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7 posts from March 2014


Actual Taxes for Virtual Money

Virtual currency is the latest product of the global internet-connected marketplace we live and work in today.  The most popular form of virtual currency is called Bitcoin. Now the IRS has issued new guidance ensuring the same old tax rules apply to this new kind of money.

Bitcoins are under scrutiny for a variety of reasons.  First, let’s look at what virtual money is and how it works.  Bitcoin is a payment network where a user can anonymously use their country’s currency to quickly purchase any amount of bitcoins on an exchange.  The digital bitcoins may then be used to buy any kind of product or service that accepts virtual money payments.

Bitcoin_bigToday, everything from webhosting services, to pizza and even manicures can be purchased with bitcoins. Bitcoins make international payments easy and cheap because this kind of currency has not yet been subject to any country’s regulations nor is it controlled by a Central Bank.

Think about how you and your family may attend a local fair.  In order to ‘purchase’ a seat on the latest spinning carnival ride, you must use your cash to purchase a ticket at a booth.  Then you give the ticket to the ride’s operator in order to take your seat.  Some rides cost more tickets than others and price adjustments can be made seamlessly and quickly.  Virtual money operates in the same way. 

When you exchange your currency for bitcoin, you have proof of the bitcoin value in what is called a “digital wallet” which you can choose to set up on your own computer, mobile device or in the cloud. You may now use the virtual account to send or accept bitcoins for selling or buying products and services.  The wallet ID is all a buyer or seller sees, so the purchase is virtually anonymous.

More merchants nationwide are beginning to accept these kinds of virtual currency payments, because they avoid paying the 2% to 3% credit card transaction fees or other transaction costs charged by their ‘middle man’ bank.  The bitcoins received can be exchanged right away for deposit as the business’ currency of choice.  This kind of payment is rapidly growing in popularity for companies who provide technical and online services to a worldwide client base.

Bitcoins are becoming so popular that even money market investors are buying and selling the bitcoins as a commodity.  In fact, speculators are now fueling price volatility because they are buying and selling bitcoins at a far greater rate than the rate of general commercial use.

That leads us to the downside.  Because of the anonymous nature of purchases, bitcoins have become the currency of choice for the online purchase of illegal drugs, illicit activities and paying for legitimate services with the provider expecting to be able to avoid taxes.  There is also a warning about investing in currencies like this that have no Central Bank authority to guarantee or insure values.  

Now, as bitcoins are making a noticable impact in the marketplace, the IRS is issuing new warnings to end any questions about the taxability of bitcoins and virtual money payments.  In a new IRS guidance, the agency makes it clear that, for U.S. federal tax purposes that the same general tax principles that apply to property transactions also apply to transactions using virtual currency.

The Journal of Accountancy explains that “in computing gross income, a taxpayer who receives virtual currency as payment for goods or services must include the fair market value (FMV) of the virtual currency (measured in U.S. dollars) as of the date the virtual currency was received.”

There are also several tax rules affecting virtual currency transactions and income.  For example, some people participate in what’s called “mining” to earn bitcoins.  It is a type of reward system for solving complex math problems.  This kind of bitcoin income is reportable.

Some global service providers and contractors are accepting bitcoins for payments to employees or themselves.  Wages paid to employees are taxable to the employee and independent contractors also face the same self-employment tax rules with payers required to issue Form 1099.

Experts say some form of virtual money is here to stay as our internet-connected world provides global accessibility 24 hours a day.  Your decision about how and when you choose to use virtual money should be carefully considered, especially if you are considering whether to accept bitcoins as payment for goods or services.  For more information on how this issue may affect you or your business, please contact us at McRuer CPAs for a review of your goals and the possible tax consequences.


Delay Collecting Social Security ...or not?

Is it a good idea to begin collecting your Social Security benefits as soon as you qualify at age 62 or should you wait until you’re 70 years of age when you could qualify for higher payments?  Financial advisors do not agree on the answer.

Social security card and cashAt first review, waiting seems like the best choice. Waiting to collect until the age of 70 qualifies a recipient to receive an additional 8% per year for every year past the “full” retirement age of 66 or 67, depending on where a person was born.  The average benefit collected by a 62-year-old in 2012 was less than $12,500 a year.  But waiting until age 70 to collect could make the annual payments more than $30,000 a year.

