnership receives a request from a partner for a Schedule K-3 after the one-month date but no requests by that due date, the partnership only needs to provide Schedule K-3 to the requesting partner by the date on which the partnership files its return or one month after it receives the request, whichever is later.

The draft instructions note that if a partnership fails the domestic filing exception test, it may still qualify for an exception to the filing requirement if all of its partners are eligible for the exemption from filing Form 1116.

A regularly updated IRS FAQ sheet on Schedules K-2 and K-3 states that "comments on the draft instructions can be provided to lbi.passthrough.international.form.changes@irs.gov on or before November 8, 2022."

The draft instructions also add guidance on when a domestic partnership with only domestic activity needs to file Schedules K-2 and K-3, on reporting capital gains and losses and foreign tax redeterminations, and on reporting income inclusions required by 2022 regulations that apply aggregate treatment to domestic partnerships in some situations.

Draft instructions for S corporations’ 2022 Schedules K-2 and K-3 have not been issued yet.

The Tax Court set aside Notice 2017-10, 2017-4 I.R.B. 544, while adjudicating a series of consolidated cases involving limited liability companies (LLCs) and conservation easements, because it was improperly issued by the IRS without meeting the notice and comment requirements under the Administrative Procedure Act (APA).

The Tax Court set aside Notice 2017-10, 2017-4 I.R.B. 544, while adjudicating a series of consolidated cases involving limited liability companies (LLCs) and conservation easements, because it was improperly issued by the IRS without meeting the notice and comment requirements under the Administrative Procedure Act (APA). Notice 2017-10 identified as listed transactions for purposes of Reg. §1.6011-4(b)(2) all syndicated conservation easement transactions, including all substantially similar transaction, entered into on or after January 1, 2010. The IRS had conducted examinations of the taxpayers’ Forms 1065, U.S. Return of Partnership Income, and disallowed the claimed deductions for noncash charitable contributions. In addition, each notice of final partnership administrative adjustment asserted a gross valuation misstatement penalty, a substantial valuation misstatement penalty, a negligence penalty, a substantial understatement penalty and an additional reportable transaction penalty.

The Tax Court held that Notice 2017-10 was a legislative rule because it created new substantive reporting obligations for taxpayers and material advisors, the violation of which prompted exposure to financial penalties and sanctions. Because the notice was a legislative rule, it should have gone through the notice-and-comment rulemaking under the APA. Moreover, Congress did not expressly authorize the IRS to identify a syndicated conservation easement transaction as a listed transaction without following the APA’s notice-and-comment procedures. In these consolidated cases, Notice 2017-10 was not issued until the tax year at issue. Accordingly, the court did not apply Notice 2017-10 retrospectively and disagreed that prior notice and comment made at the time of promulgation of Reg. §1.6011-4 satisfied the IRS’s ongoing obligation to comply with the APA when issuing Notice 2017-10. The Tax Court also concluded that the Congress had made it clear that each substantive rule of general applicability, including any amendment or revision, must comply with the APA. Consequently, the taxpayers’ cross-motions for summary judgment was granted in part, and Notice 2017-10 was set aside. Finally, Code Sec. 6662A penalties were not imposed with respect to reportable transactions.

Four concurring and two dissenting opinions were filed. The dissenting opinions focused on the express reference to Code Sec. 6011 in Code Sec. 6707A when it was enacted, and that the IRS had already identified 30 listed transactions by 2004 when Code Sec. 6707A was enacted without adherence to the APA's notice-and-comment requirements. In addition, when Code Sec. 4965 was enacted in 2006, the conference report defined a listed transaction as a tax avoidance transaction "identified by notice, regulation, or other form of published guidance as a listed transaction."

The Department of the Treasury outlined how the Inflation Reduction Act’s tax incentives will support the building of an equitable clean energy economy.

The Department of the Treasury outlined how the Inflation Reduction Act’s tax incentives will support the building of an equitable clean energy economy.

In a fact sheet issued October 26, 2022, the Treasury Department highlighted four key areas the tax policy built on the Inflation Reduction Act will drive clean energy:

• the IRA will provide targeted incentives to drive investment and create opportunity in communities across the country;
• the IRA will encourage clean energy project developers to meet strong labor standards, so that the benefits of building a clean energy economy are felt by workers making it happen;
• the IRA will lower the costs of energy-saving property improvements and rooftop solar installation, saving working families and small businesses money on their monthly utility bills and empowering families and businesses to shield themselves from volatile fossil energy prices; and
• The IRA allows state, local, and Tribal governments, as well as non-profit organizations and other tax-exempt entities, such as rural electric co-operatives, to receive certain tax credits as payments, expanding the range of actors that will have a direct incentive to invest in their communities.

According to the fact sheet, the law will "provide bonuses for investing in low-income communities, as well as in communities that have historically depended on the energy sector for jobs and economic activity."

To help incentivize this, the IRA modifies and extends the clean energy Investment Tax Credit "to provide a 30 percent credit for qualifying investments in wind, solar, energy storage, and other renewable energy projects that meet prevailing wage standards and employ a sufficient portion of qualified apprentices from registered apprenticeship programs."

It also modifies and extends the Renewable Energy Production Tax Credit "to provide a credit of 2.5 cents per kilowatt-hour in 2021 dollars (adjusted for inflation annually) of electricity generated from qualified renewable energy sources."

Other tax credits extended and/or expanded include the Energy Efficient Home Improvement Credit, the Residential Clean Energy Credit, and the Energy Efficient Commercial Buildings Deduction.

These incentives were discussed as part of an October 26, 2022, virtual roundtable hosted by Treasury Secretary Janet Yellen, during which she "emphasized that the Inflation Reduction Act provides long-term clarity and certainty for the clean energy sector, and underscored Treasury’s commitment to work expeditiously to provide guidance so that investments can move forward and our climate and economy can realize the benefits of the law as quickly as possible."

The IRS-Criminal Investigation (IRS-CI) has released its Fiscal Year 2022 Annual Report. The report details statistics, important partnerships and significant criminal enforcement actions from IRS-CI, the criminal investigative arm of the IRS, for the past fiscal year, which began October 1, 2021 and ended September 30, 2022. Over 2,550 criminal investigations, the identification of more than $31 billion from tax fraud and financial crimes, and a 90.6 percent conviction rate are just a few highlights of the report.

The IRS-Criminal Investigation (IRS-CI) has released its Fiscal Year 2022 Annual Report. The report details statistics, important partnerships and significant criminal enforcement actions from IRS-CI, the criminal investigative arm of the IRS, for the past fiscal year, which began October 1, 2021 and ended September 30, 2022. Over 2,550 criminal investigations, the identification of more than $31 billion from tax fraud and financial crimes, and a 90.6 percent conviction rate are just a few highlights of the report.

In fiscal year 2022, IRS-CI expanded partnerships with foreign counterparts to help combat tax and financial crimes on a global level. IRS-CI special agents delivered trainings in countries like Argentina, Germany, Colombia, and Palau on topics ranging from cybercrime to human trafficking. IRS-CI Mexico City, after changes to Mexico law that enabled the extradition of tax fugitives, launched an initiative to identify fugitives who had absconded to Mexico and nearby countries. This initiative resulted in the location of 79 criminal fugitives and the apprehension of eight during the first year. The report also includes additional case examples for each U.S. field office, an overview of IRS-CI’s international footprint, details about the specialized services provided by IRS-CI and investigative statistics, broken down by discipline, for fiscal year 2022.

Report Details

The Internal Revenue Service’s Criminal Investigations division earned convictions in 90.6 percent of its cases in fiscal year 2022, according to the division’s annual report.

CI Chief Jim Lee called the conviction rate "the statistic I continue to be most proud of" in the division’s annual report released November 4, 2022. "We are thorough and good at what we do. As I tell crowds around the country, if a CI special agent has you in their crosshairs, there is a good chance you are going to jail."

The report notes that of the 1,837 cases referred for prosecution, 1,564 cases resulted in convictions. CI identified $32.6 billion in financial crimes, $5.7 billion of which were classified as tax fraud.

"While navigating our way through the backend of a global pandemic, we seized record amounts of data and cryptocurrency, led some of the largest tax cases on record and spearheaded first-of-its-kind national and international initiatives aimed at developing and strengthening partnerships in the public and private sectors," Lee said in the report.

In terms of tax crimes, the report highlights four key areas that the division focused on

• General tax fraud;
• Refund Fraud Program;
• Abusive tax schemes; and
• Employment tax fraud.

The Refund Fraud Program has three parts – the Questionable Refund Program, the Stolen Identity Refund Fraud investigations, and the Return Preparer Program for both individuals and businesses. Each of these programs looks out for criminals who file fraudulent tax returns to steal government funds.

