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.

On April 28, 2021, the White House released details on President Biden’s new $1.8 trillion American Families Plan. The proposal follows the already passed $1.9 trillion American Rescue Plan Act and the recently proposed $2.3 trillion infrastructure-focused American Jobs Plan. The details were released in advance of President Biden’s address to a joint session of Congress.

On April 28, 2021, the White House released details on President Biden’s new $1.8 trillion American Families Plan. The proposal follows the already passed $1.9 trillion American Rescue Plan Act and the recently proposed $2.3 trillion infrastructure-focused American Jobs Plan. The details were released in advance of President Biden’s address to a joint session of Congress.

The plan includes many provisions that would make good on the President’s campaign promises. The proposal would provide universal preschool to three and four year-olds, two free years of community college, and free tuition for certain universities specializing in serving underrepresented students. The plan would also invest in teacher and child care education, provide free or lower cost child care to lower income families, expand paid leave programs, and improve the quality of student lunch programs. It would also establish automatic adjustments to unemployment insurance, depending upon economic conditions.

Personal Tax Breaks Extended

The proposal would also extend tax benefits already signed into law under the American Rescue Plan Act. This includes:

• extending enhanced premium tax credits and making premium reductions permanent;
• extending the enhanced child tax credit through 2025 (currently a fully refundable $3,000 per child ($3,600 for a child under age six) for 2021 only);
• permanently extending the enhancements of the child and dependent care tax credit, which increase the amount of the credit as well as the incomes at which the credit is phased out;
• permanently extending the increased earned income tax credit for taxpayers without children.

Tax Changes, TCJA Rollback

On the campaign trail, President Biden promised to increase taxes on both corporations and higher-income individuals. While the provisions of the American Jobs Plan are largely funded through a proposed increase in the corporate tax rate from 21% to 28%, the provisions of his American Families Plan are funded by the promised increases to individual taxes.

The proposal would increase the top tax rate on individuals to 39.6 percent from the current rate of 37 percent. This would return the tax rate on the highest bracket of income to where it was before the Tax Cuts and Jobs Act took effect in 2018.

The proposal would also increase the tax rate on capital gains and dividends for households making over $1 million, to match the 39.6 percent rate on income. For 2021, capital gains and certain qualified dividends are taxed at 20 percent for joint filers with taxable income of $496,000 or more.

The plan proposes to eliminate the tax-free step-up in basis on inherited property where the gain would be in excess of $1 million (up to $2.5 million in the case of a couple using existing real estate exemptions. The plan also eliminates the carried interest loophole that allows hedge fund partners to pay tax on income at capital gains rates. The plan would also limit a provision allowing for tax deferral on property exchanges, permanently extend the limitation on excess business losses, and ensure that higher income taxpayers cannot avoid the 3.8 percent Medicare tax.

The plan also provides increased funding for the IRS to improve enforcement, specifically to ensure that higher income taxpayers are unable to avoid proper payment of taxes. While the White House estimates that this will produce an additional $700 billion in revenue over 10 years, many believe this to be a vast overestimate.

Notably absent from the plan is an increase to the cap on the deduction of state and local taxes. The Tax Cuts and Jobs Act set a $10,000 limit for the deduction, but many lawmakers, particularly those representing higher tax states like New York and California, have been pressing to increase the limit or completely eliminate it

Next Steps?

It is uncertain when Congress may take up the process of proposing legislation carrying out the American Families Plan. President Biden has indicated his willingness to negotiate on any proposals he makes. However, the chilly reception to his American Jobs Plan does not indicate a smooth process to get a vote on a legislative package for the infrastructure proposal, let alone passage with razor-thin majorities in both chambers of Congress. With many lawmakers indicated that they want to work on infrastructure before moving on to other proposals, the process from proposal to law could stretch out for months.

The IRS announced that it had started issuing refunds to eligible taxpayers who paid taxes on 2020 unemployment compensation that was excluded from taxable income by the recently enacted American Rescue Plan (ARP) (P.L. 117-2).

