Three tax takeaways

1. South Dakota v. Wayfair

On-line sellers no longer have to have a physical presence within a state to be required to pay sales taxes for on-line sales within those states. On June 21, 2018 the Supreme Court overturned the physical presence standards used in the past as an “unsound and incorrect,” interpretation of the Commerce Clause that has created unfair and unjust marketplace distortions favoring remote sellers and causing states to lose out on enormous amounts of sales tax revenue.

Larger on-line sellers have mostly started charging sales taxes on their sales but it remains to be seen how the smaller retailers will comply with the changes. If you buy items over the internet and are not charged sales tax you are supposed to claim those purchases and pay a Use Tax, but most buyers are either not aware of what a Use Tax is, or simply ignore the law. This ruling gives the states more leverage in going after end users who fail to pay over Use Tax.

2. The 2018 draft of Form 1040 might be postcard size, but it will require more schedules

In our business we like to say, “Uncle Sam giveth with one hand and taketh away with the other.” Save money yes, as far as simplicity though – not so much. The TCJA reminds me of a certain bookkeeping program that sells basically the same product every year, but moves the bells and whistles around so you think you’re getting something new.

Every client I have run a projection for is going to pay a lower income tax but there are bound to be exceptions. For the simplest filers; a single person with a W-2 and nothing else, the new filing system will definitely result in lower taxes and be as simple and easy to file as we can imagine. Those with complex tax structures can expect the same amount of effort, and folks who have pass-through income have some additional work if they want to take advantage of the §199A deduction (up to 20%).

3. The Tax Court recently ruled that the property manager of an apartment complex was an employee and not an independent contractor

The Tax Court has enumerated the following factors in determining whether and employee-employer relationship exists (abridged):

  1. The degree of control exercised by the principal over the details of the work.
  2. Which party invests in the facilities used in the work.
  3. The opportunity of the taxpayer for profit or loss.
  4. Whether the principal has the right to discharge the taxpayer.
  5. Whether the work is part of the principal’s regular business.
  6. The permanency of the relationship.
  7. The relationship the parties believe they are creating.
  8. Whether the principal provided the worker employee benefits.

The Manager was the only person who preformed work regularly at he apartment complex. The Manager performed the usual routine duties of any property manager.

The Court’s conclusion ruled in favor of the IRS:

While it did not issue the Manager a Form 1099-MISC or any other Form 1099, the Apartment Complex treated the Manager as an independent contractor and neither withheld or paid employment taxes with respect to his services.

On audit, the IRS determined that the Manager should have been classified as an employee. The IRS also assessed additions to tax, and penalties for the Apartment Complex for failure to file a return (payroll tax forms 941 and 940), and related penalties for failure to pay payroll taxes.

Our conclusion:

If your business pays any individual (has an SSN only) for services, they need to receive either a W-2 or form 1099-MISC. If you simply pay them, then you are paying a worker under the table. The only payees you do not need to issue a 1099 to are corporations (has an EIN and not a SSN).

Although all worldwide income is required to be reported, this payment arrangement leaves the reporting up to the discretion of the payee. The employer also gives the impression that they were attempting to escape paying the employer portion of Social Security and Medicare taxes. Under-funding the Social Security and Medicare funds is a big problem in this country and a side of the equation the powers-that-be seem willing to ignore.

It will be interesting to see the reaction of Black Market Operators when they reach the age of collecting Social Security benefits and they scream bloody murder because their checks are so small. A number of them probably do not even realize that the size of their payments relies on the amounts they have invested into those funds.

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Some tips for building credit

Start by saving money now, because you are going to need it. Brian Tracy, the business guru and author of many best-selling business books, teaches us that unless you can save 10% of your earnings, your measure of being financially successful is not good. Another of his tips to remember is that the laws of attraction will compel a savings account to attract even more savings. The bigger it gets, the more you will want to put in there.

Avoid the financial pitfalls of spending too much on wants. Good savers are able to differentiate between needs and wants. Wants always cost a premium and you can always live without them. You need to learn the difference between needs and wants to save money.

