Archives for October 2019

NJ Amends its Sales Tax Law Regarding Transient Accommodations

October 29, 2019 by Frank

Rental of a Transient Accommodation Obtained Directly from the Owner is No Longer Subject to NJ Sales Tax

Background

In our blog post of October 30, 2018, we alerted our readers that New Jersey had enacted legislation that imposed a fee on transient accommodations on or after October 1, 2018. The new law imposed Sales Tax, the State Occupancy Fee, and the Meadowlands Regional Hotel Use Assessment on charges associated with the rental of transient accommodations.

This law supposedly targeted homeowners who rented their investment properties themselves (classified ads, referrals from friends and family, rental signs on the lawn, Airbnb, VRBO, etc.) rather than using a realtor.

Amended NJ Sales Tax Law on Transient Accommodations

Beginning August 9, 2019, the rental of a transient accommodation obtained directly from the owner is no longer subject to Sales Tax, the State Occupancy Fee, and other applicable taxes and fees, unless it is a professionally managed unit, as defined below.

A rental obtained through a transient space marketplace, which now includes a travel agency, or a rental of property that is considered to be a professionally managed unit, is subject to the applicable taxes and fees.

What is a Transient Accommodation?

The amended law revised the definition of “transient accommodation” to limit it to the rental of a room, group of rooms, or other living or sleeping space for the lodging of occupants, including but not limited to residences or buildings used as residences, that is either:

Obtained through a transient space marketplace; or
Is a professionally managed unit.

Therefore, a transient accommodation that is obtained through a transient space marketplace or is a professionally managed unit is subject to New Jersey Sales Tax, the State Occupancy Fee, and other applicable taxes and fees.

What Type of Rental Is NOT Subject to the NJ Amended Sales Tax Law?

The following rentals are no longer subject to Sales Tax, the State Occupancy Fee, and other applicable taxes and fees as long as the owner does not offer three or more units for rent (a professionally managed unit):

A rental of a transient accommodation obtained directly from the owner (such as through local newspaper ads, personal referrals, signage, etc.); or
A rental of a transient accommodation which is not obtained through a transient space marketplace.

In addition, rentals executed by a real estate broker remain not subject to the taxes and fees.

When Is a Rental Considered Obtained Through a Transient Space Marketplace?

A rental is “obtained through a transient space marketplace” where the agreement for the rental is made through the marketplace or travel agency and where payment for the accommodation is made through a means provided by the marketplace or travel agency, regardless of who receives the payment. Transient space marketplaces will continue to collect Sales Tax, the State Occupancy Fee, and other applicable taxes and fees imposed on a transient accommodation when the rental is “obtained through a transient space marketplace.”

However, a transient space marketplace does not include a marketplace or travel agency that exclusively offers transient accommodations in New Jersey that are owned by the owner of the marketplace or travel agency.

What Is a Professionally Managed Unit?

A professionally managed unit is a transient accommodation that is directly or indirectly owned or controlled by a person who offers three or more units for rent in New Jersey, and the rental unit does not share living or sleeping space with other units. A professionally managed unit is a transient accommodation that is subject to the applicable taxes and fees, regardless of how the rental is obtained.

An owner who offers three or more units for rent in New Jersey and who directly rents (such as through local newspaper ads, personal referrals, signage, etc.) continues to be required to collect Sales Tax, the State Occupancy Fee, and other applicable taxes and fees because the transient accommodation is a professionally managed unit.

Are Lessors Required to Register with NJ?

An owner who offers three or more units for rent in New Jersey must be registered to collect the applicable taxes and fees unless all of the rentals are obtained through a, transient space marketplace or through a real estate broker. In addition, transient space marketplaces, including travel agencies, must be registered to collect the Sales Tax, the State Occupancy Fee, and other applicable taxes and fees on all transient accommodations obtained through the transient space marketplace. However, d address any conflicts; work with the Office of Chief Counsel to see if they need legislation to use tax data to identify potential conflicts; and better manage the OES, both in terms of requiring employee compliance and management review.

