Reno cpas Archives - Page 8 of 17 - Barnard Vogler & Company

Travel expenses are tax deductible when you’re away on business.

As long as the trip is primarily business in nature, a tax planning element is available. You can spend some of your time for pleasure or personal purposes and still deduct most of your travel expenses.

The main types of travel expenses are travel fares, meals, lodging and expenses incident to travel. Some examples of expenses incident to travel include telephone charges, tips and dry cleaning bills.

As with all business expenses, travel expenses must be ordinary, necessary and reasonable in amount to be deductible.

When taxpayers travel for both business and personal purposes, they must allocate the expenses. If the trip is primarily for business, travel fare is deductible in total, and other various expenses must be allocated between business and personal.

For example, if you take a trip for both business and personal purposes and spend three days on business and two days for pleasure, you would allocate the expenses as follows:

➤ You would be able to deduct 100 percent of the travel fare because the travel is primarily for business.

➤ Your hotel, rental car, and meals and entertainment would be deductible for the amounts spent during the three days of business but not for the two days of pleasure.

➤ The deductible business portion of the meals and entertainment would still be subject to the 50 percent limitation.

However, if your trip is mainly for personal purposes, you will not be able to deduct any of the travel fare, for example, an airline ticket. The hotel, rental car, meals and entertainment are deductible for the business portion of the trip but not for the personal portion.

When your spouse or children accompany you on a business trip, expenses attributable to them are not deductible unless there is a bona fide business purpose. The performance of some minor tasks by your spouse and/or children does not cause these expenses to become deductible business travel expenses. They are still considered personal.

If you participate in wagering, or gambling, your taxable gains from those transactions can be reduced by your wagering losses – even if the underlying dealings are illegal.

However, wagering loss deductions are subject to a number of limitations:

➜ These losses can be used to offset winnings only during the same year, and not to offset any other types of income for that year. You may not use losses as a carryback or carryforward to reduce gambling income in earlier or later years.

➜ The losses can be claimed only as itemized deductions unless you are in the trade or business of gambling.

➜ The losses must be verified with adequate documentary evidence or other evidence, other than your personal assertion. The courts have been consistent in the past in ruling against taxpayers who have not kept detailed documentation regarding gambling losses.

If you are gambling at a casino, a good tip to follow is to use a player’s card that casinos hand out to their patrons. This card helps to keep detailed track of your activity on a daily basis. It helps track both your wins and losses.

You can use the card to print out an activity summary. The summary shows both your wins and losses on a daily basis. This is the type of independent third-party documentation that the IRS wants to see.

Losing lottery tickets would be another example of the type of documentation needed to support that gambling loss deduction.

Remember that gambling losses can be used only to offset gambling winnings. But to make sure you receive the gambling loss to which you are entitled, make sure you have adequate documentation.

A stiff prison sentence imposed by a district court on an individual convicted of filing a false refund claim and interfering with the administration of internal revenue laws has been upheld by the U.S. Court of Appeals for the Eleventh Circuit.

Taxpayer Donus R. Sroufe had submitted an unsigned Form 1040 return to the Internal Revenue Service for tax year 2008. The return contained fictitious revenue items from various sources, including the United States Department of Treasury. The total amount of income reported was $2.5 million.

Sroufe also listed a number of companies that supposedly had made estimated income tax payments to the IRS on his behalf. Sroufe claimed that such payments totaled more than $2.6 million. The tax return stated that a refund was due in the amount of nearly $1.76 million.

In addition to the tax return, Sroufe submitted a Form 56, Notice Concerning Fiduciary Relationship, listing the Secretary of the Treasury Department as his fiduciary. He also submitted a letter making an odd request of the Commissioner of the IRS to “file the enclosed 2008 Federal Tax Form 1040 along with any forms and/or returns that may be due, including those that may be required for tax years 2006 and 2007.”

The IRS deemed the submission a frivolous tax return and sent it to the Frivolous Return Program (FRP).

A letter from the FRP informed Sroufe that he had taken a frivolous position and had 30 days to file a correct return to avoid a monetary penalty. The FRP viewed Sroufe’s submissions as an attempt to “delay or impede the administration of Federal tax laws.”

In a reply letter to the FRP, Sroufe stated that he had reviewed his 2008 submissions, which he considered proper and correct.