Two of the fastest ways to build credit are to have a credit card, car loan, or both. If you have applied for a credit card and been denied, your banker can set aside a portion of your savings in a separate savings account; say $2,000. Then you can use your own money as collateral for a small secured loan. Because the loan is coming from your reputable bank, the interest rate is probably the best you are going to get. Use the loan for something that you need, and that you already have enough cash to pay for if you had to. Examples are things like a new washer and dryer, computer, or car repairs. Your small, secured loan should have a term of just over one year, fourteen months is ideal. Car loans are good because they typically offer a reasonable interest rate, and the regularity of repayment demonstrates your ability to manage a credit balance.

Remember to never, ever use credit to finance your fun. Never borrow to buy toys, lavish vacations, or go out to restaurants. If you do not have the surplus cash then you don’t get to have those things. Starting now, you are to think of borrowing as “Financing.” Don’t pay attention to commercials that try to brainwash you into thinking that it is normal to carry a high-interest balance all your life; “Credit check lets you always know your credit score – so you can be the one in control,” sort of things. Paying interest at 24% should never be considered normal. You won’t be the smart one for knowing what’s in your wallet, what you’ll be is broke.

About half way through your second secured small loan your bank should be ready to issue you a credit card. This is worth waiting for. A rule of business is that if someone approaches you, it is never for your benefit. When you receive credit card offers in the mail you’ll see this theory at work because the interest rates will average 24% and higher. Many rates from reputable banks with which you regularly do business are 19.9%. That is the best you can hope for when building credit.

You are trying to build credit, not carry a balance. When you do use your credit card, always pay the balance before the monthly cycle ends. You can build credit without paying any interest at all. It is a myth that you need to carry your credit card balance beyond a month and pay interest in order to build credit. By paying the balance before the cycle ends, you will build credit a little slower, but you will still build credit. A banker friend of mine recently shared his cheat-sheet for which elements make up a credit score:

35% payment history – always pay on time

10% types of credit used – secured loans or unsecured credit cards

10% applications for new credit – each time you take out a loan or use a credit card

15% length of credit history – how long you have demonstrated good management

30% amounts owed – the balance you carry and pay interest on

By this logic, you can add at least 10% to your credit score for using credit while not paying interest. A good example is deferring an expense for a couple of weeks but paying the entire balance before the monthly interest cycle. Assume that you need new tires and a brake job and the store has a 40% off sale that ends tomorrow. You are not allowed to use your savings. You don’t have the surplus cash right now, but you will have the cash over the next two weeks. This is a perfect time to use your credit card to take advantage of the savings, and since you will be able to pay the balance within two weeks, you will also not pay any interest. You saved money, built up your credit and paid no interest.

Within the time it will take you to save enough for a down payment on a home, your credit score will be in great shape. The combination of your savings and a good credit score will afford you the bargaining power to negotiate a best interest rate on a new home loan.

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Withdrawals from your IRA

If you are older than 59 ½ years old and withdraw money from your regular IRA, the distributions are only subject to income tax. If you withdraw funds before you reach age 59 ½ those amounts are subject to both income tax and an early withdrawal penalty equal to 10% of the amount you took out.

Because you fund a Roth with after-tax dollars, you can take your contribution out at any time and for any reason. If you are over 59 ½ years old and have held your Roth for at least 5 years, you can withdraw earnings with no tax or penalty. To escape taxes and the 10% early withdrawal penalty on earnings, you need to hold the Roth IRA for at least 5 years and be over 59 ½ years old. If you’re over 59 ½ but held the account less than 5 years you’ll pay income tax on your earnings but there is no penalty.

There are a number of exceptions to the early withdrawal penalties and those all come with a multitude of conditions. The cost of early withdrawal penalties makes it cost-effective to consult with your tax professional BEFORE you make any early withdrawal. Some common exceptions to the penalty are: the distribution is used for unreimbursed medical expenses, payments of medical insurance when you are unemployed, disability, higher-education expenses, inherited IRA, first time home purchases, substantially equal periodic payments, IRS levy, and being called up to active duty for reservists.

You may qualify for more than one exception, there are conditions, and there are other arrangements that may affect your tax calculations. Contact your licensed tax professional for a consultation because unlicensed tax preparers are prohibited from advising clients in matters of tax planning, and for good reason.

