California has always been notorious for their high cost of living combined with high income taxes. These tax rates are as high as 13.3% for high earners with income over $1,000,000. And to make matters worse, in 2012 California took the precedence of retroactively raising rates at the beginning of 2012 for a law that passed on November 6, 2012. Running numbers, an average household earning $100,000 in California, would pay close to $7,000 in taxes to the State.
The good news is that it is easy to just hop over the border, move to Nevada, and save the $7,000. This is especially true for a retiree with no job holding them down. Your $100,000 income would also go a lot further in Nevada than California!
So how would you go about moving to Nevada to not have to pay California’s onerous tax? This is easy if you own no property in California and retire in Nevada. You just sell your house and move your life to the Silver State. However, you might want to keep your home in California, which makes things more complicated as the Golden State does not want to forego any of their tax revenue (but remember, any income sourced in California will always be subject to their tax).
So what to do? First, spend less than nine months in California every year as California presumes you’re a resident of their State if you spend more than nine months there. Second, if you own a home outside of California and your presence in California is less than 6 months you are not considered a resident if you can prove that your activity is just as a guest. Further, there are additional factors that California considers in the instance that you are audited. These primary factors include:
Secondary factors, which are easy to conform to, include having a CPA and attorney in Nevada, registering your vehicles in Nevada, getting a Nevada driver’s license, and where you spend your money as California could request to look at your credit card statements.
Moving to Nevada can be a huge leap, but one that keeps more money in the bank to protect your wealth or have a more meaningful life as a retiree.
According to a recent survey performed by Bankrate.com, a third of people (roughly 36%) in the U.S. have nothing saved for retirement. Of the 1,003 adults surveyed, 69% of those with no retirement savings were between the ages of 18 to 29. That’s not entirely shocking given the fact that not only are most adults at that age not even concerned with retirement, but generally things like moving out on your own, higher education expenses, etc. take precedence. However, 33% of those surveyed between the ages of 30 to 49 had no retirement savings and 14% of those age 65 and older had no retirement savings. Most of those surveyed acknowledged that they were not on track in saving for retirement. One can only assume that these individuals are relying in part or in whole on social security.
Given the fact that most reports have predicted the Social Security Trust Fund will run out of money in 2033 and benefits from that point forward would need to be reduced, these statistics are troubling. Those surveyed between the ages of 30 to 49 won’t have even reached retirement age before the Fund runs dry, and the life expectancy of the average American continues to increase.
The Social Security Administration actually has some fairly decent calculators, one of which is the life expectancy calculator. Also, almost all banks and investment companies have free calculators online that can give someone at least a rough of idea of what you would need saved along with Social Security benefits in order to retire. Remember, it’s never too late to start saving!
Can you imagine waiting for your tax refund – and it never arrives?
Not because you don’t deserve it or the IRS didn’t send it, but because your tax preparer substituted his bank routing number for yours after you signed the form.
And then, worse news, the IRS doesn’t reimburse you for your loss.
That scenario has happened to hundreds of taxpayers who made the mistake of trusting unscrupulous, uncredentialed preparers.
But preparer fraud victims are at the back of the line when it comes to getting a refund from an IRS barraged with hundreds of thousands of identity theft cases it is processing.
In fact, the IRS has generally declined to issue refunds to victims of preparer fraud at all, according to National Taxpayer Advocate Nina Olson.
“The IRS has consistently dragged its heels, making one excuse after another, because providing relief to these victims just is not a high enough priority, or more disturbingly, because the IRS simply does not want to provide relief,” says Olson in the report she submitted to Congress and the IRS entitled “Areas of Focus, Return Preparer Fraud: A Sad Story.”
Between 2000 and 2011, the IRS Office of Chief Counsel issued four opinions and other guidance authorizing the IRS to issue replacement refunds to the victims of tax preparer fraud.
But no refunds have been issued by the IRS, Olson said.
