Archives for September 2019

IRS PLACES RENEWED FOCUS ON CRYPTOCURRENCY & NON-CRYPTO VIRTUAL CURRENCY INVESTORS

September 24, 2019 by Frank

IRS Is Using Data Analytics to Identify Taxpayers Who Invest in Cryptocurrency and Fail to Report Their Gains

Our Observations

In our Exton PA office, we are seeing more taxpayers invest in Bit Coin or some other form of Virtual Currency. The IRS has also taken notice. Whereas our clients meet with us to discuss the proper reporting of gains (or losses) from their investments, the IRS focus is on taxpayers who may have willfully or non-willfully failed to report their cryptocurrency and non-crypto virtual currencies.

IRS Action Plan

IRS Commissioner Chuck Rettig stated that “The IRS is expanding our efforts involving virtual currency, including increased use of data analytics. We are focused on enforcing the laws and helping taxpayers fully understand and meet their obligations.”

The IRS, in its effort to identify taxpayers who may have unwillingly or willingly failed to report gains from their virtual currency transactions, will send 10,000 educational letters to cryptocurrency investors in August. These letters are not being sent at random to taxpayers, but the IRS has obtained the names of cryptocurrency investors through its ongoing compliance efforts and these letters target those individuals.

The IRS is asking taxpayers to review their tax filings and if currency transactions were omitted, to file amended past returns and pay the taxes, interest and penalties related to these unreported transactions.

How Will the IRS Contact Taxpayers

There are three variation of the educational letter (6173, 6174, and 6174-A). Letters 6174 and 6174-A require no action from the taxpayer. On the other hand, Letter 6173 alleges noncompliance and requires taxpayer action. If the taxpayer fails to respond to the Letter 6173, the IRS will likely examine that tax return.This withholding requirement applies to payments made to non-resident individuals, estates or trusts or disregarded entities owned by such non-resident entities.

Does It Make a Difference If a Taxpayer Invests in Cryptocurrencies Located Outside the US?

Yes! A taxpayer’s reporting requirements are greater if investing in virtual currency abroad. There are additional filing requirements, such as the Report of Foreign Bank and Financial Accounts (FBAR) on FinCEN Form 114, that may be required. Failure to comply with FBAR reporting carries some very significant penalties.

What If a Taxpayer Does Not Hold Virtual Currencies for Investment Purposes, But Merely Uses this Currency to Pay Vendors?

Taxpayers who pay vendors or others via Bitcoin (or any other virtual currency) may have taxable transactions to report to the IRS.W

Tax Planning Tip #1:

Taxpayers who pay vendors or others via Bitcoin or some other virtual currency, and/or taxpayers who invest in virtual currencies and sell or exchange those holdings, need to speak with an experienced tax professional to ensure compliance with the Code and IRS Regulations.

Tax Planning Tip #2:

If a taxpayer has cryptocurrency exposure, it is always better to be proactive and report these transactions to the IRS before you receive one of the above letters from the IRS. If the IRS imposes a penalty against the taxpayer, the taxpayer usually is in a better position to have the IRS abate the penalty by being proactive.

Tax Planning Tip #3:

Aside from trading in mutual funds and stocks that are listed on a U.S. securities exchange, taxpayers who hold foreign stocks, bonds, bank accounts or any other type of foreign investment, directly or indirectly, as well as taxpayers who have a retirement plan in a foreign country or hold property in a joint account with a parent or other relative in a foreign country, should consult with an experienced tax professional to ensure that they are in compliance with the FBAR reporting requirements.

If you would like to discuss your business or personal tax planning, tax preparation and other financial concerns with an experienced tax professional, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.

Copyright © 2019 Keystone Financial Solutions, Inc. All rights reserved. BE SURE TO READ THE DISCLAIMER PAGE: Content in this blog is for educational purposes only and should not be considered as the rendering of tax, legal or investment advice. The publisher of this blog makes no representations as to the accuracy or completeness of any information herein, will not be liable for any errors or omissions, and shall not assume liability for any losses, injuries, or damages from the display or use of this information.

About F. Bryan Haarlander, EA, CTRS:

Bryan Haarlander is an IRS licensed Enrolled Agent and who owns and operates a specialized tax services firm serving clients in the western suburbs of Philadelphia, PA, which includes the cities of Chester Springs, Coatesville, Collegeville, Devon, Downingtown, Exton, Frazer, King of Prussia, Paoli, Philadelphia, Phoenixville, Pottstown, Radnor, Reading, Wayne, West Chester in Berks, Chester, Delaware, Montgomery and Philadelphia Counties, as well as clients in Delaware, New Jersey, New York and throughout the continental USA.

