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Archive for August, 2011

Employee Fringe Benefits Taxable Under the Law

August 31st

It is very common in many businesses for employees to receive certain fringe benefits. According to the IRS, fringe benefits constitute “a form of pay for the performance of services.” Common benefits typically include health benefits or use of a company car.

As a form of payment, fringe benefits are typically considered income. As such, they are generally taxable under the law, unless there is a specific exception.

The IRS regulations governing employee fringe benefits can be quite complicated. However, a good understanding can mean not only an accurate tax return, but also save money expenses.

Excluded Fringe Benefits

It is important to remember that any fringe benefits are taxable, and must therefore be included in calculations of total gross income, unless explicitly excluded by law.

According to IRS regulations, excluded benefits are not subject to federal income tax withholding. They are also rarely subject to Social Security, Medicare, or federal unemployment taxes. Such benefits are not reported on your Form W-2.

Here are some of the most notable exempted fringe benefits:

1. Accident and Health Benefits. These benefits are exempt from taxation, with the exception of long-term care benefits provided through flexible spending or something similar.

2. Adoption Assistance. Adoption assistance benefits are always exempt from income tax withholding. They are, however, taxable under Social Security and Medicare taxes, as well as federal unemployment.

3. Retirement Planning Services. These fringe benefits are always exempt from taxation.

4. Meals. Business-related meals are exempt from taxation only if provided on the business premises.

5. Employee Discounts. Discounts offered to employees are exempt from taxation up to certain amounts. It also does not apply to any discounts given on real property or discounts on personal property held for investment purposes, such as stocks or bonds.

If you think you might qualify for any of these exemptions, or feel any confusion managing your fringe benefits on your tax return, it is advisable to consult a tax lawyer or tax planning professional.


Joint Committee Urged to Consider Overhaul of Tax Code

August 31st

tax reformThe United States Chamber of Commerce, a business federation representing companies, business associations, state and local chambers in the United States, and American Chambers of Commerce overseas, recently sent a letter to the Congressional “Supercommittee” urging them to seriously consider major tax reforms.

The United States Chamber of Commerce currently stands as the world’s largest business federation. It represents the interest of over three million businesses and organizations. In this letter, the Chamber of Commerce uses the full weight of American business to support their conviction that enhancing the economy and stimulating job growth will not alone be sufficient to conquer the US deficit problem.

Tax Reform Necessary for Deficit Reduction?

The Chamber of Commerce argues in their letter that while the plan outlined in the Budget Control Act of 2011 to reduce the aggregate deficit by $1.5 trillion over the next decade is a step in the right direction, it is not enough to completely conquer the US deficit problem.

The letter goes on to state that what is necessary to assist the current plan in battling the deficit is a complete reform of entitlement programs and a total overhaul of the existing tax code. The Chamber urges the Joint Select Committee to restructure the tax code to “improve transparency and simplicity to drive economic growth and job creation.”

Through increased simplicity the Chamber of Commerce argued that the Tax Code could cease encouraging erroneous tax returns and tax debt. This plan, they suggested, would thus remove the Tax Code as a roadblock to savings and investment in the US economy.

Specifically, their letter suggested a need for lower overall marginal tax rates to encourage savings and investment, as well as “allowing the marketplace, and not the tax system, to allocate resources.” Lastly, they asked for “realistic transition rules” in order to allow sufficient time for implementation of the new tax system.


Avoid Falling Victim to Abusive Tax Schemes #1: Anti-Tax Law Schemes

August 31st

With the recent IRS amnesty scheme, tax scams have become a topic of increasing concern among Americans. Many taxpayers feel worry that they will suffer IRS penalties for tax scams they may not have even known they were party to.

However, this does not need to be a problem. The IRS has provided a comprehensive list of existing abusive tax schemes, and advice on how taxpayers can avoid falling victim. With these tips, taxpayers can learn how to properly identify and steer clear of such scams.

What is an Anti-Tax Law Scheme?

One of the oldest and most prevalent forms of tax scam is the anti-tax law scheme. This scam encourages others not to comply with tax laws or IRS regulations.