Some victims have been waiting since 2008 to be reimbursed, the advocate’s office reports.
One section of the new Taxpayer Bill of Rights adopted recently by the IRS states, “Taxpayers have the right to expect appropriate action will be taken against employees, return preparers and others who wrongfully use or disclose taxpayer return information.
“Nowhere has the IRS failed to abide by the Taxpayer Bill of Rights more than with respect to the issue of return preparer refund fraud,” Olson said.
Olson’s report said IRS Commissioner John A. Koskinen decided in March that the IRS would issue refunds to victims who have filed police reports and met certain other substantiation requirements. To date, the IRS hasn’t implemented that decision or given a date for victims to expect refunds, Olson said.
To help prevent future fraud, Olson reiterated her longstanding recommendation that a meaningful preparer standards program must contain four components:
A Pennsylvania professor was fined $10,000 by the Tax Court on July 31 for repeated frivolous arguments about deductions on his tax returns.
Alvin Kanofsky, a physics professor at Lehigh University since 1967, was continuing to protest a federal tax lien for unpaid taxes for 1996, 1997, 1998 and 2000.
Kanofsky was ordered to pay the taxes in a 2006 Tax Court Memorandum decision, which was reaffirmed on appeal in 2008. He reappeared again before the court in the subsequent levy case in 2010. Three attempts by Kanofsky to have the case heard by the Supreme Court were denied. In February of this year, the IRS requested a summary judgment because payment hadn’t been received and asked for a penalty to be imposed.
The unpaid taxes concerned Schedule C deductions that Kanofsky claimed had offset any tax liability for the years in question. The tax deficiency in this case totaled over $41,000, not including penalties.
At issue was a building he owned near Lehigh University, which he said he used for business purposes. Expenses he claimed included building repairs, mortgages and interest. He said all of his materials in the building had to be cleared out because he “ran into a worldwide scam.”
Many of the documents Kanofsky tried to show the court to support his claim were not admitted because of IRS objections. His appeals were based on what he called the Tax Court and IRS unfairly “suppressing” important information in the case. Kanofsky said that he and his late brother were whistleblowers in a number of instances of fraud and that he has been subjected to retaliation because of the whistleblowing.
Earlier Kanofsky had filed suit related to taxes due for 2006 and 2007, of $26,033 and $45,433 respectively, which the U.S. Court of Appeals for the Third Circuit in 2013 agreed were owed to the IRS. The court held that “neither the Tax Court nor the IRS improperly obstructed petitioner’s presentation of evidence” and “allegations of fraud and corruption and his assertion of ‘whistleblower’ status were irrelevant to the merits of his case.”
“He did not explain to the Tax Court, and does not explain now, how events as disparate as the Sandusky prosecution or alleged corruption related to the Barnes Foundation have any bearing on his tax liability,” the Court of Appeals further stated.
In its summary decision on July 31, 2014, the Tax Court said, “Petitioner is no stranger to this court. He was warned in prior proceedings that his conduct could subject him to a penalty if he continued to repeat arguments he made in earlier cases.
“He has returned for a fourth time to this court, once again raising his arguments about fraud, corruption and whistleblowing activities. … He has repeatedly asserted irrelevant and meritless arguments. He designed his petition to delay the collection of the income taxes he owes.”In rendering its decision, the Tax Court said it has unequivocally warned taxpayers about abusing procedural protections by pursuing frivolous actions for the purpose of delaying payment.
“Petitioner is a well-educated individual who admits that he understood cautions and warnings given by the court, yet he continues to reiterate the same irrelevant and groundless arguments. He has wasted the time and resources of both the [IRS] and the court.”
The court warned Kanofsky that additional penalties would be applied if he continued to raise “irrelevant, frivolous and groundless arguments or institutes or maintains further proceedings in this court to delay the payment of federal income tax lawfully assessed against him” (Alvin Sheldon Kanofsky v. Commissioner, T.C. Memo 2014-153, July 31, 2014).
