Reno accountants Archives - Page 4 of 18 - Barnard Vogler & Company

A Florida woman was denied a first-time homebuyer credit of $7,500 because the U.S. Tax Court determined that she had never actually purchased the home.

On Jan. 22, 2007, Ada Mae Pittman entered into a lease contract with an option to buy with James Piotrowski Jr. Pittman was required to meet certain conditions to exercise the option to purchase the house. She was required to:

➜ Close on the purchase of the home by Jan. 31, 2008

➜ Pay a $1,250 option fee

➜ Pay an additional $150 per month, which would be applied against the purchase price of the home if the option were exercised

Pittman paid the $1,250 option fee and made the $150 per month payments.

However, she did not exercise the right to purchase the house by Jan. 31, 2008, because she was unable to obtain the financing needed to close the purchase.

No sales documents were ever prepared.

When Pittman timely filed her 2008 federal income tax return, she claimed the $7,500 first-time homebuyer credit. The IRS subsequently sent her a letter of deficiency disallowing the credit.

Generally, under Internal Revenue Code Section 36, a transfer is complete upon the earlier of the transfer of title or the shift of the benefits and burdens of ownership.

An option to purchase a home in Florida does not give the person with the option an equitable interest in realty until the option is exercised.

IRC Section 36 is quite clear. A taxpayer must actually acquire a property to claim the first-time homebuyer credit.

Pittman did not provide any documentation substantiating her purchase of the residence.

In addition, she never exercised the option to purchase. Therefore, Pittman is not entitled to the claimed first-time homebuyer credit (Ada Mae Pittman v. Commissioner, T.C. Memo 2015-44, March 16, 2015).

An eye surgeon who had received a $2 million bonus in 2007 was told by the U.S. Tax Court that half of it was unreasonable compensation.

Dr. Afzal Ahmad was president and 100 percent shareholder of Midwest Eye Center, an ophthalmology surgery and care center practice with four locations. The center, organized as a C corporation for tax purposes, had paid him the bonus.

He held many positions for the business, including surgeon, chief executive officer, chief operating officer and chief financial officer. These various positions required him to perform different managerial tasks.

During 2007, Ahmad was paid total compensation of $2.78 million, of which $2 million was paid out in the form of a bonus. All of the bonus money was paid in November and December 2007 in four separate checks of $500,000 each.

Ahmad’s workload increased quite a bit in 2007 because one surgeon quit, and Ahmad had to take over that surgeon’s scheduled surgeries during the second half of the year. Because another surgeon had a reduced workload, Ahmad also had to take over some of that surgeon’s responsibilities.

On Ahmad’s corporate income tax return for 2007, $2.78 million was deducted as officer compensation.

The U.S. Tax Court agreed with the IRS, disallowing $1 million of the bonus as unreasonable compensation (Midwest Eye Center, S.C. v. Commissioner, T.C. Memo. 2015-53, March 23, 2015).

IRS Code Section 162 deals with this issue and “allows taxpayers to deduct ordinary and necessary expenses, including a reasonable allowance for salaries or other compensation for personal services actually rendered.” This means compensation is deductible only if it is:

➜ Reasonable in amount

➜ Paid or incurred for services actually rendered

Whether amounts paid as wages are reasonable compensation for services rendered is a question decided on the basis of the facts and circumstances of each case.

Some IRS published rules and some court cases conclude that, to determine reasonable compensation, taxpayers must look at factors other than return on equity. They have to look at what other similar professionals are earning in comparison to their overall compensation package.

Ahmad produced no evidence of comparable salaries. Instead, he said that there are no like enterprises or similar circumstances with which to compare.

Ahmad felt he was entitled to the large compensation amount because of the many different administrative hats he wore for his business.

The burden of proof was on Ahmad to show that the amount paid to him was not unreasonable. The doctor provided no such proof.

Employers should already be preparing to comply with next year’s Affordable Care Act reporting requirements regarding their employee healthcare benefits.

Self-insuring employers and employers with 50 or more full-time employees are required under the Affordable Care Act to file information with the IRS about health insurance coverage provided – or not provided – to their employees.

The required reporting with respect to calendar year 2015 begins with providing an information return to the IRS by Feb. 29, 2016, or March 31, 2016, if reporting electronically. (Normally, the deadline is Feb. 28 each year, but 2016 is a leap year.) But employers should have already begun pulling together the 2015 health coverage information for each month.

Self-insuring employers – Code Section 6055

Self-insuring employers must file an information return with the IRS using Form 1095-B, Health Coverage, and Form 1094-B, Transmittal of Health Coverage Information Returns, each year, providing information about minimum essential coverage for each individual receiving the coverage. The forms must be filed by Feb. 28, or March 31 if reporting electronically.