"This type of theft erodes voluntary compliance and taxpayer confidence in the integrity of the tax system," the report states. "It also results in the loss of vital funds needed to support government programs, many of which impact the most vulnerable Americans."

Areas the division focus on related to non-tax crimes include money laundering, public corruption, corporate fraud, general fraud, and the Bank Secrecy Act Program, which focuses on fraud using foreign bank accounts.

CI also focuses on cybercrimes and in 2022, it was a part of the largest single financial seizure in government history with "the arrest of Ilya Lichtenstein and his wife, Heather Morgan, for an alleged conspiracy to launder cryptocurrency that was stolen during the 2016 hack of Bitfinex, a virtual currency exchange," the report states. "Approximately 119,754 bitcoin (BTC) was stolen from the exchange and was valued at approximately $4.5 billion at the time of the arrest. The CI Cyber Crime Unit, with the assistance of other U.S. authorities traced the stolen funds."

Changes made by the Inflation Reduction Act of 2022 ( P.L. 117-169) are reflected in draft forms and instructions

Changes made by the Inflation Reduction Act of 2022 ( P.L. 117-169) are reflected in draft forms and instructions for:

• Form 8908, Energy Efficient Home Credit, and
• Form 8911, Alternative Fuel Vehicle Refueling Property Credit

Energy Efficient Home Credit

The Inflation Reduction Act extends the Code Sec. 45L energy efficient home credit to cover qualified new energy efficient homes sold or leased after 2021 and before 2033. The Act also increases and modifies the credit for homes sold after 2022.

The draft Form 8908 and the draft instructions reflect both the 2022 version of the credit and the post-2022 version. The IRS intends that contractors use the revised form and instructions for tax years beginning in 2022 or later. For tax years beginning before 2022, contractors should use the appropriate prior revision of the form.

Alternative Fuel Vehicle Refueling Property Credit

The Inflation Reduction Act extends the Code Sec. 30C alternative fuel vehicle refueling property credit to cover refueling property placed in service after 2021 and before 2033. The Act also modifies the credit for certain refueling property placed in service after 2022.

The draft Form 8911 and the draft instructions reflect both the 2022 version of the credit and the post-2022 version. The draft form divides Lines 4 and 5 to break out amounts subject to the lower credit rate for refueling property placed in service after 2022 that does not meet new prevailing wage and apprenticeship requirements.

The IRS intends that taxpayers use the revised form and instructions for tax years beginning in 2022 or later. For tax years beginning before 2022, the taxpayers should use the appropriate prior revision of the form.

The Internal Revenue Service is estimating the tax gap on tax years 2014-2016 to be $496 billion, an increase of more than $58 billion from the prior estimate.

The Internal Revenue Service is estimating the tax gap on tax years 2014-2016 to be $496 billion, an increase of more than $58 billion from the prior estimate.

"The increase in the tax gap estimates reflects that the IRS needs to do more, both in improving taxpayer service as well as working to improve tax compliance," IRS Commissioner Charles Rettig said in a statement, adding that the recent funding in the Inflation Reduction Act "will help the IRS in many ways, increasing taxpayer education, significantly improving services to all taxpayers and focusing on high-income/high-wealth non-compliance in a fair and impartial manner supporting compliant taxpayers."

IRS published a report on the new estimate on October 28, 2022.

According to the report, the estimated net compliance rate is 87 percent, defined as tax paid voluntarily and timely plus enforced and other late payments divided by the total true tax. The voluntary compliance rate, which is the amount of tax paid voluntarily and timely divided by the total true tax is estimated to be 85.0 percent.

The tax gap includes three components, including:

• nonfiling (tax not paid on time by those who do not file on time) - $39 billion;
• underreporting (tax understated on timely filed returns) - $398 billion; and
• underpayment (tax that was reported on time, but not paid on time) - $59 billion.

The report estimates that $68 billion of the tax gap will eventually be paid.

The IRS also reported that the tax gap for years 2017-2019 is projected to increase to $540 billion.

Former Internal Revenue Service Commissioner Charles Rettig used his farewell message to highlight the work the agency’s workforce did during his four-year term as commissioner, particularly during the COVID-19 pandemic, but also during more normal times.

Former Internal Revenue Service Commissioner Charles Rettig used his farewell message to highlight the work the agency’s workforce did during his four-year term as commissioner, particularly during the COVID-19 pandemic, but also during more normal times.

"My time as Commissioner has given me an even deeper appreciation of what our workforce is capable of achieving," Rettig wrote in his message posted November 11, 2022, on the IRS website. "I have been constantly amazed at the accomplishments of IRS employees during what has been a challenging and historic time for our nation. Time and again I have seen them deliver for taxpayers under tight timeframes and difficult circumstances – responding in a manner that demonstrates the importance of every American to the IRS and the IRS to every American."

He noted a number of accomplishments of the workforce, including disbursing COVID relief payments of more than $830 billion while the agency was still working to conduct its normal business operations, which included delivering more than $1.5 trillion in refund payments and making more than 200 million advanced payments of the Child Tax Credit totaling $93 billion.

"It's also important to realize that, during this pandemic period, our employees faced the same health and safety concerns for themselves and their families as everyone else," he added. "Nonetheless, they went the extra mile in doing their jobs, and they also made a difference in their communities."

But he also praised the employees of the agency for stepping up even when there was no disaster requiring immediate actions.

"IRS employees don’t wait for a disaster to pitch in," he wrote. "They routinely give back – by collecting food for the hungry, volunteering to help low-income people, older Americans or underserved people prepare their tax returns, and in so many other ways. IRS employees make a difference, they care, and they take pride in serving taxpayers, tax professionals, and our country, on and off the job."

Rettig also identified a number of accomplishments he was proud of during his time, particularly getting publications out in more languages to help the agency reach a wider audience and make its activities more accessible to Americans, as well as making the Form 1040 available in Spanish for the first time during the 2021 tax filing season.

He also highlighted the work of Criminal Investigations during his time.

"There are many examples, but one I’d like to highlight involves agents from CI’s Cyber Crimes Unit," he wrote. "These agents played a key role in the largest cryptocurrency seizure ever recorded for the federal government, valued at more than $3.6 billion. This involved an alleged conspiracy to launder cryptocurrency stolen from a virtual currency exchange called Bitfinex. This was also the largest single financial seizure recorded by the federal government."

The Next Steps

In addition to highlighting the accomplishments of the agency, he also pointed to the direction he leaving the agency headed, including modernizing the IRS’ information technology infrastructure, both hardware and software.

"An important part of our modernization strategy involves expanding our digital services, to give everyone a seamless experience when they interact with the IRS online," he wrote. "A great example is the IRS Online Account. We are continually working to expand the transactions that individuals can conduct through this account. Last year, for example, we launched a new feature allowing people to authorize their tax practitioner to represent them before the IRS with a Power of Attorney, and to view their tax accounts with a Tax Information Authorization."

He continued: "At the same time, we realize that there is still much for us to improve on to help taxpayers and the tax system. Our employees know we need to do more. The IRS continues to focus on reducing paper correspondence inventory and processing paper tax returns from 2021 as well as work on our response to an unprecedented level of phone demand – situations that have been compounded by the pandemic and related issues. Actions we’ve taken to address the inventory include surge teams, mandatory overtime, innovating to expedite case closures and suspending various notices. We are continuing to work hard on this area, and the efforts of our hard-working employees are enabling significant progress."

Other challenges he noted include the thwarting of identity thieves and improving work in underserved communities, areas that will benefit from the funding received from the Inflation Reduction Act. And he has faith the leadership and the workforce is up to meeting the challenges ahead.

"Although the IRS is a large government institution, it’s an institution run by people –people who care," he wrote. "The IRS has made great strides over the last four years, but as always, IRS employees want to do more, and I know they will continue moving forward in every area, in service to our great nation."

An employee or self-employed individual is allowed a deduction for the costs of meals and incidental expenses while traveling away from home for business purposes. The deduction of these costs usually requires the substantiation of the costs. However, there is an optional method provided for these taxpayers that avoids keeping receipts.

An employee or self-employed individual is allowed a deduction for the costs of meals and incidental expenses while traveling away from home for business purposes. The deduction of these costs usually requires the substantiation of the costs. However, there is an optional method provided for these taxpayers that avoids keeping receipts.

The IRS publishes per diem rates that apply to different regions of the United States (See Notice 2015–63 on irs.gov). Taxpayers can use these per diem rates for purposes of calculating the meals and incidental costs deduction and they will be presumed to be substantiated.

The election is made by claiming the amount of the per diem deduction on the taxpayer's timely filed return. The amounts can only be claimed if the taxpayer is prepared to substantiate time, place and purpose of the business travel in accordance with IRS regulations. A separate statement, however, is not required to make this election.

