Poor records cost deductions

B was a self-employed contractor and subcontractor in construction. He hired workers and purchased materials as needed. He deducted his contract labor expenses and the cost of goods sold on his Sched. C. When the IRS denied most of the deductions for inadequate or nonexistent records, B went to court.

Held: Mostly for the taxpayer. The taxpayer had kept poor records, but he did produce some pay statements and check copies as proof of payments to workers. He also produced a statement from one person who said he worked for B as both a contract laborer and as an agent to hire additional workers for him. The statement included amounts B had paid him during the years at issue. The court found this document sufficient to establish most of the labor expenses, but denied a portion because the taxpayer could not produce checks or other documents in support.

The court allowed deductions for those supplies and materials the taxpayer could supply receipts for, but denied the rest of the cost of goods sold for lack of substantiation.

[Bowerman v. Commissioner, T.C. Summ. Op. 2014-26]

Bitcoin = property, not currency.

A number of businesses now accept Bitcoin "digital currency" as payment for goods and services. There is now IRS guidance on how to treat Bitcoin transactions. Basically, Bitcoin and other digital or virtual currencies are to be treated as you would treat any other property. Thus, transactions involving digital currency potentially have capital gains and losses. A taxpayer must determine the basis of the digital currency upon receiving it and compute any capital gain or loss when the digital currency is exchanged for goods or services.

The guidance (at www.irs.gov, search bitcoin, click on first item, scroll to Notice 2014-21 and click on it) gives details on how to record different kinds of digital currency transactions. Here are some excerpts [Notice 2014-21; 2014-16 IRB 1]:

Q-6: Does a taxpayer have gain or loss upon an exchange of virtual currency for other property?

A-6: Yes. If the fair market value (FMV) of property received in exchange for virtual currency exceeds the adjusted basis of the virtual currency, the taxpayer has taxable gain -- if the FMV of the property received is less than the adjusted basis of the virtual currency, the taxpayer has a loss. See Pub. 544, Sales and Other Disposition of Assets, for details on the tax treatment of sales and exchanges, such as whether a loss is deductible.

Q-7: What type of gain or loss does a taxpayer realize upon the sale or exchange of virtual currency?

A-7: The character of the gain or loss generally will depend on whether the virtual currency is a capital asset in the hands of the taxpayer. A taxpayer generally will realize a capital gain or loss on the sale or exchange of virtual currency that is a capital asset in the hands of the taxpayer. Inventory and other property held mainly for sale to customers in a trade or business are examples of property that is not a capital asset. See Pub. 544 for details on capital assets and the character of gain or loss.

Warning; If you pay either employees or ICs using a virtual or digital currency, you must apply all taxes and withholding and report the value on the individual's W-2 or 1099.

Severance pay subject to FICA

Q Corporation discharged employees and made severance payments that it called supplemental unemployment compensation, even though they were paid in a lump sum and not in connection with the UI benefits. Initially it treated the payments as wages, including them on W-2s, and paid its share of the payroll taxes.

Subsequently, it concluded that this treatment was improper and filed a claim with the IRS for a refund of over $1 million in FICA taxes.

When the IRS did not respond to the refund request, Q Corporation filed a suit for a refund. When Q was able to prevail in the Sixth Circuit Court of Appeals, the IRS appealed to the Supreme Court.

Held: For the IRS.The Supreme Court said that if Congress had wanted lump-sum severance pay to be excluded from the definition of wages, it would have specifically excluded it. Accordingly, lump-sum severance pay is subject to FICA and FITW. [United States v. Quality Stores Inc., U.S. Supreme Court, No. 12-1408]

IRS identified employment tax targets

The IRS is wrapping up its research program comprising detailed audits of 6,000 employers, and will use the results to target future education and audit efforts. Final numbers have not been compiled but an IRS official gave a preview of problem areas the IRS has identified:

1099s and backup withholding. A high percentage of employers do not file required 1099s for workers treated as ICs/ A related issue is failing to use backup withholding when an IC does not provide a valid TIN for the employer to put on the 1099.

Tip reporting. Most firms that customarily deal with tips are not reporting them correctly, IRS research revealed. The worst offenders are small businesses. The IRS says most employers do not comply with Rev. Rul. 2012-18 (www.irs.gov - search 2012-18, click on first item), which holds that service charges must be reported as wages, not tips, and are not eligible for the employer tip credit. To date, IRS auditors have focused on employer education rather than on penalties.

Employee classification. A perennial conflict between businesses and the IRS is ICs who are really employees. The research project found that a high level of employers classified workers as ICs when the IRS believed they were employees.

