Is A Simplified Home Office Deduction Better?

Posted on January 15, 2013 by Russ

Today the IRS announced a simplified option for claiming the home office deduction (Form 8829). The deduction will allow some to take $5 per square foot of home office (up to a maximum of 300 square feet). This new “simplified” procedure will be available for 2013 tax returns filed in 2014. Do note that the home office still must be a qualifying home office to take the deduction. There is no depreciation under this simplified procedure, but mortgage interest, property tax, and casualty losses are assumed to be taken.

Well, is this a good deal for home office users? Frankly, not for many of them. I looked at all of my clients who filed this form, and the simplified procedure would have cost every one of them money. Perhaps that’s because of my client base, but I don’t think so. Most taxpayers taking the home office deduction do keep good records, so the recordkeeping isn’t that big of a deal. After all, these are small business owners who have to keep good records anyway (or are supposed to). The reality is that $5 per square foot understates the cost of most home offices, especially when factoring in depreciation.

There are two groups for whom this new procedure is beneficial. First, those business owners who do not keep good records and just haven’t bothered with the deduction in the past. (This especially holds true for renters.) Second, the IRS (and the US Treasury). The simplified procedure will cost taxpayers money, so the government definitely benefits.

There’s another issue with the simplified procedure: state conformity. I actually expect most states to conform as it is beneficial to them (the deductions will be less under this method).

What the IRS handed taxpayers might appear to be a savings of 1.6 million hours per year (per the IRS email I received today). The reality is that taxpayers and tax professionals would be well advised to spend the 1.6 million hours because the simplified procedure looks like a lemon to me.

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Entrepreneur Rant on FTB’s Retroactive QSB Ruling

Posted on January 15, 2013 by Russ

Back in December, I reported on how the Franchise Tax Board (California’s income tax agency) would interpret the Cutter decision. I didn’t spend much time on it, as the subject of Qualified Small Business stock (QSB) doesn’t impact many of my blog readers. The FTB decided that since the appellate court ruled as aspect of California’s law on sale of QSB stock unconstitutional, one way around the issue was to void the law in its entirety. And send individuals who took the QSB deduction penalty and interest notices. Surprise!

That said, an entrepreneur named Brian Overstreet has written a column that is about as nasty as can be toward the FTB and California. (I recommend reading the entire column.) As Mr. Overstreet notes the impact:

1. If you are a business founder or early investor who sold stock since 2008 and took the QSB exclusion: Surprise! You are going to get a bill from the FTB for the 50 percent of the taxes you excluded plus interest plus possible penalties.

2. If you are a business founder or early investor and have not yet sold stock: Rethink your business and tax planning strategies. Consider whether it’s fiscally prudent to stay in California.

3. If you a contemplating starting or investing in a California business: Think long and hard. Consider out-of-state alternatives.

Of course, there’s definitely a constitutional issue here, too. Given that some of the impacted entrepreneurs have deep pockets, I expect this ruling to head to court. I suspect the FTB can do this for the current tax year (2012; the ruling was announced in December) but I doubt it will hold up for prior tax years.

The other issue is one any entrepreneur in California should consider. As Mr. Overstreet noted, “Why in the world would any smart business person start or invest in a new California company facing that kind of penalty?”

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What $4.95 Buys These Days

Posted on January 15, 2013 by Russ

Living in Las Vegas gives me, at times, a very jaded perspective on life. I see individuals who otherwise pinch pennies spend $100 on bottle service at a club (or $4.95 for a thimble-sized amount of alcohol). You can still find $4.95 meal specials in the late night/early morning hours at many casinos in town. The latter, if you’re hungry, is a far better use of $4.95 than the former.

Another use of $4.95 is to purchase Robert Flach’s My Best Tax Advice. The 27 pages of tax advice within the ebook (a pdf document) are full of good, common-sense advice. While I don’t agree with everything Robert has written, any individual who follows Robert’s advice will be far, far better off than those who don’t. I especially like his comments about notices from the IRS; as Robert states, “Do not ignore an IRS or state tax notice. The problem will not just go away.” I used basically the same line in my book.

In any case, for less than five dollars you can get some common-sense advice that if followed would help most taxpayers. You can order the book through Robert’s website.

