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Credit or Cash?

 

Companies having their data hacked seems to be a common occurrence these days. This is causing credit card companies to issue new cards every few months, or at least it feels like it happens this often. This has me thinking that maybe using cash more frequently may be a good idea. There are times when using a credit card can be beneficial; however, if not used properly, a credit card can cause a lot more harm than good.

Paying with a credit card lets you postpone the actual obligation of payment to the future, while cash payments make you physically have the cash to make the purchase. Purchasing items on credit without being able to afford it will just lead to debt sitting on your card accumulating finance charges. Using cash would be beneficial if you have a tough time holding off on large purchases until you have the money.

Avoid using a credit card when the company requires large processing fees. These processing fees can sometimes be more expensive than waiting until you have the cash and paying the late fee. These fees will usually offset the rewards one would receive by using a credit card. To avoid paying more than you need to, compare the processing fees to the late fees to make sure you are making the right choice.

Most credit cards offer many types of rewards and exclusive benefits. You can avoid interest and late fees by making payments on time and paying off your balance. The rewards will add up, making credit cards more beneficial than paying cash. Just make sure you pay off your balance so the fees are not also adding up. Other credit card benefits include additional warranties and purchase protection.

As much of a pain as it is when your credit card company issues a new card after a potential data hack, it is actually one of the credit cards’ greatest advantage. If cash is stolen from you it is hard, if not impossible, to retrieve this cash. However, if your credit card is stolen or fraudulent charges are made on your card, it takes one call to cancel the credit card, refute the charges, and have another card sent to you. This is a much less painful process than trying to retrieve stolen cash.

These are only a few examples of situations where you should decide what is better, paying with cash or credit. By making conscious choices when it comes to your payment method, it can end up saving you money.

 

 

The Internal Revenue Service’s Criminal Investigation Division is cutting the number of investigators to the lowest level in forty years. This division investigates all sorts of financial crimes involving such activities as tax fraud, money laundering, identity theft, narcotics and counter-terrorism.

Recent investigations involved probes into tax evasion by Credit Swisse Group and sanctions violations by BNP Paribus resulting in settlements of $ 2.5 billion and $ 9 billion, respectively.

The number of special agents employed by the agency at its peak in 1995 totaled 3,358. As a result of budget pressures, the number is expected to drop to 2,130 by 2016. IRS Commissioner John Koskinen says the lack of resources means fewer investigations are being initiated.

Last year the IRS budget was cut by about $ 600 million as a result of sequester when Congress failed to reach agreement on the budget. Most other federal agencies saw their budgets returned to pre-sequester levels, but not the IRS.

Koskinen estimates the IRS, through criminal investigations, as well as audits, collection and other efforts, brings about $ 50 billion to $ 60 billion a year into the federal coffers. This translates to 5 to 6 times the IRS annual budget of about $ 11 billion. Last month the U.S. House of Representatives voted to cut the IRS enforcement budget for 2015 by over $ 1 billion. Koskinen estimates this latest cut will reduce revenues by $ 3 billion to $ 5 billion.

It seems to me we are stepping over dollars to pick up pennies

 

The IRS must follow a corporation’s designation of voluntary payments toward the income tax liabilities of its owner/employees, according to a recent Tax Court ruling.

However, because the payments did not represent taxes withheld at the source, the IRS was allowed to levy on the assets of the owner/employees to collect applicable interest and penalties. Likewise, the corporation remained liable for interest and penalties attributable to its failure to remit taxes on a timely basis (James R. Dixon, et. ux. v. Commissioner, 141 TC No. 3, Sept. 3, 2013 and James R. Dixon, et. ux. v. Commissioner, TC Memo 2013-207, Sept. 3, 2013).

James and Sharon Dixon served as officers and employees of Tryco. After a number of successful years, Tryco stopped filing and remitting employment taxes, and the Dixons stopped filing individual income tax returns.

Later, the Dixons were criminally prosecuted for failure to file individual income tax returns. As part of a settlement, they agreed to make restitution to the IRS for taxes in the amount of $61,021.

The Dixons contributed this amount to Tryco, and Tryco submitted it to the IRS, accompanied by a letter stating that the payment represented Tryco’s withholding taxes to be applied to the withheld income taxes of the Dixons.

When accountants prepared the individual income tax returns for the Dixons’ missing years, they determined that the couple owed an additional $30,202 in taxes. The Dixons contributed this additional amount to Tryco, and the corporation in turn submitted it to the IRS with a letter similar to the earlier one.

On the advice of legal counsel, the Dixons chose not to pay their individual income tax liabilities directly, believing that the indirect payments through Tryco would reduce both the portion of the company’s withholding tax liability attributable to themselves and their own income tax liabilities. They also hoped to avoid interest and penalties because the tax law treats withholding at the source as paid in the year of the withholding irrespective of the employer’s date of remittance.

The IRS initially credited Tryco’s payments to the Dixons’ income tax liabilities, which settled their tax obligations but not the related interest and penalties. Later, the IRS reversed itself and applied the payments to Tryco’s general unpaid employment tax liabilities.