Tax Planning Tip #1:

Lessors of rental properties in NJ need to consult with their tax advisor ASAP. Determinations need to be made if the lessors are subject to the amended NJ sales tax law on transient rentals, if they need to be registered to collect the sales tax, if they need not be registered by nevertheless are required to collect and remit the sales tax, and due to the effective dates of the previously enacted law and the amended law, renters may be entitled to refunds and how lessors should handle those refunds as well as the filing of a Final Tax Return if appropriate.

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.

BE SURE TO READ THE DISCLAIMER PAGE: Tax laws, IRS rules and regulations change frequently. Although we hope you’ll find this information helpful, this blog is for educational purposes only and should not be considered as the rendering of tax, legal or investment advice. The publisher 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.

Did You Know that your H&R Block Tax Preparer Works for the IRS?

October 22, 2019 by Frank

Your Tax Preparer May Even Work for the Criminal Investigation Unit of the IRS

Background

The Treasury Inspector General for Tax Administration (TIGTA) found that as many as 2,200 IRS employees hold unapproved jobs outside the agency that put them at a higher risk of real or perceived conflicts of interest, and that 167 may have been doing work that is specifically prohibited — such as tax preparation. Of those 167, 51 IRS employees were working in accounting, 45 in legal services and 22 in tax, including five employees who worked with the tax prep chain H&R Block.

IRS Criminal Investigation Employees

IRS Criminal Investigation (CI) employees are special agents whose investigative jurisdiction includes tax, money laundering and Bank Secrecy Act laws. While other federal agencies also have investigative jurisdiction for money laundering and some bank secrecy act violations, IRS is the only federal agency that can investigate potential criminal violations of the Internal Revenue Code. If an IRS CI employee knowing violates the IRS’s rules regarding employment outside of the IRS, what other unethical behavior is being conducted?

TIGTA reported that IRS criminal investigators were the most likely to have outside employment, with 15 percent holding second jobs, and two-thirds of those were unapproved, also the most of any IRS position. Revenue agents came in second, with 7 percent holding unapproved jobs, and a total of 13 percent holding outside jobs.

How Is This Type of Misbehavior Possible?

Perhaps more important, according to the TIGTA report, is the fact that the IRS lacks adequate processes for tracking its employees’ other jobs and gauging their potential for conflicts of interest and has no way to identify employees whose outside work is unapproved or prohibited.

Government employees are not necessarily forbidden from having outside employment, but those jobs must not present conflicts of interest with their government positions, and the employees must report them and get authorization to hold them through the Outside Employment System (OES).

Why Did TIGTA Conduct this Investigation?

TIGTA conducted the audit that led to the current report because an earlier OES investigation revealed that as much as half of full-time IRS employees who had outside jobs did not have approval for them, or the jobs were not documented in the OES. In other words, TIGTA wanted to verify if the IRS had corrected its previously reported shortcomings.

The OES alone does not guarantee that employees comply with the requirements around outside work, TIGTA noted; among other things, it found that two-thirds of the 14,155 employee requests in the OES in a sample period were not reviewed by managers on a timely basis — or were not reviewed at all.

Who Has Side Jobs at the IRS?

TIGTA Recommendations

TIGTA recommended that the director of the Workforce Relations Division review all the identified employees and address any conflicts; work with the Office of Chief Counsel to see if they need legislation to use tax data to identify potential conflicts; and better manage the OES, both in terms of requiring employee compliance and management review.

IRS management agreed or partially agreed with most of the recommendations, noting that it couldn’t commit to requiring some employees to using the OES without negotiating a change in work agreements.

What Else Is Happening at the IRS?

In a separate report, TIGTA found that the IRS has improved its processes and procedures for rehiring former employees who had substantiated conduct or performance issues (which included abusive behavior towards taxpayers), but that the updated processes weren’t always followed.

