2012 Tax Law Changes

Last week I linked you to information about personal tax planning and things you should consider now to reduce your tax burden for 2011. Most of those items dealt primarily with individual taxes.

In case you are running a business and interested in what’s coming at you in 2012, I had an article published last week in the Long Beach Business Journal that touched on the major items you should be aware of that are changing, effective next week.

For a look at it go to our website at: http://oniskoscholz.com/press-releases.php and click on the link in the center of the header.


Here’s wishing all of you a safe and a Happy New Year!

Paul

Now is the time

It’s been about two months since I wrote my last entry here. In that blog, I said I was heading for the Eastern Sierras in search of places with no cell service. I’m happy to report that because Verizon has such good coverage these days it took me a great deal of time looking for that place. I spent six weekends this fall out in the field and it was wonderful. I never did quite find it though, and I will probably have to go back and continue the search…

However, it’s the holidays and year end, and I would be remiss if I didn’t admonish you to plan for your tax liabilities now. I realize we all have other things on our mind, but now is really the best time to make moves that will affect your tax liabilities. I won’t bore you with a list here, but for some good ideas you can visit our website at: http://www.oniskoscholz.com/cat-taxindividual.php

Here’s wishing all of you a Merry Christmas and a Happy New Year!

Paul

Last minute notes

October 15th (17th this year) is a huge date for us in the tax realm. It’s the final extended due date for late filers to get their tax returns in on time. While April 15th gets a lot of publicity, historically October has been busier for our firm than April due to all the folks who go on extension. Some extend because they can’t get all their info to us by April 15th, but many are simply procrastinators who wait until the last minute to file.

Want to drive your CPA crazy? Here are some tips on how to do it:

1) Ignore for months the requests for missing information until October 13, and then insist on filing on time.
2) Telephone on 10/15 and insist on talking to your preparer to confirm that the front desk transmitted your tax return.
3) If we had to delay working on your non tax deadline work until after the tax deadline, be sure and call the next day and ask when it will be finished.
4) Plan on picking up and signing for your returns at 5PM on the 15th.
5) If you are looking for a new preparer, start calling at 4pm on 10/15 asking about prices and if we can prepare it on time.
6) Get your taxes done early, but wait until 10/15 to review them and call us with questions.

Our season went well this year, but we had our share of all of the above. As a result I will be spending several upcoming weekends in the Eastern Sierras reconnecting with the outdoors for some needed R&R. There are still areas up there without cellular service, and I intend to find them.

False Tax Returns = Prison

Sometimes at the slightest hint of a problem with their taxes, clients’ fear of the government prompts them to ask “I won’t go to prison, will I?” If you make an honest mistake or have a unique situation where the facts aren’t entirely clear, you may be facing some penalties and interest, but you needn’t be worried about jail time.

However a recent case decided in District court picked up a couple local business people who went too far… two adult entertainment execs from Cypress, CA plead guilty to deliberately falsifying tax returns. The business, Universal Media Management was in the business of providing live adult entertainment to customers for cash payments (I thought that was illegal in California anyway). Apparently that cash was deliberately underreported, and caused the business to underpay its taxes by about $140,000, and the owner of the business underreported his taxes by $33,000.

The key here is DELIBERATELY, and for their efforts the two responsible, the owner and a key employee, are both facing up to 3 years of quality time in Federal housing.

Amazon Sells (out)

Just across the wires today: Amazon has reached a deal with California lawmakers to drop Amazon’s efforts to seek a referendum to stop CA pols from assessing sales tax on internet transactions forwarded to Amazon.com from CA websites. In exchange for Amazon suspending its efforts, CA will not attempt to collect the tax for one year.

There is also a legal challenge looming for this law as well. CA politicians are not eager to have their taxes deemed unconstitutional by a court, and I suspect that Amazon was hoping to avoid the costs of litigating this issue. Both sides want to avoid a fight and that was probably the impetus for this deal. This is good news for CA consumers and those many small businesses that have website feeds to Amazon .com and other large internet sellers.

But, it would have been better news if they had driven a stake through the heart of the beast now, rather than leave it on the table for next year.

Market downturn can mean tax savings

Some serious stuff this time: Their may be a silver lining in the recent slide in the stock market. If you took advantage of the relaxed IRA/Roth Conversion rules last year and converted your regular IRA to a Roth, listen up! You probably paid tax on that conversion, and you have an opportunity until October 17, 2011 to undo that transaction and retrieve the taxes paid for 2010.

Why would you want to do that? Well, if your Roth value has eroded due to market declines to a point below what it was when you initially converted, you can recharacterize back to a regular IRA, and recoup the taxes you paid on the conversion. If you wait at least 30 days and then reconvert back to a Roth again, you push the tax into 2011, and if the value has declined, you pay tax on the lesser amount. So you reduce your taxes and delay them one year.

