The Mortgage Forgiveness Debt Relief Act originally enacted by the IRS gave taxpayers relief on short sales.  Without this relief, when taxpayers had a short sale they could be responsible for tax on the forgiven debt as it was considered taxable income reported on a Form 1099.  However, under certain conditions and with limitations, taxpayers could exclude the forgiven debt on a short sale so that it would not be taxed as income.  Through 2012, California conformed to this exemption but initially did not renew it for the 2013 tax year.

When 2013 tax returns started getting prepared this year, taxpayers were surprised when their short sale was resulting in large income amounts on the California tax return.  Many taxpayers had assumed the extension of the federal provision would also apply to California.  With taxpayers not able to afford the tax on this unsuspected income, tax professionals scrambled for a resolution.  There was a letter from Senator Barbara Boxer, a Board of Equalization statement on the matter, an IRS response to the Boxer letter, and a long discussion of recourse vs. nonrecourse debt.  However, on July 25, 2014, California finally ended the discussion and speculation and extended the provision to apply retroactively to the period of January 1, 2013 through December 31, 2013.  Taxpayers who have already filed their 2013 return can file an amended return to claim the exemption and have to write “Mortgage Debt Relief” in red at the top of the Form 540X.  Taxpayers on extension who have not yet filed, can claim the exemption using normal procedures including attaching the federal tax return and Form 982.  As for taxpayers with short sales in 2014, we may be having this discussion again next year so it is important to be aware of the tax consequences of a short sale.

Buying and selling property as well as dealing with debt can have many different tax implications.  Before undertaking a major transaction taxpayers should always consult a tax professional to make sure the finances match the intended goals.  If you have questions about selling a home, cancellation of debt income or a short sale, contact us at Hone Maxwell LLP.  As always,  you can follow us on twitter @HMLLPTax or facebook at www.facebook.com/HoneMaxwellLLP for more tax tips and the latest updates on tax news

As discussed in our post on June 24, 2014, the IRS has announced important changes to its offshore voluntary account programs. These changes were announces as FATCA took hold worldwide on July 1, 2014.

One of the biggest changes announced by the IRS was the changes made to the main disclosure program knows as the Offshore Voluntary Disclosure Program, OVDP.  More than 45,000 taxpayers have participated in the IRS programs so far and as FATCA kicks in, the IRS can expect even more.

The IRS and Department of Justice (DOJ) have warned that they have even more resources at their disposal. Over 100 Swiss banks took a DOJ deal that means full disclosure of American accounts and tiers of fines depending on how the banks behaved. Notably, this deal was not offered to the 14 Swiss banks under U.S. investigation.

The changes announced by the IRS in June to the existing OVDP include:

  • Requiring additional information from taxpayers applying to the program;
  • Eliminating the existing reduced penalty percentage for certain non-willful taxpayers;
  • Requiring taxpayers to submit all account statements and pay the offshore penalty at the time of the OVDP application;
  • Increasing the offshore penalty percentage (from 27.5% to 50%) if, before the taxpayer’s OVDP pre-clearance request is submitted, it becomes public that a financial institution where the taxpayer holds an account or another party facilitating the taxpayer’s offshore arrangement is under investigation by the IRS or Department of Justice.

This last change is the most worrisome.  The increase in penalty is substantial and may catch many off guard as investigations become public.  The IRS has published a list of the financial institutions and proprietors that are under investigation publicly here.  Currently there are ten (10) financial institutions and proprietors on the list.

Under U.S. tax law you must report your worldwide income on your U.S. income tax return.  You may also need to file an IRS Form 8938 to report foreign accounts and assets with your tax return.  Additionally, if you have foreign bank accounts exceeding $10,000 in the aggregate at any time during the year you must file an FBAR by each June 30.

