IRS Relaxes Rules for Using IRA Money for Disaster Victims

The IRS has relaxed rules for borrowing from employer-sponsored plans like 401(k)s and similar plans like 403(b) and 457(b) for victims of the recent hurricanes. You may also qualify to take advantage of a hardship distribution. Participants who live or work in disaster areas should be able to access their money with a minimum of red tape. In addition, the six-month ban on 401(k) and 403(b) contributions that normally affect employees who take hardship distributions will not apply.

Details and criteria can be complex. If you need to free up some of your retirement money for recovery start by contacting your plan administrator. For more information from the IRS go here:

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IRS Announces Hurricane Irma Extensions

Hurricane Irma victims in parts of Florida and elsewhere have until January 31, 2018 to file certain individual and business tax returns and make certain tax payments. This includes an additional filing extension for taxpayers with valid extensions that run out on October 16, and businesses with extensions that run out September 15.

The IRS is offering this relief to any area designated by the FEMA as qualifying for individual assistance; currently includes Broward, Charlotte, Clay, Collier, Duval, Flagler, Hillsborough, Lee, Manatee, Miami-Dade, Monroe, Palm Beach, Pinellas, Putnam, Sarasota and St. Johns Counties. Parts of Florida, Puerto Rico and the Virgin Islands are currently eligible, but taxpayers in localities added later to the disaster area, including other states, will automatically receive the same filing and payment relief. You can go to the Disaster Relief page at for more information;

The tax relief postpones various tax filing and payment deadlines that occurred starting on September 4, 2017 in Florida and September 5, 2017 in Puerto Rico and the Virgin Islands. As a result, affected individuals and businesses have until January 31, 2018 to file and pay any taxes that were originally due during this period.

This includes the September 15 and January 16 deadlines for quarterly estimated tax payments (for Form 1040). Please note that because your 2016 individual tax was technically due on April 18, 2017, that those payments are not eligible for this relief – you can file late (Jan. 31 instead of Oct. 15) and not receive a late filing penalty, but you will still receive the late payment penalty if it turns out that you owe.

Businesses should refer to the IRS Disaster Relief page or contact your licensed tax practitioner because a variety of tax returns and tax deposits are affected. Of major concern and relief, the corporate, partnership, tax exempt, quarterly payroll and excise tax returns are extended.

The IRS is waiving late deposit penalties for federal payroll and excise tax deposits normally due during the first 15 days of the disaster period. Check out the Disaster Relief page for the time periods that apply to each jurisdiction. If you are able to make these deposits we strongly advised that you do so as soon as you are able because if you get behind the bills just pile up and can become a crippling liability. In our industry we say, “It’s the easiest loan to take out, and the hardest to pay back.”

The IRS automatically provides filing and penalty relief to any taxpayer with an IRS address of record located in the disaster area. You do not need to contact the IRS to get this relief. If you receive a Notice pertaining to a filing or deposit affected by this relief you should call the number on the Notice to have the penalty abated.

Keep all records of expenditures related to your Irma related repairs for the Casualty Loss claim on your 2017 tax returns. Unfortunately the cost of evacuating does not qualify as replacement. Form more information see IRS Publication 547; Casualties, Disasters, and Thefts available here: and pay special attention to the “main home in disaster area,” part on page 11/18.

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How the IRS lookback rules affect both refunds and audits

Technically these are statute of limitations matters.  When these 3 year statutes of limitations pass, the IRS can generally no longer assess additional tax or allow a claim for refund.

To claim a refund or credit you must file your tax return and make that claim within 3 years of the due date; including extensions, OR make your claim for refund 2 years after the tax was actually paid (think – sending payments years after the due date because of complications).

The 3 year rule is easy enough to understand: April 15, 2017 would have been the last day you could claim a refund for your 2013 tax return (originally due April 15, 2014) – 3 years. If you had extended the due date for your 2013 return to October 15, you have until October 15 of 2017 to claim that refund. Every year, in the beginning of October, the IRS will try to alert taxpayers for whom the 3 year statute is about to expire because up to a million people a year lose out on their tax refunds because they didn’t bother to file.