It’s a bit of a hassle, but if you qualify you can get reduced taxes and a deferral. Best of both worlds.

Advice for Newlyweds

Prior to getting married (a long time ago), I did some premarital tax projections and realized that our joint income tax burden as a married couple would be significantly higher than if we were to remain single. Although I was accused of stalling, after much cajoling I managed to convince my soon-to-be bride to postpone our planned Fall wedding to January, thus saving enough money that first year to pay for most of the reception.

I was quite proud of the accomplishment, arguably getting the government to pay for part of our wedding, but have always been accused of weaseling a few months to avoid having an anniversary during hunting season. (I’m shocked at the accusation!)

Well, now I feel vindicated. The IRS recognizes that some newlyweds might be distracted by other issues and not thinking enough about taxes and related matters, so they have come to the rescue by publishing “Tax Tips for Newlyweds”.

My first thought about any guide for newlyweds envisions graphic pictures from biology books and instructions on how to boil water, but this information is far more valuable. Like helpful tip #4 – Notify Your Employer! Without this government admonishment who knows how many innocent young married couples would forget to tell anyone at their job that they got married. Or Tip #2 – Notify IRS where you are living, so they can mail you stuff. And then there’s Tip #3 – Notify the post office where you are living so they can forward IRS stuff to you. One can only envision the flood of mail that will be heading the way of these newlyweds from IRS.

But my favorite one is helpful tip #7: “Choose the best filing status”. I think that’s excellent advice. Sometimes the best filing status is Single. I spoke with a client yesterday who paid a lot of money to return to Single status. And it paid for my reception in 1981.

Checks in the Mail

The IRS is modernizing.

The IRS has learned from the private sector how to leverage their resources and get the best bang for their buck. They have invested heavily in technology and information systems that enable the agency to conduct much business through the mail and avoid costly face time with auditors. This also allows them to reach out and resolve far more issues than they were previously capable of.

Example: During 2001 IRS mailed out about 30 million notices to taxpayers regarding potential discrepancies on tax returns. During 2009, it was 201 million. That is an increase of over 670 percent, and 2011 is expected to exceed that number. They have determined that the average return on a mailed notice nets them $1,670, and it is all automated.

They are now conducting more audits by mail. Of all the audits conducted in 2010, 78% were done via US mail, with an average return of $6,600 to the Treasury.

This means that you are more likely now to have errors or omissions caught, and it may be harder to resolve them since it can be a slow and sometimes frustrating process to communicate via mail. There are, however, two things you can do to protect yourself and minimize any exposure to imperial entanglements:

First, be diligent to report all your income and be sure you match up all the 1099 forms you receive to the income you disclose on your tax return.

Second, if you do receive any correspondence from IRS, DO NOT IGNORE IT! Pretending that they will go away, or waiting for the friendly reminder will only cost you a lot more money. A timely and complete response (or payment) will put to bed a problem in its infancy that can quickly ramp up with penalties and interest.

Quick IRS news:

A couple things passed over my desk recently that I thought might be noteworthy, and I am passing them along for your review…

If you have money in a foreign bank account the IRS is expanding its efforts to locate you. They are investigating Credit Suisse and other foreign banks to determine if they aided in tax evasion similar to the big UBS crackdown last year. If you have assets that are sitting in a foreign bank that you have not disclosed to the Feds the amnesty period to come clean expires August 31.

Tax preparers who do not register as such or who do not sign returns they work on are being chased by IRS. The agency is surveying tax returns they suspect may have been done by a paid preparer but not signed, and will be contacting the taxpayers about their returns in an effort to find the preparer.

And in a recent act of administrative benevolence that will be good news for those “camera ready” politicians and anyone living in Beverly Hills, IRS announced that field auditors will no longer pursue assessing the 10% tanning tax on customers of indoor tanning salons who redeem “frequent buyer” points for a free tanning session. Perhaps we can call this the Dermatological Stimulus of 2011.

The Amazon Tax

There has been a lot of news recently about the new decrease in sales tax rates here in California, but very little about a recent law signed by California Governor Jerry Brown that attempts to levy sales tax on internet sales of goods to California residents by out of state retailers. This new law, affectionately called the “Amazon Tax” actually reaches any out of state seller, not just Amazon.com, and attempts to compel them to collect sales tax if they use third part affiliates located in the state to sell or ship products.

