audits

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.

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.

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.

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

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.

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 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.