The nanny tax guide is here! The nanny tax guide is here! Seriously though, if you have someone working in your home, such as a babysitter, and you think you may be subject to the rules (even if you are not planning on running for public office) and would like information on the nanny tax, call me.
The Republicans rule Washington! Which may not turn out to be as much fun as they think. They have promises they are now obligated to keep, such as a middle-class tax cut, a line item veto, and the famed balanced budget amendment to the Constitution. All of this sounds great and I don't want to throw water on their plan, but, you know what they say about the greatest plans of mice and men. I've heard that the tax cut is estimated to be a only few hundred dollars (which, granted, is a lot better than nothing). As for the balanced budget amendment, if Congress is now spending twice as much as is coming in, how are they going to balance the budget if forced to? Cut expenses in half? Double our taxes? A combination of the two? Remember, the Federal government doesn't just spend its money welfare and for politicians. Would any cuts include Social Security? Defense? Immigration? Highway projects? National Parks? Other programs? As for cutting the IRS's budget, I would probably have mixed feelings about that subject. This subject may get far more interesting than we want it to.
The IRS installment agreement is such a big hit that they are proposing to start charging a user fee for requesting one, estimated at $16 if requested with the return, $20 after the filing date. It's as if the user actually had money, if so, he/she could pay their taxes. They are also proposing a user fee (estimated at $8) for electronically-filed returns with a direct deposit. On a related note, the cost to get a copy of a return has increased to $14, so you may want to be sure to keep your copy in a safe place.
Sole proprietors are less than honest on their tax returns, according to a General Accounting Office (GAO) survey. Sole proprietors represent only 13% of all taxpayers, yet they represent 40% of all under-reported income. On average, they only report 75% of their net business income. According to the GAO, the worst are antique dealers, eating establishments, auto repair businesses, sales people, and landscapers. The best are professionals such as doctors, lawyers, and accountants (so there!). The most highly-overstated deductions are bad debts, meals & entertainment, travel, laundry & cleaning, and vehicle expenses. For sole proprietors who weren't planning on getting audited, this survey may not be good news.
Ministers of the United Methodist Church (UMC) are employees, not self-employed professionals, according to a recent Tax Court ruling. The Court didn't agree with the argument that the UMC's form of organization didn't create sufficient control over ministers to create an employer-employee relationship; in fact, they found that the minister "is subject to significant control." This means UMC ministers can't deduct their business expenses on a Schedule C. It is expected that the IRS will now target UMC ministers to determine compliance with the new ruling.
Like many CPAs, and unlike all non-CPAs, I participate in a peer review program in which my work is reviewed and evaluated by another CPA every 3 years. The results of the most recent one are now official: not only did I get an unmodified or "clean" report (the best possible), but there were no findings whatsoever, which is something that doesn't happen very often. It's like being audited by the IRS and getting a refund. A big refund. What this means to you, my clients, is that you are receiving high-quality services and that fact has been confirmed by one of my peers and the AICPA (the rule makers).
IRS is seriously considering registering tax preparers. One report states that for non-professional preparers, this may include fingerprinting and a criminal background check. Currently, only professional tax preparers (CPAs, attorneys, enrolled-agents, etc) are subject to any rules of professional conduct. Without these rules, the following seems to happen. Recently, a partner in "Power Tax" was indicted by a state grand jury on five felony counts, including forgery, preparing a false document, and fraudulent schemes and practices. In addition, a former CPA turned airline pilot was also indicted on nine charges, primarily for placing false deductions on his clients' tax returns. Apparently, when the returns were audited, he provided false receipts to try to substantiate the deductions. I also recently found out about a tax preparer, who was an enrolled agent, who, at some point when interviewing new clients, would ask, "How much of a refund would you like." My understanding is that this preparer got to meet a large number of IRS investigators, all on the same day.
The IRS wanted participants in the 1994 World Cup tournaments to know about this quaint custom we have called "income tax." Foreign athletes and entertainers are required to pay a mandatory 30% tax (through withholding) on their U S source income. Of course, if you think being taxed is bad, remember the player who was shot and killed for losing a game.