Fringe benefits. The IRS says that many employers treat taxable benefits as tax-free or treat benefits that might be tax-free but are not because they do not comply with code requirements.

When the IRS finishes the audits and compiles the data this year, it will likely increase audits of firms whose profiles match those the project found not in compliance (e.g., firms dealing with tips), but the IRS is likely to focus on education before emphasizing enforcement.

The IRS is so pleased with the success of its Voluntary Compliance Settlement Program -- lets firms treating workers as ICs to pay greatly reduced penalties if they come forward -- it may try similar programs for 1099 problems and other issues.

IRS eyes 401(k) matching contributions

 

Employee Plans Compliance Unit (EPCU) - Current Projects - Improper Deductions Project

Why did I receive an EPCU Compliance Check Letter?

Our records show the Form 1120 deduction amount exceeds the Form 5500 series return contribution amount by at least $1,000.

What is EPCU attempting to determine?

We want to determine whether certain plan sponsors who maintain one defined contribution plan may have taken an improper deduction. An improper deduction occurs when the Form 1120 deduction amount exceeds the Form 5500 contribution amount. Only employers with a tax year ending identical to that of the plan year ending will be reviewed. Item 2(a)(1) on Schedule I or Item 2(a)(1) on Schedule H  filed with the Form 5500 provides the total dollar amount of employer contributions for the plan year. This amount will be compared with the dollar amount listed on Item 23 of the Form 1120.

What actions do I need to take?

Please provide the information requested in the Form 886-A attached to your letter.

You may furnish other documents or clarifying material that you believe will be helpful for us to review. You should make every effort to answer the questions as accurately as possible. Failure to provide this information could result in examination of your corporate return or your plan.

If you need additional time, please contact the person whose name is listed on the cover letter to request an extension prior to the response due date.

If You Have Questions

Please feel free to contact the person listed in the cover letter with questions about this project and how it relates to your situation. You may make contact by phone, mail or e-mail. Please include “Improper Deduction Project” in the Subject line of the message.

Background

An employer contribution amount deducted on the Form 1120 must comply IRC 404(a)(6) and IRC 412(c) (10).

The activities of this project include extensive research to determine if there is a discrepancy between the employer contribution amount reported on the Form 5500 and Form 1120.

The EPCU will mail the compliance contact letter and information request to a random national sample of plan sponsors and will issue a closing letter notifying the plan sponsor of our findings.

The information gathered from this project will result in a report issued by the IRS describing responses and identifying areas where we need additional education, guidance or outreach.

Make Plans Now for Next Year’s Tax Return

Most people stop thinking about taxes after they file their tax return. But there’s no better time to start tax planning than right now. And it’s never too early to set up a smart recordkeeping system. Here are six IRS tips to help you start to plan for this year’s taxes:

1. Take action when life changes occur.  Some life events, like a change in marital status, the birth of a child or buying a home, can change the amount of taxes you owe. When such events occur during the year, you may need to change the amount of tax taken out of your pay. To do that, you must file a new Form W-4, Employee's Withholding Allowance Certificate, with your employer. Use the IRS Withholding Calculator on IRS.gov to help you fill out the form. If you receive advance payments of the premium tax credit it is important that you report changes in circumstances, such as changes in your income or family size, to your Health Insurance Marketplace.

2. Keep records safe.  Put your 2013 tax return and supporting records in a safe place. That way if you ever need to refer to your return, you’ll know where to find it. For example, you may need a copy of your return if you apply for a home loan or financial aid. You can also use it as a guide when you do next year's tax return.

3. Stay organized.  Make sure your family puts tax records in the same place during the year. This will avoid a search for misplaced records come tax time next year.

4. Shop for a tax preparer.  If you want to hire a tax preparer to help you with tax planning, start your search now. Choose a tax preparer wisely. You are responsible for the accuracy of your tax return no matter who prepares it. Find tips for choosing a preparer at IRS.gov.

5. Think about itemizing.  If you usually claim a standard deduction on your tax return, you may be able to lower your taxes if you itemize deductions instead. A donation to charity could mean some tax savings. See the instructions for Schedule A, Itemized Deductions, for a list of deductions.

6. Keep up with changes.  Subscribe to IRS Tax Tips to get emails about tax law changes, how to save money and much more. You can also get Tips on IRS.gov or IRS2Go, the IRS’s mobile app. The IRS issues tips each weekday in the tax filing season and three days a week in summer.

Remember, a little planning now can pay off big at tax time next year.

Additional IRS Resources:

• Publication 505, Tax Withholding and Estimated Tax

Ten Things to Know about IRS Notices and Letters

Each year, the IRS sends millions of notices and letters to taxpayers for a variety of reasons. Here are ten things to know in case one shows up in your mailbox.