The IRS announced that it had started issuing refunds to eligible taxpayers who paid taxes on 2020 unemployment compensation that was excluded from taxable income by the recently enacted American Rescue Plan (ARP) ( P.L. 117-2).

Unemployment compensation is taxable income, but the ARP excludes $10,200 in unemployment compensation from the income used to calculate the amount of taxes owed. The $10,200 per person exclusion applies to taxpayers who are single or married filing jointly, with modified adjusted gross income of less than $150,000. The $10,200 is the amount of income exclusion, not the amount of the refund itself.

The IRS has identified over 10 million taxpayers who filed their tax returns prior to the ARP becoming law in March, and is reviewing past returns to determine the correct taxable amount of unemployment compensation and tax. This could potentially result in a refund, reduced balance due, or with no refund being owed.

The first phase of adjustments is being made for single taxpayers who had the simplest tax returns, such as those filed by taxpayers who did not claim children or any refundable tax credits. Notices explaining the corrections will be sent to taxpayers, and are expected to reach them within 30 days of the correction being made.

The IRS stated that it will issue refunds by direct deposit to taxpayers who provided their bank account information on their returns. Alternatively, refunds will be mailed as a paper check to the taxpayer’s address of record.

These refunds will be subject to normal offset rules, such as past-due federal tax, state income tax, state unemployment compensation debts, child support, spousal support or certain federal nontax debts, such as student loans. The IRS will send separate notices to those taxpayers whose refunds could be offset to settle unpaid debts.

Further, corrections to any Earned Income Tax Credit (EITC) without qualifying children and the recovery rebate credit are being made automatically as part of this process. However, some taxpayers may be eligible for certain income-based tax credits that were not claimed on their original return. The IRS also reminded taxpayers to file an amended tax return if the revised adjusted gross income amount makes them eligible for additional benefits.

A safe harbor is available for certain Paycheck Protection Program (PPP) loan recipients who relied on prior IRS guidance and did not deduct eligible business expenses. These taxpayers may elect to deduct the expenses for their first tax year following their 2020 tax year, rather than filing an amended return or administrative adjustment request for 2020.

A safe harbor is available for certain Paycheck Protection Program (PPP) loan recipients who relied on prior IRS guidance and did not deduct eligible business expenses. These taxpayers may elect to deduct the expenses for their first tax year following their 2020 tax year, rather than filing an amended return or administrative adjustment request for 2020.

The IRS had initially determined that businesses whose PPP loans were forgiven or expected to be forgiven could not deduct business expenses paid for by the loan. However, the Consolidated Appropriations Act of 2021 ( P.L. 116-260), enacted on December 27, 2020, subsequently permitted taxpayers to deduct these expenses.

Safe Harbor Eligibility

To be eligible for the safe harbor, the taxpayer must have received an original PPP covered loan and filed a federal income tax return or information return for the 2020 tax year on or before December 27, 2020. The taxpayer must have paid or incurred original eligible expenses during the taxpayer’s 2020 tax year that the taxpayer did not deduct because:

• the expenses resulted in forgiveness of the original PPP covered loan; or
• the taxpayer reasonably expected at the end of the 2020 tax year that the expenses would result in forgiveness.

Electing the Safe Harbor

A taxpayer elects the safe harbor by attaching a statement to a timely, including extensions, federal income tax return or information return for the taxpayer’s first tax year following the 2020 tax year in which the original eligible expenses were paid or incurred. The statement must include:

• the taxpayer’s name, address, and social security number or taxpayer identification number;
• a statement that the taxpayer is applying the safe harbor provided by section 3.01 of Revenue Procedure 2021-20;
• the amount and date of disbursement of the taxpayer’s original PPP loan; and
• a list, including descriptions and amounts, of the original eligible expenses.

