COHESIVE Tax Talk

Worse than the IRS

Is there anything worse than the IRS taking your money? Actually, yes. It is thieves posing as the IRS taking your money.

Many thousands have received the following email:

From: Internal Revenue Service [mailto:admin@irs.gov]
Sent: Wednesday, March 01, 2006 12:45 PM
To: john.doe@jdoe.com
Subject: IRS Notification – Please Read This
.
After the last annual calculations of your fiscal activity we have determined that you are eligible to receive a tax refund of $63.80. Please submit the tax refund request and allow us 6-9 days in order to process it.
A refund can be delayed for a variety of reasons. For example submitting invalid records or applying after the deadline.
To access the form for your tax refund, please click here
Regards,Internal Revenue Service
© Copyright 2006, Internal Revenue Service U.S.A. All rights reserved..
3/13/

You guessed it. Unsuspecting people click the link, are sent to a phishing site that demands their bank account and security code info and then cleans out their bank accounts…all under the guise of the IRS. The IRS is good enough doing it on their own without someone else lining their pockets.
The Internal Revenue Service issued a consumer alert about an Internet scam in which consumers receive an e-mail informing them of a tax refund. The e-mail, which claims to be from the IRS, directs the consumer to a link that requests personal information, such as Social Security number and credit card information.
This scheme is an attempt to trick the e-mail recipients into disclosing their personal and financial data. The practice is called “phishing” for information.
The information fraudulently obtained is then used to steal the taxpayer’s identity and financial assets. Generally, identity thieves use someone’s personal data to steal his or her financial accounts, run up charges on the victim’s existing credit cards, apply for new loans, credit cards, services or benefits in the victim’s name and even file fraudulent tax returns.
The bogus e-mail, which claims to come from “tax-refunds@irs.gov” tells the recipient that he or she is eligible to receive a tax refund for a given amount. It then says that, to access a form for the tax refund, the recipient must use a link contained in the e-mail. The link then asks for the personal and financial information.
Keep in mind that the IRS really is very old fashioned. They do not use emails much at all. They like the traditional shock of sending official letters via the postal service. The IRS does not ask for personal identifying or financial information via unsolicited e-mail. Additionally, taxpayers do not have to complete a special form to obtain a refund.
If you receive an unsolicited e-mail purporting to be from the IRS, take the following steps:
• Do not open any attachments to the e-mail, in case they contain malicious code that will infect your computer.
• Contact the IRS at 1-800-829-1040 to determine whether the IRS is trying to contact you about a tax refund.
The IRS has seen numerous attempts over the years to defraud the public and the federal government through a variety of schemes, including abusive tax avoidance transactions, identity theft, claims for slavery reparations, frivolous arguments and more. One of the more entertaining areas of the IRS website is the section dealing with fraud.
Hopefully you will not be any part of any of this.