Of 33 former IRS employees rehired during the sample period, the problem for 29 was one of failing to document the reasons for rehiring them, despite their previous issues. For the remaining four, the new guidelines were inappropriately applied. That’s zero compliance for the 33 new hires used as a test sample.

TIGTA recommended that the IRS update its manual and tools to increase compliance with the new procedures and processes, train the appropriate officials in their use, and it conduct periodic quality reviews of hiring decisions.

As it usually does, IRS management agreed with all the TIGTA recommendations. The bigger issue is when will management ensure that such recommendations are implemented.

Tax Planning Tip #1:

Tax professionals are not fungible goods. Some are very experienced, act professionally and ethically, and thoroughly understand the tax law and how best to reduce your tax liabilities. When you price shop to have a tax return prepared, you need to carefully consider the experience and training of those low-ball prices. Don’t forget the adage “you get what you pay for”.

While cost of tax preparation is very important when choosing a tax professional, it is more important to ensure that you are dealing with an ethical and experienced tax professional.

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.

IRS Focuses on Crypto & Non-crypto Virtual Currencies

October 15, 2019 by Frank

If you invest in Bitcoin or some other form of a virtual currency, be aware that the IRS is expanding its enforcement actions and understand what your tax responsibilities are.

Background

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 taxable cryptocurrency and non-crypto virtual currencies.

What Is the IRS Doing?

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.

IRS Letters Being Mailed – Is Action Required?

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.

Don’t Forget FBAR Requirements

If a taxpayer is investing in virtual currency abroad, additional filing requirements, such as the Report of Foreign Bank and Financial Accounts (FBAR) on FinCEN Form 114, may be required.

Tax Planning Tip #1:

We recommend that all financial decisions be discussed with your tax professional before proceeding. It generally will result in a “Thank you for sharing that information with us, but there are no actions that need to be taken with respect to your planned situation.” On the other hand, if there are tax consequences, it is best to know them before proceeding rather than after the transaction has occurred.

Tax Planning Tip #2:

Taxpayers who pay vendors or others via Bitcoin or some other virtual currency, and 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.

BE SURE TO READ THE DISCLAIMER PAGE: Tax laws, IRS rules and regulations change frequently. Although we hope you’ll find this information helpful, this blog is for educational purposes only and should not be considered as the rendering of tax, legal or investment advice. The publisher shall not assume liability for any losses, injuries, or damages from the display or use of this information.

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 LESSEES REQUIRED TO WITHHOLD PA PERSONAL INCOME TAX ON LEASE PAYMENTS MADE TO NON-PA COMMERCIAL LANDLORD

October 8, 2019 by Frank

Lessees Required to Withhold PA PIT on Lease Payments Made to non-PA Commercial Landlords

PA 72 P.S. §7324.4 Withholding Requirement

PA 72 P.S. § 7324.4 states “Every lessee of Pennsylvania real estate who makes a lease payment in the course of a trade or business to a nonresident lessee shall withhold Pennsylvania personal income tax on rental payments to such nonresident lessor.”

Who Is Subject to this Withholding?

This withholding requirement only applies 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 residents.

What is Subject to Withholding?

Lessor withholding only applies to commercial lease payments (which are broadly defined). Residential lease payments are exempt from the withholding requirement.

Any Threshold Withholding Requirement?

The PA Dept. of Revenue states that withholding is optional if annual lease payments are less than $5,000. Out-of-state lessors may prefer that PA personal income tax be withheld to lessen their PA tax remittance requirement.

Tax Planning Tip #1:

PA lessees should protect themselves from failure to withhold. To determine if the lessor is a non-resident individual of PA or a disregarded entity owned by one, have the lessee complete PA Form REV-1832, 1099-MISC Withholding Exemption Certificate form. This form lists the reasons 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:

Determine the annual lease payment to the non-resident lessor. 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.