Sroufe later sent another letter to the FRP stating that the original Form 1040 was incorrect and he was in the process of correcting it. He also said that he intended to complete and file his tax returns for 2006, 2007 and 2008. But he never filed returns for 2006 and 2007 – and never amended or corrected his 2008 return.

The result was that Sroufe was indicted by a federal grand jury for interference with administration of internal revenue laws and filing a false claim against the United States for a tax refund. Sroufe pleaded not guilty, and the case proceeded to trial where he was convicted on both counts.

The judge stated that Sroufe had intended to defraud the IRS and had attempted to obtain a $1.7 million tax refund to which he was not entitled. He was sentenced to 51 months in prison on this charge.

In addition, the judge found Sroufe guilty of interference with administration of internal revenue laws because he had submitted fictitious documentation to the IRS in response to various inquiries from the agency. The taxpayer was sentenced to 36 months in prison on this charge (United States of America v. Donus R. Sroufe. U.S. Court of Appeals, Eleventh Circuit, 2014-2 U.S.T.C.).

Both sentences were at the high end of the sentencing guidelines due to the taxpayer’s prior issues with the IRS. The sentences are to run concurrently.

In response to the domestic violence case of Ray Rice and other NFL football players, a senator has introduced legislation to end the tax-exempt status of the National Football League as well as a number of other sports leagues.

Sen. Cory Booker, D-N.J., introduced the legislation which, if enacted, would end the tax-exempt status of 10 professional sports leagues, including the NFL, National Hockey League, Professional Golf Association and the U.S. Tennis Association.

Individual teams are taxed, but sports leagues typically file for tax-exempt status under Section 501(c)(6) of the IRS code. Some have held tax-exempt status for decades – the NFL’s tax-exempt status dates back to 1966.

Major League Baseball dropped its nonprofit status in 2007, reportedly in part because it didn’t want to make public large executive salaries. The National Basketball League never had tax-exempt status.

NFL Commissioner Roger Goodell earned a reported $44 million in 2012, according to published reports. The NFL brings in $9 billion a year.

Booker said the act could raise up to $100 million over the next 10 years, which could be used to support domestic violence prevention programs.

Booker is not the only government official trying to end the tax breaks for professional sports leagues. Sen. Tom Coburn, R-Okla., has been pushing to end the tax breaks since 2013.

Coburn wants teams with more than $10 million in annual revenue to lose their exempt status. In addition, he wants a number of leagues organized under 501(c)(6) to have their exempt status revoked.

Sen. Maria Cantwell, D-Wash., has joined the battle, saying she wants the exemption gone because of the NFL’s failure to force Washington to change its name from “Redskins.”

Code Sec. 501(c)(6) status means that these sports leagues do not pay any federal income tax. The code section refers to “business leagues, chambers of commerce, real-estate boards, boards of trade, or professional football leagues (whether or not administering a pension fund for football players), not organized for profit and no part of the net earnings of which inures to the benefit of a private shareholder or individual.”

It is tough to get lawmakers in cities that have professional sports teams to back this legislation. Because of the interplay between ticket prices, fan loyalty and voting preference, sports fans might not look too kindly on their lawmakers if they help to increase the cost of event ticket prices.

The IRS has increased both the high- and low-cost per diem rates.

An employer that pays a per diem allowance in lieu of reimbursing actual expenses that an employee pays or incurs for travel away from home may use the high-low method. Under the high-low method, a high rate applies to areas designated as high-cost localities, and a low rate applies to every other locality within the continental United States.

The federal per diem rates are generally adjusted every Oct. 1. The 2014-2015 special per diem rates, according to IRS Notice 2014-57, have increased as follows:

➜ The high-cost area per diem rates increased from $251 to $259 per day.

➜ The low-cost area per diem rates have increased from $170 to $172 per day.

The IRS publishes a listing of various cities that it considers to be high-rate localities.

If you are away on business in one of these cities, you can use the high-cost per diem rate to reimburse yourself for lodging, meals and incidental expenses.

This rate would be in lieu of reimbursement for your actual expenses. By using the rate, you don’t have to keep a receipt for every single item you purchase.

If you are away on business in a city that is not considered to be a high-rate locality, you would use the low-cost area per diem rates for reimbursement.

Notice 2014-57 provides the new per diem rates and lists any additions or subtractions to the high-cost area list.