If you haven’t been doing this it is vital you speak with a tax attorney immediately to discuss your options.  Can you start filing complete tax returns and FBARs prospectively, but not try to fix the past?  The risk is that past non-compliance will be noticed and it will then be too late to make a voluntary disclosure.  Although criminal cases are rare, FBAR violations and tax violations can result in criminal prosecution.  Furthermore, even civil penalty cases for the failure to file an FBAR can be disastrous. The non-willful FBAR penalty is $10,000 per account per year. Willful violations are hit with $100,000 or 50% of the amount in the account for each violation.

If you have undisclosed foreign financial assets, income or bank accounts contact Hone Maxwell LLP today.

The IRS has announced that beginning in January 2015, only 3 direct deposit refunds will be able to go into any single financial account.  The fourth and following refunds will automatically convert to a paper check that is mailed to the taxpayer.  This change is an attempt to prevent fraud and identity theft issues.  Frequently, this type of fraud comes from tax preparers taking advantage of their clients.  The tax preparer can either file faulty returns for the client in order to share the benefit, or a scarier situation is where a return is filed without the taxpayer’s knowledge.  In some cases, the tax preparer shows the taxpayer a tax return for signature that includes a refund.  The tax preparer may then offer to pay the refund to the taxpayer immediately, in return for the taxpayer having the refund deposited in the tax preparer’s account.  Then, the tax preparer fraudulently changes the tax return and files a return showing a larger refund, and pockets the difference.  Unfortunately, this is a common case.  When there is tax preparer misconduct, one of the first steps for a taxpayer should be to review IRS records to make sure the returns they have signed are actually what was filed under their social security number.   In fact, the situation is so common the IRS even has a reporting procedure in place using Forms 14157 and 14157_A to report these incidents.

Despite these changes, the IRS encourages taxpayers to continue to use the direct deposit method for refunds.  Most taxpayers will not be affected by the changes.  Hopefully, these changes will help limit the possibility that the taxpayer is ever affected by the fraud and misconduct they are designed to prevent.  If you have received IRS notices that don’t match what you believe should be on file for your account, or other questions regarding your tax return, contact us at Hone Maxwell LLP today for a complete analysis of your tax situation.  As always,  you can follow us on twitter @HMLLPTax or facebook at www.facebook.com/HoneMaxwellLLP for more tax tips and the latest updates on tax news.

Amid heavy pressure from tax professionals and taxpayers alike, the IRS has finally made changes to the Offshore Voluntary Disclosure Program (OVDP).  The pressure to change the program came from the clear impression by many that the former programs were too severe for taxpayers who were not attempting to evade taxes or hide assets offshore.  Therefore, the unintended consequences were that non-willful offenders were sometimes left with the choice of entering the program and paying a very high penalty, or risking the unknown by making a quiet disclosure.  While the new program offers additional disclosure options for the non-willful offender, the IRS has increased the penalties on taxpayers they catch before the taxpayer makes a voluntary disclosure and broadened the definition of what this means.  Further complicating the matter are new procedures for making a disclosure as well as transitional rules for participants already involved in the program.

The Good News:

Taxpayers whose failure to file a foreign financial report was non-willful, and who meet certain other requirements, have a new streamlined process to make a disclosure.  For people qualifying under this new streamlined procedure the penalty will only be 5% of the highest aggregate balance of offshore accounts for taxpayers falling under the resident category, and the penalty will be waived in its entirety for participants falling under the non-resident category.  This is in heavy contrast to the prior OVDP standard penalty of 27.5%.  The previous OVDP did allow for reduced penalty amounts of 5% – 12.5% but these options came with heavy restrictions and requirements that ruled out many taxpayers.  The streamlined process also does not include the other penalties included in the OVDP such as the accuracy related penalty, and for non-resident filers also the failure to file penalty and failure to pay penalty.  Other than the residency requirement and applicable penalty of 5%, the other major difference between the resident and non-resident procedures is that residents must have filed tax returns for the three previous years.  Furthermore, in addition to the lesser penalty, the reporting required under the streamlined process, including returns, forms and documents, is much less onerous than the standard OVDP.  Before entering the new streamlined process taxpayers should have a tax professional analyze their specific facts and circumstances to determine if they qualify for this process.

