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7 posts from February 2014

02/24/2014

Internet Sales Face New Tax Debate

Retailers report online sales were up 8% for the week of Valentine’s Day compared to 2013. More than a third of the internet-based purchases were made through mobile devices tallying up a total of nearly $14 Billion in online consumer spending for the romance-based holiday.  Upcoming debates will reveal how state and local authorities would ‘love’ to tax online revenue flow to compensate for declining income and real estate tax revenues.

Internet-Sales-TaxIn the next few weeks, heated debate is expected on the proposed Marketplace Fairness Act which gives states the authority to collect sales taxes and use taxes from remote online retailers. The legislation attempts to simplify state sales tax rules to make collections easier and more uniform.

Americans are using the internet to buy and sell products and services at an explosive rate.  Surveys show the top reasons they buy online include the ability to select from a wide variety of items, discounted pricing, free shipping and, in many cases, no sales tax.  Officials are targeting large Internet retailers who currently escape state and local sales taxes.  

Right now, retailers with no physical presence in a state (such as a store, office, warehouse or sales representative) are not required to collect sales tax for an internet-based sale to a consumer in that state.  Proposed legislation targets remote sales made by retailers with annual gross receipts exceeding $1 million.

Brick-and-mortar businesses pay property and income taxes that the online or remote-selling counterparts may not pay.  Their business associations support requiring sales tax collections for all online sales and other taxes on profits made by online retailers.  Amazon.com and Overstock.com are just a few of the large retailers that have been lobbying against the tax increases, saying, if they must pay a tax on their bottom line income, they will have to pass it on to consumers.  

The issue of collecting Internet taxes is complex. Retailers and taxing authorities disagree about who is responsible for collecting taxes.  Should states themselves collect both sales taxes on purchases and income taxes on retailers with headquarters or warehouses in their jurisdiction?  Are Internet service providers responsible for collecting taxes? Is the Internet itself to be considered a product or a service; and then what kind of taxes apply?

States and municipalities are lobbying with renewed intensity for the chance to collect Internet sales and use taxes arguing they are losing billions of dollars in badly needed revenues.  Opponents claim the benefits of the Internet contribute to economic growth and productivity that already boosts revenues.  They also say gearing up intermediary taxing authorities to collect and manage the new taxes would be too costly and ripe for corruption.

Meanwhile, since 1998, the Internet Tax Freedom Act has banned federal, state and local governments from imposing internet-only taxes such as taxing the bandwidth you use, the volume of data used (or bit use), and email usage.  It also prevents the imposition of multiple or layers of taxes on e-commerce.  It does not prevent the taxation of the sale of goods through the Internet.

When it was enacted, the legislation grandfathered existing taxes in ten states that were mostly access, franchise and telecommunications taxes, as the potential of the Internet sales base was not yet clearly understood.  The law has been extended three times, but is set to expire this October which could open another window for imposing new taxes.

In Kansas, an attempt last year to revise the out-of-state Internet sales tax law died in committee.  In Missouri, the physical-presence rule applies and has been a hotly debated matter.

For now, the national debate is gearing up again with lawmakers expected to call for a vote on the matter this Spring.

02/20/2014

Go Mobile With IRS2Go

IRS2GO Mobile App“Go Mobile” even applies to your taxes.  The IRS has released its newly redesigned mobile app that can help you stay connected to your filed federal income tax return and request tax records.

The 4.0 version of IRS2Go is available in English and Spanish. The app is free.

IRS2Go provides a status tracker so a user can keep up with their 2013 tax return processing. That information is available within 24 hours for those taxpayers who file their return electronically or 4 weeks after you mail a paper return.  You may also request a transcript of your tax return or a copy of your tax bill.

The app provides a quick link to IRS videos and social media information resources.  It also shows sites where free tax preparation information services are available for the elderly and low income.

If you use an Apple iPhone or iTouch device, you can download IRS2Go through the iTunes app store. If you are an Android user, IRS2Go is available through the Google Play Store.