1. Don’t panic. You often only need to respond to take care of a notice.

2. There are many reasons why the IRS may send a letter or notice. It typically is about a specific issue on your federal tax return or tax account. A notice may tell you about changes to your account or ask you for more information. It could also tell you that you must make a payment.

3. Each notice has specific instructions about what you need to do.

4. You may get a notice that states the IRS has made a change or correction to your tax return. If you do, review the information and compare it with your original return.

5. If you agree with the notice, you usually don’t need to reply unless it gives you other instructions or you need to make a payment.

6. If you do not agree with the notice, it’s important for you to respond. You should write a letter to explain why you disagree. Include any information and documents you want the IRS to consider. Mail your reply with the bottom tear-off portion of the notice. Send it to the address shown in the upper left-hand corner of the notice. Allow at least 30 days for a response.

7. You shouldn’t have to call or visit an IRS office for most notices. If you do have questions, call the phone number in the upper right-hand corner of the notice. Have a copy of your tax return and the notice with you when you call. This will help the IRS answer your questions.

8. Keep copies of any notices you receive with your other tax records.

9. The IRS sends letters and notices by mail. We do not contact people by email or social media to ask for personal or financial information.

10. For more on this topic visit IRS.gov. Click on the link ‘Responding to a Notice’ at the bottom left of the home page. Also, see Publication 594, The IRS Collection Process. You can get it on IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Additional IRS Resources:

• Tax Topic 651 - Notices – What to Do
• Tax Topic 652 - Notice of Underreported Income – CP-2000
• Tax Topic 653 - IRS Notices and Bills, Penalties and Interest Charges

Unpaid Debt Can Affect Your Refund

If you owe a debt that’s past-due, it can reduce your federal tax refund. The Treasury Department’s Offset Program can use all or part of your refund to pay outstanding federal or state debt.

Here are five facts to know about tax refunds and ‘offsets.’

1. The Bureau of Fiscal Service runs the Treasury Offset Program.

2. Debts such as past due child support, student loan, state income tax or unemployment compensation may reduce your refund. BFS may use part or all of your tax refund to pay the debt.

3. You’ll receive a notice if BFS offsets your refund to pay your debt. The notice will list the original refund and offset amounts. It will also include the agency that received the offset payment and their contact information.

4. If you believe you don’t owe the debt or you want to dispute it, contact the agency that received the offset. You should not contact the IRS or BFS.

5. If you filed a joint tax return, you may be entitled to part or all of the refund offset. This rule applies if your spouse is solely responsible for the debt. To request your part of the refund, file Form 8379, Injured Spouse Allocation.

You can get forms on IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Additional IRS Resources:

Tax Topic 203 - Refund Offsets

Trauma Care for Women Vets

"There is an educational need for trauma care training for organizations that support women veterans," noted Lucia Bruce at a Center for Continuous Learning class in Rockville, Md., on April 10. Bruce, regional administrator of the Women's Bureau in Philadelphia, collaborated with the Montgomery County, Md., Department of Health and Human Services and the Veterans Affairs Trauma Services to train 50 DHHS employees and staff from non-profit veterans' assistance organizations on trauma care for women veterans.

• Read the Women's Bureau Traum Guide

Tips for Taxpayers Who Missed the Tax Deadline

If you missed the April 15 tax filing deadline, don’t panic. Here’s some advice from the IRS.

• File as soon as you can.  If you owe taxes, you should file and pay as soon as you can. This will help minimize the interest and penalty charges. There is no penalty for filing a late return if you are due a refund.

• IRS E-file is still available.  IRS e-file is available through Oct. 15. E-file is the easiest, safest and most accurate way to file your taxes. With e-file you receive confirmation that the IRS received your tax return. If you e-file and choose direct deposit of your refund, you’ll normally get it within 21 days.


• Pay as much as you can.  If you owe tax but can’t pay it all at once, try to pay as much as you can when you file your tax return. Pay the remaining balance as soon as possible to stop further penalties and interest.

• Make a payment agreement online.  If you need more time to pay your taxes, you can apply for a payment plan with the IRS. The easiest way to apply is to use the IRS Online Payment Agreement tool. You can also mail Form 9465, Installment Agreement Request. The tool and form are both available on IRS.gov.

• A refund may be waiting.  If you’re due a refund, you should file as soon as possible to get it. Even if you are not required to file, you may still get a refund. This could apply if you had taxes withheld from your wages or you qualify for certain tax credits. If you don’t file your return within three years, you could forfeit your right to the refund.

For more information, contact me (Ken Reid) at mastertype@mabspc.com..