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.

In a landmark decision, the Chicago district of the National Labor Relations Board has ruled that Northwestern football players are employees of the university and can unionize.  In the ruling, the regional director stated that the players “fall squarely within the [National Labor Relations] Act’s broad definition of ‘employee’ when one considers the common law definition of ‘employee.”  For college administrators and  most fans of college football, the obvious issue at hand is if this will lead to players being paid, creating their own schedules, or going on strike.  However, this is only the start of the questions that begin with this ruling.

Many students take jobs working for the college in order to earn extra money and these jobs can generate taxable income.  Generally, college scholarships and grants are not taxable.  Based on this new ruling it would seem clear that any straight pay these athletes get will be taxable, but does it also call into question the scholarship itself?  Is the scholarship a payment for performance on the field as opposed to a traditional scholarship to aid with the cost of school?  Furthermore, as employees it would create payroll tax responsibilities for the university.  Besides the typical water cooler talk about paying athletes and the problems that creates, universities are now also going to have to deal with the scrutiny of the taxing agencies as well.

Overall, employee classification is a major issue when it comes to payroll and income taxes.  In California, the EDD audits businesses to make sure they are properly classifying employees, and reporting and paying tax for these employees.  Employment status is not a black and white test, but rather a facts and circumstances analysis which leaves a lot of uncertainty.  It can be difficult for employers to navigate this world, and if done incorrectly can create problems including taxes and penalties if they are ever audited.  If you have questions about employee status or a payroll audit through the IRS or EDD, 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.

The U.S. Supreme Court overruled a lower court decision and has decided in favor of the government on the issue of payroll taxes related to severance payments.  The Court ruled severance payments are subject to medicare and social security taxes under FICA.  In the case, Quality Stores Inc. was contending the payments were supplemental unemployment insurance and therefore should not be subject to FICA.  However, the court disagreed with this analysis and found the payments to be taxable wages as stated in the opinion – “Under FICA’s broad definition, these severance payments constitute taxable wages.”

The decision was very crucial for the government.  If the lower court decision was not overturned the IRS may have been forced to give more than $1 billion in refunds.  What does this mean to the average taxpayer getting laid off, a situation not uncommon in today’s market?  Overall, taxpayers are not going to see a new tax or new cost.  FICA taxes are taken out of every paycheck you receive from your employer.  On your W-2 you can see these amounts in boxes 4 and 6.  Therefore, severance payments will be very similar to receiving an additional paycheck from your employer when it comes to these taxes.

The issue of payroll taxes continues to be a major point of emphasis for the IRS.  The penalties for neglecting payroll taxes are severe and can sometimes lead to criminal prosecution or assessment against unsuspecting members of the business.  If you have questions about your payroll tax obligations or issues, contact us at Hone Maxwell LLP today for a complete 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.