You can make yourself happy or miserable. The amount of work is the same. Carlos Casteneda
"Club" dues not deductible! Starting after 1993, the IRS Code does not allow deductions for amounts paid or incurred for membership (ie, "dues") in any "club" organized for business, pleasure, recreation, or other social purpose. At first reading, it sounds like it covers most organizations. IRS proposed regulations clarify that clubs would be subject to the rule if the principal purpose of the organization is to provide entertainment activities for members or access to entertainment facilities. Examples given include country clubs, golf & athletic clubs, hotel clubs, and airline clubs. However, professional organizations, business leagues, chambers of commerce, boards of trade, and civic or public service organizations (eg Kiwanis, Lions, Rotary, and Civitan) would not be subject to the rules.
Who says crime doesn't pay? The Earned Income Tax Credit (EITC) was extended to include "childless taxpayers over age 24 and under 65 who are not claimed as an exemption on another taxpayer's return." Apparently, much of the US prison population now qualifies. It has been estimated that they will collect nearly $14 million over the next five years under this provision. And Washington wonders why voters are angry!
Severance pay for downsized employees is a settlement for age discrimination, and thus are excludable from income, according to the National Organization of Downsized Employees (NODE). A downsized employee generally is one who forced into early retirement due to cutbacks in a large corporation. The basis for NODE's claim is because, in order to receive the severance pay, the employees had to surrender their right to sue for age discrimination. On the other side of the issue, the IRS claims that severance pay is taxable even if the employee signs a waiver to not sue as part of the deal. People who join NODE are given names of certain lawyers and some other information, so I would anticipate seeing this matter in Tax Court in the next year or so.
For people in a downsizing situation, I have seen suggestions that they arrange with the employer to file an age discrimination claim and then settle it. This way the payment would be excludable from income. It is also possible the employee would accept a smaller payment if it were tax-free. If you are in this type situation, you may want to consider contacting an appropriate lawyer or advisor before signing anything.
Collectibles may be depreciable property! The Tax Court recently ruled that two 19th century violin bows and a 17th century bass viol can be depreciated. The reasoning is that, with use, these items will suffer wear and tear, which is the theoretical reason depreciation is ever allowable. The key seems to be that the taxpayer will need to be able to show that the property is actually used in a way that causes wear and tear. If the item is used only as a collector's piece, depreciation would not be allowed.
Not everyone filed their returns early! April 15th fell on a Friday this year and the IRS reported they received 20 million pieces of mail the following week.
If you buy a vehicle in a place where you do not pay sales tax, you will be billed for a use tax instead. I have seen TV ads for a car dealer near Tucson that advertises "no city sales tax," and recently, I saw a magazine ad that you can buy a car in Oregon "and pay no sales tax." I also read in the Arizona Department of Revenue's newsletter that, when a vehicle is registered, the Department of Transportation will collect the state use tax if no sales tax had been paid, and, if no city tax was paid, they will notify the appropriate city, who then bills the taxpayer.
A dependent does not have to be alive all year to qualify a taxpayer for the personal exemption. In a Revenue Ruling years ago, the IRS ruled that is a taxpayer's child is born alive, the tests for dependency are met, even if the child only lives momentarily. But the child must be actually born. In a recent case, the taxpayers took the position that the child became a dependent upon conception. While the expenses may start shortly thereafter, the Court ruled that the exemption for a child isn't available until the child is born, which in this case was the next year. You know, I really like the creativity in some of these cases; this one was really imaginative, wrong but imaginative.
Points paid by the seller can be deducted! For years beginning after 1990, the IRS announced in a new revenue procedure that points paid by a seller will be treated as having been "paid directly by the taxpayer;" thus making them deductible, subject to the normal restrictions on deducting points.
The taxpayer's method of accounting should "clearly reflect income." In a recent case, the taxpayer had to pay settlement payments to claimants and was able to fund the settlements with single premium annuity contracts. These were structured so that the annual amounts received from the annuity equaled the required annual payments to the claimants. For tax purposes, the taxpayer deducted everything in one year; for financial statement purposes, it only expensed the annual payment portion (thus showing a much higher income). The Tax Court determined that the financial statement method more clearly reflected income. You can guess the rest. Taxpayers who use one method on tax returns and use another method on financial statements may have opened themselves to a potential problem. Even if everything is perfectly justifiable, you may have to explain things and hope the IRS understands.
