Archives for October 2013

We continuously see new clients who had been using a tax preparation software package to prepare their personal tax returns and discover that preparation errors have been inadvertently made by the taxpayer. Whereas these software packages are ideal for a taxpayer with a couple of W-2s and are claiming the standard deduction, taxpayers with more complex returns can overpay their taxes by not [Read more…] about IRA 60-DAY ROLLOVER DEADLINE MISSED – TAXPAYER, NOT BANK, IS HELD RESPONSIBLE

Apparently, not all IRS employees believe in proper tax planning and tax preparation.

A former IRS supervisory and group manager has been fined $20,000 and sentenced to a year in prison, followed by 12 months of supervised release, after she was convicted of accessing IRS computers on behalf of a commercial tax preparation business that she operated while employed by the IRS. She was found to have exceeded her authorized access to IRS computers and engaging in a criminal act of interest. Not only did she access the IRS computers, but she had her IRS subordinates access the IRS databases over 2,000 times for the benefit of her business. The court found that this employee of the IRS for over 34 years had compromised the public’s trust in the IRS. As an aside, did the judge really believe that the public trusts the IRS?

Then there is the case of an individual who worked 28 years for the IRS with 20 of those years as a revenue agent (an auditor). She graduated from college with two majors and a minor in accounting, finance, and economics, and had completed some graduate work in forensic accounting. She also had passed some parts of the CPA exam and was working to pass the remaining parts. She seemingly was an intelligent person . . . but may have lacked street smarts. When filing her 2008 and 2009 tax returns, she claimed $12,025 and $25,140 of charitable contributions, respectively. She was audited by the IRS and upon request, she produced letters on the purported letterhead of the church to which she claimed the donations were made. When the pastor of the church was contacted to collaborate the donations, he told the IRS [Read more…] about IRS AGENTS – SAD BUT TRUE STORIES

Since the exemption from the federal estate tax is currently $5,250,000, indexed for inflation, some may say that federal estate tax planning and estate tax preparation are dead. If the emphasis is on the federal estate “tax”, we would agree since most American families have an estate that does not exceed the federal exemption amount. Although we are focusing on the federal rules, let’s not forget that many states have a state exemption or inheritance tax that needs to be considered.

However, if one is making the argument that estate planning is dead, we do not agree. The focus on estate planning has always been to preserve the estate for loved ones or for philanthropic purposes. In other words, asset protection is and always has been the key to effective estate planning. Since we live in a litigious society, steps should be taken to protect our assets from creditors and predators.

One estate planning strategy is to use an asset protection trust. Without going into detail, a life insurance policy could be transferred to the trust or the trust is funded and thereafter purchases an asset from the grantor at an arm’s–length price on an installment basis. One variety of the asset protection trust is the Intentionally Defective Grantor Trust (IDGT). If you are wondering why a trust that is intentionally defective is an effective estate planning tool, you are [Read more…] about EFFECTIVE ESTATE PLANNING TOOL – INTENTIONALLY DEFECTIVE GRANTOR TRUST

Proper tax planning and tax preparation considerations require that all taxpayers take the necessary steps to properly document their transactions. Failure to document transactions can lead to unintended results with the IRS. Taxpayers often fail to take the necessary steps for various reasons, including the belief that they are too busy, will address it “tomorrow”, don’t want to incur a fee to address the issue with their CPA, “everyone else does it” mentality, believing that the chances that the IRS would challenge this are remote, a total disdain for documentation, or believing that they can correct the situation at a later date.

Let’s take a peek at a recent court case that discusses what happens when substantiation and documentation are lacking (Glass Blocks Unlimited v. Commissioner, Dec. 59,600(M), TC Memo. 2013-180). The president of an S Corp. was its sole shareholder and only full-time employee. In 2007 and 2008, the president transferred funds to his S Corp. to fund its operations. The corporation considered these advances as loans. During these same years, the corporation distributed funds to the president which were not reported as wages or distributions since the president considered these repayments of loans from his company to him. During these years, the S Corp. did not issue Forms W-2, Wage and Tax Statement, Forms 1099-MISC, Miscellaneous Income, or file any Forms 941, Employer’s Quarterly Federal Tax Return. The president did not report the S corporation distributions on either his 2007 or 2008 income tax returns.

While many a business person would agree that the treatment by the president and his company were proper, the IRS did not concur and found [Read more…] about UNREASONABLE COMPENSATION – S CORP LOAN RECHARACTERIZED AS WAGES

Proper tax planning and tax preparation considerations require that taxpayers substantiate their tax deductions and document them. If these two steps are done, then most tax deductions will be sustained if audited by the IRS. Let’s take a peek at a court case that discusses what happens when substantiation and documentation are lacking (K.D. Humphrey, TC Memo. 2013-198, Dec. 59,619(M)).

Kenneth Humphrey claimed as deductions: legal fees incurred in connection with his employment; Medicare taxes, dental care, and the cost of a gym membership as medical deductions; charitable contributions; a home office where utility, Internet and cable expenses were claimed; business expenses such as business gifts, meal and entertainment expenses, auto expenses, cell phone, and computer expenses.

The disallowance of Humphrey’s deductions are presumed correct by the courts since deductions are a matter of legislative grace and taxpayers bear the burden of proving that they are entitled to the claimed deductions. In addition, a taxpayer must keep sufficient records to substantiate the deductions claimed.

Looking at the facts of this case illustrates what the IRS looks at and how taxpayers need to substantiate their deductions. Taxpayers who claim these deductions need to assess their documentation and whether they have sufficient substantiation to claim these deductions. Looking at the facts in this case . . . [Read more…] about INDIVIDUAL TAXPAYER DENIED DEDUCTIONS – IRS IMPOSES ACCURACY RELATED PENALTY