The IRS then issued a notice to the Dixons of intent to levy on their assets in satisfaction of their now unpaid income tax liabilities. The Dixons petitioned the Tax Court.

The Dixons contended first that they were entitled to a withholding credit for the amounts submitted by Tryco on their behalf. Second, they asserted that the IRS was obligated to honor Tryco’s designation of the payments as withheld income taxes and to credit the amounts toward the Dixons’ income tax liabilities.

The IRS argued that its policy of honoring designations of voluntary payments does not extend to designations of delinquent employment tax by one party toward the income tax liability of another.

The Tax Court concluded that the funds submitted by Tryco to the IRS were not withheld at the source and, accordingly, the Dixons were not entitled to a credit against their individual income tax liabilities. Regarding the Dixons’ second argument, the majority determined that the IRS was obligated to follow its published administrative position regarding designations of voluntary payments.

The IRS was therefore directed to credit the $91,223 payments to the Dixons’ account, discharging their income tax obligations. The IRS was allowed, however, to levy on the Dixons’ assets to collect applicable interest and penalties. Tryco likewise remained liable for interest and penalties.

©2014 CPAmerica International

 

The Tax Court ruled on a case in December that involved falsified documents, deception and forgery – perpetrated by the wife.

The wife’s tangled web included:

➜ Submitting falsified requests to withdraw funds from her husband’s IRAs

➜ Forging her husband’s signature to endorse the distribution checks

➜ Depositing the funds into a joint account that only she used

➜ Using the proceeds for her personal benefit

The husband did not find out until the next year. The Tax Court said the husband was not required to include the distributions in his gross income and was not liable for the additional tax on early distributions.

Andrew Roberts and his wife, Cristie Smith, maintained two joint checking accounts. Although the accounts were titled in joint name, Roberts exclusively used one account, and Smith exclusively used the other account.

Roberts did not have a checkbook for, write checks on or make withdrawals from Smith’s account, and he didn’t receive or review the bank statements. He didn’t know about, authorize or benefit from any deposits into, or withdrawals from, Smith’s account.

The custodians of Roberts’s two IRAs received requests with his forged signature, faxed from Smith’s workplace, to withdraw approximately $37,000 from his IRAs. Roberts did not make or authorize the requests.

Checks were sent pursuant to the withdrawal request, the endorsement was forged, and the checks were deposited into Smith’s joint account that she maintained separately from Roberts. The court inferred that Smith (or someone on her behalf) forged Roberts’s signature on the distribution requests and endorsements.

Roberts first learned of the unauthorized withdrawals when he received Forms 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., early in the following year. By the time Roberts had determined Smith’s involvement, the couple was already involved in a divorce proceeding.

Roberts advised the trial court of what had happened, and the court’s decree of dissolution took into account that Smith had withdrawn the funds.

Throughout their marriage, Smith prepared and filed a joint income tax return with Roberts. In early 2009, Roberts, although separated from Smith, discussed with her the preparation and filing of a joint income tax return for 2008. He understood from that conversation that he and Smith would still file a joint return.

Roberts gave his tax information to Smith so that she could prepare the 2008 joint return. However, Smith prepared and filed separate returns, using married filing separate filing status for herself and single filing status for Roberts.

On Roberts’s return, Smith made several errors, including not reporting the IRA withdrawals as income. Roberts’s return showed a refund that had been electronically deposited into the joint account controlled by Smith. She did not show Roberts the return or give him a copy, despite his asking for one.

Upon examination, the IRS argued that Roberts should have reported the withdrawals as taxable distributions because he was the owner of the IRAs and the person entitled to receive distributions, the distributions were deposited into a joint account, and they went toward “family living expenses.” The IRS also found it significant that Roberts never attempted to return the funds to the IRAs or contest the distributions once he discovered the payments.

Roberts claimed that he was not a payee or distributee of the funds because the IRA withdrawals were made pursuant to forged requests, the checks were stolen, the endorsement signatures were forged, and he had received no economic benefit.

The Tax Court concluded, based on common sense as well as its finding of fact and analysis, that Roberts was not a payee or distributee of the funds. The court noted that, although it has held that the distributee or payee of an IRA distribution is “generally” the participant or beneficiary entitled to receive the distribution, it has rejected the claim that the recipient is “automatically” the distributee.

The court also found that Roberts’s failure to timely pursue a state law remedy did not necessarily mean that he had received a taxable distribution from his IRA accounts. Thus, on the basis of the overall facts, the court concluded that Roberts did not fail to report any income attributable to the IRA distributions. Because the withdrawals were not distributions taxable to Roberts, he was not liable for the additional tax on early withdrawals.

However, the court ruled against Roberts on the issue of filing status. It reasoned that, because Roberts and Smith were still married on Dec. 31, 2008, and were not separated for the last six months of the year, the proper filing status was married filing separately.

The court also held that, to the extent that the final computations showed that his understatement of tax exceeded the greater of 10 percent of the tax required to be shown on the return or $5,000, Roberts would be liable for a substantial underpayment penalty (Andrew W. Roberts v. Commissioner, 141 TC No. 19, Dec. 30, 2013).

©2014 CPAmerica International





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