The rules and procedures regarding claiming per diem expense deductions are outlined in Rev. Proc. 2011-47. Only the per diem amounts have changed, not the basic rules and procedures.

There was a major change to the threshold percentage regarding the medical expense deduction in 2013.

Starting in tax year 2013, your medical expenses now must exceed 10 percent of your adjusted gross income (AGI) for you to receive any tax benefit from those expenses. The rate prior to the change in 2013 was 7.5 percent.

The old rule of 7.5 percent still applies if the taxpayer or his spouse attains age 65 by the end of the tax year in question. Older taxpayers will receive the preferred 7.5 percent rate until 2016.

So, for tax year 2014, if one spouse of a married couple is at least 65, the couple still is subject to the former rate of 7.5 percent.

The types of medical expenses that are allowed to be deducted are the same as they were in the past. Expenses for the diagnosis and treatment of physical disorders, travel and lodging costs related to such expenses, qualified long-term care expenses and medical insurance premiums are still deductible. The limit on lodging costs of $50 per day, per individual, is the same.

The general rule is that medical expenses are deductible in the year paid. Deductible medical expenses must be substantiated. It is always a good idea to keep a copy of all medical invoices and receipts.

Your local pharmacy can give you a printout of all of your prescription activity for the entire year. This is a nice, convenient summary instead of having a bunch of individual receipts that you accumulated during the year.

The invoices, receipts and prescription summary serve as your backup. Just a canceled check without any documentation supporting it would not be considered adequate substantiation by the IRS. The IRS can disallow any unsubstantiated deduction.

The amount that you pay in medical expenses during the year is reduced by any reimbursements that you receive from your insurance company. If the insurance company covered the whole cost of a procedure, you do not have an eligible medical expense deduction. Only out-of-pocket expenses paid by the taxpayer qualify.

The medical expense deduction is not limited to qualified expenses of the taxpayer but includes the taxpayer’s spouse and dependents. The cost of providing medical insurance coverage for your family, such as employee co-pays (if your employer provides you with medical insurance coverage), is an example. And qualified out-of-pocket expenses for the spouse and dependents qualify as well.

As an example, if you have an AGI of $50,000 and are under the age of 65, you will need more than $5,000 in qualified medical expense deductions to receive any tax benefit. If you have $7,000 of qualified medical expenses, $2,000 will qualify as a potential itemized deduction. If you do not itemize on your return, you receive no benefit from these expenses.

With insurance costs rising, companies increasing the size of employee co-pays, insurance companies limiting various types of coverage and many people out of work, it becomes more important to keep accurate records of your medical expenses to see whether you qualify for this type of itemized deduction despite the threshold being increased from 7.5 percent to 10 percent.

Courts

File your tax returns in a timely manner, or your filing status may be determined for you – by the IRS.

That’s the lesson Donald Thomas Salzer and his wife learned the hard way. They failed to file income tax returns for 2008 and 2009. Mrs. Salzer had refused to sign the 2008 and 2009 tax returns for political reasons.

Salzer and his wife had filed under the married filing jointly status from 1985 through 2007. However, when the IRS prepared returns for Salzer and his wife for 2008 and 2009, it selected the filing status of married filing separately for the taxpayers.

The difference in tax rates between the two filing statuses caused the taxpayers to have a deficiency on the returns for both years in question. Under normal circumstances, with the taxpayers filing jointly, they would have received a refund as they did in 2007. The amount of the 2007 refund was $1,375.

The taxpayers’ situation in 2008 and 2009 was almost identical to that of 2007. Salzer was still married, still had two dependents, had the same job, and was withholding in a similar manner. The taxpayers would have received a refund for 2008 and 2009 had the returns been prepared with the filing status of married filing jointly.

The Tax Court ruled recently that an individual was not entitled to claim joint filing status for a return prepared by the IRS after the individual and his wife failed to file a return for two years. The court further stated that joint return rates apply only if a married individual files a return jointly with his or her spouse. Joint filing status cannot be imputed. (Donald Thomas Salzer v. Commissioner, T.C. Summary Opinion 2014-59, June 24, 2014)

The court imposed penalties for failure to timely file and pay tax since the husband failed to address the penalties at trial. The amounts of the penalties are still in dispute and will be settled by the U.S. Tax Court Rules of Practice and Procedure.