These transactions were previously exempted, and this new attempt at taxing by the state has a very good chance of backfiring. As soon as the law went into effect, Amazon.com informed their 8000 California affiliates that they were terminating their affiliates’ contracts. Overstock .com is reported to be doing the same and it can be expected that most internet sellers of goods who previously worked through California affiliates will be sourcing those products out of state to avoid creating the “nexus” that subjects these transactions to tax.

Some sources have estimated the number of theses affiliates for all internet sellers at around 25,000! If that’s true, the potential scorecard for this new legislation would be:

Additional taxes collected - zero
California businesses damaged or destroyed - 25,000

Is it any wonder that the public wasn’t too concerned when the State Controller suspended legislator’s pay for failure to balance a budget?

Savings up in smoke

There’s been much going on in our office in the last few weeks and I have been hard pressed for spare time to keep you informed about interesting tax stuff, but this came across my desk and I just had to share it:

One of our clients recently received a letter from the California Board of Equalization (now that's a politically correct name) assessing unpaid Sales and Excise taxes on purchases of cigarettes by mail from an out of state retailer. Apparently this individual had been buying cigarettes for years from this source, and the state sent their auditors out and obtained records of these sales. The period for the assessment was 2005 through 2007, and the total bill to our client was over $1600!

More good news: at some point he will assuredly get another bill for 2008 and forward.

This is just another salvo in the state’s campaign to collect Sales and Use taxes. All of you who own businesses have received letters by now demanding that you file Use Tax returns online or face fines, even if no tax is due. You may also have noticed on your personal California tax return the line that you are supposed to use to voluntarily pay Sales (Use) tax on internet purchases you may have done in the previous year. The state is desperate for revenue and they perceive, perhaps correctly, that there is a lot of noncompliance in this area. Look for more and more of this type of audit, even at the individual level, in the coming years.

With respect to this particular assessment, I’m not sure which surprised me most. The fact that California was able to obtain such complete data from the out of state retailer, or that my client (age 70) still smokes unfiltered Lucky Strikes

The Winds of Change

Now that the tax filing date has passed and I have some extra time to notice what’s happening in the rest of the world, I’ll try and keep you posted as things of interest pop up. One thing that we should all be mindful of is the promise of change.

I know the word change has been overused a lot in the last few years when it comes to the political arena, but consider this:

Most of the provisions of the 2010 Tax Relief Act (affectionately known as the tax hike prevention act) that was passed late in 2010 expire again in 2012.

The President’s Tax Commission proposed major changes to the tax code in a report issued last August.

In the President’s speech last week he called for Congress to undertake “comprehensive tax reform” and said that we cannot afford to extend the "Bush Tax cuts”.

No matter how you look at the issue of income taxes, the least likely scenario you can imagine is status quo. In fact, its probably a safe bet that even if the rules remain the same through 2011, that 2012 will see some changes, and 2013 has the potential of massive revisions if Congress either (A) does nothing, or (B) decides to actually reform the tax code. Either way you slice it, taxes will be going UP.

Therefore, now is the time to start thinking about long term planning for your taxes, and how best to deal with the 2012 and beyond tax environment.

What were they thinking?

I haven’t written anything recently, not because there has been a lack of interesting stuff, but a lack of time on my part. Tax Season hits our business and we ramp up hours, production, and stress. All the stories you hear about accountants working late hours in a mad frenzy are true!

This last week saw Congress finally succeed in repealing a small, onerous part of the Obamacare Law that dealt with increased 1099 reporting for businesses. Under that provision, businesses would be required to issue 1099 forms for ALL payments, not just to noncorporate recipients for services. It was draconian in that if allowed to stand it would dramatically increase the amount of 1099 forms being issued by every business, and would not have accomplished its objective.

Some unknown tax writers in Washington theoretically determined that all these 1099 forms flying around would identify lots of previously unreported income that would now be taxed, and politicians were reluctant to let go of that theoretical new revenue. To see the absurdity of this argument, ask yourself this: How much additional revenue would Verizon, So Cal Edison, General Motors, & Office Depot report if they received a 1099 from each of their business customers? Answer: NONE! In fact they would actually have more expenses because they would have to pay someone to handle and throw away all those forms they receive, which would increase their costs and reduce taxable income!

At any rate this third attempt to repeal has made it out of Congress and it looks like the President will sign it.

The thing that I find most disturbing about this repeal effort is that even when faced with overwhelming support by the business community and the public, and even when presented with the estimates of the crushing paperwork burden the law would create as well as all the additional accounting costs to comply, there were still 12 Senators that voted against repeal.

Makes you wonder just what is going on back there.

I can't deduct Buffalo Meat?

This case got my attention real quick. Probably had something to do with the 300# of Buffalo meat I brought home from Montana last month…

A professional Body Builder claimed deductions for Buffalo Meat, Posing Body Oils, and Protein Shakes, all as business expenses. He ate three pounds of buffalo meat a day all year round for its healthful protein content. He claimed it was necessary to maintain his competitive physique, making it a business expense.