Also note that deductions that an employee claims on his or her tax return due to the fact that his or her employer does not reimburse the employee are taken as itemized deductions and subject to the 2 percent floor for miscellaneous deductions before amounts may be deducted.

Many federal income taxes are paid from amounts that are withheld from payments to the taxpayer. For instance, amounts roughly equal to an employee's estimated tax liability are generally withheld from the employee's wages and paid over to the government by the employer. In contrast, estimated taxes are taxes that are paid throughout the year on income that is not subject to withholding. Individuals must make estimated tax payments if they are self-employed or their income derives from interest, dividends, investment gains, rents, alimony, or other funds that are not subject to withholding.

Many federal income taxes are paid from amounts that are withheld from payments to the taxpayer. For instance, amounts roughly equal to an employee's estimated tax liability are generally withheld from the employee's wages and paid over to the government by the employer. In contrast, estimated taxes are taxes that are paid throughout the year on income that is not subject to withholding. Individuals must make estimated tax payments if they are self-employed or their income derives from interest, dividends, investment gains, rents, alimony, or other funds that are not subject to withholding.

Estimated income tax payments are required from taxpayers who:

1. expect to owe at least $1,000 in tax for the year, after subtracting taxes that were paid through withholding and tax credits; and
2. expect that the amount of taxes to be paid during the year through other means will be less than the smaller of—

• 90% of the tax shown on the current year's tax return, or
• 100% of the tax shown on the previous year's return (the previous year's return must cover all 12 months). This 100-percent test increases to 110 percent if the taxpayer's AGI for the previous year exceeds $150,000.

U.S. citizens who have no tax liability for the current year are not required to make estimated tax payments.

Form 1040-ES. Taxpayers use Form 1040-ES to calculate, report and pay their estimated tax. The annual liability may be paid in quarterly installments that are due based upon the taxpayer's tax year. However, no payments are required until the taxpayer has income upon which tax will be owed. Taxpayers may also credit their overpayments from one year against the next year's estimated tax liability, rather than having them refunded.

Generally, the required installment is 25 percent of the required annual payment. However, a taxpayer who receives taxable income unevenly throughout the year can elect to pay either the required installment or an annualized income installment. The use of the annualized income installment method, provided on a worksheet contained in the instructions to Form 2210, Underpayment of Estimated Tax by Individuals and Fiduciaries, may reduce or eliminate any penalty for underpaid taxes.

Due Dates. For most individual taxpayers, the quarterly due dates for estimated tax payments are:

Penalties. A penalty generally applies when a taxpayer fails to make estimated tax payments, pays less than the required installment amount, or makes late payments. However, the IRS may waive the penalty if the underpayment was due to casualty, disaster or other unusual circumstances.

The IRS has responded to criticism from the Treasury Inspector General for Tax Administration and the National Taxpayer Advocate, among others, that resolution of identity theft accounts takes too long by increasing its measures to flag suspicious tax returns, prevent issuance of fraudulent tax refunds, and to expedite identity theft case processing. As a result, the IRS's resolution time has experienced a moderate improvement from an average of 312 days, as TIGTA reported in September 2013, to an average of 278 days as reported in March 2015. (The 278-day average was based on a statistically valid sampling of 100 cases resolved between August 1, 2011, and July 31, 2012.) The IRS has recently stated that its resolution time dropped to 120 days for cases received in filing season 2013.

The IRS has responded to criticism from the Treasury Inspector General for Tax Administration and the National Taxpayer Advocate, among others, that resolution of identity theft accounts takes too long by increasing its measures to flag suspicious tax returns, prevent issuance of fraudulent tax refunds, and to expedite identity theft case processing. As a result, the IRS's resolution time has experienced a moderate improvement from an average of 312 days, as TIGTA reported in September 2013, to an average of 278 days as reported in March 2015. (The 278-day average was based on a statistically valid sampling of 100 cases resolved between August 1, 2011, and July 31, 2012.) The IRS has recently stated that its resolution time dropped to 120 days for cases received in filing season 2013.

Even with a wait time of 120 days, taxpayers who find themselves victims of tax refund identity theft likely find the road to resolution a frustrating and time consuming process. This article seeks to explain the various pulleys and levers at play when communicating with the IRS about an identity theft case.

Initiating an ID theft case

A taxpayer may become aware that he or she is a victim of tax-related identity theft when the IRS rejects their tax return because someone has already filed a return using the taxpayer's name and/or social security number. A taxpayer may also receive correspondence directly from the IRS that informs them, prior to filing, that someone has filed a suspicious return under their information. In other cases, a taxpayer may have had his or her identity information compromised and wishes to alert the IRS as to the possibility that he or she may be targeted by an identity thief.

For all such cases, the IRS has created Form 14039, Identity Theft Affidavit. Taxpayers who are actual or potential victims of tax-related identity theft may complete and submit the Affidavit to ensure that the IRS flags the tax account for review of any suspicious activity. Taxpayers who have been victimized are asked to provide a short explanation of the problem and how they became aware of it.

The Identity Theft Affidavit may also be submitted by taxpayers that have not yet become victims of tax-related identity theft, but who have experienced the misuse of their personal identity information to obtain credit or who have lost a purse or wallet or had one stolen, who suspect they have been targeted by a phishing or phone scam, etc. The form asks these taxpayers to briefly describe the identity theft violation, the event of concern, and to include the relevant dates.

Once the Form 14039 has been completed and submitted, the taxpayer should expect to receive a Notice CP01S from the IRS by mail. The Notice CP01S simply acknowledges that the IRS has received the taxpayer's Identity Theft Affidavit and reminds the taxpayer to continue to file all federal tax returns.

IDVerify.irs.gov

The IRS has implemented a pre-screening procedure for suspicious tax returns. Rather than halt the refund process entirely, which can prevent a refund claimed on a legitimately filed return, the IRS has provided taxpayers with the opportunity to verify their identity.

Now when the IRS receives a suspicious return, it will send a Letter 5071C or Notice CP01B to the taxpayer requesting him or her to either visit idverify.irs.gov or call the toll-free number listed on the header of the letter (1-800-830-5084) within 30 days. When the taxpayer does this, the taxpayer will encounter a series of questions asking for personal information. If the taxpayer fails to respond to the verification request or responds and answers a question incorrectly the IRS will flag the return as fraudulent and follow the prescribed procedures for resolving identity theft cases.

Resolving the case

After a tax return has been flagged with the special identity theft processing code, the IRS will assign the case to a tax assistor. TIGTA reported that the IRS assigns each case priority based first on its age and then by case type—for example, with cases nearing the statute of limitations placed first, followed by cases claiming disaster relief, and then identity theft cases. However, TIGTA has reported that cases are frequently reassigned to multiple tax assistors, and there are often long lag times where no work is accomplished toward resolution. National Taxpayer Advocate Nina Olson also noted in her recent "Identity Theft Case Review Report" on a statistical analysis of 409 identity theft cases closed in June 2014 that a significant number of cases experience a period of inactivity averaging 78 days.

After resolution

The IRS has also created the Identity Protection Personal Identification Number (IP PIN) project, which is meant to prevent taxpayers from being victimized by identity thieves a second time after the IRS has resolved their cases and closed them. The IP PIN is a unique six-digit code that taxpayers must entered on their tax return instead

The IRS assigns an IP PIN to a taxpayer by sending him or her a Notice CP01A. Generally this Notice is issued in December in preparation for the upcoming filing season. The taxpayer then enters it into the appropriate box of his or her federal tax return (i.e. Forms 1040, 1040A, 1040EZ or 1040 PR/SS). On paper returns, this box is located on the second page, near the signature line. When e-filing, the tax software or tax return preparer will indicate where the taxpayer should enter the IP PIN, social security number or taxpayer identification number (TIN) at time they file their tax return. The IP PIN is only good for one tax year.

Taxpayers who have been assigned an IP PIN, but who have lost or misplaced it cannot electronically file their tax returns until they have located it. Previously such taxpayers had no way to retrieve their IP PIN and had to file on paper. Beginning on January 14, 2015, however, taxpayers who had lost their IP PINs were able to retrieve them by accessing their online accounts and providing the IRS with specific personal information and answer a series of questions to verify identity.

Latest breach

The IRS announced on May 26th that 100,000 taxpayers became victims of a new identity theft scheme discovered in mid-May 2015. Identity theft criminals used stolen personal identification information to access the IRS's online "Get Transcript" application and illegally download these taxpayers' tax transcripts. The IRS is concerned that the criminals intend to use taxpayers' past-year return information to file false tax returns claiming tax items and refunds that look legitimate and that do not trigger the IRS's filters for finding suspicious returns. 