Taxpayers do have rights. It may not always seem so, but they do.
In fact, there is even a national taxpayer advocate named Nina Olson who works inside the IRS building and does what her title implies – she advocates for the taxpayer.
Olson’s office has been pushing for a Taxpayer Bill of Rights for some time, and the IRS formally adopted one this summer.
The list of 10 taxpayer rights brings together dozens of existing rights into a clear, accessible format that Americans can easily understand, according to the IRS.
There is now a special section on the IRS website highlighting the 10 taxpayer rights. While the bill of rights currently has no enforcement mechanisms, Olson says articulating the rights of taxpayers brings into focus areas where there are “gaps between rights and remedies.”
Here is your Taxpayer Bill of Rights:
1. The Right to Be Informed
Taxpayers have the right to know what they need to do to comply with the tax laws. They are entitled to clear explanations of the laws and IRS procedures in all tax forms, instructions, publications, notices and correspondence. They have the right to be informed of IRS decisions about their tax accounts and to receive clear explanations of the outcomes.
2. The Right to Quality Service
Taxpayers have the right to receive prompt, courteous and professional assistance in their dealings with the IRS, to be spoken to in a way they can easily understand, to receive clear and easily understandable communications from the IRS, and to speak to a supervisor about inadequate service.
3. The Right to Pay No More than the Correct Amount of Tax
Taxpayers have the right to pay only the amount of tax legally due, including interest and penalties, and to have the IRS apply all tax payments properly.
4. The Right to Challenge the IRS’s Position and Be Heard
Taxpayers have the right to raise objections and provide additional documentation in response to formal IRS actions or proposed actions, to expect that the IRS will consider their timely objections and documentation promptly and fairly, and to receive a response if the IRS does not agree with their position.
5. The Right to Appeal an IRS Decision in an Independent Forum
Taxpayers are entitled to a fair and impartial administrative appeal of most IRS decisions, including many penalties, and have the right to receive a written response regarding the Office of Appeals’ decision. Taxpayers generally have the right to take their cases to court.
6. The Right to Finality
Taxpayers have the right to know the maximum amount of time they have to challenge the IRS’s position as well as the maximum amount of time the IRS has to audit a particular tax year or collect a tax debt. Taxpayers have the right to know when the IRS has finished an audit.
7. The Right to Privacy
Taxpayers have the right to expect that any IRS inquiry, examination or enforcement action will comply with the law and be no more intrusive than necessary, and will respect all due process rights, including search-and-seizure protections and will provide, where applicable, a collection due process hearing.
8. The Right to Confidentiality
Taxpayers have the right to expect that any information they provide to the IRS will not be disclosed unless authorized by the taxpayer or by law. Taxpayers have the right to expect appropriate action will be taken against employees, return preparers and others who wrongfully use or disclose taxpayer return information.
9. The Right to Retain Representation
Taxpayers have the right to retain an authorized representative of their choice to represent them in their dealings with the IRS. Taxpayers have the right to seek assistance from a Low Income Taxpayer Clinic if they cannot afford representation.
10. The Right to a Fair and Just Tax System
Taxpayers have the right to expect the tax system to consider facts and circumstances that might affect their underlying liabilities, ability to pay or ability to provide information timely. Taxpayers have the right to receive assistance from the Taxpayer Advocate Service if they are experiencing financial difficulty or if the IRS has not resolved their tax issues properly and timely through its normal channels.
U.S. income tax is basically pay as you go. As you earn income during the year, you’re expected to pay your taxes on it – or you’ll be penalized.
You may pay taxes in basically two ways:
➤ Through withholding from your paycheck
➤ By making estimated payments if your withheld tax is insufficient
Those needing to make estimated payments are self-employed individuals who run their own businesses or professionals in business for themselves, as well as investors and retirees who receive interest or gains, among others.