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Estimated Tax Payment Deadline Is January 15th

Posted on January 14, 2013 by Russ

Tomorrow, Tuesday, January 15th is the deadline for making your fourth quarter 2012 estimated tax payments. This is a postmark deadline, so if you are mailing your estimated payments, go to the post office and spend the few dollars to mail your payment certified mail, return receipt requested. If you use EFTPS, the payment must settle tomorrow (the 15th).

Most states have the same deadline for fourth quarter estimated payments (January 15th).

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“The IRS Has Failed to Provide Effective and Timely Assistance to Victims of Identity Theft”

Posted on January 9, 2013 by Russ

That’s not just my opinion, it’s the opinion of the National Taxpayer Advocate, Nina Olson. Most tax professionals who have run into identity theft can relate horror stories. Jason Dinesen, an Enrolled Agent in Iowa, has been dealing with an identity theft matter for over 20 months (that’s nearly two years). The matter is still unresolved.

Ms. Olson today came to the conclusion that:

■■ The IRS is moving backward — away from a centralized approach to assisting identity theft victims — and is increasing the risk that taxpayer-victims may fall through the cracks;
■■ After years of ineffective efforts to reengineer its processes, the IRS still takes too long to fully resolve the accounts of victims;
■■ While the Identity Protection Personal Identification Number (IP PIN) that the IRS has developed provides additional security, it does not cover all victims;
■■ The Taxpayer Protection Unit may not be sufficiently staffed to handle the volume of calls from impacted taxpayers;
■■ Congress may unnecessarily create additional exceptions to taxpayer privacy protections; and
■■ The Social Security Administration still makes the Death Master File available to the public, creating an opportunity for identity thieves to steal and then misuse personal information.

The IRS and the Taxpayer Advocate both have reasonable arguments; the report (linked to above) notes both sets of issues. But I think Ms. Olsen misses a key point: The place to stop identity theft is checking addresses when returns are filed. The proposal that I made back in September would stop some identity theft before it happens. An ounce of prevention is worth a pound of cure.

Ms. Olson hits a bullseye with her comments on the Social Security Death Master File; she sees no reason for that to be available to the public while the social security numbers could be used for identity theft. I agree completely. The government is handing to crooks information they need to be crooks.

Finally, Ms. Olson’s comments about the length of time it takes to resolve many identity theft claims are accurate. The cases take a long time. They are complex. That said, many individuals are waiting years to get matters resolved. This is a disservice to an agency that has “service” in their name.

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IRS Announces Tax Season to Start on January 30th

Posted on January 8, 2013 by Russ

The IRS announced today in an email that tax filing season will begin on Wednesday, January 30th. That’s a delay of about two weeks and is caused by Congress’s delay in enacting the “fiscal cliff” tax extender legislation (including the AMT patch).

A small subset of individuals will not be able to file returns until late February to March. These include individuals who file Form 5695 (residential energy credits), Form 4562 (depreciation and amortization), and Form 3800 (General Business Credit). There are more forms that will be impacted; these will be listed on the IRS’s website.

UPDATE: Here is a link to the full list of forms. The most notable of the other forms is Form 8582, Passive Losses. This will impact some taxpayers.

The email in full is reproduced below.

IRS Plans Jan. 30 Tax Season Opening For 1040 Filers

WASHINGTON — Following the January tax law changes made by Congress under the American Taxpayer Relief Act (ATRA), the Internal Revenue Service announced today it plans to open the 2013 filing season and begin processing individual income tax returns on Jan. 30.

The IRS will begin accepting tax returns on that date after updating forms and completing programming and testing of its processing systems. This will reflect the bulk of the late tax law changes enacted Jan. 2. The announcement means that the vast majority of tax filers — more than 120 million households — should be able to start filing tax returns starting Jan 30.

The IRS estimates that remaining households will be able to start filing in late February or into March because of the need for more extensive form and processing systems changes. This group includes people claiming residential energy credits, depreciation of property or general business credits. Most of those in this group file more complex tax returns and typically file closer to the April 15 deadline or obtain an extension.

“We have worked hard to open tax season as soon as possible,” IRS Acting Commissioner Steven T. Miller said. “This date ensures we have the time we need to update and test our processing systems.”

The IRS will not process paper tax returns before the anticipated Jan. 30 opening date. There is no advantage to filing on paper before the opening date, and taxpayers will receive their tax refunds much faster by using e-file with direct deposit.

“The best option for taxpayers is to file electronically,” Miller said.

