On December 20, the House approved H.R. 1, the Tax Cuts and Jobs Act, a sweeping tax reform measure. While much still needs to be determined for tax planning opportunities, we can look at the new income tax rates and how they compare to the pre-Act law.
It isn’t until we get to $387,000 where we see the 2018 tax surpass that of the 2017 tax rates. From this point on there is a window of taxpayers (Single filers) who make between $387,000 and $417,000 who, with no other changes, will see their taxes go up for 2018. For the remaining filers, it appears that for the next 8 years you should see a tax rate decrease.
Recently I had the delight to visit Graceland, Elvis Presley’s former home and now an excellent place to reflect on Elvis’ life and get taken back in time to the 1970s. There I viewed many of Elvis’ cars including his pink Cadillac, a couple Rolls Royce’s and Mercedes, Lincolns and his Ferrari. His home was just how he left it back in 1977 with his dozen TVs scattered throughout the home, shag carpeting and roof, the colorful kitchen, his dad’s old office, and many other furnishings that were a flashback to the 70s.
As a CPA and tax guy, I was also fascinated with the financial documents that were displayed detailing many of Elvis’ large purchases and even his dad’s tax return after he was born showing he paid 1% tax on his income . Elvis must have trusted his dad immensely as there were dozens of checks signed by Elvis’ father Vernon as Vernon took care of all of his son’s finances. This is surprising given that Vernon spent a year in jail during Elvis’s childhood for check forgery and only had an eighth grade education.
Elvis would have benefited immensely if he would have utilized a CPA to assist his dad in tax planning and financial management. Even though Elvis was the largest U.S. taxpayer in 1973 and the highest paid entertainer for many years, he died with an estate worth “only” $10.2 million dollars. Apparently Elvis didn’t like to utilize pertinent tax deductions and had a horrible deal with his manager Colonel Tom Parker, who received over 50% of Elvis’ earnings . Parker even convinced Vernon to pay him 50% of the income from the Elvis’ estate after he died! With this mismanagement, Elvis’ estate lost $9 million in value over two years, and was only worth $1 million in 1979.
Many lessons can be learned with Elvis, but one financially is the importance of trusts for estate planning in which attorneys can be invaluable and utilizing competent and qualified CPAs to assist with tax, estate and financial planning.
On May 11, 2017, the Tax Court issued a Memorandum Decision (TC Memo 2017-79) that addressed, among other things, the Taxpayer arguing that the software “lured” him into claiming too many deductions on his tax return.
There were a number of issues on this return that caught the eye of the IRS: alimony paid deduction, interest deduction, and deduction for other expenses. When examined by the IRS, the Taxpayer did not have much in the way of paperwork to support his positon for the deductions reported.
In addition to disallowing the majority of the deductions taken, the Taxpayer was assessed an accuracy related penalty for substantial understatement of income tax. For this penalty, the burden shifts to the Taxpayer to show that his mistakes were reasonable and in good faith. “He admitted during trial that he deducted items he shouldn’t have, and that he overstated certain losses. He tried to blame TurboTax for his mistakes, but tax preparation software is only as good as the information one inputs into it,” the Court concluded.
Tax preparation software must be used correctly to be useful for purposes of showing reasonable cause and good faith as a defense to accuracy related penalties. The majority of court cases have rejected this defense.
When preparing your return, ensure you are reviewing the return before filing it. I just received a phone call this week from someone that was asking if his tax software was properly calculating the tax on rental property he had sold. A first for him. I commend him for wanting to understand what he was filing.
Remember: You can’t blame the software!
Reno, Nevada CPAs in the office of Barnard Vogler & Co. can assist individuals in many ways. We offer the traditional CPA services of 1040 preparation and tax planning. More specifically, our Reno CPAs have tax experience with California residency issues, cancellation of debts of recourse and nonrecourse, Chapter 11 bankruptcy tax matters and various trusts issues beyond just the preparation of the tax return.
Our CPAs in Reno, Nevada are also versed in a wide array of business matters. Some areas of expertise are the customary services that Certified Public Accountants typically provide such as financial statement preparations, compilations, reviews and audits. Additionally, we have assisted businesses with a congressional tax audit returning to the taxpayer a multimillion dollar tax refund, entity selections to provide the most beneficial business types, or controller/CFO services of remote bookkeeping, budget assistance and development of accounting policies and procedures. At our downtown Reno, Nevada location CPAs have also helped unravel and report on multimillion dollar frauds, been Chapter 7 bankruptcy examiners, and performed business valuation and expert witness testimony.
Give our office a call if you need a Reno CPA for yourself or your business.
The Harvard Business Review recently published an article outlining an interesting strategy which should make negotiations more civil, speedy and fair.
It works like this. If the other side’s position is unreasonable, one’s initial reaction is often to be just as unreasonable, believing that the issue will be resolved somewhere in the middle, and thus be reasonable. This may ultimately be the result but often only after investing a lot of time and money to get there. It stands to reason that if the parties come to a negotiation with realistic starting positions, the negotiations that follow should be relatively civil, speedy and fair.