For 2014, estimated tax deadlines for individuals are April 15, June 15 and Sept. 15, 2014, and Jan. 15, 2015. The January payment may be skipped without penalty if you file your 2014 tax return and pay all taxes due by Feb. 2, 2015.
If you do not pay enough tax throughout the year, penalties may apply. But with proper planning, the penalties are avoidable.
You won’t be penalized if you owe less than $1,000 in taxes after subtracting withholding and credits. You also won’t be penalized if you pay at least 90 percent of the tax you owe for the current year, or 100 percent of the tax shown on your tax return from the prior year.
If adjusted gross income for 2013 was more than $150,000 for married taxpayers, 110 percent of the 2013 tax liability must be paid for 2014, or there will be a penalty.
There are special rules for farmers and fishermen. If two-thirds of income comes from farming or fishing, only 66 2/3 percent of the current-year tax owed is payable in one installment due Jan. 15.
In general, your estimated tax payments should be made in four equal amounts to avoid a penalty. But if your income is received unevenly during the year, annualizing your payments and making unequal payments may enable you to eliminate or lower your penalty.
If it appears that you will be subject to an underpayment penalty, you may be able to reduce or eliminate the penalty by initiating or increasing your quarterly estimated tax payments or by adjusting your withholdings.
A quirk in the penalty rules treats withheld taxes – even those withheld late in the year – as if they had been taken evenly throughout the year. So, if you’re employed, instructing your employer to withhold more from your pay can even eliminate penalties that accrued earlier in the year.
While most people want to avoid unnecessary penalties, it is seldom a good idea to pay more than the law requires or to pay your taxes earlier than necessary. Why let the government hold your money only to return it to you next year as a tax refund – with no interest?
Your goal should be to pay just enough to avoid an underpayment penalty but not so much as to create a large refund. Consult with your tax adviser to optimize your tax payments to avoid penalties.
©2014 CPAmerica International
IOLTA (Interest on Lawyers Trust Accounts) was created in 1980, when the Congress modified federal banking laws allowing banks to pay interest on checking accounts. The first IOLTA account was created in Florida in 1981.
IOLTA is source of funding to provide access to justice for individuals and to improve our justice system. Every state, along with the District of Columbia and the Virgin Islands, operates an IOLTA program. These funds, together with private grants and donations enable nonprofit legal aid providers to help low-income people with various civil legal matters and provide education about our justice system. The United States IOLTA programs generated more than $124 million dollars nationwide in2009.
Every attorney and law firm in Nevada are required to create and maintain an interest-bearing trust account for the deposit of clients’ funds when the funds cannot otherwise earn enough income for the client to be more than the cost of securing that income. The trust accounts must be an interest on Lawyers Trust Account (IOLTA) at participating financial institutions. The client, and not the IOLTA program, will receive the interest if the funds are large enough or will be held for a long period of time. These funds will not be in IOLTA accounts. Each attorney or firm has the discretion to decide whether the client’s funds are nominal or are to be held for a short period of time.
Examples of types of funds to be deposited into IOLTA accounts include:
There may be other types of funds that should be deposited into IOLTA accounts.
The interest income from IOLTA accounts payable to a tax-exempt organization is not taxable to the client or the attorney nor is it deductible.
It’s time for your kids to go back to school, and with that comes a lot of added expenses. With all of the back to school sales it is easy to get overwhelmed, and end up spending much more than planned. Here are a few tips to stay in budget when going back to school shopping this year:
Many people forget to factor in sales tax when creating a budget. These amounts can definitely add up so it is important to include this in your budget. Some states even offer a few days in the late summer where school related items can be purchased tax-free. If you live in one of these states, try to take advantage of this because it will make a difference.
By staying on budget it will make back to school shopping more enjoyable for both you and your children.
Final IRS regulations make permanent, and expand the scope of, proposed regulations that allow the use of truncated, or shortened, taxpayer identification numbers on payee statements and certain other documents.
A truncated taxpayer identification number (TTIN) displays only the last four digits of a taxpayer identifying number and uses asterisks or X’s for the first five digits.