You have 3 years from the due date to claim your refund, or 2 years from the date the tax was actually paid, whichever comes later. Generally the 2 year rules come into play for tax returns that were not filed, filed late, or amended. If you don’t file your tax return by April 15, the IRS will consider any tax paid for that year to have been paid on April 15 – whether you file or not.

If you file a return beyond the 3 year lookback period, then your claim to any refund or credit will be limited to amounts of tax that were paid in the last 2 years. Again, we’re dealing with tax returns that were either filed late, or amended; it happens.

The lookback rules also affect audits. Generally the IRS has 3 years from the date the return was filed, including extensions, to examine it. That’s from the time the return was filed. If you don’t file, then the statute of limitations never starts.

We do meet folks who do not file for many years because of IRS phobias, and they lost refunds for years beyond the 3 year lookback period. The last project we had like that; the client lost approximately $7,000 in potential refunds. I have two friends who refuse to file because they don’t want the IRS to know their addresses; addresses that the IRS already has – they lose refunds every year. How do I know they are losing refunds? Because if the IRS though they owed tax, then my friends would receive an IRS Notice asking about that tax year. No notice generally means refund. Those people are also leaving the door open for the IRS to audit the older years because the statute of limitations on examining the tax return was never started – because the tax return was never filed.

The lookback rules involve a number of statutes and can become complex beyond the scope of this article. If you file and pay your taxes on time you should not have any problems. If you do have a related problem make sure you seek competent help from a licensed practitioner such as a CPA, Enrolled Agent or Tax Attorney.

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Innocent Spouse Relief Denied

In Tax Court Memo 2017-144, the Tax Court denied relief to a spouse where the Court held that she knew, or had reason to know, that her husband’s tax liabilities would not be paid.

In this case Dr. Ryke, a medical doctor with little financial experience, first discovered her husband’s history of tax problems before they were married. As a result the Rykes maintained separate credit cards and Dr. Ryke put the home mortgage in her name only.

The Rykes filed joint tax returns for eight years. Mr. Ryke, a self-employed attorney, handled the family’s joint tax returns and Mrs. Ryke signed them. She did not examine the tax returns before she signed.

Married taxpayers who file a joint federal income tax return are jointly and severally liable for the tax reported or reportable on the tax return.

Every year the Rykes owed money but failed to pay the balance. Dr. Ryke thought that her husband was paying their taxes when he was filing their joint tax returns. She was surprised when she found out that he wasn’t. At her husband’s request she made a payment of over $50,000 to satisfy the debts, and later requested relief under the Innocent Spouse rules so that she might recover the portion of the tax debts attributable to her husband’s business.

The Tax Court ruled that Dr. Ryke either knew, or had reason to know that the liabilities shown on the returns would not be paid. The Court also found that she had actual knowledge of outstanding tax liabilities, (versus mere knowledge). Since she signed the returns, she was jointly and severally liable for the entire debt, not just her portion.

If your spouse is bad with money, you should consult a licensed tax practitioner before signing any joint tax return because your circumstances may warrant filing separately. In this case the Rykes were still married at the time of the Court’s Memo, but in most of these cases involve divorce; the claim of Innocent Spouse usually comes after the divorce, but can also be a factor contributing to divorce.

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Taking the IRS to Court

There are three courts that you can use in IRS disputes; the U.S. Tax Court, the U.S. District Court, and the U.S. Court of Federal Claims.

The U.S. Tax Court is the only venue where you can take your case before you pay the tax. You have 90 days from the date of your Notice of Deficiency to petition the Tax Court. Do not be intimidated, many taxpayers go to tax court Per Se; meaning you will be representing yourself. Petitioning the tax court will cost you $60. If you believe that the IRS is in error, or at fault, consult your CPA, EA, or Tax Attorney for an evaluation before you attempt this on your own because there are usually other remedies available, and you will need guidance. There are no monetary limits; you can owe the IRS as little as $500 and be in disagreement, and take them to Tax Court if you like.