Tax Planning Tip #3:

If lessor will likely be paid more than $5,000 or if the lessee wishes to withhold, register for a 1099 withholding account on E-Tides. Withhold tax at 3.07% rate for lease/rental payments made to non-PA resident lessors on PA situs property.

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:

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.

Excess IRA Contribution

October 1, 2019 by Frank

“Excess IRA Contributions Cannot be Ignored, Unless You Don’t Mind Being Assessed an Annual 6% Penalty”

Background

If a contribution is made to an Individual Retirement Account (IRA) in excess of the allowable amount, that contribution is referred to as an excess contribution. It is subject to an annual 6% excise tax unless the excess, plus earnings, are withdrawn by the due date for the taxpayer’s tax return for that year (including extensions).

How Excess Contributions are Made

Exceeding the Annual Limit

The 2019 annual contribution limit is $6,000, with an additional $1,000 allowed for persons over age 50. While this limit seems rather straightforward, it may become a greater challenge for persons (1) who make an annual contribution to multiple IRA accounts and lose track of the individual contributions and (2) those whose income unexpectedly exceeds the earnings limits.

Exceeding the IRA Income Limits

If a taxpayer makes an IRA contribution but has too much income, an excess contribution is deemed to have been made. Fortunately, there are no income limits for Traditional IRAs (but there are income limits for tax deductible contributions).

There are phase-out income limits for Roth IRAs which begin when ones modified adjusted gross income is greater than $122,000. Roth IRA contributions that exceed the income limitation are subject to an annual 6% excise tax.

Insufficient Earned Income

To make an IRA contribution, the taxpayer must have sufficient earned income. Earned income consists of W2 wages and self-employment income (including those of your spouse in certain circumstances). It does not include social security, rental income nor investment income.

A trap for the unwary is that gains from self-employment are offset by losses from self-employment. Thus a taxpayer who has two Schedule C businesses, one showing net profits of $10,000 and a second with a loss of $12,000, this taxpayer has zero net profits for IRA contribution limits.

Too Old For a Traditional IRA

When you reach the year that you attain age 70 ½, you can no longer contribute to your Traditional IRA. Accordingly, contributions made for a year when you are age 70½ or older are excess contributions subject to the annual excise tax.

There are no age limits for Roth IRA contributions.

Failed Rollovers

The IRS rollover rules have changed in recent years and taxpayers could thus fall afoul of the new rule which allows only one rollover per 12-month period. In addition, taxpayers could also fail the 60-day rollover period requirement. In such cases, an excess contribution has occurred.

To avoid the one rollover rule, consider making direct transfers directly from one IRA account to another where you do not have access to the funds.

RMDs Not Eligible for Rollover

RMDs (Required Minimum Distributions) for the tax year cannot be rolled over. The excess contribution can arise when a taxpayer converts a traditional IRA to a Roth IRA, and then takes a RMD. That rolled over RMD is considered an excess contribution by the IRS subject to the excise tax. The RMD must be taken before the rollover to an IRA occurs.

Inherited IRAs

You cannot make contributions to Inherited IRAs for persons other than your spouse. You also cannot combine that account with another IRA account. If you do, you have an excess contribution.

How To Fix Excess IRA Contributions

Should an excess contribution occur, you need to take immediate action to avoid the 6% IRS penalty in the year of the excess contribution and subsequent years if corrective action is not taken.

To fix the problem, you need to withdraw the excess contribution amount PLUS any earnings associated with the contribution. So if you made an excess contribution of $500 and the earnings for the entire account was $3,000, you need to work with the financial advisor where the IRA account is being held to determine what portion of the $3,000 earnings are attributable to the $500 excess contribution.

Tax Planning Tip:

If you are self-employed, you likely will not know your net earnings until you close out your books. Accordingly, while it may be best to make an early contribute to maximize earnings on the retirement account, you need to be aware that your contribution amount will not be known until the books are closed for the year. Accordingly for some persons, it may make sense not to make your (full) contribution until the net earnings of the business is finalized with your tax advisor or accountant.

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.