Social Security benefits are calculated on a number of factors including lifetime earnings, average life expectancy at the age benefits are taken, marital status and more.  The Social Security Administration reports that a person aged 65 years old today can expect to live to age 84 if a man or 86 if a woman.  Waiting to collect benefits provides a great monthly benefit which may bring peace of mind long term.

However, today’s economy has made it extremely difficult for many Americans to meet their current monthly expenses and, at age 62, there may be no other option than to seek the relief of Social Security benefits.

Some advisors say the only time it makes sense to wait to collect until you’re 70 years old is if you’re still earning a decent wage and have a healthy retirement portfolio.  They point to low retirement savings, more active and expensive senior lifestyles, longer life spans and, increasingly, tax issues as reasons to begin collecting benefits as soon as you qualify.

Other experts reason that waiting means you’ll be living off your portfolios.  That decreases the amount you may leave to children or charity.  Any savings you used by waiting decreases the amount you have in your account that can grow, meaning less cash will be available in those accounts in later years.  Benefits may be more per month if you wait, but when you die, those benefits cannot be passed on to a spouse.

Decisions about Social Security are extremely important especially during today’s uncertain economic times.  Contact us at McRuer CPAs and we’ll review your retirement plans with you to help you determine the best strategy for the years ahead.


Overtime Rules Set for a Change

If overtime rules apply to more workers, will that put jobs in jeopardy or create new jobs?  Will it cause an increase or decrease in wages?  These questions are at the heart of debate over last week’s executive order from President Obama directing the Labor Department to revise federal overtime pay rules.

Current federal regulations allow salaried workers who are categorized as “professional, administrative, executive or outside sales” to be denied overtime under what’s commonly referred to as the “white-collar exemption”.   Also, employers are only officially required to pay time-and-a-half overtime pay to workers who make less than $455 per week. Overtime with windup clock

The President says his order is a response to a “crisis of economic inequality” evidenced in recent years by soaring corporate profits, but worker wage decline to all-time lows.  The President’s order seeks a raise in the minimum weekly exemption salary level to $1,000 per week and a revision of the description of the kind of work that allows an employer to exempt workers from overtime pay.

For example, a report from the Economic Policy Institute explains under current rules an employer may declare a worker’s responsibility is ‘executive’ in nature because that worker supervisors other employees.  Even if a worker spends a majority of time performing tasks, if that worker manages even one other employee or vendor, that worker could be exempted from receiving overtime pay.

Reports predict changing the overtime exemption rules could affect five million workers.  Employees have been putting in longer workweeks in recent years and it’s now estimated it adds up to an average of 30 overtime hours a month or 360 extra hours per year.  That can be a major source of extra income if the worker is not exempted from overtime pay.

The rules changes also address workers with supervisory ‘management’ jobs, such as fast-food managers, who work long hours doing tasks and also manage a team of workers, but receive a salary.

Small business associations have already been lobbying hard against a push to increase the minimum wage.  Now the overtime order is causing additional concern.  They fear overtime changes would mostly harm small businesses by increasing the cost of doing business, while having little effect on major corporations and their highly paid executives, boards and shareholders which are supposed to be the target of political pressure.

They also point out that the Bureau of Labor Statistics shows that only 4.7% of hourly workers receive minimum wage and more than 20% of that number were 16 to 19 years of age.  They say that shows that the issue that affects generally the least experienced part-time worker has been blown out of proportion.

Opponents claim overtime changes would result in fewer jobs, because small businesses would no longer achieve profitable production levels and would be forced to close their doors.  They also fear businesses would simply cut back worker hours, causing an overall decrease in income.  

Proponents say qualifying more workers for overtime would lead businesses to hire more workers to cover daily production to escape overtime costs.  They also claim businesses would hire more workers at higher wages to avoid the higher overtime hourly pay threshold.

In Missouri, the minimum wage is $7.50 per hour and overtime is mandated at a minimum 1.5 times that rate to $11.25 per hour.  In Kansas, the minimum wage is $7.25 per hour and overtime is set at $10.88 an hour.  Neither Missouri nor Kansas has a daily overtime limit.

Already, the President has issued an executive order requiring an increase in the minimum wage paid to federal workers be raised to $10.10 and requesting companies that do business with the federal government raise their minimum wage.

The Labor Department must go through a public comments process on the new overtime regulations.  Typically, that process takes at least six months to complete depending upon how controversial the requested change may be.