Within this latest breach of security, identity thieves had attempted to download a total of 200,000 transcripts, but had only been successful half of the time, according to an announcement by IRS Commissioner John Koskinen. Because the IRS has yet to see how many taxpayers were actually victimized, the IRS may not provide IP PINs to all of these 200,000 taxpayers. However, the 100,000 taxpayers whose tax transcripts were downloaded will receive free credit monitoring services at the IRS's expense, Koskinen stated.

Employers generally have to pay employment taxes on the wages they pay to their employees. A fine point under this rule, however, is missed by many who themselves have full time jobs and don’t think of themselves as employers: a nanny who takes care of a child is considered a household employee, and the parent or other responsible person is his or her household employer. Housekeepers, maids, babysitters, and others who work in or around the residence are employees. Repairmen and other business people who provide services as independent contractors are not employees. An individual who is under age 18 or who is a student is not an employee.

Employers generally have to pay employment taxes on the wages they pay to their employees. A fine point under this rule, however, is missed by many who themselves have full time jobs and don’t think of themselves as employers: a nanny who takes care of a child is considered a household employee, and the parent or other responsible person is his or her household employer. Housekeepers, maids, babysitters, and others who work in or around the residence are employees. Repairmen and other business people who provide services as independent contractors are not employees. An individual who is under age 18 or who is a student is not an employee.

Payments and Withholding

As a household employer, the parent must withhold and pay Social Security and Medicare taxes if the cash wages paid to the nanny exceed the threshold amount for the year. If the amount paid is less than the threshold, the parent does not owe any Social Security or Medicare taxes. For 2017, the domestic employee coverage threshold, as adjusted for a slightly different inflation factor and subject to rounding, will be $2,000, which is the same as for 2016 after rising from $1,900 in 2015. Earnings of any domestic employee are not subject to Social Security taxes if they do not exceed that threshold for the year. If the employee earns more than $1,000 in any calendar quarter, the parent must also pay federal unemployment (FUTA) tax on wages paid, up to $7,000. Publication 926, Household Employer's Tax Guide, has more information about withholding and paying employment taxes.  

If the amount paid is more than the threshold, the parent must withhold the employee's share of Social Security and Medicare taxes unless the parent chooses to pay both the employee's and the employer's share. The taxes are 15.3 percent of cash wages, 7.65 percent each for the employee and the employer. This includes 6.2 percent for Social Security and 1.45 percent for Medicare (hospitalization insurance).

The parent is not required to withhold income tax from the nanny's wages. However, the parent and the nanny may agree to withholding income tax from the nanny's wages. The nanny must provide a filled-out Form W-4, Employee's Withholding Allowance Certificate, to the employer.

The employment taxes amounts are part of the parent's tax liability and can trigger an estimated tax penalty if not enough is paid during the year. The parent submits estimated tax payments on Form 1040-ES, Estimated Tax for Individuals.

Forms to File

If the parent must pay Social Security and Medicare taxes, or if the parent withholds income tax, the parent must file Schedule H, Household Employment Taxes, with the parent's Form 1040. The parent may also need to file a Form W-2, Wage and Tax Statement, and furnish a copy of the form to the nanny. To complete Form W-2, the parent must obtain an employer identification number (EIN) from the IRS, either by applying online or by submitting Form SS-4, Application for Employer Identification Number.

Please do not hesitate to contact this office if you have any questions regarding your “nanny tax” responsibilities.

Under Code Sec. 25B, a low-income taxpayer can claim a tax credit for a portion of the amounts contributed to an individual retirement account, 401(k) plan, or other retirement plan. A credit is allowed for up to $2,000 of contributions to qualified retirement savings plans. The maximum credit is $1,000 for individuals and $2,000 for married couples. A taxpayer's credit amount is based on his or her filing status, adjusted gross income, tax liability and amount contributed to qualifying retirement programs. However, the percentage of contributions for which the credit is allowed decreases depending on the individual's adjusted gross income.

Under Code Sec. 25B, a low-income taxpayer can claim a tax credit for a portion of the amounts contributed to an individual retirement account, 401(k) plan, or other retirement plan. A credit is allowed for up to $2,000 of contributions to qualified retirement savings plans. The maximum credit is $1,000 for individuals and $2,000 for married couples. A taxpayer's credit amount is based on his or her filing status, adjusted gross income, tax liability and amount contributed to qualifying retirement programs. However, the percentage of contributions for which the credit is allowed decreases depending on the individual's adjusted gross income.

The credit is also reduced for any distributions from qualified retirement plans that the taxpayer, or the taxpayer's spouse if they file a joint return, has received during the tax year, the previous two tax years, or the period of the following year before the due date for the return on which the return is filed, including extensions. A taxpayer can claim the credit in addition to any other deduction or exclusion that would apply to the contribution. Contributions for which the credit is claimed are treated as after-tax contributions and can be included in the taxpayer's investment in the contract, thus reducing the amount of income included in distributions from the retirement plan.

Eligible Individuals

The saver's credit is available for any individual, other than a full-time student, who is age 18 or over at the close of the tax year, provided the individual is not claimed as a dependent for the same tax year. The credit is not available for single taxpayers or married taxpayers filing separately with adjusted gross income (AGI) more than $30,000 for 2014, and $30,500 for 2015; heads of households with AGI more than $45,000 for 2014, $45,750 for 2015; or married taxpayers filing jointly with AGI more than $60,000 for 2014, $61,000 for 2015.

The AGI limits are adjusted annually for inflation. The AGI amounts for single taxpayers are one-half the indexed amounts for married taxpayers filing a joint return, and the limits for heads of households are three-fourths the indexed amounts for married taxpayers filing a joint return. These amounts are adjusted for inflation.

Amount of Credit

The saver's credit is equal to a percentage, ranging from 50 percent to 0, depending on adjusted gross income (AGI), of the individual's qualified retirement savings contributions for the tax year, up to a maximum amount of contributions of $2,000. For married taxpayers filing jointly, contributions up to $2,000 a year for each spouse can give rise to the saver's credit.

Claiming the Credit

Taxpayers claim the saver's credit on Form 8880, Credit for Qualified Retirement Savings Contributions, and attach the form to their Form 1040 or 1040A. The instructions for the form indicate how to calculate the credit. The saver's credit is a non-refundable personal credit. Thus, the amount of the credit is limited by the taxpayer's tax liability. Taxpayers can also take a projected saver's credit into account in figuring the allowable number of withholding allowances claimed on Form W-4, Employee's Withholding Allowance Certificate.

Health flexible spending arrangements (health FSAs) are popular savings vehicles for medical expenses, but their use has been held back by a strict use-or-lose rule. The IRS recently announced a significant change to encourage more employers to offer health FSAs and boost enrollment. At the plan sponsor's option, employees participating in health FSAs will be able to carry over, instead of forfeiting, up to $500 of unused funds remaining at year-end.

Health flexible spending arrangements (health FSAs) are popular savings vehicles for medical expenses, but their use has been held back by a strict use-or-lose rule. The IRS recently announced a significant change to encourage more employers to offer health FSAs and boost enrollment. At the plan sponsor's option, employees participating in health FSAs will be able to carry over, instead of forfeiting, up to $500 of unused funds remaining at year-end.

Health expenses

Health FSAs are designed to reimburse participants for certain health care expenditures, typically expenses that qualify for the medical and dental expense deduction. Medical supplies, such as eye glasses and bandages, are usually treated as qualified expenses. However, nonprescription medicines (other than insulin) are not considered qualified medical expenses.

Health FSAs are often funded through voluntary salary reduction agreements with the participant's employer under a cafeteria plan. In that case, they are very taxpayer-friendly because no federal employment or federal income taxes are deducted from the employee's contribution. The employer may also contribute to a health FSA. However, there are special rules which govern employer contributions.

Typically, participants designate at the beginning of the year the amount they want to contribute to their health FSA and these amounts are deducted from their pay. For 2014, an employee's salary reduction contributions cannot exceed $2,500. The $2,500 cap is very important because cafeteria plans that do not limit health FSA contributions to $2,500 are not treated as cafeteria plans, and all benefits offered under the plan are included in the participants' gross income.

Use-or-lose rule

As mentioned, the use-or-lose rule is a drawback to health FSAs. Unused amounts remaining in the health FSA at year-end are forfeited. Employers are not allowed to refund any unused funds in a health FSA. Critics of the use-or-lose rule argue that it has discouraged participation in health FSAs because many employees do not want to risk forfeiting unused funds. Often, participants have to scramble at year-end to use their health FSA dollars

Grace period option

A few years ago, the IRS modified the use-or-lose rule. The IRS allowed cafeteria plans to adopt a grace period. Participants can use amounts remaining in a health FSA at year-end for up to an additional two months and 15 days. This grace period is optional. Employers are not required to offer the grace period, although many do.