Minimum coverage is defined as a healthcare plan designed to pay at least 60 percent of the total cost of medical services for a standard population. Most employer-sponsored health coverage qualifies as “minimum essential coverage.”

However, specialized coverage, such as vision and dental care, workers’ compensation, disability policies and coverage for only specific health issues, does not qualify.

The required information return must contain the following:

➜ Name, address and taxpayer identification number of the primary insured, as well as the name and taxpayer identification number of any family members of the primary insured who are also covered under this policy.

➜ Dates during which individuals were covered under minimum essential coverage during the year.

➜ Whether the health insurance is a qualified health plan in the small group market offered through an exchange. In a situation where employers are providing minimum essential health insurance coverage during the year, they must provide information regarding whether the coverage is a qualified health plan offered through a healthcare exchange and how much the amount of the advance payment is, if any.

➜ Any additional information the IRS requires.

If the minimum essential coverage is provided by the employer through a traditional group health plan, a return is still required to be filed by the deadline.

The return must contain the following information:

➜ Name, address, and employer identification number of the employer maintaining the plan

➜ Portion of the premium, if any, required to be paid by the employer

➜ Any other information the IRS requires

Employers providing health insurance coverage are also required to furnish related information about the coverage to each individual. For calendar year 2015, the information is due to individuals by Jan. 31, 2016.

These statements must provide the following information:

➜ The name and address of the employer maintaining the plan, and a contact name and phone number that the employees can access if they have any questions

➜ The information required to be reported on the return with respect to such individual

Large employers – Code Section 6056

Large employers, those with 50 or more full-time or full-time equivalent employees, must file Form 1095-C, Employer-Provided Health Insurance Offer and Coverage, and Form 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Return, with the IRS by Feb. 29, 2016, or March 31 if reporting electronically. This information return reports the terms and conditions of the healthcare coverage they provided to their employees for the calendar year.

The employers must also provide related information to their employees by Jan. 31, 2016.

The information return must include the following:

➜ Employer’s name and identification number

➜ Certification of whether the employer offers full-time employees and their dependents the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan

➜ Number of full-time employees for each month of the calendar year

➜ Name, address and taxpayer identification number of each full-time employee employed by the employer during the calendar year and any months during which the employee and any dependents were covered under the eligible employer-sponsored plan during the calendar year

➜ Any other information the IRS requires

Large employers that offer employees the opportunity to enroll in minimum essential coverage are required to report:

➜ Duration of any waiting period for the coverage

➜ Months during the calendar year when coverage was available

➜ Monthly premium for the option that cost the lowest amount in each enrollment category

➜ Employer’s share of the total allowed costs of benefits under the plan

Do you have a “junk drawer” as a catchall where you toss items that don’t seem to have a specific place?

The IRS provides Line 21, Other Income, of Form 1040 as a kind of catchall used to report any taxable income not reported elsewhere on your return or other schedules.

This line is where you list the type and amount of miscellaneous, or other, income. Some examples of income to report on Line 21 include the following:

1. Most prizes and awards

2. Jury duty pay

3. Gambling winnings, including lotteries and raffles

4. Recoveries of items deducted in earlier years, for example, various itemized deductions

5. Income from the rental of personal property if you were engaged in the rental for a profit but were not in the business of renting such property

6. Income from an activity not engaged in for profit

7. Taxable distributions from a Coverdell education savings account or a qualified tuition program

8. Taxable distributions from a health savings account or an Archer medical savings account

9. Canceled debts on something other than your personal residence, for which canceled debt is not taxable

10. Net operating loss (NOL) deduction

11. Alaska Permanent Fund dividends

Jury duty pay, recoveries, gambling winnings and NOL are some of the more common items to include on Line 21. All are income items except for NOL, which reduces the amount of income on this line.

NOL is a net operating loss from a prior year carried forward. It means you had more losses than income in a particular year. You are allowed to carry forward a loss for 20 years or until it is used up.

For more detailed information, refer to the 1040 instructions for Line 21.

The term “personal property tax” means an ad valorem tax imposed on an annual basis on personal property.

To qualify as a personal property tax, a tax must meet a three-part test:

Part 1: The tax must be ad valorem. A tax based on criteria other than value is not considered an ad valorem tax. For example, some states base a motor vehicle tax on the vehicle’s value, weight, model year or horsepower. If the motor vehicle tax is based on value, it is considered ad valorem and qualifies as a deductible personal property tax.

If part of the motor vehicle tax is based on value and part based on weight, the portion of the tax related to the value is deductible, and the portion of the tax related to the weight is not.

Part 2: The tax must be imposed on an annual basis, even if collected more or less frequently.