For more information on how the regulation changes may affect you or your business, contact us a McRuer CPAs.


ACA Deadlines for Businesses

Affordable care act  on flagAffordable Care Act (ACA) deadlines applying to businesses have been changed.  Businesses are not yet officially required to offer employee coverage, but if large businesses with more than 50 full-time employees don’t provide qualified coverage, they may have to make what’s called an Employer Shared Responsibility Payment (ESRP) in 2015 and 2016.

The ESRP applies differently depending upon the size of the large business and is required at different times for different types of businesses. Many lawmakers backed by business trade associations continue seeking compliance date extensions.

The Treasury Department is now providing more clarification of ACA business rules affecting businesses with 50 or more employees as well as guidance if your business utilizes volunteers, students or seasonal employees.  Generally, businesses with between 50 and 100 full-time employees have until 2016 to provide insurance or pay the ESRP. 

Businesses with 100 or more full-time workers must offer affordable health coverage and provide what is called a minimum value to at least 95% of its full-time employees and their dependents by 2015 or pay the ESRP.

The IRS reports the ESRP is “equal to the number of full-time employees the employer employed for the year (minus up to 30) multiplied by $2,000, as long as at least one full-time employee receives the premium tax credit.”

If you are a business owner with fewer than 50 full-time employees, you are not required to pay the ESRP, but you are required to provide your employees a notice of the available online marketplace. You are also urged to shop for employee insurance coverage through the ACA Marketplace featuring small business insurance plans.

An extensive list of questions and answers has been posted to explain the ESRP as business associations plead for a simplified reporting method.  

All of this while debate continues on whether the Online Marketplace will be working and reliable in time for large businesses to purchase and provide qualified health insurance plans that comply with the ACA deadlines.

New Affordable Care Act Provisions

Stethoscope on flagNEW:  The deadline for individuals to sign up for health insurance online has been moved to April 15th to allow more time for those people who may have had a difficult time accessing the healthcare.gov website.

The following information was published before this deadline change--though the other content below is still accurate, consumers need to be aware that provisions of the Affordable Care Act are subject to change amidst budget and political pressures:

The IRS has published an updated and more-detailed explanation of the tax provisions of the Affordable Care Act (i.e. ACA or Obamacare).   The agency is charged with collecting non-compliance penalties, as well as confirming and sending credits to qualified taxpayers and businesses that need assistance paying for the coverage.

The Obamacare mandates and rules are extensive.  The newly-updated information contains recent changes to deadlines and penalties in a number of categories. To help you find the specific ACA information that applies to your concerns, click on the description category below.

Individuals and Families

Small Business Employers  (Fewer than 50 full-time employees or equivalents)

Large Business Employers  (50 or more full-time equivalent employees)

Other Organizations  (Self-insured organizations, tax exempt and government organizations)

The registration deadline for qualified health insurance coverage is March 31st

As we explained in a previous blog Individual Shared Responsibility Payment or Penalty?, if you (as an individual) don’t have qualified health insurance coverage and have not registered this year, you’re required to pay as a penalty the higher of either 1% of your income, or $95 per adult ($47.50 per child). You'll pay the penalty on your 2015 income taxes.

If you have health insurance coverage you may still want to compare prices and benefits through the online marketplace at healthcare.gov.


Individual Shared Responsibility Payment or Penalty

The Affordable Health Care Act mandates that you and your family must have qualifying health insurance coverage by April 1st of this year or qualify for an exemption.  If you don’t meet either of those criteria, you’ll have to make a payment (which is also referred to as a penalty) in 2015 when you file your 2014 federal income tax return. Th

The payment is called the “individual shared responsibility payment” and must be paid by you and any dependent included on your tax return who does not meet the above mandates for any month of 2014.

A person may be exempt from paying the penalty if the minimum payment for annual premiums is more than 8% of annual income, if a gap in coverage is less than three consecutive months, or a hardship excludes a person from obtaining coverage (which is supposed to qualify that person for government-sponsored care).  Recently regulators also have added an exemption from the penalty if the initial enrollment period for a Marketplace purchase caused a gap in coverage.

The payment amount is either a flat rate per person or a percent based on income, whichever is greater.  It is capped at the cost of the average annual premium of a bronze-level plan purchased on the Marketplace.