Carryover option

At its option, an employer may now amend its cafeteria plan to provide for the carryover to the immediately following year of up to $500 of any amount remaining unused as of the end of the year in a health FSA. The carryover of up to $500 may be used to pay or reimburse qualified expenses under the health FSA incurred during the entire plan year to which it is carried over. Additionally, the carryover does not count against or otherwise affect the salary reduction limit ($2,500 for 2014) for health FSAs. However, the new rules do not allow participants to cash out unused health FSA amounts or convert them to other types of benefits.

The maximum carryover amount is $500. An employer can choose to offer a $0 carryover, a $500 carryover or any amount in between. As we discussed, the carryover is optional. Employers can choose not to offer any carryover.

Employers cannot offer both the grace period and the carryover. It is a choice of either the grace period or the carryover....or neither. The employer and not the participant decides. In regulations, the IRS described how employers can amend their cafeteria plans to provide for the carryover and how they can, if they choose, replace the grace period with the carryover.

Let's take a look at an example: Jacob participates in a health FSA under his employer's cafeteria plan. At year-end, Jacob has $255 remaining in his health FSA. Jacob's employer never offered a grace period but opted to allow participants to carry over up to $300 of unused health FSA dollars. Jacob can carry over all of his $255 in unused health FSA dollars.

If you have any questions about the new carryover option or health FSAs, please contact our office.

Notice 2013-71

A child with earned income above a certain level is generally required to file a separate tax return as a single taxpayer. However, a child with a certain amount of unearned income (from investments, including dividends, interest, and capital gains) may find that this income becomes subject to tax at his or her parent's highest marginal tax rate. This is referred to as the "kiddie tax," and it is designed to prevent parents from transferring income-producing investments to their children, who would generally be taxed at a lower rate.

A child with earned income above a certain level is generally required to file a separate tax return as a single taxpayer. However, a child with a certain amount of unearned income (from investments, including dividends, interest, and capital gains) may find that this income becomes subject to tax at his or her parent's highest marginal tax rate. This is referred to as the "kiddie tax," and it is designed to prevent parents from transferring income-producing investments to their children, who would generally be taxed at a lower rate.

Does the kiddie tax apply to my situation?

The kiddie tax applies if:

1. The child has investment income greater than the annual inflation-adjusted amount ($1,900 for 2013; $2,000 for 2014);
2. At least one of the child's parents was alive at the end of the tax year;
3. The child is required to file a tax return for the tax year;
4. The child does not file a joint return for the tax year; and
5. The child meets one of the following requirements relating to age and income:

• The child was under age 18 at the end of the tax year; or
• The child was age 18 at the end of the tax year and the child's earned income does not exceed one-half of the child's own support for the year; or
• The child was a full-time student who was under age 24 at the end of the tax year and the child's earned income does not exceed one half of the child's own support for the year (This does not include scholarships.)

Computing the kiddie tax

If the kiddie tax applies to a child, the child's tax is calculated as the greater of one of two items:

1. The tax on all of the child's income, calculated at the rates applicable to single individuals; or
2. The sum of two things:

• The tax that would be imposed on a single individual if the child's taxable income were reduced by net unearned income, plus
• The child's share of the allocable parental tax.

The allocable parent tax is the amount of the increase in the parent's tax liability that results from adding to the parent's taxable income the net unearned income of the parent's children who are subject to the kiddie tax. If a parent has more than one child with unearned income subject to the kiddie tax, then each child's share of the allocable parental tax would be assigned pro rata according to the ratio that its net unearned income bears to the aggregate net unearned income subject to the kiddie tax.

Which tax form should I use?

A parent with a child or children whose unearned income is subject to the kiddie tax must generally complete and file Form 8615, Tax for Certain Children Who Have Investment Income of More Than $1,900, along with his or her tax return. However, if the child's interest and dividend income (including capital gain distributions) total less than $9,500 for 2013 ($10,000 for 2014), the parent may be able to elect to include that income on the parent's return rather than file a separate return for the child. In this case, the parents should complete Form 8814, Parents Election To Report Child's Interest and Dividends. However, the IRS cautions that the federal income tax owed on a child's income may be lower if the parent files a separate tax return for the child, which would enable him or her to take certain tax benefits that cannot be taken on the parents' return.

Divorced, separated, or unmarried parents

The kiddie tax is based on a parent's tax return, but what happens when parents do not file joint returns? Several special rules determine what should happen. If the parents are married, but file separate returns, then the child should use the return of the parent with the largest taxable income to figure the kiddie tax.

If the parents are married, but do not live together, and the custodial parent is considered unmarried then generally the custodial parent's return would be used. However, if the custodial parent is not considered unmarried, the child should use the return of the parent with the largest amount of taxable income.

If the child's parents are divorced or legally separated, and the custodial parent has not remarried, the child should use the custodial parent's return. If the custodial parent has remarried, the child's stepparent, rather than the noncustodial parent, is treated as the child's other parent. Similarly, if the child's parent is a widow or widower who has remarried, the new spouse is treated as the child's other parent.

If the child's parents never married each other, but lived together all year, the child should use the return of the parent with the greater taxable income. If the parents were never married and did not live together all year, the rules are the same as the rules for parents who are divorced.

Calculating the kiddie tax can become confusing as a taxpayer attempts to sort through the numerous rules governing who is subject to the tax, which income is subject to the tax, and how to report it properly. Please do not hesitate to contact our offices with any questions.

Small employers will be able to purchase health insurance for their employees for 2014 and subsequent years through Small Business Health Options Program (SHOP) Marketplaces. Many of these small employers may also be eligible for the Code Sec. 45R tax credit that helps to offset the cost of insurance. In August, the IRS issued new rules on the Code Sec. 45R small employer health insurance credit in the form of proposed regulations. The regulations describe in detail how employers can claim the credit, especially for years after 2013.

Small employers will be able to purchase health insurance for their employees for 2014 and subsequent years through Small Business Health Options Program (SHOP) Marketplaces. Many of these small employers may also be eligible for the Code Sec. 45R tax credit that helps to offset the cost of insurance. In August, the IRS issued new rules on the Code Sec. 45R small employer health insurance credit in the form of proposed regulations. The regulations describe in detail how employers can claim the credit, especially for years after 2013.

Tax credit

The Code Sec. 45R credit was created by the Patient Protection and Affordable Care Act (Affordable Care Act) to encourage small employers to offer health insurance coverage to their employees. A small employer is eligible for the credit if it has fewer than 25 full-time employees (FTEs); the average annual wages of employees are less than $50,000 (adjusted for inflation after 2013), and the employer pays at least 50 percent of the cost of premiums. The Code Sec. 45R credit phases-out for employers if the number of FTEs exceeds 10, or if the average annual wages for FTEs exceed $25,000 (adjusted for inflation after 2013). The phaseout of the credit operates in such a way that an employer with exactly 25 FTEs, or with average annual wages exactly equal to $50,000 (adjusted for inflation after 2013), is not eligible for the credit.

SHOP Marketplaces

When Congress passed the Affordable Care Act in 2010 there was no requirement that employers obtain insurance through a SHOP Marketplace (because they did not exist). The requirement to offer insurance through a SHOP Marketplace starts after 2013. SHOP Marketplaces are scheduled to open on October 1, 2013, with coverage starting January 1, 2014.

Employees and hours of service

Determining who is an "employee" requires a complex calculation. Critics of the credit have said this complexity has discouraged small employers from taking advantage of the credit. For example, the Affordable Care Act and the regulations exclude certain employees from being counted as FTEs because of their status. These include sole proprietors, partners, and their family members (spouses, children, step-children, parents, and other family members). There are also special rules for seasonal workers, part-time workers and leased employees.

Employers must also calculate how many hours service each employee performs. Hours of service include vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty, or leave of absence, but hours in excess of 2,080 for a single employer are excluded. The IRS allows employers to calculate hours of service using any of three methods: actual hours worked; days-worked equivalency; or weeks-worked equivalency.

Let's look at an example from the IRS:

ABC Co. pays five employees wages for 2,080 hours each, three employees wages for 1,040 hours each, and one employee wages for 2,300 hours. The employer uses the actual hours worked method to calculate hours of service. The employer's FTEs would be calculated as follows:

10,400 hours for the five employees paid for 2,080 hours (5 x 2,080)
3,120 hours for the three employees paid for 1,040 hours (3 x 1,040)
2,080 hours for the one employee paid for 2,300 hours (lesser of 2,300 and 2,080)

The total hours counted is 15,600 hours. The employer has seven FTEs (15,600 divided by 2,080 = 7.5, rounded to the next lowest whole number).