Because of concerns about identity theft, the IRS has run a pilot program allowing filers of certain information returns to truncate an individual payee’s Social Security number (SSN) or other nine-digit identifying number on paper payee statements if the filers met certain requirements. The pilot program was not available for any information return filed with the IRS, any payee statement furnished electronically, or any payee statement that was not in the Form 1098, Form 1099 or Form 5498 series.
Last year, the IRS published proposed reliance regulations that established the TTIN and set forth guidelines for its use. The scope of the proposed regulations mirrored that of the pilot program with one exception: The proposed regulations permitted use of a TTIN on electronic payee statements in addition to paper payee statements.
The IRS has now issued final regulations that expand the circumstances under which taxpayers may use TTINs. Specifically, the final regulations permit truncation of an employer identification number (EIN).
The final regulations permit use of a truncated taxpayer identification number on any federal tax-related payee statement or other document required to be furnished to another person except:
➤ Where prohibited by statute, regulation or other guidance published in the Internal Revenue Bulletin, form or instructions;
➤ Where a statute, regulation, other guidance published in the Internal Revenue Bulletin, instructions or form specifically requires use of a Social Security number, individual tax identification number, adoption identification number or employer identification number; or
➤ On any return or statement required to be filed with, or furnished to, the IRS.
A person may not truncate its own taxpayer identification number on any tax form, statement or other document that taxpayer furnishes to another person. For example, an employer may not truncate its EIN on a Form W-2, Wage and Tax Statement, that the employer furnishes to an employee.
The final regulations became effective July 15, 2014. The amendments to the specific information reporting regulations are effective for payee statements due after Dec. 31, 2014.
©2014 CPAmerica International
A business owner who advanced funds to a new employee was not entitled to deduct as a business bad debt either the funds that he knowingly advanced or the funds that the employee misappropriated from the business, the Tax Court determined recently.
Ronald Dickinson was a self-employed consultant. He hired Terry DuPont, a former employee, to work for him again in a new consulting business. Dickinson was aware that DuPont had financial obligations to his former spouse and to his children and was experiencing financial problems as a result.
Dickinson sent DuPont a letter stating, essentially, that he would informally lend him money until DuPont was generating his own commissions. Ultimately, Dickinson wrote several checks to DuPont.
There was no promissory note or similar document evidencing the loans or stating that DuPont was obligated to repay. Dickinson neither charged interest nor provided a fixed repayment schedule, and DuPont did not offer any collateral.
After DuPont started working for Dickinson, he withdrew funds that he was not authorized to withdraw from one or more bank accounts over which he and Dickinson had signatory authority. DuPont also deposited certain funds that he was not authorized to deposit into one or more of his own bank accounts.
Dickinson later filed a complaint against DuPont in the state court alleging that DuPont had requested, and Dickinson had advanced to DuPont, funds totaling approximately $33,000 as loans that DuPont was obligated to repay. In his answer and counterclaim, DuPont admitted that Dickinson “did on occasion write checks payable” to DuPont but disputed the amount. DuPont also admitted that the funds were advanced at his request and constituted loans that he was obligated to repay.
The lawsuit was ultimately dismissed by the state court.
Dickinson claimed a business bad debt deduction of $32,550. He attached a letter to the return with his description of what had occurred. The IRS disallowed the deduction because Dickinson failed to show “that any amount was incurred for a bona fide debt which became worthless during the year.”
The Tax Court agreed with the IRS that Dickenson failed to prove that the arrangement constituted a bona fide loan, noting among other things the absence of any objective characteristics of a loan, such as interest or a debt instrument. The court also found that Dickenson did not have a reasonable expectation of recovering any portion of the funds at the time they were advanced because of DuPont’s known financial problems (Ronald R. and Shirley F. Dickenson v. Commissioner, TC Memo 2014-136, July 10, 2014).
©2014 CPAmerica International