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The TCJA changes for unreimbursed employee expenses

One of the most profound changes in the new tax law is that taxpayers who are used to taking a deduction for unreimbursed employee expenses subject to the 2% of AGI floor will loose those deductions effective from 2018 through 2025. Unreimbursed employee expenses are schedule A deductions. These changes to the tax laws do not affect sole proprietors who report their business activities on schedule C.

These are the expenses that you may incur during your W-2 job that are not reimbursed by your employer. Common deductions may include mileage for a salesperson, tools for a mechanic, uniforms, professional licenses, union or other professional dues, home office, home computer, travel expenses, or meal and entertainment expenses to name a few.

The largest impact in the clients I work with is going to be for salespeople because they can drive between 40,000 and in some cases as many as 70,000 miles each year. They are also required to entertain. Those are a lot of expense deductions that they are loosing. If you think 70,000 business miles is a lot, that is the same as driving from Naples, FL to Miami and back, five times a week, for one year. There are plenty of employees who make drives like that and more, and for them, and anyone else who relies on these deductions, the TCJA is going to hurt.

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When the IRS files a return for you

When the IRS prepares a return for you they call that an Automated Substitute for Return (ASFR). It is an assessment tool intended to enforce compliance for those who are delinquent in filing their tax returns. Generally it is used to systematically calculate tax liabilities so that the IRS can commence with collections actions.

I have met people who never file their tax returns but they also never hear from the IRS. They are wrong in thinking that the Government is not paying attention to them. The reality is that if they never hear from the IRS it is because they are due a refund. For the record, the IRS also gets copies of any payee statements that you get; so they know.

If the only record the IRS has for you is a copy of your W-2, calculating tax based only on the W-2 is easy enough that it is done by machine. You don’t hear from the IRS because the IRS has made the calculation and they know that you are due a refund. The IRS has no reason to send you a notice because you don’t owe any tax. A refund for a tax return can not happen until the tax return is filed.

Conversely, after the IRS has your W-2s, 1099s, or other payee statements, and it turns out that you owe taxes, they will want to collect. They will start with reminder notices and go from there. If you fail to respond to the reminders and proposals, the IRS will eventually file a Substitute tax return (ASFR) for you so that they can commence with collecting that tax due for that return. Your tax return then goes to the IRS Collections department, and subsequently the Balance Due department, and those actions represent escalations in enforcement. But is the tax they are after the right amount?

You are not on this earth to unjustly enrich the Government. Yes – you can still file your back tax return(s). You need to get that tax return filed because the IRS may not have all of the adjustments and deductions that you are entitled to. After a seasoned tax pro sorts things out, you may even be entitled to a refund. Under certain circumstances you may be entitled to apply for abatement of the related penalties. Or, you can just roll over and pay the tax.

Contact us for help with unfiled tax returns because you may be due a refund. For more information visit our sister site at http://www.taxhelpsource.com/

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The IRS Streamlined Installment Agreement

That means having your installment agreement processed in a streamlined manner compared to providing a stack of financial information going back three months.

If you owe taxes to the Government and can not pay right away, the Internal Revenue Service will generally allow you to enter into an agreement to pay in installments over time. You will incur interest and penalty expenses. There is a setup fee and that can vary. Short term plans are for 120 days or less, and the longest you can go is 72 months (although the IRS is testing terms that go out to 84 months). Sometimes a tax lien is filed against the taxpayer to protect the Government’s interest. Tax liens, depending on the taxpayer’s history, can be filed for any amounts. The payment amounts generally must be enough to pay the entire debt within the time frame agreed upon, but there are exceptions.

There are general categories for installment agreements (IA) based on how much money you owe; less than $10,000, less than $25,000, between $25,000 and $50,000, and over $50,000. Generally an IA for an individual (no businesses or trusts) who owe $10,000 or less is guaranteed; it is there for the asking. Taxpayer’s who owe less than $25,000 generally qualify for an automatic streamlined agreement. Taxpayer’s who owe between $25,000 and $50,000 may qualify for an automatic streamlined agreement but if they have had problems in the past, the IRS may insist on either partial financial information, or complete financial information with a financial statement. If you owe more than $50,000 expect to produce a financial statement and three months of bill copies representing necessary living expenses.

A complete discussion of these matters is well beyond the scope of this blog. There are very many laws that pertain to collecting taxes, and for every law there is generally an exception. As such, collections matters can be mind-boggling. If you find yourself in trouble, don’t go it alone because you need competent and licensed professional representation.

