Starting January 1, 2015, for any taxable year that began on January 1, 2014 or later (or in less technical terms for 2014 tax returns), any business entity filing an original or amended return using tax preparation software will be required to e-file the return. There are exceptions to the rule if there are technology constrains, e-filing would cause an undue financial burden, or if there is reasonable cause (an innocent mistake). Taxpayers can also request a waiver to not have to e-file the return. The IRS has stated that a wealth of information should be released soon to help taxpayers with this change.
California taxpayers may have noticed their tax preparer is asking them about something called “use tax.” What is this tax? Why do they have to pay it? Everyone is familiar with sales tax, where the retailer collects the sales tax from the buyer and includes the tax in the total charge. California imposes sales tax at a state rate of 7.5%, with local sales rates ranging from 0% to 2.5%. By combining the state and local rates, the amount of sales tax collected on a retail sale may be as much as 9.0% depending on where in California a sale is made.
On the other hand, not all taxpayers are familiar with use taxes. A California resident who buys merchandise from an out-of-state retailer that does not collect California sales tax is responsible for paying the would-be sales tax if this purchase was made in California – this is the use tax. This commonly occurs when items are purchased in states that do not have a sales tax and brought back to California, or when items are purchased online from out-of-state companies that do not collect California sales tax. In both of these situations the buyer does not pay sales tax at the time of purchase, but will have to pay the use tax to have the product in California. The amount of use tax due is the same as the sales tax that would have been collected if the merchandise were purchased from a California retailer, which is 7.5% to 9% depending on where a buyer uses the purchased item(s).
Now that the dream is crushed of buying large items out-of-state to save money by avoiding sales taxes, how does a California resident pay the use tax? The use tax can be paid on the taxpayer’s California tax return. The problem then becomes, who actually keeps track of these purchase amounts? California realized such recordkeeping would be onerous for the taxpayer and difficult for California to verify. To solve the problem, California created “safe harbor” amounts that can be paid without calculating the precise use tax due. Taxpayers can simply pay this set safe harbor amount based on their income and do not have to calculate the actual use tax that they would owe. In order to qualify for safe harbor reporting the following requirements must be met:
- The buyer is an individual
- The buyer is not required to hold a California Seller’s Permit or Consumer Use Tax account
- The items purchased are for personal use
- The price of each individual item is less than $1,000
The safe harbor amounts range from $2 – $61 for taxpayers earning less than $200,000/year and .033% of income for taxpayers above $200,000/year.
As you can imagine, for most taxpayers this information is interesting and can help understand the question from the tax preparer, but a $2 – $61 additional tax is not a major deal. However, for taxpayers making many purchases, the safe harbor could potentially offer tax savings, as long as these purchases are less than $1,000 each. In general, use tax probably won’t drastically change your taxes, but it is something to be aware of, in case there is a unique situation, and to make sure you properly address it on your tax return. If you have questions about use tax or are having a Board of Equalization audit (the group that collects and enforces use tax), 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.
Despite claims that it was stepping up international tax enforcement, based on a recent report from the Treasury Inspector General for Tax Administration (TIGTA) the IRS is falling short on international tax compliance. TIGTA’s report found that ineffective management oversight, control weaknesses, and unreliable statistics have hampered the efforts to crack down on taxpayers who are not compliant with international tax reporting. Furthermore, despite having tools such as the customs hold, there is not clear information showing how effective or utilized these tools are in enforcement. Even as TIGTA was making its recommendations for action, the IRS was at work to try to improve the processes and procedures. The biggest aid to the IRS has been the Offshore Voluntary Disclosure Program (OVDP) and FATCA. Through the OVDP program many taxpayers have engaged in self-enforcement in order to avoid criminal prosecution and severe penalties. Nevertheless, TIGTA feels the IRS needs to take further action to make sure overall enforcement is bolstered.
Taxpayers should not take any comfort in these weaknesses when it comes to international compliance enforcement. The IRS has made it very clear that this is a priority, and through FATCA, they are slowly gaining the support of the rest of the world. It is only a matter of time before the IRS is functioning at a very high level with international tax enforcement. At that time, it is likely that many amnesty programs such as the OVDP will no longer be available, and it can be assumed the IRS would not be sympathetic to the people who didn’t come forward when they had the chance. If you have international tax questions or issues, time is of the essence to come forward now and take advantage of the options the IRS has given to become compliant. Contact us at Hone Maxwell LLP today to discuss your options for compliance or how to make sure you are meeting your obligations on an on-going basis.