The Bad News:

For taxpayers that were already planning to make a standard disclosure under the previous terms of the OVDP, the changes are less drastic.  The major items to note are that the pre-clearance submission now requires additional information and the penalty payment and bank statements relating to the disclosure are due at the time of filing regardless of the size of the accounts.  The big hammer comes in the form of an increased penalty on the aggregate account balances to 50% if the taxpayer enters the program after “either a foreign financial institution at which the taxpayer has or had an account or a facilitator who helped the taxpayer establish or maintain an offshore arrangement has been publicly identified as being under investigation or as cooperating with a government investigation.”  The program goes into some detail about what this means but of most concern is the inclusion of banks that are cooperating with the IRS to give information about U.S. account holders.  As FATCA compliance becomes more widespread, many taxpayers are getting letters from foreign financial institutions stating that they are in the process of or preparing to submit the taxpayer’s information to the IRS.  It is not completely clear if this means the threshold has been hit to push a taxpayer’s penalty into the 50% threshold; however, if the taxpayer has decided to make a disclosure the best option is to enter the program immediately to give the best chance of being considered under the original penalty structure of 27.5%. The IRS does not want taxpayers waiting until they are forced into the program, they are asking for voluntary disclosure now.

Other Concerns:

Quiet Disclosure?

Quiet disclosure is an option some taxpayers had previously made when faced with the options before these recent changes.  A typical quiet disclosure is where a taxpayer files all late forms and amended returns outside of the OVDP and hope they are processed without further inquiry.  The IRS has previously stated that they do not want taxpayers to make quiet disclosures and with the new streamlined process for taxpayers that unintentionally violated IRS filing requirements; we expect the IRS will not view any quiet disclosures favorably and will likely assess all potential penalties against those that are caught attempting quiet disclosure.  Furthermore, with the electronic filing of the foreign financial account statements (previous FBAR) it will also be easier for the IRS to identify those attempting quiet disclosure.

Additionally, the IRS has given further insight into their position on quiet disclosure by stating in the most recent FAQ to the updated OVDP that they encourage anyone who has made a quiet disclosure to enter the new streamlined process.  As you can imagine, in order for this recommendation to carry any weight, the IRS will have to be vigilant in assessing penalties against quiet disclosures. Could this be the end of quiet disclosure?  Possibly.

Opting-Out

The new OVDP also may be the end of opting out for many taxpayers.  Under the prior OVDP, at the end of the process the taxpayer had the option to opt out of the program if they felt the penalty was not appropriate for the facts and circumstances of their case.  In most cases, this only made sense if the taxpayer was a non-willful violator.  Now, a non-willful violator should use the streamlined approach to pay the lesser penalty or no penalty if they qualify as a non-resident and therefore will essentially eliminate the benefit of opting out of the OVDP for most taxpayers.  Of course for those taxpayers that are non-willful, but ineligible for the streamlined process (e.g. a resident who has not filed their last 3 years of tax returns) they may still choose to enter the OVDP and consider opting out.

Conclusion:

Any taxpayer with unreported foreign financial accounts or earnings needs to have a comprehensive analysis done of the new procedures and processes versus their particular facts.  This is true whether the taxpayer is considering making a disclosure or in the middle of one already.  For taxpayers who have not yet made a disclosure, delaying the process could result in severe consequences if the matter is not addressed soon.  The IRS appears to be making it clear that they are working towards a fair and reasonable resolution for the people that voluntarily come forward and will be relentless in pursuing those who choose not to disclose.

If you have any questions about your foreign accounts, assets, or earnings, contact us at Hone Maxwell LLP today for a full analysis of your case.  At Hone Maxwell LLP we have experience to guide you through the web of disclosure options, potential penalties, and filing requirements.  Whether you choose us or another representative, make sure you choose someone with experience, technical skills, knowledge of the various programs and the customer service you need to make your experience as comfortable, efficient and effective as possible.