Maximum credit

For tax years beginning during or after 2014, the maximum Code Sec. 45R credit is 50 percent. The maximum credit for tax-exempt employers for tax years beginning during or after 2014 is 35 percent.  These percentages were lower before 2014 (35 percent for for-profit employers and 25 percent for tax-exempt employers).

The IRS explained in the proposed regulations that an employer may claim the credit for two-consecutive tax years, beginning with the first tax year in or after 2014 in which the eligible small employer attaches a Form 8941, Credit for Small Employer Health Insurance Premiums, to its income tax return, or in the case of a tax-exempt eligible small employer, attaches a Form 8941 to the Form 990-T, Exempt Organization Business Income Tax Return. 

Transition rules

Through the proposed regulations, the IRS has provided employers some relief pending the transition into the 2014 tax year. For example, an eligible small employer does not need to switch plans mid-year to comply with the requirement that an employer offer coverage to its employees through a SHOP Exchange. An employer that has a plan year that begins after the start of its tax year may count premiums paid for the entire 2014 taxable year if the employer begins offering coverage through a SHOP Exchange on the first day of the 2014 health plan year; and the employer offers coverage during the period before the first day of the 2014 health plan year that would have qualified the employer for the credit under the rules applicable to years before 2014.

Reliance regulations

The proposed regs won't be officially effective until finalized. Taxpayers, however, may rely on the proposed regs for tax years beginning after December 31, 2013, and before December 31, 2014. If future guidance is more restrictive, the IRS explained that future guidance would be applied without retroactive effect and employers will be given time to come into compliance.

If you have any questions about the Code Sec. 45R credit, please contact our office.

NPRM REG 113792-13

Facilitated by the speed, ubiquity, and anonymity of the Internet, criminals are able to easily steal valuable information such as Social Security numbers and use it for a variety of nefarious purposes, including filing false tax returns to generate refunds from the IRS. The victims are often unable to detect the crime until it is too late, generally after the IRS receives the legitimate tax return from the actual taxpayer. By that time the first return has often been long accepted and the refund processed. Because of the ease, speed, and difficulty involved in policing cybercrime, identity theft has grown rapidly. One estimate from the National Taxpayer Advocate Service has calculated that individual identity theft case receipts have increased by more than 666 percent from fiscal year (FY) 2008 to FY 2012.

Facilitated by the speed, ubiquity, and anonymity of the Internet, criminals are able to easily steal valuable information such as Social Security numbers and use it for a variety of nefarious purposes, including filing false tax returns to generate refunds from the IRS. The victims are often unable to detect the crime until it is too late, generally after the IRS receives the legitimate tax return from the actual taxpayer. By that time the first return has often been long accepted and the refund processed. Because of the ease, speed, and difficulty involved in policing cybercrime, identity theft has grown rapidly. One estimate from the National Taxpayer Advocate Service has calculated that individual identity theft case receipts have increased by more than 666 percent from fiscal year (FY) 2008 to FY 2012.

There is, however, another dangerous facet of identity theft that costs the government, taxpayers, and businesses millions of dollars each year. That is business identity theft, which like its consumer counterpart involves the theft or impersonation of a business's identity. To add insult to injury, business identity theft can have crippling federal tax consequences. The following article summarizes the problem of business taxpayer identity theft, the methods employed by thieves, and the means by which you can protect your business.

Business v. individual identity theft

Businesses generally deal with larger transactions, have larger account balances and credit lines than individual taxpayers, and can set up and accept merchant credit card payments with numerous banks. Business information regarding tax identification numbers, profit margins and revenues, officers, and even officer salaries are often public and easily accessed. At the same time remedies and enforcement tend to focus more on individual identity theft. Thus, business identity theft can be more lucrative and arguably less dangerous to engage in than individual taxpayer identity theft.

Methods used

Only some of the many business identity theft schemes relate to tax. Nevertheless, such schemes can be devastating for businesses, resulting in massive employment tax liabilities for fictitious wages or huge deficiencies in reported income. Identity thieves can use a business's employer identification number (EIN) to initiate merchant card payment schemes, file false tax returns, and even generate hundreds of fake Form W-2s in furtherance of more individual taxpayer identity theft.

How they do it

Business identity theft can require less effort than individual identity theft because less information is required to establish a business or open a line of credit than is required of individuals. In general, the thief needs to obtain the business's EIN, which is easy to acquire. Common sources for an EIN include:

• Filings made to the Securities and Exchange Commission (SEC) such as the Form 10-K, which includes the EIN on its first page;
• Public databases that enable users to search for business entities sometimes also display the employer's EIN;
• Websites specifically designed to search for EINs, such as EINFinder.com;
• Business websites sometimes openly display the EIN; and
• Forms W-2, W-9, or 1099.

Once a thief has the EIN, he or she may file reports with various state Secretaries of State to change registered business addresses, registered agents' names, or even appoint new officers. In some cases the thief will apply for a line of credit using this new information. Since the official Secretary of State records display the changed information, potential creditors will not be alerted to the fraud. In one case, however, criminals changed the names of a business's officers by filing with the Secretary of State's office and then sold the whole business to a third party. In the end, however, once an identity thief has established a business name, EIN, and address information, he or she has all the basic tools necessary to perpetrate business identity theft.

Best practices

Businesses should review their banks' policies and recommendations regarding fraud protection. They should know what security measures are being offered and, if commercially reasonable, take them. In a recent U.S. district court case from Missouri, the court found that a bank was not liable for a fraudulent $440,000 wire transfer because it had offered the business a commercially reasonable security procedure, and the business had rejected it. The decision cited Uniform Commercial Code Article 4A-202(b), as adopted by the Missouri Code. Many other states have also adopted the UCC, meaning victimized businesses might find themselves without recourse against their banks in the event of a large fraudulent wire transfer.

Other easy preventative measures that businesses can take include monitoring their financial accounts on a daily basis. They should follow up immediately on any suspicious activity. Businesses should also enroll in email alerts so that they would immediately be apprised of any change in your account name, address, or other information.

A business should also monitor the information on its business registration frequently, whether or not the business is active or inactive. Often businesses that close do not go through the formal dissolution process, which terminates all of the corporate authority. They instead let the charter be forfeited by the Secretary of State. These forfeited charters may be easily reinstated and hijacked by identity thieves.

After fraud occurs

If it is too late, and a fraudulent transaction has occurred in your business's name, take immediate action by contacting your bank, creditors, check verification companies, and credit reporting companies. Report the crime to your local law enforcement authorities and your state's secretary of state business division. Finally, whenever possible, memorialize all correspondence in writing and keep it in your records.

If you'd like more information on how you can take steps to safeguard your personal or business "identity" through safeguarding your tax and other financial accounts, please contact this office.

For many individuals, volunteering for a charitable organization is a very emotionally rewarding experience. In some cases, your volunteer activities may also qualify for certain federal tax breaks. Although individuals cannot deduct the value of their labor on behalf of a charitable organization, they may be eligible for other tax-related benefits.

For many individuals, volunteering for a charitable organization is a very emotionally rewarding experience. In some cases, your volunteer activities may also qualify for certain federal tax breaks. Although individuals cannot deduct the value of their labor on behalf of a charitable organization, they may be eligible for other tax-related benefits.

Before claiming any charity-related tax benefit, whether for a donation or volunteer activity, you must determine if the charity is a "qualified organization."  Under the tax rules, most charitable organizations, other than churches, must apply to the IRS to become a qualified organization. If you are uncertain about an organization's status as a qualified organization, you can ask the charity. The IRS has a toll-free number (1-877-829-5500) for questions from taxpayers about charities and also maintains an online tool at www.irs.gov/charities.

Time or services

An individual may spend 10, 20, 30 or more hours a week volunteering for a charitable organization. Precisely because the individual is a volunteer, he or she receives no remuneration for his or her time or services and cannot deduct the value of his or her time or services spent on activities for the charitable organization. Unpaid volunteer work is not tax deductible.

Vehicle expenses

Vehicle expenses associated with volunteer activity should not be overlooked.  For example, many individuals use their personal vehicles to transport others to medical treatment or to deliver food to shut-ins. Taxpayers can deduct as a charitable contribution qualified unreimbursed out-of-pocket expenses, such as the cost of gas and oil, directly related to the use of their vehicle in giving services to a charitable organization. However, certain expenses, such as registration fees, or the costs of tires or insurance, are not deductible.  Alternatively, taxpayers can use a standard mileage rate of 14 cents per mile to calculate the amount of their contribution. Do not confuse the charitable mileage rate, which is set by statute, with business mileage rate (56.5 cents per mile for 2013), which generally changes from year to year. Parking fees and tolls are deductible whether the taxpayer uses the actual expense method or the standard mileage rate.