Part 3: The tax must be imposed on personal property. A tax may be considered to be imposed on personal property even if, in form, it is imposed on the exercise of a privilege.

These three rules are why taxpayers are able to deduct registration fees for cars, boats, mobile homes and trailers as a personal property tax provided that they are ad valorem or at least partially ad valorem.

To deduct any personal property tax, taxpayers must file Schedule A and itemize their deductions.

Taxpayers should look at a car, boat, mobile home or trailer registration to determine whether the registration fees are ad valorem. This document usually shows the amount of the fees as well. The registration form itself can serve as documentation or backup for the deduction.

Taxpayers should keep up with the U.S. bonds they purchase and cash in – and their tax liability on the interest.

Mr. and Mrs. Lobs purchased ten $1,000 Series EE U.S. savings bonds for their son in mid-November 1992. The bonds were registered to both Mr. and Mrs. Lobs even though they purchased the bonds to provide for their son Joseph’s college education.

In 1995, the Lobses divorced. Mrs. Lobs received the 10 bonds in the divorce settlement.

During September 2010, Mrs. Lobs’s son needed some money. Mrs. Lobs cashed in the bonds, which were registered in both her and her ex-husband’s names.

The proceeds from the bonds were deposited in her checking account. A cashier’s check for $12,640 was immediately made payable to her son Joseph. Joseph cashed the check.

Mrs. Lobs timely filed a Form 1040 return for 2010 but did not include any interest income from the bond transaction on the return.

The IRS sent Mrs. Lobs a notice of deficiency in April 2013 determining that she had failed to report $7,640 of interest income. Mrs. Lobs timely filed a petition with the IRS claiming that the bonds belonged to her son, not to her, and that the interest on the bonds was not properly taxable to her.

The Internal Revenue Code states that interest income received by the taxpayer constitutes taxable gross income. In particular, interest on U.S. obligations, such as U.S. savings bonds, is fully taxable.

Registration of Series EE U.S. savings bonds is generally conclusive of actual ownership of, and interest in, such bonds. Savings bonds are usually not transferable and are payable only to the owner named on the bonds.

Mrs. Lobs cashed in the bonds and had the proceeds transferred to her checking account. The difference between the original purchase price and the amount of proceeds received became taxable income to her.

It doesn’t matter that Mrs. Lobs had meant to have her son’s name put on the bonds when they were originally purchased. The court can rule only on what happened.

The reality of the situation is that Mrs. Lobs was a registered co-owner of the bonds who was entitled to receive, and did in fact receive, the proceeds of the bonds upon their endorsement and surrender. Therefore the $7,640 is taxable to her as interest income (Ruth A. Lobs v. Commissioner, U.S. Tax Court, T.C. Summary Opinion 2015-17, March 3, 2015).

James A. Ericson really missed the mark as a federal income tax preparer.

In February 2015, the U.S. District Court for the District of Hawaii permanently barred Ericson from preparing federal income tax returns.

Ericson had prepared a large number of income tax returns in which he took unrealistic and unsustainable positions on clients’ tax returns. He willfully understated taxes due and had a reckless and intentional disregard for tax rules and regulations.

The 9th U.S. Circuit Court of Appeals does not have a clear standard or test for the district court to apply in determining whether a lifetime or permanent ban against all tax return preparation is proper. However, the courts have considered a variety of factors in analyzing this issue.

The following are some of the factors considered by the courts through the years in determining whether a lifetime ban is appropriate:

1. A defendant’s willingness or refusal to acknowledge wrongdoing

2. Compliance with the law following a warning or notification by the IRS that the conduct is unlawful

3. Percentage of tax returns filed that are fraudulent

4. Severity of the harm, i.e., the amount of money fraudulently requested and the amount actually and erroneously released

5. Number of discrete fraudulent practices

6. Longevity of the fraudulent scheme

7. Defendant’s degree of “scienter,” or knowledge

The facts and circumstances of the case indicate that Ericson performed negatively under all seven factors.

Regarding the first factor, Ericson has always maintained his innocence under cross-examination. He was warned by the IRS back in 2009 that his practices were improper, and he was fined.

Ericson continued preparing improper returns for the next three years, violating the second factor.

Ericson severely violated the third through fifth factors. The IRS examined 611 federal income tax returns of his clients from 2007 through 2012 and found a total tax shortfall of more than $2.4 million. This amounts to an average of almost $4,000 per return, and when projected over all of the returns that Ericson prepared, a loss to the U.S. Treasury of over $30 million in revenue. Between 86 and 92 percent of Ericson’s clients received a refund.

The sixth factor was violated because this fraudulent activity had been carried out for over five years. The court also found Ericson guilty of the seventh factor because it felt that he knowingly and repeatedly violated the U.S. Tax Code.