The opening of the filing season follows passage by Congress of an extensive set of tax changes in ATRA on Jan. 1, 2013, with many affecting tax returns for 2012. ‬While the IRS worked to anticipate the late tax law changes as much as possible, the final law required that the IRS update forms and instructions as well as make critical processing system adjustments before it can begin accepting tax returns.

The IRS originally planned to open electronic filing this year on Jan. 22; more than 80 percent of taxpayers filed electronically last year.

Who Can File Starting Jan. 30?

The IRS anticipates that the vast majority of all taxpayers can file starting Jan. 30, regardless of whether they file electronically or on paper. The IRS will be able to accept tax returns affected by the late Alternative Minimum Tax (AMT) patch as well as the three major “extender” provisions for people claiming the state and local sales tax deduction, higher education tuition and fees deduction and educator expenses deduction.

Who Can’t File Until Later?

There are several forms affected by the late legislation that require more extensive programming and testing of IRS systems. The IRS hopes to begin accepting tax returns including these tax forms between late February and into March; a specific date will be announced in the near future.

The key forms that require more extensive programming changes include Form 5695 (Residential Energy Credits), Form 4562 (Depreciation and Amortization) and Form 3800 (General Business Credit). A full listing of the forms that won’t be accepted until later is available on IRS.gov.

As part of this effort, the IRS will be working closely with the tax software industry and tax professional community to minimize delays and ensure as smooth a tax season as possible under the circumstances.

Updated information will be posted on IRS.gov.

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The Problem with PEOs

Posted on January 7, 2013 by Russ

Sometimes I have the right idea but don’t consider the full spectrum of issues. That’s the definition of a blind spot, and with my post on the $7 million tax fraud yesterday, I had a big blind spot. Thankfully, some of my fellow tax accountants noted the issue.

Joe Kristan noted the problem with Professional Employer Organizations (PEOs):

PEOs that file taxes under their own names and ID numbers have a hidden danger: their clients can’t verify that the IRS has received their payments via the Electronic Federal Tax Payment System (EFTPS). Employers can use EFTPS to monitor payments when they use a payroll service that reports employee taxes under the employer’s own name and Tax ID number. This makes it necessary for taxpayers to investigate PEO-type providers very carefully before trusting them with payroll services. If your payroll taxes are stolen by your payroll provider, the IRS will come after you to collect. Not many employers can afford to pay payroll taxes twice. [emphasis in original]

As noted by Joe and Ann-Margaret Johnston (in a comment to my post), you can’t check PEO tax payments. This means that if you use an unscrupulous PEO, you’re out of luck; the IRS can come after you for the unpaid payroll taxes.

Does this mean you shouldn’t use a PEO? Of course not; there are many PEOs that are well-run. It does mean that you need to be very, very careful using a PEO; you need to check references; you may want to get periodic copies of payroll tax deposits made for your “employees.” Other than that, there aren’t many reliable solutions to this dilemma.

Posted in Payroll Taxes | 2 Comments

What’s $7 Million Among Freinds?

Posted on January 6, 2013 by Russ

Arthur Weiss had a successful business running various professional employer organizations (PEOs). For a fee, his business would pay employees, remit taxes to the IRS and states, file tax returns, and provide workers compensation insurance. It turns out his fee was slightly larger than advertised.

Mr. Weiss did take in all the money, and he did pay employees. It was was the remitting of payroll taxes to the government that he didn’t like to do. Instead, he lived the good life enjoying jewelry, Ferraris, Lamborghinis, and Porsches. The amount of payroll taxes not remitted to just the IRS was over $4 million.

But that’s not all! The workers compensation premiums also lined Mr. Weiss’ pockets, so employees who got hurt weren’t covered (nor were employers).

But there’s more! Mr. Weiss decided to commit insurance fraud. He reported four pieces of jewelry worth $177,480 lost or stolen. They were found during a search of his former home. Oops….

Like a bad informercial, there’s yet even one more crime: bank fraud. Mr. Weiss decided to get some loans. Instead of showing the tax returns he submitted to the IRS, he made up new returns which, of course, showed more income than he reported.

Sooner or later this fraud was bound to be discovered. And it was, with Mr. Weiss indicted last June. He pleaded guilty in October. He was sentenced last week to more than 15 years at ClubFed. He also must make restitution of $7 million to his victims. Given that bankruptcy fraud was among the crimes he was accused of, it’s likely restitution will be a long time in coming.