Over the years there have been numerous attempts by individuals or groups to challenge the applicability of tax laws using a variety of arguments. In particular, assertions have been made that the Sixteenth Amendment was not properly ratified, that tax law is unconstitutional, and that tax law may only be applied to certain individuals.

Despite the courts having repeatedly rejected these arguments, there are those who continue to expound them, and even incur penalties for bringing frivolous cases into court or for filing frivolous tax returns. Such cases are often presented in a pseudo-legal format in an attempt to lure unsuspecting taxpayers into participating in their schemes.

Common Anti-Tax Law Scams

There are a few arguments that appear over and over in anti-tax law schemes. It is important to learn to recognize such arguments as false. Adherence to such advice can lead to violation of the tax code, and subsequent punishment through penalties and in some cases, even criminal prosecution.

The following arguments are the most common:

  • There is no Internal Revenue tax code that imposes taxes
  • Only “individuals” are required to pay taxes
  • Code Section 861 limits taxable income to certain sources which do not apply to most US citizens
  • The US government can assess taxes only against people who file returns

Tax Relief for 2011 Victims of Natural Disasters

August 30th

disaster reliefThis year has featured an astounding number of domestic natural disasters. In particular, the tornados that struck the southeastern states earlier this year left hundreds dead and thousands more injured or homeless.

In response to this wide-spread disaster, US Senator Jeff Sessions (R-AL), ranking member of the Senate Budget Committee, and Senator Richard Shelby (R-AL) cosponsored a bill that would provide tax relief for those affected by recent storms.

Specifically, the Southeastern Disaster Tax Relief Act of 2011 provides tax deductions for individuals affected by natural disasters. It gives permanent, uniform tax relief to all victims of federally declared disasters declared after December 21, 2010. This bill would replace temporary legislation enacted in previous years to care for victims of specific disasters.

The Disaster Tax Relief Act would be fully offset by existing undesignated federal funds, and would therefore have no impact on the US deficit.

Disaster Relief Act

Besides the promise of basic tax breaks, this bill also brings a number of other changes to the treatment of disaster victims. These changes allow more generous tax declaration and deduction conditions for those who have suffered losses as a result of a 2011 natural disaster. Included in these are:

  • Qualified disaster expenses are eligible for listing under Tax Code Section 198A.
  • A five-year net operating loss carryback is allowed.
  • More generous expensing rules apply to qualified disaster losses.
  • Rises in charitable contribution limits made to causes in support of qualified disaster relief.



Texan Tax System Places Greatest Burden on its Poorest Residents

August 30th

texas taxesIn a recent study conducted by the Census Bureau, statistics show that in the state of Texas, the tax burden is disproportionately shouldered by those who can least afford to pay: those living below the poverty line. This, in turn, causes more lower-income Texans to struggle with tax debt and face IRS penalties. The discrepancy in responsibility is considerable, which is ironic considering Texas Governor Rick Perry’s recent speeches, arguing against the injustice of poorer Americans not paying any income tax.

Even though Texas is commonly thought of as a low-tax state, recent studies have found this to only be the case for the richest few. Taxes paid by the poorest 20 percent of Texas households are actually the fifth highest in the nation. This group contains those with incomes averaging only $11,200 a year, not even enough to owe federal income tax.

Pushing Families Further into Poverty

According to the Tax Policy Center, nation-wide statistics show that three-fourths of the US households that pay no federal income tax (approximately 46 percent of total taxpayers) earn less than $30,000 a year.

Yet, these families still bear equally the burden of gasoline taxes, payroll taxes, excise taxes, property taxes and sales taxes. This means that in the end, these families will ultimately be paying a larger proportion of their income in taxes than wealthy households.

This imbalance is a particular issue in Texas, where they have a particularly strong reliance on property and sales taxes. Ultimately, the poorest fifth of Texans end up paying approximately 12 percent of their income in taxes, even without contributing income tax.

This figure stands in stark contrast to the tax burden shouldered by the wealthiest 1 percent of Texans. These individuals generally only pay approximately 3 percent of their income in state and local taxes.