Mike Sorrentino, aka “The Situation,” who gained fame as a star on the reality show Jersey Shore, now has some real problems. Mike and his brother have pleaded not guilty to a seven-count indictment which includes filing false documents, failure to file tax returns, and conspiracy to defraud the United States. According to the charges, The Situation filed false documents to under report income through his business, claimed personal expenses as business deductions and failed to file a return for 2011 when he earned nearly $2 million. The unfortunate part for The Situation is now that the case is public the IRS is going to have to pursue it vigorously. With limited resources and an extremely large tax constituency to govern, the IRS has to make sure that when it takes on a case such as this one that they have a favorable outcome. If a high profile case was ever to come out unfavorable for the IRS it would set a devastating precedent – just ask Wesley Snipes.
Although higher profile cases may receive more attention and resources, that does not mean the IRS wouldn’t pursue the everyday person for transgressions such as this. If you have questions, are currently under investigation or have issues you want to fix before they become a serious problem 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.
When a tax return is filed and taxes are paid it can appear to be one process. However, the rules of the IRS dictate that these are actually two, very distinct obligations that have to be fulfilled. First, taxes are due to be paid on April 15th. There is NO EXTENSION FOR PAYING TAXES. An extension is only an extension of time to file the return. Additionally, a tax return is required on the due date regardless if there is an amount owed, refund, or no tax due. Even S corporations and partnerships, which usually do not pay taxes, can have penalties assessed for not timely filing a tax return. Therefore, the penalty structure and requirement are completely independent. You can have a penalty for not paying taxes by April 15th even if you file an extension, and for some returns, even if no tax is due you can have a penalty for not filing a return.
The practical application of this is to make sure you pay your taxes by April 15th, or have a tax professional calculate if you have paid a sufficient amount to meet one of the IRS safe harbors. The IRS does allow safe harbor payments by April 15th based on prior year taxes for taxpayers that don’t yet have an accurate estimate of what they will owe. Next, April 15th is a hard deadline for an extension and October 15th is a hard deadline for the return (3/15 and 9/15 for corporations and 4/15 and 9/15 for partnerships). Your return/extension has to be filed by these deadlines no matter what the underlying tax situation.
If you have penalties or issues with tax balances contact us at Hone Maxwell LLP today for an assessment of your options. The key is to not simply provide a quick fix to get the IRS off your back, but to find a long-term remedy that is manageable based on your finances, and also address the underlying issue so that it does not happen again. For more tax updates and the latest news you can follow us on twitter @HMLLPTax or facebook at www.facebook.com/HoneMaxwellLLP.
Last year we posted about an IRS warning regarding phone scams against taxpayers (click here for that article). The IRS has recently put out new information to continue these warnings. The newest literature includes 5 easy ways to spot a scam:
- Receiving a phone call without first receiving an official notice in the mail.
- Demanding taxes are paid immediately without giving you a chance to question or appeal the amount.
- Requiring a specific method for payment, such as a prepaid debit card.
- Asking for credit or debit card numbers over the phone.
- Threatening to get local authorities or law enforcement involved to arrest you if you do not comply immediately.
Taxpayers have to be vigilant to avoid these scams. The perpetrators can talk very fast and be very convincing. You don’t want to be in the middle of providing your social security number or credit card number when you realize it is a scam. Therefore, it is good to review this list and be prepared. If you have questions about your taxes or are unsure if you have any unknown issues, contact us at Hone Maxwell LLP today for a complete and comprehensive review of your case. It is always better to be proactive than to be susceptible to scams or wait for the IRS to use its methods to find you. For more tax updates and the latest news you can follow us on twitter @HMLLPTax or facebook at www.facebook.com/HoneMaxwellLLP.
After more than a year of tax issues, a Spanish judge has ruled that the tax case against Lionel Messi and his father will proceed. The case stems from allegations that Messi was running funds through multiple countries and business entities in an attempt to evade taxes. Messi has denied any wrongdoing but has also made statements that his former agent handled these types of matters. Also, it appears Messi’s father may have had a larger role in the transactions.
Besides being an interesting story for the sports world and gossip columns, this also points out the global movement towards transparency. Through FBAR reporting, FATCA, and the offshore voluntary disclosure program, the IRS has made it clear it will no longer stand for secrecy when it comes to foreign accounts and businesses. The case against Messi shows that other countries, Spain in this case, are taking the lead to join the IRS. This is very bad news for tax evaders. With the new reporting of FATCA it was going to be difficult enough to avoid the IRS. If other countries are going to tighten down on tax abuse as well, not only will it become even more difficult to hide funds, but it also may eliminate some of the incentive. If taxpayers cannot enjoy lenient tax enforcement in foreign jurisdictions, perhaps they would rather come clean with their situation instead of waiting for the IRS to find them and drop the hammer.
What this all means for the average taxpayer is that in the future it appears the rules will apply and be enforced on everyone. It also means that all global tax strategies taken should be compliant and transparent. With so much attention and enforcement, even an honest mistake or just the appearance of impropriety could create a world of headaches. If you have questions about your global tax structure or reporting of foreign accounts and income contact us at Hone Maxwell LLP today. We have the experience to help you navigate the extensive new regulations and laws. 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.
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.