To your success…
Karla Dennis – America’s Tax Diva

I get a number of questions about carried interest and how it is taxed. Most see it as horribly complicated and with the auditors on the prowl, it could lead to problems. So, here is an explanation to help the average person understand how it whole process works.
How Carried Interest Is Taxed. When the general partners of an investment firm are paid a flat fee for their management services, it is considered earned income and taxed at ordinary income tax rates. Often, however, general partners receive as payment a portion of the partnership that was funded by the limited partners (those who contributed the capital to fund the firm); the income from that transferred ownership share is called carried interest, and it is taxed based on its form:
• If it is a distribution of interest from an investment by the partnership, the carried interest is taxed as ordinary income (currently up to 35 percent but due to rise to 39.6 percent next year).
• If it is a distribution of dividends earned by the partnership, it is taxed up to 15 percent (due to rise to 39.6 percent next year).
• If it is capital gains – the increase in the value of an asset – it is taxed at the current capital gains rate of 15 percent (due to increase to 20 percent next year).
• Moreover, beginning in 2013, all income from savings, whether taxed at the income tax or the capital gains tax rate, will be subject an additional 3.8 percent Medicare tax for individuals earning more than $200,000 a year.
Effect on Tax Revenues. For the most part, it makes no difference in federal tax revenues whether payments to the general partner take the form of a fee or a portion of the partnership returns. Consider a case in which the partnership earns capital gains and the general partner gets part of the total:
• The Treasury will collect an amount equal to the total capital gains income times the capital gains tax rate. (For instance, $1,000 multiplied by the 15 percent capital gains rate equals $150 in tax revenue.)
• It will collect some from the limited partners and some from the general partners – the split does not affect the total revenue ($150).
Then consider an alternative to carried interest in which the partnership pays the general partner a management fee high enough to compensate for the higher tax rate on the general partner, and the limited partners keep and pay tax on the entire $1,000 capital gains:
• The general partner would pay ordinary income tax rates on their fee. (For example, 35 percent on a fee of $100 equals $35.)
• But the limited partners would get a tax deduction for the management fee that they could claim against ordinary income.
• The tax they save with the deduction of the management fee would equal the tax paid on the fee by the general partners ($35), resulting in zero net revenue to the Treasury.
The Treasury would only receive the tax on the capital gains earned by the partnership. In other words, if carried interest were treated as ordinary income, and replaced by fees, the Treasury would net no additional income.
Conclusion. If carried interest is treated as ordinary income, it would net the Treasury little additional income. Linking the returns of the management to the performance of the investments via carried interest is a strong motivator for general partners to make investments as productive as possible. Breaking that link by raising taxes on carried interest would reduce these incentives, and force more of the investment risk onto the limited partners. To the extent that additional revenues were raised by taxing carried interest at higher rates, it would raise the cost of investment, as well as reduce productivity and wages.
To Your Success…
Karla Dennis – America’s Tax Diva
Cohesive

Obviously I do not need a tanning service, but many people patronize them. Tanning salons are also a part of many small businesses that deal with hair and nails.
For reasons unknown to most of us, the government isolated tanning businesses for a special tax in the new Health Care Law, and it just went into effect.
Starting July 1, 2010, businesses offering tanning services must collect a 10 percent excise tax on the tanning services they provide. This excise tax requirement is part of the “Affordable” Care Act that was enacted in March 2010…The Health Care Law.
The IRS has offered these friendly Tax Tips for those now being levied:
1. Businesses providing ultraviolet tanning services must collect the 10 percent excise tax at the time the customer pays for the tanning services.
2. If the customer fails to pay the excise tax, the tanning service provider is liable for the tax.
3. The tax does not apply to phototherapy services performed by a licensed medical professional on his or her premises.
4. The tax does not apply to spray-on tanning services.
5. If a payment covers charges for tanning services along with other goods and services, the other goods and services may be excluded from the tax if they are separately stated and the charges do not exceed the fair market value for those other goods and services.
6. If the customer purchases bundled services and the charges are not separately stated, the tax applies to the portion of the payment that can be reasonably attributed to the indoor tanning services.
7. The tax does not have to be paid on membership fees for certain qualified physical fitness facilities that offer indoor tanning services as an incidental service to members without a separately identifiable fee.
8. Tanning service providers must report and pay the excise tax on a quarterly basis.
9. To pay the tax, businesses must file IRS Form 720, Quarterly Federal Excise Tax Return using an Employer Identification Number assigned by the IRS. Businesses that don’t already have one can apply for an EIN online at IRS.gov.

Such details will entangle all of our lives very soon. As always, I suggest contacting your Tax Strategist right away.
To Your Success…
Karla Dennis – America’s Tax Diva
Cohesive

Social Security –getting the most and giving less.

Don’t expect the IRS to go easy on individuals getting ready to retire or already retired. Uncle Sam gets you coming and going. When someone starts collecting Social Security retirement benefits, up to 85% of the benefits may be added to his or her taxable income.

Strategy: Be proactive about taxation of Social Security benefits. Depending on a client’s situation, you can use one or more of the four strategies below to reduce or eliminate his or her tax liability.
There is a common denominator. Each of the strategies aims to limit the client’s “provisional income” (PI) for Social Security purposes.