I don't care if you're driving down the back straight at Daytona and your car gets struck by lightning, it's your fault. It's your fault for being where the lightning wanted to land. As a driver you've got to look at it that way, or else you'll always be ripe for it to happen again. And every time you get hit you'll say, 'It wasn't my fault.' But if you don't find the reason why it was your fault, it will happen again and again." Doc Bundy, racing instructor
When it comes right down to it, all you have is yourself. The rest is nothing. Pablo Picasso.
I've heard this is now happening here in Phoenix. Often when applying for a loan, the bank asks for a copy of the applicant's tax returns (usually if self-employed). The tax return is, of course, provided, showing the amount of income the applicant claims to have earned. Later, the bank asks the applicant to sign a request to have the IRS send them a copy of the tax return that was actually filed for that year. People either sign the request as if nothing is wrong or they find a reason to withdraw the loan application, for some reason. Bottom line - don't lie to the bank and don't lie to the IRS - it just isn't worth it.
Revenue from "affinity' cards isn't taxable to exempt organizations. Tax-exempt organizations are generally taxed on income from income that isn't related to their tax-exempt purpose. However, the Tax Court decided that the "royalty fee" the Sierra Club received from allowing a credit card company to use its logo and membership list was royalty income, not business income, and, therefore, was not subject to the tax on unrelated business income.
IRS is still trying to nail non-profits for advertisement income. A tax exempt organization is exempt only on its "exempt function" income; other income may be subject to the "unrelated business income tax." The IRS has taken the position that revenues received advertising and corporate sponsorship are not part of an organization's exempt function and are subject to tax. In 1990, the IRS lost a case against the NCAA related to the revenues received from advertisements printed in it "Final Four Tournament" program. The court ruled that the event was not "regularly carried on" since it was only once a year. The reason the IRS doesn't want to back down is due to the money involved; it has grown from $400 million in 1984 to over $3 billion in 1991.
Tax exempt organizations that mismanage funds can lose their tax exemptions. An anti-nuclear group gave another environmental organization $84,200. The second organization gave the money back to the leaders of the first organization as "civic achievement awards." The second organization then dissolved. The IRS declared the transaction improper and revoked the first organization's tax exempt status.
According to Money, the 12 IRS audit triggers from 1992 were: 1) Fake dependents, 2) Failure to pay self-employment taxes, 3) Early pension withdrawals, 4) Deducting miscellaneous deductions on Schedule C, not Schedule A, 5) The off-the-books baby sitter, 6) The questionable hobby-deduction, 7) Excessive IRA deduction, 8) Unwarranted home-office deduction, 9) Filing late, 10) Deducting personal bad debts as business deductions, 11) Exceeding passive-activity-loss limitation, & 12) Overdepreciating automobiles.
Having an office-in-home is great, at least until you sell the home. Then the office-in-home percentage is applied to the sales price, that portion is figured as a taxable sale and is not eligible for being rolled over with the gain on the residence portion of the sale. There is an exception, however. (Isn't there always?) If business use ceases before the year of the sale, the gain can be included with the rolled-over gain. Same thing if the taxpayer uses the office-in-home personally in the year that it is sold.
For those who have lost the office-in-home deduction, the IRS wants to take away a part of your vehicle expense also. Traveling from your home to your customer's business is not deductible, unless your business is located in your home. If your home office is not deductible, the IRS says it does not exist, so your travel to your first customer and from your last customer would be non-deductible commuting. In 1993, the Tax Court held that, if there was no deductible home office, travel from your regular place of business (your non-deductible home office) was not commuting and could be deducted. However, if you get audited, you can expect a fight and may have to go to Tax Court to win your deduction.
If you move, you must notify the IRS, or else you may never receive notices from them, yet be liable for responding to the notice. Changing your address on your tax return is okay, but the IRS has been held to not be responsible for updating their files for prior year returns (open years that may be audited). If you have recently moved, let me know and I will get you the necessary IRS form that notifies them of your new address.