A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.

PA MOTOR VEHICLE UNDERSTATED VALUE PROGRAM REVISITED

September 19, 2019 by Frank

Philadelphia Inquirer Interested in PA Motor Vehicle Understated Value Program

Do You Want to Become Famous?

Do you want to become famous and to see your name mentioned in a story in the Philadelphia Inquirer? Okay, we exaggerate. You likely will not become famous if your name were included in a newspaper article.

Opportunity to Share Your Personal Experience with a Reporter

We were contacted by a reporter from the Philadelphia Inquirer about our October 2018 blog posting. The posting dealt with the PA DOR & PA Dept Motor Vehicles assessing PA residents sales tax on private car sales after-the-fact. These are situations where the all-knowing PA DOR (tongue-in-cheek) makes a tax assessment on a private car sale where PA determines that the stated value of the car on the title transfer paperwork was understated and additional PA sales tax is due.

The reporter would like to speak with persons who received one of these deficiency notices and what happened next. If you had such an experience, please call me a 610-594-2601 so we can discuss your situation and if the reporter wishes to speak with you directly.

About F. Bryan Haarlander, EA, CTRS:

A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.

PA REQUIRES PA COMPANIES TO WITHHOLD PA PERSONAL INCOME TAX ON PAYMENTS MADE TO NON-PA BASED CONTRACTORS

September 17, 2019 by Frank

Brief Overview of the PA PIT Withholding Requirement When PA-Based Companies Make Payments to Non-PA-Based Contractors

PA 72 P.S. §7316.2 Withholding Requirement

PA 72 P.S. § 7316.2 states that a person that (1) makes payments of income from sources within PA to a non-resident individual or an entity that is disregarded that has a non-resident member and (2) who is required to file Form 1099-MISC with the PA Department of Revenue, shall deduct and withhold the PA Personal Income Tax (PIT) at the rate of 3.07%.

Who Is Subject to this Withholding?

This withholding requirement applies to payments made to non-resident individuals, estates or trusts or disregarded entities owned by such non-resident entities.

Who Is Not Subject to this Withholding?

Payments to any of the following are NOT subject to this withholding requirement: Partnerships, Corporations, Multi-Members LLCs, Residents, and disregarded entities (LLCs) owned by partnerships, corporations, multi-member LLCs or PA residents.

What Types of Payments Are Subject to Withholding?

Payments for services rendered in PA by non-residents of PA are subject to the PIT withholding requirement.

Withholding Examples

Ex. 1: PACo, a business located in West Chester, PA, hires Stephanie, a MD resident individual, to perform customer surveys from her home in MD. PACo (the payor) pays Stephanie (the payee) $10,000 for her consulting services. PACo will report the $10,000 on Form 1099-MISC since it exceeds the $600 dollar filing requirement threshold.

However, since Stephanie performed no services within PA, she is not subject to PA PIT withholdings.

Ex 2: If we change the facts to show that Stephanie spent time in PA to perform some of her services, then PA withholding is required for the services provided within PA by this non-resident individual. PACo has the compliance burden of devising a process to substantiate the time Stephanie spent in PA to perform her services and withhold PA PIT on the fees she earned for her work performed within PA.

Ex 3: The facts are the same as in Example 2, except Stephanie is a single owner of her LLC and the LLC (not Stephanie) was contracted to perform the consulting services in PA.

The PA payor is required to withhold PA PIT because the LLC is a disregarded entity.

What Types of Payments Are Not Subject to Withholding?

Payments made related to goods or materials (inventory), sale of property, and interest and dividend income are not subject to the PA withholding tax requirement.

Tax Planning Tip #1:

PA payors should protect themselves from failure to withhold. To determine if the payee is a non-resident individual of PA or a disregarded entity owned by one, have the payee complete PA Form REV-1832, 1099-MISC Withholding Exemption Certificate form. This form lists the reason(s) the payee is not subject to the PA 3.07% withholding tax. The payee simply checks the appropriate box which the landlord can normally accept in good faith.

Tax Planning Tip #2:

Estimate the annual calendar year payments to the non-resident payee. If not more than $5,000 in a calendar year, no withholding is required. If it is unknown whether the $5,000 threshold will be met, the PA DOR encourages withholding.