But how can a negotiator who wants to be fair at the outset be sure that his or her counterpart will do the same? This is where the “final-offer arbitration challenge” can help to reach fair agreements efficiently. It works like this: To encourage reasonableness, one side should make their offer demonstrably fair from the outset. Then, if the other side is unreasonable, they should be challenged to take the offers to an arbitrator who must not compromise, but must choose one or the other offer. This approach should result in offers that are more aligned from the beginning. Thus it is to everyone’s benefit if the parties come to the negotiations with reasonable offers in hand.
This is not unlike the way thoughtful parents have resolved disputes between two siblings. Have one cut the last piece of cake in half, and have the other choose first.
In a recent case, an appeals court upheld the Tax Court’s decision that a bookie’s plea agreement on criminal charges does not bar a civil action for unpaid taxes.
Gary Kaplan operated an illegal sports booking business called BetOnSports. The majority of Kaplan’s booking business was located in the Caribbean islands and Costa Rica for most of the 1990s.
Right before the company went public in July 2004, Kaplan engaged in several transactions and stock transfers that allowed him to set up two trust funds worth $98 million dollars. These trusts were referred to as the “Bird Trusts,” and the money was located somewhere off the coast of France.
Kaplan was the sole grantor of the Bird Trusts. As the grantor of the trusts, Kaplan was responsible for paying income taxes on the earnings of the trusts. Kaplan neglected to pay federal income tax or capital gains tax for the trusts for either 2004 or 2005.
In 2006, Kaplan was indicted by a federal grand jury for operating an illegal bookmaking operation within the United States. Kaplan ended up making a plea deal with the government. In exchange for accepting reduced charges, Kaplan agreed to allow the federal government to take civil action against him regarding the two years at issue.
During a change-of-plea hearing in 2009, Kaplan was questioned about the provision in his original plea agreement that dealt with the right of the government to pursue a civil tax matter against him for the 2004 and 2005 tax years. Kaplan assured the judge that he understood the difference between a civil court matter and a criminal court matter. He insisted that he was aware of the ramifications of the plea deal.
After the change of plea hearing, the court accepted the plea offer and sentenced him to 51 months in jail and ordered him to forfeit $43.65 million to the United States.
Sometime in 2012, the IRS commissioner issued a notice of deficiency for failure to file and pay taxes for 2004 and 2005. Kaplan was also liable for interest and various penalties. The taxes, penalties and interest totaled almost $25.5 million for 2004 and a little over $11 million for 2005.
Kaplan challenged the IRS at the district court level and lost. He brought his appeal to the U.S. Court of Appeals for the 8th Circuit.
Kaplan raised three issues in his appeal:
1. The statute of limitations had run on the commissioner’s ability to assess the unpaid taxes.
2. His 2009 plea agreement barred the claim.
3. Judicial estoppel barred the commissioner’s determination.
The appeals court rejected all three of these issues.
The statute of limitations does not start to run until an income tax return is actually filed by the taxpayer. Because the taxpayer did not file a tax return for 2004 and 2005, the statute of limitations has not run on those tax years. So Gary Kaplan lost on this issue.
The 2009 plea agreement was unambiguous as to the government’s ability to bring a civil action against Gary Kaplan. In addition, during the 2009 change-of-plea hearing, the court referenced answers given by Gary Kaplan that clearly demonstrated that he understood the government had the ability to bring a civil tax proceeding against him.
On the issue of judicial estoppel, Kaplan felt that, because the government did not object to his Presentence Report, it was prevented from bringing a civil tax proceeding against him. In his report, Gary Kaplan did not list any tax liabilities for 2004 and 2005. There were a number of reasons that Kaplan lost this issue, including that the numbers contained in the report were compiled and put together by Kaplan himself, not the IRS. (Gary Kaplan v. Commissioner, U.S. Court of Appeals, Eighth Circuit, 14-2342, July 29, 2015) ■
©2015 CPAmerica International
When starting a new business, a wise first step is to seek the advice of your CPA.
Some things you might want to consider before starting the business:
Learn the tax basics of starting a business on IRS.gov at the Small Business and Self-Employed Tax Center. ■
©2015 CPAmerica International
Most people are probably familiar with the general tax rule about hobbies: You can deduct expenses only to the extent that you have income from the hobby.
This rule applies to individuals, S corporations, partnerships, estates and trusts.
There is a certain pecking order in deducting these expenses:
The income from the hobby activity is picked up on line 21 on page 1 of the Form 1040 return. This income is not subject to self-employment tax but is subject to federal income tax.
No. 1 deductions are Schedule A-type itemized deductions not subject to the 2-percent-of-adjusted-gross-income limitation. To take advantage of these deductions, you must itemize your deductions.
Nos. 2 and 3 deductions are Schedule A-type itemized deductions, but they are subject to the 2-percent-of-AGI limitation. To take advantage of these deductions, you must itemize your deductions. But even if you itemize your deductions, a portion of the expense deduction is lost because of the 2 percent rule.