Uniforms

Some volunteers are required to wear a uniform, such as a jacket that identifies the wearer as a volunteer for the charitable organization, while engaged in activity for the charity. In this case, the tax rules generally allow taxpayers to deduct the cost and upkeep of uniforms that are not suitable for everyday use and that the taxpayer must wear while performing donated services for a charitable organization.

Hosting a foreign student

Qualifying expenses for a foreign student who lives in the taxpayer's home as part of a program of the organization to provide educational opportunities for the student may be deductible. The student must not be a relative, such as a child or stepchild, or dependent of the taxpayer and also must be a full-time student in secondary school or any lower grade at a school in the U.S. Among the expenses that may be deductible are the costs of food and certain transportation spent on behalf of the student. The cost of lodging is not deductible. If you are planning to host a foreign-exchange student, please contact our office and we can explore the possible tax benefits.

Travel

Volunteers may be asked to travel on behalf of the charitable organization, for example, to attend a convention or meeting. Generally, qualified unreimbursed expenses may be deductible subject to complicated rules. Very broadly speaking, there must not be a significant element of personal pleasure, recreation, or vacation in the travel. Special rules apply if the charitable organization pays a daily travel allowance to the volunteer. There are also special rules for attendance at a church meeting or convention and the capacity in which the volunteer attends the church meeting or convention. If you plan to travel as part of your volunteer activity for a charitable organization, please contact our office and we can review your plans in greater detail.

If you have any questions, please contact our office.

Vacation homes offer owners tax breaks similar-but not identical-to those for primary residences. Vacation homes also offer owners the opportunity to earn tax-advantaged and even tax-free income. This combination of current income and tax breaks, combined with the potential for long-term appreciation, can make a second home an attractive investment.

Vacation homes offer owners tax breaks similar-but not identical-to those for primary residences. Vacation homes also offer owners the opportunity to earn tax-advantaged and even tax-free income. This combination of current income and tax breaks, combined with the potential for long-term appreciation, can make a second home an attractive investment.

Homeowners can deduct mortgage interest they pay on up to $1 million of "acquisition indebtedness" incurred to buy their primary residence and one additional residence. If their total mortgage indebtedness exceeds $1 million, they can still deduct the interest they pay on their first $1 million. If one mortgage carries a substantially higher rate than the second, it makes sense to deduct the higher interest first to maximize deductions.

Vacation homeowners don't need to buy an actual house (or even a condominium) to take advantage of second-home mortgage interest deductions. They can deduct interest they pay on a loan secured by a timeshare, yacht, or motorhome so long as it includes sleeping, cooking, and toilet facilities.

Gains from selling a vacation home are generally taxed as short-term or long-term capital gains.  While gain on the sale of a principal residence can be excludable, gain on the sale of a vacation home is not. Recent rules limit the amount of prior gain on a vacation residence that can be sheltered if a vacation home is converted into a primary residence.

Vacation home rentals. Many vacation home owners rent vacation homes to draw income and help finance the cost of owning the home. These rentals are taxed under one of three sets of rules depending on how long the homeowner rents the property.

• Income from rentals totaling not more than 14 days per year is nontaxable.
• Income from rentals totaling more than 14 days per year is taxable and is generally reported on Schedule E (Form 1040), Supplemental Income and Loss. Homeowners who rent their properties for more than 14 days can deduct a portion of their mortgage interest, property taxes, maintenance, utilities, and other expenses to offset that income. That deduction depends on how many days they use the residence personally versus how many days they rent it.
• Owners who use their home personally for less than 14 days and less than 10% of the total rental days can treat the property as true "rental" property if certain rules are followed.

If you are considering the purchase of a vacation home, our offices can help compute your true, "after-tax" cost of ownership in determining whether such a purchase makes sense.

An LLC (limited liability company) is not a federal tax entity. LLCs are organized under state law. LLCs are not specifically mentioned in the Tax Code, and there are no special IRS regulations governing the taxation of LLCs comparable to the regulations for C corporations, S corporations, and partnerships. Instead, LLCs make an election to be taxed as a particular entity (or to be disregarded for tax purposes) by following the check-the-box business entity classification regulations. The election is filed on Form 8832, Entity Classification Election. The IRS will assign an entity classification by default if no election is made. A taxpayer who doesn't mind the IRS default entity classification does not necessarily need to file Form 8832.

An LLC (limited liability company) is not a federal tax entity. LLCs are organized under state law. LLCs are not specifically mentioned in the Tax Code, and there are no special IRS regulations governing the taxation of LLCs comparable to the regulations for C corporations, S corporations, and partnerships. Instead, LLCs make an election to be taxed as a particular entity (or to be disregarded for tax purposes) by following the check-the-box business entity classification regulations. The election is filed on Form 8832, Entity Classification Election. The IRS will assign an entity classification by default if no election is made. A taxpayer who doesn't mind the IRS default entity classification does not necessarily need to file Form 8832.

"Check-the-Box" Election

An LLC with more than one member can elect tax status as:

• Partnership
• Corporation
• S corporation (accomplished by electing to be taxed as a corporation, then filing an S corporation election)

An LLC with only one member can elect tax status as:

• Disregarded entity
• Corporation
• S corporation (accomplished by electing to be taxed as a corporation, then filing an S corporation election)

The IRS will assign the following classifications if no entity election is filed for an LLC (the default rules):

• any business entity that is not a corporation is classified as a partnership
• any entity that is wholly-owned by a single person will be disregarded as an entity separate from its owner (taxed as a sole proprietorship).

Typically, an LLC with more than one member will elect to be taxed as a partnership, whereas a single-member LLC will elect to be disregarded and taxed as a sole proprietorship.

If you have any questions relating to LLCs, their benefits, drawbacks, or their treatment under the Tax Code, please contact our offices.

The IRS has unveiled the IRS Data Retrieval Tool (DTR), a time-saving tool designed to minimize the time required for college-bound students and their parents to complete the Department of Education’s Free Application for Federal Student Aid (FAFSA). The new IRS DTR is available through the website www.fafsa.gov.

The IRS has unveiled the IRS Data Retrieval Tool (DTR), a time-saving tool designed to minimize the time required for college-bound students and their parents to complete the Department of Education’s Free Application for Federal Student Aid (FAFSA). The new IRS DTR is available through the website www.fafsa.gov.

The FAFSA form is necessary for college-bound students and their parents who are applying for numerous federal government education programs or subsidies, such as the Pell Grant, low-interest federal student loans, and the Federal Work Study Program. Eligible taxpayers may use the tool for either the initial or the renewal FAFSA.

Completion of the FAFSA requires certain federal tax information such as the student and parents’ adjusted gross income, tax, and exemptions. The free IRS DTR tool enables applicants to automatically transfer their tax return information onto the FAFSA form. The tool will also increase the accuracy of the income information reported on the FAFSA form and minimize processing delays. Taxpayers who are eligible to use the DRT can access it one to two weeks after the federal income tax return is filed if the return is filed electronically. In the cases of a paper tax return, taxpayers may access the tool approximately six to eight weeks after filing.

Who can use the DRT?

To use the DRT to complete the 2012–2013 FAFSA, taxpayers must meet several prerequisites:

1. They must have filed a federal 2011 tax return;
2. Have a valid SSN;
3. Have a valid Federal Student Aid PIN; and
4. Have not changed marital status since December 31, 2011.

What if I don’t have a PIN?

If an individual does not have a Federal Student Aid PIN, he or she may apply for one beforehand through the FAFSA application process. An online application is available at www.pin.ed.gov.

What if I can’t use the DRT?

In some cases the IRS DRT is unavailable. The tool is not accessible for completion of the 2012-2013 FAFSA if either the student or parents:

1. Filed an amended 2011 tax return or did not file a 2011 tax return;
2. Filed their 2011 tax return as married, filing separately; or
3. Filed a foreign tax return or Puerto Rican tax return.

If a student cannot or chooses not to use the IRS DRT, that student, his or her parents or spouse can verify income information submitted to the Financial Aid Office through a tax transcript from the IRS. Applicants may request a transcript on IRS Form 4506-T, Request for Transcript of Tax Return. Transcripts may be requested online through www.irs.gov or by phone at 1-800-908-9946.

A SIMPLE (Savings Incentive Match Plan for Employees of Small Employers) IRA is a retirement savings plan designed specifically for small employers. A SIMPLE IRA is an IRA-based plan with ease of use features intended to encourage small employers, which may otherwise not offer a retirement plan, to create a retirement plan.