Understanding Innocent Spouse Tax Relief

August 29th

innocent spouseThe IRS recently made a landmark change to the Tax Code when they relaxed the requirements to qualify for Innocent Spouse tax relief. While they have extended the application period past its old two-year limit, many individuals still do not understand fully what this means.

Many potentially qualifying individuals do not even know that they can receive these benefits. It is important to understand fully when you might be liable for tax debt, and when you can avoid it through innocent spouse relief.

Requirements for Innocent Spouse Relief

There are three basic requirements to qualify for innocent spouse relief:

  1. There is an understatement of tax due to erroneous items from the other spouse.
  2. The “innocent spouse” did not know of any wrongdoing, nor would have any reason to know that there was an understatement of tax by the other person.
  3. It would be unfair to hold the innocent spouse accountable for the tax amount owed by the guilty party.

Often, those who qualify for innocent spouse relief are separated or divorced from the guilty party. In other situations, qualifying applicants might be those who were coerced or forced to sign a joint tax return.

Applying for Innocent Spouse Relief

If you think you might qualify for innocent spouse relief, you may apply by filing and IRS Form 8857. This one form provides the means by which you can qualify for the three different kinds of innocent spouse relief available – classic relief, equitable relief, and relief by separation of liability. If you owe over $8,000 to the IRS it is advisable to seek the assistance of a qualified tax professional for the application process.

The most common reason that innocent spouse relief is denied is because the applicant cannot prove they had no knowledge of wrongdoing. It is therefore vital to show appropriate documentation to support assertions of innocence.


Rising Healthcare Costs have Tax Consequences for US Government

August 29th

Analysts from the Tax Foundation have assessed the potential for rising national debt, despite the recent debt ceiling deal. This phenomenon, they say, is largely due to rapidly-increasing healthcare spending.

Currently Medicare and Medicaid are the two largest components of healthcare spending, but over the next few years this is expected to change. In 2014 the “other healthcare” benefits will come into effect, thereby causing healthcare spending to skyrocket. As such, the budget could experience further debt issues. Yet, the US budget and system of taxation does not allow for this rise in spending.

Value-Added Tax Necessary to Fund Entitlement Programs ?

The Tax Foundation explains that many countries, such as Germany and the UK, that have large welfare systems have managed to keep their AAA credit ratings through the application of high taxes on goods and services, particularly a Value-Added Tax (VAT).

A VAT is the largest source of revenue for these European welfare-states, thus enabling them to sustain high-cost public programs. However, such a cost would significantly change the way Americans behave and spend. A VAT would lead to much higher taxes than Americans are currently accustomed to – very possibly as much as 10 percent more in taxes as a share of gross domestic product.

This substantial tax increase would have a profound effect on the long-term growth trend in the United States. Such a high level of taxation would considerably slow economic growth in the US, and require greater tax planning from individual taxpayers, but would be a great help in funding a wide range of public programs.

In the end, it appears to be a trade-off. The US government presently promises European-style welfare programs, but also promises that American taxpayers won’t have to pay for it. This is not a sustainable plan. Ultimately, there appear to be two options: significantly reduce the promises made to entitlement recipients, especially with regards to healthcare, or evolve a high-tax, low-growth system through the implementation of a VAT, like many European democracies.


Credit Card Purchases Open to Increasing IRS Scrutiny

August 29th

credit cardThe Internal Revenue Service have announced plans over the next few months to become more aggressive in their tracking of credit and debit card purchases. They intend to focus more heavily on spotting discrepancies between purchases and the income claimed on tax returns.  Offenders should therefore expect an increase in IRS audits, as well as the more liberal application of penalties and fines to those who commit this form of fraud.

In 2008 the Housing and Recovery Act was passed requiring all credit and debit card transactions be tracked by banks or third-party organizations, and subsequently reported to the IRS. The agency was then supposed to compare this information with income reported by business taxpayers on their annual tax returns, in an effort to maintain tax compliance. At the time, the Treasury Department estimated that such procedures could bring in an extra $10 billion a year in tax revenue.