Hobbies are considered to be activities engaged in without a profit motive. Whether an activity is engaged in for profit is determined by a facts-and-circumstances test.
Here are a couple of general rules:
© 2015 CPAmerica International
The U.S. Tax Court settled a case in July between a landlord and a tenant who wasn’t paying rent – and the court came down on the side of the tenant.
John E. Burgess owned a piece of land that he rented to Dennis Mineni. The land was used as an overflow parking lot for Mineni’s business, Atwater Flea Market. The two men had a handshake agreement that required Mineni to pay Burgess $2,000 (later reduced to $1,500) a month for the use of the land.
Burgess failed to file income tax returns for the years 1999 through 2007. The IRS assessed taxes for each unfiled year, and the total amount was almost $5 million.
Because of the assessment, Burgess was considered a delinquent taxpayer. This designation allows the IRS to place a levy upon a taxpayer’s property or rights to property.
Burgess brought up tax-protestor-type arguments, claiming that he is not a federal citizen and therefore is not subject to the jurisdiction of any federal institution or law, including but not limited to Congress, the IRS and the Social Security Administration.
Burgess felt that he did not owe any federal income tax and that the levy placed against him was invalid.
Mineni’s business was required by law to report the rent payments made to Burgess on IRS Form 1099. A copy of the Form 1099 was sent to Burgess and another copy was submitted to the IRS as required. The IRS became aware of Burgess’s income through the Form 1099.
The IRS sent a notice of levy to Atwater Flea Market, which was now incorporated and renamed Franklynn Properties, Inc. Through payments made by his business, Mineni honored the notice of levy by paying his monthly rent payment directly to the IRS instead of Burgess.
Over a 21-month period, Franklynn Properties, Inc., paid $31,500 to the IRS.
Under Internal Revenue Code Section 6332, anyone in possession of property, or rights to property, that belongs to a delinquent taxpayer upon whom a levy has been made must surrender to the IRS the property or rights to the property. Failure to honor the levy may result in personal liability.
The person who surrenders the property or rights to the property to the IRS will be discharged from any obligation or liability to the delinquent taxpayer. Immunity under IRC Section 6332 has been interpreted generously to protect people who honor levies.
The U.S. government requested and received summary judgment on the grounds that Mineni is immune from suit for his surrender of rental payments, owed to Burgess, to the IRS under an IRS levy.
So Mineni was not required to reimburse Burgess for the rent payments that were sent to the IRS. In fact, he is to continue making the rent payments directly to the IRS until such time as the levy is found invalid or stopped (John E. Burgess, Plaintiff, v. Dennis Mineni, Defendant/Dennis Mineni, Counterclaim-Plaintiff, v. John E. Burgess, United States of America, Counterclaim-Defendants, U.S. District Court, Eastern District of California, 2015-2 U.S.T.C., July 20, 2015).
©2015 CPAmerica International
The U.S. Tax Court recently upheld the IRS’s frivolous return position, costing a taxpayer $10,000 in fines.
Mark A. Lovely failed to file tax returns for 2005, even though he admitted that he had received compensation from Tradewinds Airline, Inc., and Triad International Maintenance Corp. He claimed the compensation did not constitute “wages” and therefore it was not taxable income.
Each of Lovely’s employers issued to him a Form W-2 Wage and Tax Statement. Because the IRS receives a copy of every W-2, the agency knew that Lovely had earned income and a requirement to file a tax return.
Using this information, the IRS prepared a substitute return for Lovely and assessed income tax, penalties and additions to tax.
In July 2009, Lovely prepared a Form 1040X, Amended U.S. Individual Income Tax Return. He claimed that he had no income for the tax year at issue, which was 2005. He in fact had $29,500 worth of taxable compensation for that year. He requested that the federal income tax amount of $1,475.37, which had been withheld from his wages, be refunded to him.
In September 2012, Lovely followed a similar procedure. This time he filed a 1040X requesting a refund of $781.51.
The IRS determined that both Forms 1040X submitted by Lovely had constituted frivolous returns and assessed a $5,000 fine for each one submitted.
In a collection due process hearing with the IRS, Lovely contested the $10,000 in fines assessed by the IRS for his having submitted frivolous returns. He claimed he did not receive a statutory notice of deficiency and did not have a proper opportunity to dispute the fines.
Both of the issues raised by Lovely are defenses to the existence of the amount of the tax liability according to the Internal Revenue Code. The tax liability in this case was the $10,000 in fines.
The IRS brought up some prior court cases that supported the position that issuing a statutory notice of deficiency and allowing the taxpayer an opportunity to dispute the tax are not required when the taxpayer’s original position on the 1040X is frivolous.
Lovely agreed that he had received compensation for his services but contended that it was not taxable income because he didn’t work for the federal government. The court ruled that his tax-protestor-type arguments in support of his position were frivolous.
Taking all of the facts and circumstances of the case into account, the Tax Court ruled in favor of the IRS and upheld the $10,000 in fines (Mark A. Lovely v. Commissioner, T.C. Memo 2015-135, July 27, 2015). ■
©2015 CPAmerica International