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Can the IRS put me in jail?

Yes, but never for owing taxes. The IRS can criminally prosecute you and possibly put you in jail if you voluntarily and deliberately violate a known legal duty in order to avoid paying taxes. That would be tax fraud (sometimes called evasion). However, if you do everything right, and find yourself in a bind because you can not pay a tax, you will have collections problems but you will not go to jail.

Tax fraud is the deliberate and willful attempt to evade tax law or defraud the IRS. Fraud, as defined by the IRS, “Is the 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, is the obtaining something of value from someone else through deceit,” IRM 25.1.1.2.

The criminal fraud penalty requires the IRS to prove intent and this penalty is 100% of the tax owed plus interest. Because intent can be difficult to prove, in many smaller cases the IRS will often opt to assess a Civil Fraud Penalty instead. The Civil Fraud Penalty is 75% of the tax owed, plus interest. Imposing a penalty for Civil Fraud is much easier for the IRS to impose and generally results in the same outcome; to punish an infraction and encourage future compliance.

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Unlimited above-the-line charitable deduction proposed

New legislation called the “Charitable Giving Tax Deduction Act,” was recently introduced by Rep. Chris Smith (R-NJ) and Rep. Henry Cuellar (D-TX). The bipartisan bill could make tax deductions for charity available to everybody, instead of just those who itemize. The bill is also aimed at addressing concerns that the recent changes brought by the Tax Cuts and Jobs Act (TCJA) would result in fewer people itemizing, and therefore fewer people donating to charity.

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Did you know that the IRS generally has 10 years to collect taxes?

It is called the Collection Statute Expiration Date (CSED). That is the expiration of time period established by law that the IRS has to collect a given tax. Once a CSED expires the IRS will write it off.

Assume that you filed your 2017 form 1040 on time on April 18, 2018. You owed taxes for that return that you did not pay. All things being equal, after April 19, 2028 the IRS can no longer lawfully collect that tax and you are off the hook.

A CSED starts only after a tax return has been filed. The CSED does not start automatically on the due date. If a taxpayer filed their 2017 tax return on June 1 of 2020 that is when their 2017 CSED will start. If there are no tolls on the CSED, on June 2 of 2030 the IRS can no longer legally come after that 2017 tax.

The CSED can be tolled, or stopped, by different collections and legal actions, so it is not always easily defined. Because a serious IRS collections matter will take years to resolve, and the taxpayer and their representatives will try different strategies for relief, it is typical for a CSED to be tolled and re-computed. Some actions that toll a CSED are: Collection Due Process Cases, being in a Disaster Area, Military Postponement, Bankruptcy, Offer-in-Compromise, Installment Payment Agreement, Summons Enforcement, Taxpayer Assistance Order, and Innocent Spouse. When a taxpayer is in any of these situations, the CSED changes and will need to be re-computed.

Sometimes a taxpayer owes more than one type of tax, and for more than one period; businesses have multiple due dates throughout a given year. You can imagine how complicated calculating any CSED can get when a taxpayer falls a couple of years behind. You will need the help of a licensed professional if you plan to use the CSED as part of a larger strategy.

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Did you know that the IRS has a first time automatic penalty abatement?

If you qualify, you can receive administrative relief from penalties for failing to file a tax return, pay on time, and/or to deposit taxes – no questions asked.

The most common IRS penalties are for failing to file (on time), and failing to pay (on time). If you owe federal income tax, your tax return as well as the payment, is due by April 15. You can extend your time to file until October 15, but that is never an extension of time to pay. If you fail to pay by April 15 you will incur the failure to pay penalty. If you do not file by your deadline you will incur the failure to file penalty. It is common for delinquent taxpayers to have both penalties assessed against them.

If you have three years of clean tax history immediately prior to your trouble year, you filed all currently required returns or filed an extension, and you have paid, or arranged to pay, any tax due, you may qualify for automatic administrative relief from the penalties.

If you are usually on time with your tax returns and payments and had this one bad year that is when you need to remember this lesson. As tax returns become more complex, and the amounts of money involved get bigger, there will be a number of elements that need checking. If you are not sure if you qualify, contact our office or other qualified and licensed tax firm for help.

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