Certain Expenses and Loans Not Covered

The safe harbor applies only to original eligible expenses, and not to additional expenses that were added by the Consolidated Appropriations Act. The safe applies only to original PPP loans. It does not apply to PPP second draw loans.

Individuals may use two special procedures to file returns for 2020 that allow them to receive advance payments of the 2021 child credit and the 2021 Recovery Rebate Credit.

Individuals may use two special procedures to file returns for 2020 that allow them to receive advance payments of the 2021 child credit and the 2021 Recovery Rebate Credit. Under the procedures:

• individuals who are not required to file returns for 2020 can use a simplified federal income tax return filing procedure; and
• individuals with zero adjusted gross income (AGI) for 2020 can file electronic returns by entering "$1" in several fields.

Simplified Return Procedures

Individuals may file simplified 2020 returns electronically or on paper if they have not filed and are not required to file 2020 returns. The simplified procedures apply to Forms 1040, 1040-SR and 1040-NR.

The individual should write "Rev. Proc. 2021-24" at the top of a paper return. The procedure includes detailed instructions for providing identification, income and direct deposit information.

Zero AGI

Many filing systems for electronic returns will not accept returns that report zero AGI. To file an electronic return, in addition to all other information required to be entered on Form 1040, Form 1040-SR, or Form 1040-NR, an individual with no AGI should report:

• $1 as taxable interest on line 2b of the form;
• $1 as total income on line 9 of the form; and
• $1 as AGI on line 11 of the form.

Filers of Form 1040-NR with no AGI should also report $1 as itemized deductions on lines 7 and 8 of Schedule A (Form 1040-NR) and line 12 of Form 1040-NR.

Returns Must Be Accurate

Simplified returns and zero-AGI electronic returns are federal income tax returns for all purposes. Thus, the individual must properly sign the return under penalties of perjury. The returns must also provide accurate information. However, the IRS will not challenge the accuracy of income items reported by taxpayers using these special procedures.

Individuals Who Filed 2020 Returns

Individuals who have already filed their 2020 returns do not have to do anything further to:

• receive advance child credit payments for an eligible child shown on that return;
• receive a third-round Economic Impact Payment (EIP) for the 2021 recovery rebate credit that is attributable to a dependent shown on that return; or
• claim a previously claimed 2020 recovery rebate credit and additional 2020 recovery rebate credit for themselves and for each eligible qualifying child.

Similarly, an individual who filed a federal income tax return for 2019, including by entering information in the "Non-Filers: Enter Information Here" tool on the IRS website, also do not need to file any additional forms of contact the IRS in order to receive advance child credit payments for a qualifying child shown on that return. An individual who did not receive EIPs for the full amount of the 2020 Recovery Rebate Credits may claim them by filing a 2020 federal income tax return.

U.S. Territory Residents

The simplified return and zero-AGI procedures do not apply to residents of American Samoa, Guam, the Commonwealth of the Northern Mariana Islands, the Commonwealth of Puerto Rico, or the U.S. Virgin Islands.

• Residents of Puerto Rico may be eligible to claim the child tax credit from the IRS under procedures to be announced at a later date, but they are not eligible to receive advance child tax credit payments.
• Residents of other U.S. territories should contact their local territory tax agency for additional information about the child tax credit and advance child tax credit payments, third-round economic impact payments, the 2020 recovery rebate credit, and the additional 2020 recovery rebate credit.

The IRS has provided guidance for employers, plan administrators, and health insurers regarding the new credit available to them for providing continuation health coverage to certain individuals under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) during the COVID-19 (Coronavirus) emergency.

The IRS has provided guidance for employers, plan administrators, and health insurers regarding the new credit available to them for providing continuation health coverage to certain individuals under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) during the COVID-19 (Coronavirus) emergency.

COBRA provides eligible former employees, retirees, spouses, former spouses, and dependent children with the right to temporary continuation of health coverage at group rates. COBRA generally covers health plans maintained by private-sector employers with 20 or more full and part-time employees. It also covers employee organizations or federal, state or local governments. State mini-COBRA laws often provide similar benefits for insured small employers not subject to Federal COBRA.