This brings up the key point of this case: If you use an outside payroll company, you must make sure they remit your payroll taxes. For the IRS, there’s an easy way to do this. Simply enroll in EFTPS, and you can verify that the payroll deposits are being made. “Trust but verify” is a good motto when dealing with payroll. Why is this important? Because paying payroll taxes is bad enough the first time; to have to pay them twice is very bad. Yet if your payroll company does what Mr. Weiss did (abscond with the payroll deposits), that’s what will happen to you. A one-time registration followed by periodic checking up which takes just a few seconds can prevent this.

Note that this is not doable for a PEO. Please look at my new post on PEOs.

I’m sure many of Mr. Weiss’s clients wish they had done this.

Posted in Payroll Taxes, Tax Fraud | 2 Comments

American Rights Litigators Has a Cameo Appearance

Posted on January 6, 2013 by Russ

Do you remember American Rights Litigators (ARL)? They were the outfit that counseled Wesley Snipes so successfully that he’s now enjoying three years at ClubFed. A couple who also believed the snake oil that ARL peddled is likewise about to find their way to ClubFed.

Stephen Thomas and Patricia Anderson of Lawrenceville, Georgia operated an outdoor furnishing store and a contracting business in Duluth, Georgia. (Both locations are near Atlanta.) Rather than file tax returns, Thomas and Anderson (who are married) submitted letters noting they were not US citizens but American citizens. In 2009 they submitted two claims for refunds of over $420,000 (they weren’t entitled to these, of course). They also submitted fictitious business documents to the IRS, including a purported $100 billion bond. Before 2009, they didn’t file tax returns for ten years.

Thomas was sentenced to five years at ClubFed while Anderson received only 51 months. Both will follow their sentences with three years of supervised release and both must pay a $10,000 fine. And although not mentioned in the DOJ press release, they will have to file real tax returns that show the real results of their businesses.

A hint to anyone else trying to practice such snake oil schemes: Don’t. Their chance of success is what you would expect (zero).

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Your Mileage Log: Start It Now!

Posted on January 2, 2013 by Russ

Today is the first business day of the new year. You may have resolved to keep good records this year (at least, we hope you have). Start with keeping an accurate, contemporaneous written mileage log.

Why, you ask? Because if you want to deduct all of your business mileage, you must do this! IRS regulations and Tax Court rulings require this. Written is defined as ink, so that means you need a paper log.

The first step is to go out to your car, and note the starting mileage for the new year. So go out to your car, and jot down that number (mine was 40,315). That should be the first entry in your mileage log. I use a small memo book for my mileage log; it conveniently fits in the center console of my car.

Here’s the other things you should do:

On the cover of your log, write “2013 Mileage Log for [Your Name].”

Each time you drive for business, note the date, the starting and ending mileage, where you went, and the business purpose. Let’s say you drive to meet a new client, and meet him at his business. The entry might look like:

1/2 40315-40350 Office-Acme Products-Office, 1234 Main St, Las Vegas
Discuss requirements for preparing tax return, year-end journal entries

It takes just a few seconds to do this after each trip, and with the standard mileage rate being $0.565/mile, the 35 miles in this hypothetical trip would be worth a deduction of $20. That deduction does add up.

Some gotchas and questions:
1. Why not use a smartphone app? Actually, you can but the current regulations require you to also keep a written mileage log. You can transfer your computer app nightly to paper, and that way you can have the best of both worlds. Unfortunately, current regulations do not guarantee that a phone app will be accepted by the IRS in an audit.

2. I have a second car that I use just for my business. I don’t need a mileage log. Wrong. First, IRS regulations require documentation for your business miles; an auditor will not accept that 100% of the mileage is for business–you must prove it. Second, there will always be non-business miles. When you drive your car in for service, that’s not business miles; when you fill it up with gasoline, that’s not necessarily business miles. I’ve represented taxpayers in examinations without a written mileage log; trust me, it goes far, far easier when you have one.

3. Why do I need to record the starting miles for the year? There are two reasons. First, the IRS requires you to note the total miles driven for the year. The easiest way is to note the mileage at the beginning of the year. Second, if you want to deduct your mileage using actual expenses (rather than the standard mileage deduction), the calculation involves taking a ratio of business miles to actual miles.

So start that mileage log today. And yes, your trip to the office supply store to buy a small memo pad is business miles that can be deducted.

Posted in IRS | Tagged | 2 Comments