Housing and Recovery Act Failures

A government report released last week found that the IRS had been somewhat negligent in the actual implementation of the 2008 law

In particular, the report conducted by the Treasury Inspector General for Tax Administration noted that the redesigned income tax forms for 2011 might not be conducive to facilitating the desired communication of information.

There are fears that the new income tax return forms may not match up clearly with the sales reported on Forms 1099-K, Merchant Card and Third Party Network Payments, thereby making it more difficult to notice reporting discrepancies.

Efficiency Improvements to be Implemented

Treasury Inspector General for Tax Administration (TIGTA), J. Russell George, commented that the report clearly demonstrates the need for improvements in the current system. Already the IRS has made adjustments to one tax form and is reviewing other affected forms in order to improve the efficacy of the inspection system as soon as possible.

The report also made a number of other recommendations, including better monitoring of amounts reported for merchant card and third-party payments, the inclusion of additional information such as financial reporting on risk assessments, and additional documentation. Thus far, the IRS has agreed with all the recommendations made and is planning to implement corrective actions.


What Does a Burglary Mean for Your Taxes?

August 26th

After a robbery, the last thing you want to be concerned with is your tax bill. Such an event can have not only an emotional impact, but a huge financial one as well. However, in some cases, it may be possible to deduct some of the cost from your taxes.

Navigating Tough Tax Laws

The problem with trying to deduct losses from a robbery lies in several tough tax-law hurdles. In particular, taxpayers often have trouble with the “$100 rule” and the “10 percent rule” on casualty and theft losses, which involve “personal-use” property.

According to regulations set out by the IRS, $100 must be subtracted from the value of each casualty or theft event that occurred during the year. These amounts must then be added, then 10 percent of your adjusted gross income subtracted from the amount. That gives the allowable casualty and theft losses for the year. Ultimately this means that while part of the amount may be deductible, there are limits on the amount that may be claimed.

It is important to note that rules such as these can change based on circumstance. When in doubt it is a good idea to consult a tax professional or tax lawyer.

Important Facts to Remember

Though in some cases it is possible to deduct part of the losses incurred as the result of a robbery, it is never possible to deduct anything already covered by insurance unless you file a timely claim for reimbursement. In these cases, you will have to reduce the amount of losses reported by any reimbursement you receive.

It is also important to keep as close a record of the burglary as possible. This could include photographs of the crime scene or, most importantly, a police report documenting the event.

Also, nothing can be deducted from your tax returns unless you itemize your deductions.


New York Amish Contend with Local Tax Authority

August 26th

The Amish population of New York are butting heads with the local tax authorities over new tax filing regulations that conflict with their beliefs.

Earlier this year the New York Department of Taxation and Finance updated its compliance regulations, making it mandatory for all taxpayers to file their state tax returns electronically. The new rules are at clear odds with the beliefs of the local Amish population, who do not believe in the use of electricity or any other modern technology.

The Amish community frequently have to file tax returns. It is not uncommon for the Amish to provide services to the general public or sell products that draw a tax liability and thus require the filing of annual tax returns. However, in this instance, members of the Amish community have spoken out. They state that while they do not object to paying their tax liability, the community takes offense to being forced to use electronic services that violate their beliefs.

An Underrepresented Population?

According to several affected Amish taxpayers, they have already sent handwritten letters requesting exemption from the filing requirements. Unfortunately, there has been trouble processing their requests.

The New York Department of Taxation and Finance refused to process the exemptions without being able to speak with the taxpayers over the telephone to confirm their requests. This has obviously caused difficulties. To this point, several members of nearby non-Amish communities have acted as intermediaries in the discussions.

However, there remains concern that such cultural differences may leave the Amish community underrepresented to the tax authorities. At present it is estimated that approximately 12,000 Amish live in New York state. Many of these individuals have been unable to have their voices heard in this debate.

In fact, several Amish taxpayers who have been unable to negotiate permission to file their tax returns due to such difficulties have received warnings from the tax authorities. They have received letters stating that failure to comply with the current system will result in financial penalties.


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