The American Rescue Plan Act ( P.L. 117-2) provided a temporary 100% reduction in the premium that individuals would have to pay when they elect COBRA continuation health coverage following a reduction in hours or an involuntary termination of employment. The new law provides a corresponding tax credit for the entities that maintain group health plans, such as employers, multiemployer plans, and insurers. The 100% reduction in the premium and the credit are also available with respect to continuation coverage provided for those events under comparable state laws, sometimes referred to as "mini-COBRA."

Under the new law, COBRA premium assistance is available to eligible individuals as of the first period of coverage beginning on or after April 1, 2021, and will not be available for periods of coverage beginning after September 30, 2021. For each Assistance Eligible Individual, COBRA premium assistance does not extend beyond the period of COBRA continuation coverage in the event that the period ends prior to September 30, 2021. If an individual receiving premium assistance becomes eligible for coverage under any other group health plan or for Medicare, the premium assistance period ends.

Example: On April 1, 2021, the individual’s employment is terminated, and the individual becomes a qualified beneficiary. The individual elects COBRA continuation coverage and becomes an Assistance Eligible Individual with COBRA continuation coverage beginning on April 1, 2021, the date the individual lost coverage. On July 1, 2021, the individual becomes eligible for coverage under a group health plan sponsored by the employer of the individual’s spouse and ceases to be an Assistance Eligible Individual. The individual ceases COBRA continuation coverage as of July 1, 2021, and enrolls in coverage in the group health plan sponsored by the employer of the individual’s spouse. On August 1, 2021, the individual’s spouse has an involuntary termination of employment, and as a result the individual and spouse lose coverage. The individual and spouse become qualified beneficiaries due to the loss of coverage and elect COBRA continuation coverage with the plan sponsored by the spouse’s employer. The individual and spouse become Assistance Eligible Individuals with respect to COBRA continuation coverage as of August 1, 2021.

In Notice 2021-31, the IRS has provided information regarding the calculation of the credit, the eligibility of individuals, the premium assistance period, and other information vital to employers, plan administrators, and insurers to understand the credit.

The IRS has reminded employers that under the American Rescue Plan Act of 2021 (ARP) ( P.L. 117-2), small and midsize employers and certain government employers are entitled to claim refundable tax credits that reimburse them for the cost of providing paid sick and family leave to their employees due to COVID-19. This includes leave taken by employees to receive or recover from COVID-19 vaccinations.

The IRS has reminded employers that under the American Rescue Plan Act of 2021 (ARP) ( P.L. 117-2), small and midsize employers and certain government employers are entitled to claim refundable tax credits that reimburse them for the cost of providing paid sick and family leave to their employees due to COVID-19. This includes leave taken by employees to receive or recover from COVID-19 vaccinations.

ARP tax credits are available to eligible employers that pay sick and family for leave from April 1, 2021, through September 30, 2021. Under the Act, eligible employers include any business, including tax-exempt organizations with fewer than 500 employees who are not able to work or telework due to reasons related to COVID-19, including needing to recover from any injury, disability, illness or condition related to the vaccinations.

The IRS has informed taxpayers that the paid leave credits under the ARP are tax credits against the employer’s share of the Medicare tax. The tax credits are refundable, and the employer is entitled to payment of the full amount of credits if it exceeds the employer’s share of the Medicare tax. The tax credit for paid sick leave wages is equal to the sick leave wages paid for COVID-19 related reasons, for up to two weeks at 100 percent of the employee’s regular rate of pay. Further, the tax credit for paid family leave wages is equal to the family leave wages paid for up to twelve weeks, at 2/3rds of the employee’s regular rate of pay. Importantly, the amount of these tax credits increases according to allocable health plan expenses and contributions for certain collectively bargained benefits, as well as the employer’s share of social security and Medicare taxes paid on the wages.