The other two venues require that you pay the full amount of tax before you bring your case; think of these venues as being for refund disputes.

U.S. District Court: if you have already paid the tax, and your case has gone beyond 90 days from the date of the Notice of Deficiency, and you want a jury, then you will want to take your case to the District Court. This is the only forum with a jury. You must first file a claim for refund with the IRS, and the IRS must reject your claim, then you can file suit in District Court.

U.S. Federal Court of Claims: this court hears many claims against the United States, including claims involving taxes. Your tax attorney will need a good understanding of the different circuits, it’s more for a fairness issue versus a technical issue, and the litigations will be complex and expensive. The reasoning lies in the fact that if the Supreme Court has not ruled in a similar case, the judges in the different circuits can decide the case based on precedent specific to their circuit.

District Court and the Federal Court of Claims are going to be expensive. For all of these venues you should first start by conferencing with your licensed practitioner.

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Trucker’s Deadline Approaching

The Highway Use Tax Return is due August 31. The Highway Use Tax applies to motor vehicles with a taxable gross weight of 55,000 pounds or more. Don’t wait until the last minute to file your form 2290 and pay your tax because penalties and interest will accrue. Contact your licensed tax professional.

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Assigning Payments to Taxing Agencies

Whenever you are making a payment to any taxing agency you must remember to assign your payment, otherwise the agency has the legal flexibility to apply your payment in a way that benefits the agency, and not necessarily you. By assignment I mean that you are putting the agency on legal notice as to where to apply your payment.

Consider that you still owe the IRS $5,000 for last year and you are currently in an installment agreement with them to make monthly payments. To insure that you do not owe them anything this year like you did last year, you send a quarterly estimated payment or voluntary payment in the form of a $3,000 check. If that payment is not assigned, the IRS will automatically apply that payment to the oldest balance; which is last year. Then you file your 2017 tax return thinking everything is OK, and 6 months later receive a surprise in the form of an IRS letter penalizing you for not paying your taxes on time – and they want the $3K too.

The way to avoid these misapplications is to properly assign your payments. To do this, in the memo section of your check write your Social Security Number, the tax form, and the year; “SSN: XXX-XX-XXXX, Form 1040, Tax Year 2017.” Do this whenever you send a check to any taxing agency be it the IRS or your State’s Department of Revenue.

If you are making a payment on line, be certain to choose the correct form and period before making your payment.

If the person in our example was to write a letter and request that the IRS please apply the payment to 2017, the IRS would likely oblige, or they might not; it depends. It would be a lot easier to just assign your payments to avoid such pitfalls. You should also contact your licensed tax professional for a Voucher to include with any mailed check.

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Fraud in Relation to Taxes

In our profession we like to say, “Once is an isolated event, twice is a coincidence, and three times is a pattern.”

“Fraud is deception by misrepresentation of material facts, or silence when good faith requires expression, which results in material damage to one who relies on it and has the right to rely on it. Simply stated, it is obtaining something of value from someone else through deceit,” Internal Revenue Manual

There are many badges, or indicators of fraud, and this is a far reaching subject, so today we are going to focus only on some of the indicators of fraud that the IRS looks for:

  • No records, poorly kept records, or attempts to falsify or alter records
  • Destroying books and records without plausible explanation, or refusal to make certain records available
  • The extent of your control over sales receipts, records and the bank deposits; the unwillingness to delegate those functions to employees
  • Engaging in illegal activities
  • Dealing in cash instead of using bank accounts, and making large cash transactions
  • Concealment of bank accounts, or the co-mingling of bank assets and physical assets between different companies under the full control of the same owner
  • Concealment of assets, dissipation of assets, and the transfer of assets (putting your racing boat in your brothers name the day you got the audit letter – too bad they usually take pictures of your house before they send out those letters, and the boat was taking up the entire right-hand side of your driveway that day)
  • Having a cash intensive business that hardly deposits any cash into the bank account; a pizzeria that buys 7 times more pizza boxes than the number of pizzas they say they sold
  • A pattern of failing to file tax returns
  • Fictitious or improper deductions, or deductions that are greater than reported income
  • Evading tax – unreported income, false statements, destruction of records, transfers of assets to others, dissipated assets – this is criminal fraud and you can go to jail
  • A consistent pattern over several years of reporting less taxable income than is necessary to justify your standard of living
  • Education and experience – at what point should you be expected to know better?