Generally, the law states you would owe a penalty of 1/12th of the annual health insurance premium payment for each month you and/or your dependents do not have coverage.  As the Marketplace is still in flux, the 2014 annual payment amount is figured on 1% of your household income that is above the tax return threshold for your filing status or a charge per person of $95 per adult, $47.50 per child limited to no more than $285, whichever is greater.

Please Note:  This issue is being hotly debated and a Presidential executive order may change the amounts and timing of the payments.  The amounts shown in this blog are numbers currently provided online by the IRS.  Be watching for additional information on this blog in the next few days featuring direct links to the most detailed and most up-to-date information on ACA Tax Provisions for both individuals and businesses.

If you have questions, please don't hesitate to contact us at McRuer CPAs.


Taking the IRS to Tax Court

You can take your neighbor to court.  You can take your boss to court.  You can take your spouse to court.  And….you can even take the IRS to court.

Many taxpayers don’t realize that they have an alternative if they can’t resolve a dispute directly with the IRS.  They can turn to the United States Tax Court.

The Tax Court is not affiliated with the IRS, but rather provides taxpayers an independent destination with tax-savvy federal judges who issue opinions and decisions.

US Tax Court LogoMost taxpayers who file a petition with the court seek relief from an IRS assessment of a deficiency.  Generally, they either dispute the amount the IRS says they owe or the method the IRS used to determine the deficiency.  They may have already attempted to appeal through the IRS appeals process, but the IRS did not budge (which may not be a surprise).

The Tax Court filing fee is $60 and the payment of the underlying tax is usually postponed pending the outcome of the case.  The petition has to be filed in a timely way depending upon the kind of case and the tax year of the disputed issue; so carefully following filing instructions is crucial to getting the case on the court docket.

A case is tried in Tax Court before a judge.  There is no jury.  Both the taxpayer and the IRS are parties to the case and are equally responsible for presenting documents, testimony and arguments to prove their side of the issue.

A taxpayer may use a practitioner or attorney that has been admitted to the bar of the Tax Court or they can represent themselves.  About 45% of taxpayers with a case in Tax Court choose to face the judge without representation.

The U.S. Tax Court is officially located in Washington, D.C., but 19 judges travel nationwide to conduct trials in designated cities with large populations, such as Los Angeles and New York. Typically, they hold court in an office that is located in a federal courthouse in that city. 

In smaller cities, the Tax Court does not have a permanent office for trials.  In those locations, only “small tax cases” are heard and are usually held in chambers; that is, in an informal office setting rather than a more formal courtroom.  Taxpayers with more complicated cases must travel to one of the larger cities for a trial in a federal courthouse there.

In most tax disputes that involve $50,000 or less, the court suggests that taxpayers elect to have their cases heard in the faster and simplified “small tax case” procedure.  However, cases heard under these rules are not appealable.

Tax Court trials in Missouri are held in federal courthouses in Kansas City and St. Louis.  In Kansas, there is no permanent courtroom and only small tax cases are heard in Wichita.  There is no permanent courtroom in Nebraska and, if a taxpayer files, he or she is notified by letter where the case will be heard.

Reports show that last year, 30,000 taxpayers filed cases with the Tax Court.  A majority of them were settled without having to go to trial.  Several types of cases beyond deficiency arguments are heard including requests for relief from joint liability, failure to pay due to medical causes, interest abatement, appeals of Collection Due Process (CDP) hearings, worker classification disagreements, disagreements over business expense claims and more.  In some cases, the judge may determine the matter falls under the jurisdiction of the Bankruptcy Court or the U.S. Court of Federal Claims.

Who wins most often?  It depends upon the case.  For example, taxpayers are fully successful in Gavel
about 15% of the cases involving tax assessments and another 10% result in split decisions that reduce the IRS assessment.  But, in cases where a taxpayer has been assessed over undocumented business expense claims or underreporting income, taxpayers only fully prevailed in 2% of the cases.  The IRS usually wins 90% of cases involving a lien against a non-paying taxpayer’s property and 95% of cases involving a summons to examine records and transactions related to a civil or criminal tax liability.

The Tax Court is a helpful tool for taxpayers who believe they have pursued all over venues with no success, but have the documentation and the fair argument that the IRS has issued an unfair assessment.   P.S. An actual argument thatwas used, but was not successful for the taxpayer, is:  “I used TurboTax and any tax error is that company’s fault.”

If you have any questions about an IRS audit or assessment, contact us at McRuer CPAs and we’d be happy to discuss your options.

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