Background information: PI is an awkward tally of the client’s adjusted gross income (AGI); tax-exempt interest income; and one-half of the Social Security retirement benefits received. For example,
if someone’s AGI for 2010 is $100,000, municipal bond income is $5,000 and Social Security benefits are $20,000, the PI is $125,000. What often confuses taxpayers is the inclusion of interest income that is otherwise tax-exempt in the PI computation. The higher the PI, the greater the tax bite on Social Security benefits. Conversely, cutting down your PI enables an individual to pay a lower tax—or even no tax—on the benefits. The tax law uses a three-tiered threshold:

• If the PI for joint filers is below $32,000 ($25,000 for single filers), there is no tax on Social Security benefits.
• If the PI is between $32,000 and $44,000 ($25,000 and $34,000 for single filers), up to half of the Social Security benefits are taxed.
• If the PI exceeds $44,000 ($34,000 for single filers), up to 85% of the Social Security benefits are taxed. Chances are, if the PI is more than $50,000, it’s likely that 85% of the benefits will be taxed. However, if someone’s PI is in the middle range of $32,000 to $44,000 ($25,000 to $34,000 for single
filers), some astute tax planning can pay off big.

4 ways to lower the SS tax bill
The trick for reducing the tax on Social Security benefits is to knock down the PI below the next threshold.
Here are four ideas:
1. Cash in on stock market losers. Is your client currently holding paper losses on securities? The capital losses realized before the end of the year can offset capital gains plus up to $3,000 of ordinary
income. This may be enough to pull down the PI to a lower level.
2. Borrow money for living expenses. Alternatively, you can support your retirement in your 60s by borrowing against your home, your life insurance or your securities portfolio. None of these maneuvers will produce taxable income, so your AGI won’t increase.
3. Defer taxable income to next year. For example, if a client plans on investing in CDs or Treasury Bills, make sure the investments won’t mature until 2011 or later. For instance, the client can buy six-month T-bills after June 30.
4. Double up on IRA liquidations. A client who has to tap an IRA for living expenses might take a double distribution in 2010. Next year, if the client isn’t required to take withdrawals, he or she could live off the proceeds without taking taxable funds from the IRA.
Advisory: This last technique may give one year on and one year off from taxation of Social Security benefits.

Finally hitting the boundary?

Somehow we all knew when all the massive new taxes, regulations and rules hit the fan the blowback would be tremendous.  Ironically, in a just released report to Congress, the group complaining the most about the burdening mountain of paperwork…is the IRS.  Their report expresses concern about the adequacy of IRS taxpayer service, particularly as the IRS begins to implement health care reform, about new information reporting burdens facing small businesses and others, and about certain IRS collection practices.

It is a huge report, but allow me to touch on just one item. The gentle reader has heard me soundly speak out regarding the new 1099K and 1099-misc forms. Here is the IRS side of the issue – in their own words (bold words are my emphasis)–

The report expresses grave concern that a new reporting requirement contained in the Patient Protection and Affordable Care Act  (That’s the official name of the Health Care Law) may impose significant compliance burdens on businesses, charities, and government agencies.  Beginning in 2012, all businesses, tax-exempt organizations, and federal, state and local government entities will be required to issue Forms 1099 to vendors from whom they purchase goods totaling $600 or more during a calendar year. 

To meet this requirement, these businesses and entities will have to keep track of all purchases they make by vendor.  For example, if a self-employed individual makes numerous small purchases from an office supply store during a calendar year that total at least $600, the individual must issue a Form 1099 to the vendor and the IRS showing the exact amount of total purchases.  The provision will have broad reach.  According to a TAS analysis of 2009 IRS data, about 40 million businesses and other entities will be subject to the new requirement, including roughly 26 million non-farm sole proprietorships, four million S corporations, two million C corporations, three million partnerships, two million farming businesses, one million charities and other tax-exempt organizations, and more than 100,000 government entities.  All of these nearly 40 million businesses and other entities are subject to the new reporting requirement.

TAS has not yet reached any conclusions regarding the benefits and burdens of the requirement, but the report expresses concern that the burdens “may turn out to be disproportionate as compared with any resulting improvement in tax compliance.” 

Essentially what they are saying is that there is no way on earth they can handle all that paperwork.  As well, the amount spent to process all of it is so disproportionate to the income eventually derived that it will cost the government much more to do this than it will ever bring in cash-wise. It was suggested that Congress consider less burdensome tax gap proposals.

There are limits to excess and power. Perhaps one of those boundaries has been reached.  

And yes, I chuckled too.

To Your Success…

Karla Dennis – America’s Tax Diva

Cohesive.