Eligible employers are recommended to report their total paid sick and family leave wages, health plan expenses and collectively bargained contributions, including their share of social security and Medicare taxes on the paid leave wages for each quarter on their federal employment tax return. Form 941, Employer’s Quarterly Federal Tax Return, can be used to report income tax and social security and Medicare taxes withheld from employee wages.

Further, in anticipation of claiming the credits on the Form 941, eligible employers can retain the federal employment taxes that they otherwise would have deposited, including federal income tax withheld, the employees’ share of social security, Medicare taxes and their share of social security and Medicare taxes with respect to all employees up to the amount of credit for which they are eligible. If, however, an eligible employer does not have enough federal employment taxes set aside for deposit to cover amounts provided as paid sick and family leave wages, the eligible employer may request an advance of the credits by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19. The eligible employer will then have to account for the amounts received as an advance when they file Form 941, Employer's Quarterly Federal Tax Return, for the relevant quarter. Finally, self-employed individuals may claim comparable tax credits on their individual Form 1040, U.S. Individual Income Tax Return.

The IRS has reminded taxpayers who owe 2020 taxes that there are different ways to pay their taxes online, including payment options for many people who cannot pay in full.

The IRS has reminded taxpayers who owe 2020 taxes that there are different ways to pay their taxes online, including payment options for many people who cannot pay in full.

The IRS stated that the most important thing that taxpayers with a tax bill should do is file a return by the May 17 due date, even if they cannot pay in full, or request a six-month extension to avoid higher penalties for failing to file on time. The IRS emphasized that even though automatic tax filing extensions are available, these extensions do not change the payment deadline.

Further, interest, plus the much smaller late-payment penalty, will apply to any payments made after May 17. Normally, the late-payment penalty is one-half-of-one percent (0.5%) per month. The interest rate, adjusted quarterly, is currently 3% per year, compounded daily.

The IRS urges taxpayers to use Direct Pay, which is the fastest and easiest way to pay a personal tax bill. In addition, the IRS has noted that online payment plans are processed more quickly than requests submitted with electronically-filed tax returns.

There are two main types of online payment plans:

• Short-term payment plan: The payment period is 120 days or less and the total amount owed is less than $100,000 in combined tax, penalties and interest. A 180-day payment plan is also possible, but is only available by calling or writing the IRS.
• Long-term payment plan ( "installment agreement"): Payments are made monthly, and the amount owed must be less than $50,000 in combined tax, penalties and interest. If the IRS approves an installment agreement, a setup fee normally applies, but low-income taxpayers may qualify to have the fee waived or reimbursed. In addition, for anyone who filed their return on time, the late-payment penalty rate is cut in half while an installment agreement is in effect. This means that the penalty accrues at the rate of one-quarter-of-one percent (0.25%) per month, instead of the usual one-half-of-one percent (0.5%) per month.

Taxpayers who do not qualify for an online payment agreement may still be able to arrange to pay in installments. If the IRS determines a taxpayer is unable to pay, it may delay collection until their financial condition improves. Taxpayers can request a delay by calling the phone number on their IRS notice or 800-829-1040.

Some taxpayers can qualify to settle their tax bill for less than the full amount due through an offer in compromise. Though there is typically a $205 non-refundable application fee, it is generally waived for low-income taxpayers, and for offers based on doubt as to liability. The Offer in Compromise Pre-Qualifier tool can help determine eligibility for anyone interested in applying.

The IRS reminds taxpayers that May includes National Hurricane Preparedness Week and National Wildfire Awareness Month. It urges taxpayers to create or review emergency preparedness plans for surviving natural disasters.

The IRS reminds taxpayers that May includes National Hurricane Preparedness Week and National Wildfire Awareness Month. It urges taxpayers to create or review emergency preparedness plans for surviving natural disasters.