02/18/2014

IRAs Need Updated Designated Beneficiary Forms

Individual Retirement Accounts have been around long enough now that many Americans are learning what happens when they inherit an IRA. It’s not always good news.  If the owner has not filed an up-to-date beneficiary form, the heir of the estate risks losing a major portion of the IRA value to taxes and fees. IRA-nest-egg

The Employee Benefit Research Institute (EBRI) reports the average IRA value is close to $94,000. The EBRI also says there are nearly 15 million IRA accounts held by more than 11 million people.  With total assets of more than $1 trillion, it’s important to make certain that, should the owner die, the IRA doesn’t lose its value upon transfer to a new owner.

Advisors warn that many IRA owners mistakenly believe because they have a will, the person(s) they list as their heir(s) will automatically receive the IRA to use as a savings tool or turn into cash in whatever manner they wish.  Yet, without a specific and up-to-date IRA beneficiary designation form for each IRA, the beneficiary may be forced to empty the account right away risking taxes and penalties; and may even be bumped into a higher income tax bracket.   Some states require the accounts to go through probate court when there is no beneficiary form.

IRA owners should fill out what is a very simple beneficiary form separate from their will.  That way, when the owner dies, the designated beneficiary is able to determine the best distribution strategy over his or her lifetime.  A new beneficiary form is needed any time an IRA account is changed or updated, or the account is moved to a new custodian.

Typically, IRA beneficiaries must take distributions during their lifetime.  Inherited traditional IRAs require taxes to be paid on distributions.  Rollover, SEP, and SIMPLE IRAs are treated the same way. Beneficiaries are not required to pay taxes on distributions from an inherited Roth IRA.

Generally, surviving spouses have several choices including even disclaiming up to 100% of the IRA assets, which, besides avoiding extra taxable income, enables their children to inherit the IRA assets.  But, if the spouse decides to take a lump sum distribution, or begins distributions on a traditional IRA, taxes must be paid.

Non-spouse beneficiaries have fewer choices.  Among them, including taking the lump sum amount and paying a large share in federal taxes; disclaiming all or part of the assets for up to 9 months after the previous owner’s death; or begin taking taxable distributions from the account.

If you inherit an IRA, you cannot roll it over into your own IRA. You must also make certain it is re-titled as an inherited IRA.  If you move the IRA to a new custodian, make certain it is made as a “trustee-to-trustee” transfer or it will be considered as a taxable total distribution, thereby, ending the account as an IRA.  There are deadlines for your actions and you can even face the dreaded 50% penalty if you don’t make a required withdrawal in time.

To ensure you leave as much of your IRA asset as possible to whom you choose, or if you inherit an IRA, consult your financial advisor for the best steps to take to lessen the taxes and maximize the advantages of these retirement accounts.

If you have any questions about your financial savings plans, beneficiaries and the tax consequences of your choices, please contact us at McRuer CPAs.

02/17/2014

Court Says "No" to More Tax Preparer Regulations

The American Institute of CPAs reports the D.C. Circuit Court of Appeals has held that the IRS does not have the authority to regulate unenrolled tax return preparers.

The IRS had issued new regulations requiring unenrolled tax preparers to pass a certification test, take continuing education courses and pay an enrollment fee.  CPAs, accountants and enrolled agents have higher levels of expertise needed for complex tax returns and have been subject to these regulations and more for many years.

An article in the Journal of Accountancy reports a lawsuit was filed by three unenrolled tax preparers who argued the IRS had no authority to enforce the regulations claiming that enforcement is the role of the Treasury Department.

The new court decision affirmed that the estimated 700,000 unenrolled preparers are not subject to IRS supervision because they only have limited taxpayer representation. It said their preparation work applied more generally to the calculated amount of taxes paid, which is under Treasury Department authority. 

Unenrolled agents are not allowed to execute claims for refunds, receive refund checks, file extensions for assessments or collections, or handle IRS audits on the taxpayer’s behalf.  They may only help a taxpayer calculate their tax liability for the taxable year of the return.  Most storefront preparation services employ unenrolled agents who handle more simple tax returns.

Tax-Preparer with taxpayerThe IRS claims data shows returns filed by unregulated tax preparers contain more mathematical mistakes and have more errors regarding tax deductions and credits. While the court decision has delayed the most recent attempt to regulate all tax return preparers, it does not end ongoing efforts to protect taxpayers.

Meanwhile, taxpayers are reminded that no matter who prepares their return, they are ultimately responsible for the accuracy of their income tax return and are personally liable for any penalties or fees that result from errors.