KEEP IN MIND THAT IF IT WAS ANTICIPATED THAT THE PAYEE WOULD BE PAID LESS THAN $5,000, BUT THAT THRESHOLD WAS EXCEEDED, THE PAYOR IS LIABLE FOR THE FULL 3.07% PIT WITHHOLDING AMOUNT ON THE ENTIRE MONIES PAID TO THE PAYEE.

Tax Planning Tip #3:

If payee will likely be paid more than $5,000 or if the payee wishes to have tax withholdings, register for a 1099 withholding account on E-Tides. Withhold tax at 3.07% rate for payments made to non-PA resident service providers working in PA.

About F. Bryan Haarlander, EA, CTRS:

A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.

PA DEPT. OF REVENUE NOT REFUNDING TAXES WITHHELD

September 3, 2019 by Frank

Taxes Withheld May Not be Refundable in PA

Real Life Scenario #1

You put in your retirement papers to start receiving pension benefits or you decide to withdraw IRA retirement monies.

You are a PA resident and you request to begin receiving your company pension plan. The employer will likely request at what income tax rate do you wish to have your federal and state income taxes withheld. The employer may have default rates. If you do specify the desired withholding rate, the employer will use the default rate.

Do you consult with your tax professional as to how to respond? Likely not because it is a simple form that likely appears not to have much significance. If too many taxes are withheld, your think you will get a refund. If too little taxes are withheld, you believe you may have a small underpayment penalty.

Real Life Scenario #2

You instruct your financial advisor/broker to begin to make RMDs (required minimum distributions) from your retirement account. You instruct your broker to withhold federal taxes at the rate of 30% (your federal effective rate) and PA taxes at 10%. You realize that the PA statutory rate is 3.07%, but you despise making quarterly estimated tax payments for the dividend and capital gains that will be reported to PA. Your thinking is that the rate differential will be used to apply against the taxes due on those sources of income.

Again, you do not consult with your tax professional.

What Is the Problem?

The problem is that one of the few benefits of residing in PA is that many forms of retirement are non-taxable. Pension benefits and RMDs are generally not taxable for PA personal income tax (PIT).

Let’s assume that the payor of the pension plan or RMD properly shows the pension or IRA distribution on Form 1099-R as non-taxable for PA and also reflects the PA taxes withheld on those distributions.

Your PA-40 PIT income tax return claims the tax withheld from your retirement proceeds because those taxes were actually withheld from the gross retirement proceeds. You paid those taxes and now you want those taxes applied against your total PA taxes due. Seems perfectly logical.

All is seemingly well, but then that letter from the PA Department of Revenue arrives in the mail. PA is challenging those withheld taxes on your non-taxable retirement benefits. The PA DOR requests a letter from your employer or broker stating that the taxes withheld were done so in error and should not have been withheld. (After all, everyone knows that those retirement benefits are non-taxable and no taxes should be withheld). The DOR further states that without that letter, the withheld taxes will be ignored. Or, the DOR instructs the taxpayer to prove that those withheld taxes were remitted to PA. After all, simply showing the amount of withheld taxes in the tax withholdings box is not proof that the taxes were remitted to PA.

So you call your employer or broker and tell them that you need this letter stating that they made a mistake. This can be a challenge. First of all, the payor of the retirement funds did not make a mistake. You the taxpayer made the mistake by instructing that PA PIT be withheld. While an employer may be willing to sign such a letter for a long-term and valued employee, a brokerage firm may not wish to issue such a letter stating that it made an error when it merely followed your instructions.

Okay. So you cannot obtain the letter admitting a withholding error, surely the payor can provide proof of payment to PA. Again, it is very doubtful that the corporate office of a Wall Street brokerage firm will take such action due to your error. An employer . . . maybe?

Frantic Call to Tax Professional

Realizing that the PA DOR is about to deny these withheld taxes and will be sending you a tax assessment along with interest and penalties, you now decide its time to call your tax professional to decry the authoritarian and oppressive actions of the PA DOR and get your return accepted without any adjustment.

You are likely not going to be pleased when your tax professional explains that a fee will be charged to represent your issue with the PA DOR, the likelihood of not being successful at the DOR department dealing with your tax account, how PA’s appeal process is draconian, and the cost of going to appeals.

Tax Planning Tip:

When life events occur, be sure to share those with your tax professional at your earliest convenience. Preferably, before the event, such as when you decide to retire. You did not wake up one morning and retire, get married, have a child, etc.

If pre-retirement planning had been done, the withholding rate for PA retirement funds would have been discussed as being zero, and the above scenarios could easily have been avoided.

About F. Bryan Haarlander, EA, CTRS:

A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.