Take seriously your responsibility to file your tax returns in a timely manner. If the IRS has to prepare your returns for you, under certain circumstances, they can change your filing status.

This case was tried in the U.S. Tax Court Small Case Division. The decisions do not serve as precedent for other taxpayers but are indicative of how the Tax Court may rule in a similar situation.

The date of an irrevocable letter of authorization sent to a financial services company by an individual should be considered the date of the contribution to his retirement account, the IRS determined in a recent private letter ruling.

This situation involved a taxpayer who sent his financial services company a letter of authorization (LOA) instructing the company to transfer funds from one of the taxpayer’s nonretirement accounts to an IRA. The date of the letter – April 15 – was treated as the day of the contribution.

Thus, if the LOA was postmarked by April 15, or if the individual made a verbal request to the company by April 15, the taxpayer is deemed to have made the contribution by the end of the preceding tax year. The verbal request must be summarized in a document and signed and dated by the financial services company.

The letter of authorization must specify the amount of the cash contribution, the account from which the funds are being transferred and the tax year for which the contribution is made.

The rules regarding an IRA account allow taxpayers to make contributions to their accounts by the due date of their returns without taking into account any extensions.

If a taxpayer made a contribution to his account by April 15, 2014, it would count as a 2013 IRA contribution because that is the due date for the 2013 return.

The issue here is that, although the actual transfer of funds occurred after April 15, the contribution authorized by the LOA was considered made in the preceding year. The IRS treated the date of the authorizing letter as the contribution date.

This private letter ruling (Letter Ruling 201437023, June 18, 2014) is consistent with a 1985 IRS private letter ruling in which the IRS stated that the postmark date of a contribution would be treated as the contribution date.

Please keep in mind that private letter rulings are not binding on the IRS. These rulings are based on a particular taxpayer’s facts and circumstances. There is no guarantee that the IRS would take the same position in another situation.

With tax season 2014 fast approaching, a few tips regarding donating property seem in order.

Specifically, clothing, household items and cars are the most common items donated to qualified organizations.

To receive a tax deduction, you need to donate the property to a qualified organization. A qualified organization includes nonprofit groups that are religious, charitable, educational, scientific or literary in purpose, or that work to prevent cruelty to children or animals.

If you ask organizations whether they are qualified, most will be able to tell you.

The IRS has an online resource at IRS.gov. Click “Tools” and then “Exempt Organizations Select Check.” This online tool will allow you to search for qualified organizations.

The general rule regarding contributed property is that the amount of the charitable contribution is the fair market value of the property at the time of the contribution.

There are some special rules regarding clothing and household items. You cannot take a deduction for clothing or household items you donate unless the items are in good used condition or better.

The IRS is trying to stop people from donating items that are basically worn out and of no use to anyone. So, unless your donated items are in good condition, you will not be allowed to take a charitable contribution deduction.

Now let’s define the term “household items.” Household items are considered to be furniture, electronics, appliances, linens and other items. Some examples of items that are not considered household items include food, paintings, jewelry and collectibles.

Used clothing and household items are usually worth far less than what you originally paid for them. These items are difficult to value because they do not lend themselves to fixed formulas or methods.

A good habit to follow is to prepare a detailed list of the items you plan to donate. You should put a value on every item donated. Located next to the item should be its thrift shop value.

What thrift shops are selling the various used clothing and household goods items for is a good indication of the fair market value. Some of these thrift shops and charities actually have price lists that you can use as a guide.

Determining the fair market value of a car you donated is no problem if the value of the donation you are claiming is $500 or less. You can use a used car guide or a blue book to determine the fair market value of the donated car.

When using one of these guides, you should be honest about the condition of the vehicle. Very few people have cars in excellent condition. Most cars would probably fall into the average category. In addition, use the private sale price, not the higher dealer retail value.

If you are claiming a deduction of more than $500 for the car, the rules are a little more complicated. You will be able to deduct the smaller of the actual sales price of the vehicle received by the donee organization or its fair market value on the date of the contribution.

The donee organization will provide you with a Form 1098-C, which shows the gross proceeds from the vehicle sale. This 1098-C form must be attached to your return if you are mailing it in or transmitted as a PDF file if your software program allows you to attach it.