The IRS breaks fraud up into two broad categories; civil fraud and criminal fraud. Of course the consequences for anything that goes criminal are far greater than that of a civil matter, and can include jail time. Two elements the IRS considers when developing a case for fraud are the amount of tax due, and fraudulent intent. Intent is difficult to prove in court, and unless the amount at stake is very large, and the intent can be proven, it’s just easier to levy a civil fraud penalty instead of pressing for criminal fraud charges. The civil fraud penalty is 75% of the tax they caught you trying to get out of, and that punishment is usually enough to encourage future compliance.

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Segregation of Duties

This internal control concept relates to my last posting because bookkeeping falls under its guise.

Segregation of duties is where the worker at the cash register is never the person who counts the drawer at the end of the day and compares the amounts to the receipts, it’s where the bookkeeper that prints the checks never has signature authority, and where the guy working in the warehouse is never allowed to do purchasing or inventory counts.

In the last 10 years I have been involved with three clients in the Naples area who were robbed by their warehouse men because they did not take periodic inventory. One of the robbers even started driving his corvette to his $10 and hour job. The two other instances were both floor covering warehouses where the warehouse guys were installing carpet on the side for cheap because their materials were all stolen from their employers. In all three cases the clients estimated that they had each lost more than $125,000 due to these defalcations, and in all three cases the owners could not bring themselves to press charges.

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5 Bookkeeping Hacks

  1. ALICE: To remember which accounts are debits or credits remember ALICE; Assets, Liabilities, Income, Capital (older term for Equity), and Expenses. The first and last letters, the ones on the ends – those are the debit accounts, and the ones in the middle are your credits. This is an old tool, but like a hammer, still gets the job done nicely.
  2. Transpositions: if your accounts are out of balance look for transposition errors first because they are the most common of all accounting errors. A transposition is when you switch two numbers around. Consider that you intend to write the number 69, but your hand for some reason writes down 96 – that is a transposition.
  3. Due Date Calendar: missing filing deadlines is a costly pitfall (see #4 – vertical analysis). The average small corporation can be expected to meet as many as 26 or more filing requirements each year if it pays sales tax and runs payroll – a lot of room for error. If you are having problems meeting deadlines because of forgetfulness, as opposed to poor budgeting, get one of those paper calendars and in early January write down every deadline you need to meet for the entire year. Then count backward 5 business days and put down a reminder that the deadline is coming.
  4. Vertical Analysis: consider an income statement; income at the top, less all expenses, with the profit at the bottom. Divide all expense numbers and the profit number by the income number; you’ll get a percentage for each of these. In a nutshell, that is a vertical analysis and a graphic representation of the ratio of each expense and the profit, in relation to the gross income. Now consider that you missed a deadline that resulted in a $100 IRS penalty. Pitfalls like penalties and fines are not business expenses, and as such must come out of the profit. Since the $100 came out of profits, and your profits are 10% of the gross in this model, you will need to generate an additional $1,000 of gross income to make it up. Think about that next time you get a $3,000 IRS late penalty; at 10% net – $30K of gross income effort down the drain.
  5. Your Title: is your title that of “Bookkeeper,” or something more elaborate and ego stirring like, “Controller?” Do your research because if you’re making $11 an hour at the Golf Course and your title is Controller, might make you feel important but on paper that makes you responsible for the payroll tax deposits, and the IRS will come after you if your boss absconds with that money. The burden will be on you to prove to the IRS that you had no real control over who gets paid, how much, and when, despite being able to sign checks as a convenience to the organization. Always downplay your title to what it is: bookkeeper.

There are volumes dedicated to bookkeeping and business records. These are just 5 ideas that are hopefully easy to remember.

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