02/13/2014

Most Common Taxpayer Mistakes

Taxing ConfusionStatistics show that one in five self-preparers either pay more income taxes than they owe or claim exemptions they don’t qualify for.  These often innocent mistakes are blamed on the growing tax code complexity that can befuddle even the most experienced professionals.

The most common errors costing taxpayers include:  claiming the wrong number of dependents, failing to itemize deductions, overlooking qualifying medical expenses, reporting an erroneous cost basis, and overstating charitable gifts.

Income reports involving 1099s are another area where a number of discrepancies occur.  The 1099 series are designed to prevent cheating by requiring payers to independently provide the IRS with income payments like interest, dividends, capital gains, and trust distributions.  They also must report payments made to independent contractors, sole proprietors and the like. 

An IRS computer matches these 1099 statements with information reported on a taxpayer's individual income tax return.  Taxpayers must make certain their returns and these 1099s report the same amounts.  If a taxpayer receives a copy of a 1099 that is not correct, he should request the payor send a corrected 1099 as soon as possible before filing a return. This helps avoid an IRS correspondence audit (a letter pointing out the discrepancy and potential tax liabilty issue) and the related delay and costs associated with handling the audit.  Unfortunately, even if that correction is not made in a timely manner, the taxpayer is still responsible for filing a tax return by the April 15th deadline.

Another common mistake is an easily avoided “oops” that likely occurs because it is simple.  Tens of thousands of taxpayers file unsigned returns each year.  If you overlook signing your return, the IRS may consider the return unfiled, and will withhold any refund until the matter is settled.  However, if you owe taxes, the IRS will cash your check without delay then will wait to hear from you to finish processing your return.

While engaging a tax preparation professional reduces these risks, these professionals are not clairvoyant so taxpayers must do their homework to provide correct information.

02/10/2014

Tech Savvy Tax Scams

What would you do if the IRS called you to say your tax payment was too low?  Or texted you to call a 1-800 number to confirm your social security number?  Or emailed you about a tax refund?  Warning:  IF you have received this kind of communication, it’s not from the IRS.

The new tax season is launching with new warnings about tax scams that use the IRS logo and lingo in more sophisticated and hard-to-track ways than ever before.

Tax Scam Alert

Tax Scammers today are tech savvy and use every kind of trick to try to cheat you out of your money and your identity.  Victims have reported being contacted by text message, tweets, email, social networking posts, phone calls and more.

Officials say in the most prevalent schemes, perpetrators tend to use the lure of a refund or fear of a new penalty to hook innocent taxpayers.  A tax scammer may pose as an IRS tax agent using very official sounding words on the phone or in emails or letters.

A common theme known as “phishing” includes a phone call or email saying the taxpayer owes more money and they should contact the IRS immediately or face a penalty.  The phone message or email provides a number to call that is a direct link to the scammer.  When the number is called, the scammer requires a taxpayer to ‘confirm’ their personal information (and/or bank account and/or credit card information) in order to make a payment right away.  In reality, the scammer is stealing that taxpayer’s identity and/or every penny from their financial accounts.

Another common tax scam involves filing fake tax returns using stolen social security numbers seeking refunds.  This kind of identity theft-based crime is the fastest growing tax-related crime.

Investigators say if you receive an unexpected call from the IRS threatening arrest, driver’s license revocation or deportation if a tax payment is not made immediately, you can be assured the call is from a scammer.

Some characteristics of scammers:

  • Scammers generally use fake common names and surnames to identify themselves.   “This is “Mr. Jim Williams of the IRS.”
  • Scammers will give you a fake IRS “badge” number.
  • Scammers may know the last four digits of your social security number and hope to trick you into giving them the rest of the number.
  • Scammers may back up a bogus call with a bogus email.
  • Scammers fake the IRS toll-free number on caller ID to make it seem real. (i.e. 800-IRS-CALL is fake.)
  • Victims say they often hear background noises on calls mimicking a call site.
  • More than one scammer may call; the first caller may make a threat and hang up.  A second caller soon afterwards will repeat the threat and may also claim to be with the police or DMV.
  • Some scammers claim a taxpayer has won a lottery, but in order to collect their winnings, they must first pay the taxes they owe on the prize.

The real IRS:

…never initiates contact with a taxpayer by email, text message nor social media.

…never requests personal or financial information by email or text.