 

When preparing your IRS tax return it has to be complete and accurate based on the information of the current year.  Mistakes in past years cannot be “fixed” in the current year.  Phrases such as “at the end of the day,” “it all works out,” or “it nets to zero” should not be used when preparing tax returns.  Each year standing alone is a principle the IRS frequently uses when auditing tax returns.  Therefore, for example, if you incorrectly recognize income in a past year you cannot simply recognize less income in the current year.  Another common example is that a missed deduction in a prior year cannot be “caught up” or used in the current year.  If you notice a mistake or something was done incorrectly you have to file an amended tax return to fix the prior year.  In some cases you may be past the deadline to file an amended return; however, even in this scenario adjusting the problem in the current year is not an option.  This principle even goes so far as to sometimes cause you to continue a mistake.  If you choose an improper accounting method in a prior year you may have to continue using the incorrect method.  In order to change to the correct method you will likely have to file for an accounting method change or possibly amend the prior year returns.

Overall, when preparing your tax returns you have to make sure you are consistent with prior years methodologies and carryovers, while at the same time only reporting the current year information.  If you have questions about changing your accounting method, past return mistakes, or if the IRS is using this principle against you in an audit, contact us at Hone Maxwell LLP today.  Although, the principle of “each year standing alone” cannot be changed there are ways to mitigate the consequences.  As always,  you can follow us on twitter @HMLLPTax or facebook at www.facebook.com/HoneMaxwellLLP for more tax tips and the latest updates on tax news.

A federal jury has found an 87 year old man guilty of willfully failing to file FBARs (Foreign Bank  and Financial Account Reports) for tax years 2004, 2005, and 2006.  The result is a civil penalty of 50% of the entire account balance PER YEAR.  This means, the total penalty will roughly equate to 150% of the account balance.  This is a landmark and eye-opening case for several reasons.  This was the first time the 50% willful penalty has been applied to multiple years in a civil case.  Furthermore, it has sometimes been believed that the IRS would pursue elder individuals less vigorously.  Possibly the IRS did not pursue criminal charges because of age, but it appears to have had no effect on the civil side.  Lastly, many people ask the question about why should they enter the OVDI program and pay 27.5% of the account balance  if the FBAR penalty is only $10,000/year.  This decision is a loud statement of why one cannot assume only the $10,000/year penalty will apply.  If the IRS did not pursue more harsh penalties for the people who did not come forward the Offshore Voluntary Disclosure Program would offer no incentive for taxpayers.  As such, the available penalties for the IRS to assess on people who do not comply has to have real teeth in order to push people into the program.  With this decision the IRS is making it clear that you are playing with fire if you do not come forward on your own.

If you have unreported foreign bank accounts you should talk with a tax professional immediately.  As more countries become FATCA compliant this issue is only going to continue growing.  At some point down the road, people with offshore accounts are likely going to have to come to the IRS or let the IRS find them.  Based on this decision you may want to choose the first option.  If you have questions about your offshore accounts contact us at Hone Maxwell LLP today.  We can give you a detailed review of your situation including the risks, costs, and benefits of all available options.  As always,  you can follow us on twitter @HMLLPTax or facebook at www.facebook.com/HoneMaxwellLLP for more tax tips and the latest updates on tax news.

When it comes to taxes there is a major difference between alimony and child support.  Child support has no effect on taxes for the person paying or receiving it.  However, alimony is much different.  The person paying the alimony is allowed an “above the line” deduction, meaning that they can deduct the amount paid even if they do not itemize their tax deductions.  On the other end, the person receiving the alimony must recognize the payment as income.  This is a very standard principle of taxes that when someone is getting a deduction it is usually because someone else has income.  The person paying the alimony must list the social security number of the person they are paying, which allows the IRS to easily verify if the income is being recognized.

When alimony is being paid, documentation is key.  If there is ever an audit, you have to be prepared to show that the payments being made are in fact legal alimony.  If someone helps out with the bills or any other informal arrangement, this is not deductible alimony.  Also, if alimony payments are mixed with child support the IRS will look to marital settlement agreements or other court documents to make sure the proper allocation is being applied to the payments.  If you have questions about alimony payments or how other financial arrangements related to a divorce effect your taxes, contact us at Hone Maxwell LLP today for an analysis of your case.  Also,  you can follow us on twitter @HMLLPTax or facebook at www.facebook.com/HoneMaxwellLLP for more tax tips and the latest updates on tax news.