IRS employees perceive themselves as highly ethical, according something I read recently. And I must say that I'm not aware of many tax practitioners that would disagree with that. Apparently, however, the IRS perceives taxpayers as not as ethical and, therefore, not as trustworthy as the IRS. Talk about having an attitude! The implication is that IRS personnel have a chip on their shoulders before they ever meet the taxpayers when they audit them.
Mixing business with pleasure on a vacation can save some taxes if done properly. If the primary purpose of your trip is for business, such as a convention or seminar, your expenses qualify as business expenses. If you can prove a business purpose for having your spouse with you (and not just so he/she can keep an eye on you), his/her expenses would qualify as business expenses also. While I've never heard of a case that stood up to IRS scrutiny, if you can figure out a business purpose for taking your children with you, then you're home free, so to speak. Expenses related to non-business time are not deductible. So, if you go to a business conference, you can deduct the cost of getting there and back, and the costs of staying there for your conference. Once the conference is over, so are your deductions. However, if you have a meeting on Monday and another meeting on Friday, I think most people would agree that it would be reasonable to stay there Tuesday through Thursday rather than travel back and forth. Remember, you get the same car allowance for six people in the car as you do for one person, which is not the same as for airplane tickets. The rules for traveling out of the country are different. When you promise to take me along, I'll tell you what they are.
Tax protesting and the constitutionality of the tax laws: In 1991, the U S Supreme Court held that a person who subjectively believes, in good faith, that the tax laws do not apply to him cannot be convicted of willful failure to file. However, the Tax Court has ruled that a tax protester is liable for fraud penalties after he stopped filing returns because he felt that the tax laws were unconstitutional. The court noted that the Supreme Court ruling applied to a "good faith misunderstanding" of the law and not, as in this case, simply a belief that the law was invalid. The court concluded that the tax protester was fully aware of his obligation to file return, report income, and pay taxes. A belief that tax laws are unconstitutional does not provide a sufficient defense against fraud.
Investing! I've tried investing two times in my life. The first time, based on a "tip" from my Dad (be careful who you trust), I bought Valley National Bank stock at $14 a share; it immediately went to $8. The other time, my wife and I invested in three mutual funds 6 weeks before Black Monday (in 1987); all declined a full third on that day. The only one to recover took 3 years to do so. So I don't give advice on specific investments to make. I can give advice on general rules to follow though. If you are thinking about making an investment without doing your homework first, consider these rules. 1) If it seems too good to be true, it probably is. Return equals risk - high yields with "no risk" do not exist; 2) Use your common sense, if it doesn't "smell" right, pass on it; 3) Never gamble more than you can afford to lose - stay away from risky investments if you can't stand a total loss (financially or emotionally); 4) Check the references and background of the managers and promoters of the investment; 5) Don't be pressured into making the investment - if you are told "I've got 10 other people waiting to put their money in, but I wanted to give you first chance - I have to know by 3 today," it is a clear indication that the promoter does not want you to scrutinize the details; 6) Avoid any promoter who offers to cut corners or make shady deals because "everyone does it." When fraud is discovered, the government shows no mercy to investors; 7) Review the proposed investment with your lawyer and CPA - it's far cheaper than making a bad investment; 8) Be sure everything is in writing and that all documents are signed by all parties; 9) Insist that proper evidence of ownership is transferred to you; 10) If collateral is to be taken as security, be sure it is perfected (papers properly filed, etc); 11) Insist that financial statements and operating reports be provided on a regular and timely basis; 12) Treat any significant investment as a purely business transaction. If friends are involved, ask yourself before investing "If I need to get my money back, will I be willing to sue Fred and Mary?" If not, don't make the deal.
Gary J Wood, P C, CPA has been solving tax and accounting problems for individuals and owners of closely-held businesses in the Valley area for more than a decade. Information contained in this article is general by its nature and should not be construed to be tax or legal advice.
If you would like specific advice for your situation,
please call (602) 956-1774 and arrange an appointment.
A copy of his newsletter, Schedule FYI, is available on the Internet at / or by sending a SASE to
P O Box 32815, Phoenix, AZ 85064.
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