If you do not attach your Form 1098-C in some fashion, the deduction for the car will be disallowed by the IRS. This form serves as a type of control mechanism against taxpayers claiming inflated values for the used cars that they have donated – a problem with this type of donation in the past.

The key to donating clothing, household items and cars successfully is to know the rules for determining fair market value. Be reasonable when you are applying those rules. And always request some type of documentation from the charity when you donate.

An opinion piece by CPAmerica member R. Milton Howell, III, CPA, CSEP, Partner, Davenport, Marvin, Joyce & Co., LLP

Several years ago, the IRS issued its “Taxpayer Bill of Rights.” These spell out the minimum standard of service that you should expect from your dealings with the IRS (after all, the S in IRS is for, well, Service.)

To quickly summarize, the “Taxpayer Bill of Rights,” as published by the IRS,

is as follows:

1. The right to be informed. You are entitled to clear explanations of laws and to be informed about IRS decisions on your tax matters.

2. The right to quality service. You should expect prompt, courteous and professional service.

3. The right to pay no more than the correct amount of tax. You should pay only the amount you owe and all payments should be applied properly.

4. The right to challenge the IRS’ position and be heard. The IRS will consider your timely objections and documentation promptly and fairly.

5. The right to appeal an IRS decision in an independent forum. Administrative appeals and court actions are available as remedies.

6. The right to finality. You have the right to know when an audit has concluded, as well as the maximum amount of time for the government to audit or collect tax on a particular tax year.

7. The right to privacy. IRS inquiries, examinations and enforcement actions should be no more intrusive than necessary.

8. The right to confidentiality. Information provided to the IRS will not be disclosed unless authorized by the taxpayer or required under law.

9. The right to retain representation. You have the right to have a professional of your choice to deal with the IRS for you.

10. The right to a fair and just tax system. The government should consider other facts and circumstances that affect your tax liability, ability to pay or ability to provide information.

I would suggest that these “official” rights are a great idea, but they are really too conceptual and aspirational. They mean well, but these times require more specific rights that attempt to address the problems that taxpayers are having with our tax system.

Milton Howell’s suggestions for the “Taxpayer Bill of Rights,” written by a taxpayer for taxpayers:

1. The right to a prompt response to your inquiries. You should not have to wait 90 days or more for the IRS to acknowledge and respond to your letter, particularly when the agency may proceed with audit or collection actions that do not take your response into consideration.

2. The right to know what the rules are for that year before the year begins. Too many tax rules are decided at the end of the year, retroactive to the beginning of the year. A few times, it has been retroactive to the beginning of the prior year! This election year of 2014 is likely to be no different, with legislators wanting to wait until after the November elections to push needed tax bills through. You would not play a new board game without knowing the rules first – why should paying taxes be different?

3. The right to a simpler tax code with fewer rules and still fewer exceptions. The rules are just too darn complex, and fewer taxpayers should require a CPA’s assistance for basic tax issues.

4. The right to hold our tax agencies to the same standards of behavior and accountability to which they hold us. If I tell IRS auditors that I cannot get the information because the computer crashed and it could not be saved, do you think they would accept my explanation and drop the matter?

5. The right to greater year-to-year consistency in tax rules. Some tax law changes are quite significant from year to year, and taxpayers should not need to consult a scorecard from their accountant on every financial decision.

6. The right to be able to rely on IRS guidance and responses, whether verbal, in publications or on its website. If the IRS tells us that something is so, we should be able to count on that guidance – even if it is wrong.

7. The right for consistent application of laws, regulations and rulings. Whether an item is “income” should be a uniform answer, and it should not matter whether you are a corporation, partnership, LLC, trust or individual taxpayer.

8. The right to speak to a real person on the phone in less than 30 minutes. No one wants to, and should not have to, spend all afternoon on hold.

9. The right to a business fiscal year-end if it makes economic sense for my business. I realize this is already technically available, but the test hurdles are just too high to be practical. Right now, only the most bizarre fact patterns can make it work.

10. Here’s a technical but important one – the right to a conclusive determination of whether a working arrangement is that of an employee or an independent contractor. Perhaps publish an IRS form that both parties sign, agreeing to the form of the arrangement, and file the form with the IRS. This would provide protection against retroactive government changes to the arrangement. The government could change the arrangement if it is clearly wrong, but not for past years if the form was properly filed.

How about a set of tax rights that actually works for us? After all, it is our government.