The IRS advises taxpayers to do the following:

• Secure key documents such as tax returns, birth certificates, deeds, titles and insurance policies inside waterproof containers in a secure space. Keep duplicates of these documents with a trusted person outside the area of the taxpayer. Scan these documents for backup storage on electronic media such as a flash drive.
• Take current photos or videos of a home or business’s contents, especially expensive and high value items. The IRS disaster-loss workbooks in IRS Pub. 584-B can help individuals and businesses compile lists of belongings or business equipment.
• Employers who use payroll service providers should ask the provider if it has a fiduciary bond in place. The bond could protect the employer in the event of default by the payroll service provider.
• Reconstructing records after a disaster may be required for tax purposes, getting federal assistance or insurance reimbursement. Taxpayers who have lost some or all their records during a disaster can visit IRS’s Reconstructing Records webpage as one of their first steps.

Dependent care assistance benefits carryovers and extended claims period amounts that would have been excluded from income if used during the preceding tax year will remain excludable in tax years ending in 2021 and 2022. In addition, these benefits will not be taken into account in determining the dependent care benefits exclusion limit for the tax years ending in 2021 and 2022.

Dependent care assistance benefits carryovers and extended claims period amounts that would have been excluded from income if used during the preceding tax year will remain excludable in tax years ending in 2021 and 2022. In addition, these benefits will not be taken into account in determining the dependent care benefits exclusion limit for the tax years ending in 2021 and 2022.

Dependent Care Assistance Exclusion

Employees may exclude amounts their employer pays or incurs for dependent care assistance benefits if furnished pursuant to a dependent care assistance program. For 2020, the exclusion could not exceed $5,000, $2,500 if married filing separately (for 2021 only, increased to $10,500, $5,250 if married filing separately). Unused benefits may be used during a 2 1/2 month grace period following the plan year’s end. However, if the sum of the benefits used in the tax year (including unused benefits used during a grace period that falls in the tax year) exceeds the limitation, the excess is taxable.

Carryovers and Extensions

Beyond the grace period, carryovers of unused dependent care assistance program amounts generally are not permitted. However, the Taxpayer Certainty and Disaster Tax Relief Act of 2020 ( P.L. 116-260) allowed employers to amend their plans to permit carryovers to plan years ending in 2021 and 2022, or to extend the permissible period for incurring claims to plan years over the same period.

Under Notice 2021-15, I.R.B. 2021-10, 898, if an employer adopts the carryover or the extended period, the annual limits apply to amounts contributed for a year, and not to amounts reimbursed or otherwise available for reimbursement.

Notice 2021-26 clarifies that dependent care assistance program benefits that would have been excluded from income if used during the tax year ending in 2020 or 2021, remain eligible for exclusion from the participant’s gross income, and are disregarded in applying the limits for the employee's subsequent tax years when they are carried over from a plan year ending in 2020 or 2021 or permitted to be used pursuant to an extended claims period.

Notice 2021-26 also provides examples illustrating the possible tax consequences of electing $10,500 in benefits for a plan year beginning in 2021 but ending in 2022.

The Treasury Department has released a statement discussing investment in the IRS and improving tax compliance. 

The Treasury Department has released a statement discussing investment in the IRS and improving tax compliance. While roughly 99 percent of the taxes due on wages are remitted to the IRS, compliance across other forms of income is substantially less, because the IRS has had difficulty verifying whether income from unverified sources is properly reported. The Treasury states that noncompliance is concentrated at the top of the distribution: according to a recent study, the top one percent failed to report 20 percent of their income, and failed to pay nearly $175 billion in taxes owed annually.

The Treasury states that lower levels of compliance not only negatively impact tax progressivity, but also lower tax revenue and deteriorate the country’s fiscal position. If left unaddressed, the difference between taxes owed to the government and taxes actually paid will total approximately $7 trillion in the next 10 years. This massive gap in revenue would mean that policymakers must choose between higher taxes elsewhere in the tax system, lower spending on fiscal priorities, or rising budget deficits. This tax gap has many underlying causes, with insufficient resources being at the forefront. In addition, budget cuts over the past decade have resulted in an IRS that lacks the capacity to address sophisticated tax evasion efforts. Over this period, audit rates for taxpayers making over $1 million in income have fallen by almost 80 percent.