In our last post we discussed how to track your refund.  But what if your refund is issued and you only receive a portion of it, or possibly none of it?  Your refund can be offset or allocated elsewhere under the Treasury Department’s Offset Program if you owe debts for things such as child support, student loans, state income tax, or unemployment compensation.  Also, the IRS may offset your refund to pay taxes you owe from other tax years.  Therefore, if you do not receive your full refund, you need to determine what the problem or debt is that is causing the Offset Program to allocate your refund instead of sending it to you.  For some taxpayers this can cause financial problems; even if the debt is owed, the taxpayer may not be able to afford to pay such a large portion at this time.  The taxpayer may have been depending on getting the full refund and then setting up other payment arrangements for the debt.  Unfortunately, unless the debt can be proven invalid, it is likely not possible to get a refund and set up other payment arrangements once the refund has been offset.

There are a few things taxpayers can do in this situation.  First, make sure that if you owe one of these types of debts you are working with the proper authorities to set up payment arrangements so that they do not offset your refund.  Next, if you are in a situation where your refund is going to be offset, which can happen even when you have alternative payment arrangements, you want to make sure you do not overpay taxes and cause a large refund, unless you want it applied to the other debt.  This can be accomplished by working with your tax advisor throughout the tax year to ensure you pay enough in taxes but do not greatly overpay, causing a large refund which could be offset.  If you have questions about outstanding debts that can offset your refund, or questions about how to pay in the proper amount of taxes during the year contact us at Hone Maxwell LLP today.  Also,  you can follow us on twitter @HMLLPTax or facebook at www.facebook.com/HoneMaxwellLLP for more tax tips and the latest updates on tax news.

Now that many people have filed their tax returns they could be waiting for a refund.  It is not a secret that a phone call to the IRS frequently results in extremely long hold times and there is no guarantee of success once you finally speak with someone.  However, the IRS has now simplified the process by allowing taxpayers to electronically track their refund.  To check the status of your refund use the IRS resource “Where’s My Refund?” and follow the instructions.  For those who want to take it one step further you can also use the smartphone application “IRS2Go 4.0.”  If you are unable to get any information after using these resources, or if your refund is not being issued and you do not understand why, contact us at Hone Maxwell LLP today.  There are many variables that can affect your refund and we can help you figure out why it is not happening as you expected.  Also,  you can follow us on twitter @HMLLPTax or facebook at www.facebook.com/HoneMaxwellLLP for more tax tips and the latest updates on tax news.

 

Most people are breathing a sigh of relief to have 2013 taxes behind them.  However, in some ways, 2014 taxes literally start today.  First of all, the first quarter estimated tax payment for 2014 is due on 4/15.  This means people who have to pay taxes throughout the year, most notably independent contractors and sole proprietor business owners, have to make their first payment today.  Next, it is very hard to perform tax planning after the fact.  At this time, with the 2013 taxes fresh in mind, could be the best time to look at tax saving opportunities.  These strategies can then be implemented during the year.  Lastly, your CPA or tax preparer should have just completed asking you for all the information needed to prepare your return.  This is the time to make sure you take all the receipts and documentation you used to gather this information and store it in a safe and organized place in case there is ever an audit.  Furthermore, now that you know what was needed for 2013 you can continue to keep more diligent and complete records for 2014.

Filing a tax return and paying taxes can be intimidating and scary processes to some people.  Although the tendency may be to ignore taxes until next year, being proactive now can make 2014′s tax process easier and more manageable.  If you have questions about your tax situation, preparing for 2014 taxes, or how to organize in case you are ever audited, contact us at Hone Maxwell LLP.  Also,  you can follow us on twitter @HMLLPTax or facebook at www.facebook.com/HoneMaxwellLLP for more tax tips and the latest updates on tax news.