Unfortunately the tax court killed that idea, reasoning that if it could be eaten by anyone, it wasn’t a professional expense. This reasoning seems a bit skewed, since protein shakes and posing oils can also be purchased by anyone, and they allowed those deductions.

The court said that the reason for allowing the shakes and body oils was that they were marketed only through body building publications and not available to the general public.

Obviously these judges don’t shop in West Hollywood.

Murder your husband and avoid tax!

Ok, that may not be quite what she had in mind at the time, but that was the effect.

DN, a minor, received a distribution from his father’s 401(k) plan as a secondary beneficiary. He received the distribution because the primary beneficiary, his mother, was in prison for murdering the father. Under Oregon law if you murder your spouse you aren’t entitled to receive his/her retirement benefits. (This law by itself probably prolongs many husbands’ lives more than any healthy lifestyle ever could.)

DN, the child, argued that even though he received the money that his mother was ineligible for, she should be the deemed recipient for tax purposes since she was the primary beneficiary (and still alive).

The courts disagreed, finding that the minor child received the money and should pay the tax. The net effect was that the murderous mom avoided paying tax on the distribution.

She also avoided receiving the money.

Falsify Tax Returns, go to Prison

Very rarely do we have a client ask us to fabricate a tax return. Most people, even if they were inclined to do that, know better than to even ask. I have had taxpayers after being asked for their deductions say something like “how much can I get away with?”, but that’s usually as far as it goes. Years ago I actually had one fellow take his data back to another preparer when I explained that his nonexistent horse was not a deductible horse racing business. Even after admitting he didn’t have a horse, he felt that he had gotten away with it for so long he should keep doing it, and that he was paying me to make it look right!

Unfortunately there are more than a few preparers around who feel that a tax return is a good forum for fiction, and the people who hire them think they are getting good service.

But consider the case of Robert Larsen of Riverside, CA. He was a tax preparer who falsified tax returns by overstating itemized deductions and business and investment losses. Clients were told that he possessed specialized knowledge in tax preparation, or that he could obtain receipts if necessary to justify deductions taken. He defrauded the Federal government of $3.6 million by falsifying at least 1162 tax returns.

Mr Larsen was sentenced to five and a half years in federal prison and ordered to pay restitution of over $200,000.

That takes Mr Larsen out of the party, but what about the 1162 tax returns? How did the IRS know it was $3.6 million? The IRS was able to calculate damages by examining those returns. I’m sure that made 1162 taxpayers real happy with Robert. Actually it was probably fewer taxpayers and multiple years per client, but you get the idea. Add to that the love letters they all will receive from the Governor of California asking for his share, and I’ll bet those taxpayers won’t be happy with the great deal they got.

IRS ahead of the curve!

I am rarely in a position to praise the IRS for a job well done. In fact, if you look back at all the previous blogs on the website, I’d be surprised if you found even one entry giving IRS any kind of complement. That’s about to change.

Recently the IRS announced that a free app called IRS2Go can be downloaded from either the Android Marketplace or the Apple App Store. This Smartphone Application will let you check on the status of your refund as well as give you helpful tax information, right on your mobile device!

You can also follow the IRS Twitter news feed at @IRSnews.

Set aside for the moment the obvious question, why would anyone want to? and marvel as I did at how cool it is that this agency which is notorious for having antiquated computer systems and being un-user friendly can suddenly catapult into techie-cool status.

A good example of tax dollars at work.

Kicking the Can…

Last fall we saw Congress extend the Bush tax cuts through 2012. This extension provides for the same Capital Gains tax rates and ordinary income tax rates that we have used for the last several years and extends or maintains popular deductions and credits such as the deduction for teacher’s supplies, some college tuition expenses, and child tax credits that were scheduled to expire last December.

In addition, the Alternative Minimum Tax exemption for 2011 was set slightly above the 2010 amount so that we can comfortably predict who will be impacted by AMT in advance this year.

That’s all good, and taxpayers of all stripes will benefit from this legislation. The not so good news is that some of these provisions (example: AMT) were extended just ONE YEAR. Most of the rest were extended only TWO YEARS.

What this means is that next fall we will be wondering what the AMT tax will be for 2012 until Congress acts, and sometime in 2012 – think election year again – we will be looking at this Congress to pass another major tax law. If 2010 was any example, our representatives will not have the temerity to do so before the November elections, creating a scenario like the one we just experienced.

If there is no 2012 tax legislation, we will default back to the 2001 rules that were looming over taxpayers last fall, which will raise taxes significantly on everyone.