Basics

Generally, any business with 100 or fewer employees can establish a SIMPLE IRA. If an employer establishes a SIMPLE IRA plan, all employees of the employer who received at least $5,000 in compensation from the employer during any two preceding calendar years (whether or not consecutive) and who are reasonably expected to receive at least $5,000 in compensation during the calendar year, must be eligible to participate in the SIMPLE IRA.  For purposes of the 100-employee limitation, all employees employed at any time during the calendar year are taken into account

SIMPLE IRAs must be established under a written plan agreement.  All employees must be notified about the SIMPLE IRA plan. Generally, employees must be informed about his or her opportunity to make or change a salary reduction choice under the SIMPLE IRA plan and the employer's decision to make either matching contributions or nonelective contributions.  Employees are always 100 percent vested in a SIMPLE IRA.

Salary reduction contributions

SIMPLE IRAs are subject to important limits on salary reduction contributions.  The limit is $11,500 for 2012.  However, employees age 50 or over may make so-called $2,500 "catch-up" contributions for 2012.

Employer contributions

Employers have two choices in determining their contributions to a SIMPLE IRA plan:

• A two percent nonelective employer contribution, where employees eligible to participate receive an employer contribution equal to two percent of their compensation (limited to $245,000 per year for 2012 and subject to cost-of-living adjustments for later years), regardless of whether the employee makes his or her own contributions.
• A dollar-for-dollar match, up to three percent of compensation, where only the participating employees who have elected to make contributions will receive an employer contribution (this is called a matching contribution).

Each year, employers can choose which one they will use for the next year's contributions. This choice must be communicated to employees.  Owners of small businesses can use SIMPLE IRA plans as vehicles for retirement savings for themselves without reference to how many of their employees actually participate, as long as the employees are given the option.

The three percent matching contribution applies if the employee has made a contribution.  In contrast, the two percent nonelective contribution applies even if the eligible employee did not make a contribution.

Let's look at an example:  Jacob, age 29, has worked for his employer for five years. This year, the employer established a SIMPLE IRA plan for Jacob and its other 44 employees. The employer will match contributions made by Jacob and the other employees dollar-for-dollar up to three percent of each employee's compensation. Jacob contributes three percent of his yearly compensation to his SIMPLE IRA (three percent of $40,000 or $1,200).  His employer's matching contribution is also $1,200.  The total contribution to Jacob's SIMPLE IRA is $2,400.

The three percent limit on matching contributions may be reduced for a calendar year at the election of the employer, but only if the limit is not reduced below one percent; the limit is not reduced for more than two years out of the five-year period that ends with (and includes) the year for which the election is effective; and employees are notified of the reduced limit within a reasonable period of time before the 60-day election period during which employees can enter into salary reduction agreements. If an employer fails to satisfy the contribution rules, the SIMPLE IRA plan is in jeopardy of losing its tax benefits for the employer and all participants.

If you have any questions about matching contributions to SIMPLE plans or how to set up a SIMPLE plan, please contact our office.

The number of tax return-related identity theft incidents has almost doubled in the past three years to well over half a million reported during 2011, according to a recent report by the Treasury Inspector General for Tax Administration (TIGTA). Identity theft in the context of tax administration generally involves the fraudulent use of someone else’s identity in order to claim a tax refund. In other cases an identity thief might steal a person’s information to obtain a job, and the thief’s employer may report income to the IRS using the legitimate taxpayer’s Social Security Number, thus making it appear that the taxpayer did not report all of his or her income.

In light of these dangers, the IRS has taken numerous steps to combat identity theft and protect taxpayers. There are also measures that you can take to safeguard yourself against identity theft in the future and assist the IRS in the process.  

IRS does not solicit financial information via email or social media

The IRS will never request a taxpayer’s personal or financial information by email or social media such as Facebook or Twitter. Likewise, the IRS will not alert taxpayers to an audit or tax refund by email or any other form of electronic communication, such as text messages and social media channels.

If you receive a scam email claiming to be from the IRS, forward it to the IRS at phishing@irs.gov. If you discover a website that claims to be the IRS but does not begin with 'www.irs.gov', forward that link to the IRS at phishing@irs.gov.

How identity thieves operate

Identity theft scams are not limited to users of email and social media tools. Scammers may also use a phone or fax to reach their victims to solicit personal information. Other means include:

-Stealing your wallet or purse
-Looking through your trash
-Accessing information you provide to an unsecured Internet site.

How do I know if I am a victim?

Your identity may have been stolen if a letter from the IRS indicates more than one tax return was filed for you or the letter states you received wages from an employer you don't know. If you receive such a letter from the IRS, leading you to believe your identity has been stolen, respond immediately to the name, address or phone number on the IRS notice. If you believe the notice is not from the IRS, contact the IRS to determine if the letter is a legitimate IRS notice.

If your tax records are not currently affected by identity theft, but you believe you may be at risk due to a lost wallet, questionable credit card activity, or credit report, you need to provide the IRS with proof of your identity. You should submit a copy of your valid government-issued identification, such as a Social Security card, driver's license or passport, along with a copy of a police report and/or a completed IRS Form 14039, Identity Theft Affidavit, which should be faxed to the IRS at 1-978-684-4542.

What should I do if someone has stolen my identity?

If you discover that someone has filed a tax return using your SSN you should contact the IRS to show the income is not yours. After the IRS authenticates who you are, your tax record will be updated to reflect only your information. The IRS will use this information to minimize future occurrences.

What other precautions can I take?

There are many things you can do to protect your identity. One is to be careful while distributing your personal information. You should show employers your Social Security card to your employer at the start of a job, but otherwise do not routinely carry your card or other documents that display your SSN.

Only use secure websites while making online financial transactions, including online shopping. Generally a secure website will have an icon, such as a lock, located in the lower right-hand corner of your web browser or the address bar of the website with read “https://…” rather than simply “http://.”

Never open suspicious attachments or links, even just to see what they say. Never respond to emails from unknown senders. Install anti-virus software, keep it updated, and run it regularly.

For taxpayers planning to e-file their tax returns, the IRS recommends use of a strong password. Afterwards, save the file to a CD or flash drive and keep it in a secure location. Then delete the personal return information from the computer hard drive.

Finally, if working with an accountant, query him or her on what measures they take to protect your information.

In light of the IRS’s new Voluntary Worker Classification Settlement Program (VCSP), which it announced this fall, the distinction between independent contractors and employees has become a “hot issue” for many businesses. The IRS has devoted considerable effort to rectifying worker misclassification in the past, and continues the trend with this new program.  It is available to employers that have misclassified employees as independent contractors and wish to voluntarily rectify the situation before the IRS or Department of Labor initiates an examination.

The distinction between independent contractors and employees is significant for employers, especially when they file their federal tax returns. While employers owe only the payment to independent contractors, employers owe employees a series of federal payroll taxes, including Social Security, Medicare, Unemployment, and federal tax withholding. Thus, it is often tempting for employers to avoid these taxes by classifying their workers as independent contractors rather than employees.

If, however, the IRS discovers this misclassification, the consequences might include not only the requirement that the employer pay all owed payroll taxes, but also hefty penalties. It is important that employers be aware of the risk they take by classifying a worker who should or could be an employee as an independent contractor.

“All the facts and circumstances”

The IRS considers all the facts and circumstances of the parties in determining whether a worker is an employee or an independent contractor. These are numerous and sometimes confusing, but in short summary, the IRS traditionally considers 20 factors, which can be categorized according to three aspects: (1) behavioral control; (2) financial control; (3) and the relationship of the parties.

Examples of behavioral and financial factors that tend to indicate a worker is an employee include:

• The worker is required to comply with instructions about when, where, and how to work;
• The worker is trained by an experienced employee, indicating the employer wants services performed in a particular manner;
• The worker’s hours are set by the employer;
• The worker must submit regular oral or written reports to the employer;
• The worker is paid by the hour, week, or month;
• The worker receives payment or reimbursement from the employer for his or her business and traveling expenses; and
• The worker has the right to end the employment relationship at any time without incurring liability.

In other words, any existing facts or circumstances that point to an employer’s having more behavioral and/or financial control over the worker tip the balance towards classifying that worker as an employee rather than a contractor. The IRS’s factors do not always apply, however; and if one or several factors indicate independent contractor status, but more indicate the worker is an employee, the IRS may still determine the worker is an employee.

Finally, in examining the relationship of the parties, benefits, permanency of the employment term, and issuance of a Form W-2 rather than a Form 1099 are some indicators that the relationship is that of an employer–employee.

Conclusion

Worker classification is fact-sensitive, and the IRS may see a worker you may label an independent contractor in a very different light. One key point to remember is that the IRS generally frowns on independent contractors and actively looks for factors that indicate employee status.

Please do not hesitate to call our offices if you would like a reassessment of how you are currently classifying workers in your business, as well as an evaluation of whether IRS’s new Voluntary Classification Program may be worth investigating.