To ensure a fair and effective tax system, the Treasury says that a robust and sustained investment in the IRS is necessary. The IRS requires access to 21st century technology and to better information, so that it can target its efforts at offenders while helping compliant taxpayers avoid unnecessary and costly audits. Importantly, this investment will also put the IRS in a position to provide taxpayers with timely answers to questions.

The Treasury has listed some considerations that provide the basis for a series of proposals in the American Families Plan (AFP). The AFP intends to overhaul tax administration and provide the IRS with the resources and information it needs to address tax evasion. These reforms are expected to generate an additional $700 billion in tax revenue over the course of a decade. The reforms are expected to:

• Provide the IRS with necessary resources to stop sophisticated tax evasion. A key component of this initiative is the provision of a sustained, multi-year stream of funds to help the IRS tackle costly tax evasion.
• Provide the IRS with more complete information on third parties. When the IRS has information from third parties, income is accurately reported, and taxes are fully paid. Importantly, this proposal intends to provide additional information to the IRS without an increased burden on taxpayers. It leverages the information that financial institutions have about account holders, requiring that they add to their regular, annual reports information about aggregate account outflows and inflows.
• Overhaul outdated technology to help IRS identify tax evasion, by providing the IRS with resources to modernize its technological infrastructure.
• Improve taxpayer service and deliver tax credits. Service enhancement will improve the ability of the IRS to communicate with taxpayers securely and promptly. The proposal would also include the necessary resources to ensure that the IRS efficiently delivers credits to families and workers, including newly expanded child tax credits and child and dependent care tax credits.
• Regulate paid tax preparers by providing the IRS with legal authority to implement safeguards in the tax preparation industry. This includes stiffer penalties for unscrupulous or "ghost preparers" who fail to identify themselves on tax returns and defraud taxpayers.

Michael Jackson’s image and likeness, as well as his interests in two trusts—one trust (NHT II) that held his interest in the Sony/ATV Music Publishing, LLC, and one trust (NHT III) that held Mijac Music—were valued for estate tax purposes.

Michael Jackson’s image and likeness, as well as his interests in two trusts—one trust (NHT II) that held his interest in the Sony/ATV Music Publishing, LLC, and one trust (NHT III) that held Mijac Music—were valued for estate tax purposes.

Image and Likeness

The estate claimed that the decedent’s image and likeness was valued at about $2,000. However, at trial, the estate brought in additional experts and increased the value to about $3 million. This amount was based on a 10-year revenue projection, which examined pre-death revenue, post-death rights, and growth and decline rates using pre-death marketability and a potential post-death boom. An estimate of expenses incurred in administering the image and likeness and expenses related to rehabilitation of the decedent’s image reduced the revenue stream. As a result, the Tax Court determined that the date-of-death value of the decedent’s image was $4.1 million.

Interest in Sony/ATV

In the years prior to his death, the decedent had borrowed against his interest in the Sony/ATV company. The company was valued using the discounted cash flow method. After finding the value of the company as a whole, a discount for lack of control was applied to one-half of that amount to reflect the decedent’s 50-percent interest. Because of the debt secured by the interest, however, the Tax Court determined that the date-of-death value of NHT II was zero.

Interest in Mijac Music

The major asset of NHT III was Mijac Music, which owned compositions from many artists, including the decedent. The decedent also assigned the income he earned from his writer’s share of certain performance revenue to NHT III. The discounted cashflow analysis was used again and the court determined the revenue streams of Mijac Music and the writer’s share of revenue. After subtracting the trust’s liabilities from the revenue, the Tax Court determined the value of NHT III was $107 million.

No Penalties

Although the values differed widely, the estate was not liable for accuracy-related penalties. Its reliance on the appraisal values was reasonable.

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.