...never requests personal identification numbers or passwords by email or phone.

The only IRS phone number a taxpayer needs to call to inquire about their federal income taxes is the IRS toll-free number:  800.829.1040.  The only official IRS website is:  www.irs.gov.

If you feel you have been the victim of a scam or were contacted by a scammer, click here to find out how to report the information.  Also, here is a link to a video with details on what to do if you have been a victim of a tax scam.

At McRuer CPAs we remind you to never give out your personal information over the phone, through the mail or on the internet unless YOU have initiated the contact and are sure of the recipient.  Please feel free to contact us with any questions.

02/02/2014

Warning: It's a New Tax Season

Red warning flagThe 2014 tax processing season has launched amid criticism over IRS customer service declines, proliferate tax scams, and new taxes that will surprise many taxpayers.

IRS Customer Service Decline
In the new Annual Report to Congress, National Taxpayer Advocate Nina E. Olson has detailed concerns that the IRS cannot keep up with taxpayer requests.  The report says in 2013 taxpayers made more than 100 million requests to the IRS using its toll free telephone service.  The IRS only responded to 61% of the calls and, for those taxpayers who were lucky enough to speak to a customer service representative, their average wait time on hold was more than 17 minutes.

On top of that, the report reveals the IRS received nearly 8.5 million letters from taxpayers requesting an adjustment to their tax liabilities.  At last count, 53% of the requests had not yet been processed and were considered “over age” in IRS terms, because the letters had been sitting for more than 45 days.

Olson blames the lack of resources and insufficient funding for IRS troubles.  Many in Congress have blamed the IRS budget problems on irresponsible spending.  They point to the scandal over the $50 million in expenses paid for IRS employee conferences in the past 3 years as one example.  Meanwhile, needy taxpayers who anticipated receiving free assistance to prepare their tax returns may be surprised to learn that the IRS has announced it will no longer prepare returns at all.

All of this also follows a report that during the 2013 tax filing season, 49% of returns prepared by IRS-trained volunteers were prepared incorrectly and customer service complaints are at the highest level ever recorded.

Increase in Tax-Related Scams
Reports say as more taxpayers grow desperate for help or discouraged this will only add to an increase in the number of victims of tax scams that use the IRS name.  Tax-related scams are showing up in every kind of form imaginable including phone calls, emails, social networking sites, websites, and even text messages.

The bottom line, the IRS never makes requests of taxpayers by email or phone.  The IRS never initiates a communication through electronic means to request your PIN numbers, passwords, personal bank account information, credit card information, and financial statements.  We’ll provide more information on tax-related scams in next week’s The ReSourceeNewsletter.

New Tax Rates Begin
Tax increases that went into effect in 2013 may surprise many taxpayers.  Even with continued debate, monumental questions remain about the Affordable Care Act tax penalties concerning who must pay and how much and when.  Obamacare-related rules are expected to cost both individuals and businesses, and are set to be enforced by the IRS through 2013 tax returns.

An employee’s share of the payroll tax is returning to 6.2% of the Social Security wage base, ending the two year temporary 2% rate relief.  This increased withholding likely is showing up on withholding statements already, but employers have until February 15th to implement the new rate.

Most taxpayers with modified gross income (MAGI) under $200,000 are not affected by other tax increases, but several deductions and tax credits have expired, so, in effect, tax obligations will increase.

For taxpayers with income greater than $200,000 ($250,000 married filing jointly), 2013 adds new taxes and new tax rates.  For example, Obamacare included two new taxes; including an increased Medicare payroll tax rate of 0.9% and an additional 3.8% Medicare surtax on either net investment income or the amount for which MAGI exceeds income thresholds.

Upper-income taxpayers may be subject to a new 39.6% marginal income tax rate on taxable income over $400,000 ($450,000 for married couples filing jointly). Likewise, they may also be subject to a capital gains and qualified dividends tax rate that can be as high as 20%---or 23.8% if the new Medicare surtax on net investment income applies.  Additionally, there are new taxes and regulations (thereby, more fees and penalties) impacting corporation dollars invested overseas.

If you are unsure about your tax obligations, or have a question about these new taxes, contact us at McRuer CPAs to schedule an appointment to determine the best tax strategy for you. As tax laws grow more complex, having a CPA on your side is a good plan. 

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