Because the court found all of the seven factors against Ericson, it felt it was appropriate to impose a lifetime ban on his ability to prepare individual income tax returns (United States of America v. James A. Ericson, U.S. District Court, District of Hawaii, 2015-1 U.S.T.C. Paragraph 50,222, Feb. 20, 2014).

Donating an automobile with a fair market value of more than $500 has a few twists and turns when taxpayers claim a deduction.
Taxpayers donating to charity a qualified vehicle, car, truck, boat or aircraft valued at over $500 must obtain from the charity either a Form 1098-C or a similar contemporaneous written acknowledgment of the contribution. They should attach this documentation to their return.

The acknowledgment must provide the following information:

➜ Donor’s name
➜ Donor’s Social Security number
➜ Vehicle’s identification number
➜ Description of each donated item
➜ Good-faith estimate of any goods or services provided by the charity in exchange for the vehicle

The fair market value of any goods or services received by the donor reduces the amount of the charitable contribution deduction.

The acknowledgment also must contain the amount of sales proceeds if the vehicle was sold in an arm’s-length transaction. For a vehicle sold in an arm’s-length transaction with no material improvements, the amount of the donation is limited to the amount of the sales proceeds.

If the charity retains the vehicle for its own internal purposes, the acknowledgment must state that as well. Under those conditions, the taxpayer can deduct the fair market value of the vehicle.

If the charity sells the vehicle to a needy individual at a price below fair market value, the taxpayer is allowed to claim the fair market value as the deduction amount, provided the sale furthers the charity’s purpose. Most of these types of charities have as their purpose helping needy individuals by providing them with good-quality, low-cost automobiles.

When itemizing deductions, taxpayers should deduct charitable contributions on Schedule A and attach it to their Form 1040 tax return. In addition, they should remember to attach a copy of their 1098-C or similar acknowledgment.

You have a choice between deducting state and local sales taxes or state and local income taxes. A prudent tax planner would obviously choose the larger of the two deductions.

The option to deduct state and local sales taxes benefits the residents of Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. These states don’t impose a state income tax.

You may claim this deduction by electing to deduct state and local sales taxes instead of state and local income taxes on Schedule A of your 1040 return.

You can calculate this deduction in two different ways. You can choose to:

➤ Keep a copy of all of your sales receipts in which sales or use tax was charged, and total the amount of sales and use taxes paid during the year, or

➤ Use the optional sales tax tables provided by the IRS in the instruction booklet to Schedule A.

Using the optional sales tax tables reduces your record-keeping burden and is generally the easier way to go. The tables provide an amount of sales taxes paid based on a number of factors, including state of residence, adjusted gross income and number of exemptions.

A nice benefit of using the optional sales tax tables is getting to deduct the amount of sales taxes determined by the tables, plus any state sales and local taxes paid on the following:

➤ Motor vehicles

➤ Boats

➤ Aircraft

➤ Homes, including mobile and prefabricated homes

➤ Materials to build a home

The IRS provides taxpayers with an Internet tool to determine whether they might benefit by electing to deduct state and local sales taxes at www.irs.gov/Individuals/Sales-Tax-Deduction-Calculator. ■

The modern-day secession movement that has sprung up around the country in recent years is evidence that a number of states – as many as 20, stretching from New Jersey to Oregon to Texas – have citizens who would like to assert their independence from the federal government.

John Trowbridge Jr. found out the hard way that living in Texas means he is a U.S. citizen and is subject to U.S. tax laws.

In addition, district courts have the jurisdiction, and the Internal Revenue Code gives them the power, to hear tax cases and settle those disputes.

Trowbridge has been a longtime tax protester. He has on two prior occasions lost Tax Court cases regarding similar issues.

This particular case involved the district court, which had reduced Trowbridge’s tax liabilities for the years 1993 through 1997 to the amount of the associated tax liens on his property. The court foreclosed on the liens and then sold Trowbridge’s property for back taxes.

Trowbridge’s argument against the court is that he lives in Harris County, Texas, which he doesn’t consider a part of the United States, meaning that he is not, therefore, a U.S. citizen. He feels that he isn’t subject to the federal income tax laws and that the district court doesn’t have jurisdiction in his case.

The courts have already held in prior cases that citizens of Texas are also citizens of the United States, so Trowbridge lost that argument. There is also an Internal Revenue Code section authorizing the district courts to hear Tax Court cases and disputes, so he lost on that issue as well (United States of America v. John Parks Trowbridge, Jr., No. 14-20333, U.S. Court of Appeals, Fifth Circuit, Feb. 3, 2015).

don’t impose a state income tax.