MA / RI NATP Chapter Annual Meeting & Seminar Details and Registration

2014 Annual Meeting & Seminar

Massachusetts / Rhode Island NATP Chapter Annual Meeting & Educational Seminar October 28th 2014

Join the Massachusetts / Rhode Island NATP Chapter on Tuesday, October 28th, 2014 for our Annual Meeting & Educational Seminar. This all day event will be held at the Holiday Inn in Mansfield, MA. Registration details are below, and will be handled online by National this year. Take a look at the details on our speaker and topics provided in this great 8 CE Hour opportunity including continental breakfast, snacks, lunch, vendors and great networking opportunities. This seminar is limited to the First 100 Registrants!

• To register by phone, fax or mail, click for the registration form.
• For online registration with credit card, click here.
• After October 27, please print the form (see link above) and register at the door.

Speaker - Mary Mellem, EA

Mary has 30 years experience as a Tax Professional and 21 years
experience teaching tax programs throughout the country. She and
her husband operate Ashwaubenon Tax Professionals. Mary holds a
Bachelor Degree in Secondary Education from the University of
Wisconsin in the field of Mathematics and Economics. In 1990, she
received the Enrolled Agent designation. Mary is a member of the
NAEA and the NATP.


Bankruptcy

Overview of bankruptcy laws and taxes ~ Taxes and their dischargability ~ Preparation of the tax return(s) for the individual who files bankruptcy: Short Years, Carryovers of capital losses, NOLS, and other attributes.  IRS #JSAQG-T-00010-14-I

HSAs

What are HSAs and who qualifies? ~ How are HSAs established? ~ Contributions to the HSA ~ Distributions ~ Rollover ~ Employment Issues ~ A Hidden IRA.  IRS #JSAQG-T-00011-14-I

Schedule D & Form 8949

Stocks and Bonds ~ Mutual Funds ~ Wash Sales ~ Equity Options (puts, calls) ~ Stock Options.  IRS #JSAQG-T-00012-14-I

Audit Proofing Business Returns

Covers areas IRS has indicated it will be examining and what taxpayers need to have to justify information on tax returns.  IRS #JSAQG-T-00013-14-I

Special Offer for the January 8, 2015 State Update Seminar

Sign up on October 28, 2014 and pay by November 10, 2014 for ½ Price 

Request From the Massachusetts DOR Taxpayer Advocate

As the 2014 tax filing season approaches, DOR is preparing for the annual review of our major tax forms and we want your input.  For example, we want to know if there is anything in the instructions for Form 1 or Form 1-NR/PY that you find unclear. And, we want to hear about other forms that you think could be improved.  Please send an email to taxadvocate@dor.state.ma.us and tell us what form, and the specific line item or instruction, that caused confusion or uncertainty.  With your help we can improve the filing process.

Please send your suggestions for improving any process at DOR to the Taxpayer Advocate.  Our stakeholders offer useful solutions for the issues they report to us and we want to hear yours.

Regards,

Dennis Buckley
DOR Taxpayer Advocate

To Fight ID Theft, IRS Expands Use of Truncated TINs

As part of its ongoing efforts to deter identity theft, the Internal Revenue Service has issued final regulations on use of truncated Taxpayer Identification Numbers (TINs). The new regulations, which apply to those who furnish and receive payee statements and tax-related documents, generally follow proposed regulations issued last year, albeit with some modifications.

Based on the final regulations, a truncated TIN may be used in lieu of the taxpayer’s Social Security number (SSN),  Individual Taxpayer Identification Number (ITIN), Adoption Taxpayer Identification number (ATIN) or Employer Identification Number (EIN) on certain documents.  With a truncated TIN, only the last four digits of the identifying number are displayed. The other numbers are replaced with asterisks or Xs.

Due to increasing concerns over the risk of identity theft, the IRS launched a pilot program allowing information return filers to truncate a payee’s identifying number on various statements, such as Forms 1098, 1099 and 5498, for the 2009 and 2010 tax years. Subsequently, the program was generally extended for the 2011 and 2012 tax years, although certain forms were still excluded.

But the proposed regulations issued in 2013 permitted use of a truncated TIN only if it was affirmatively authorized by the IRS. Thus, there were limits on the benefits of  the program. Critics pointed out these shortcomings.

Under the new final regulations, every information rule doesn’t have to be separately amended so that a truncated TIN may be used. This alleviates the IRS’ administrative burdens. It won’t have to implement changes each time to authorize use for a document nor will it have to keep track of those that have changed and those that haven’t.

As opposed to the proposed regulations, the final regs also permit the replacement of an EIN with a truncated TIN. And the truncated version is now permitted on electronic payee statements as well as paper statements.  Finally, the new regulations make the pilot program permanent.

However, a truncated TIN still won’t be allowed for a return filed with the IRS. The IRS says the entire identifying number is needed to ensure compliance and to verify the information on the return. For example, you can’t use a truncated TIN on a Form W-9 or to replace an employer’s EIN on the W-2s it provides to employees.

Taxpayers may have already relied on the 2013 proposed regulations. The amendments to the specific information reporting rules are generally effective for payee statements due after December 31, 2014.

What does it all mean to you? The final regulations are generally being viewed by the accounting profession as a positive. They are expected to discourage hackers from obtaining taxpayer ID numbers and using those numbers for illegal activities. As someone who often deals with confidential and sensitive information, the extra layer of security is welcome. Of course, you may have to refer to other documents to access a client’s account or double-check numbers, but the few minutes should be worth the effort.

By Ken Berry, CPA Practice Advisor Tax Correspondence 07-16-14

Limited Representation Rights

Bill Delaney, Westwood MA

As covered in a recent article (see "IRS Changes Who Can Represent Taxpayers"), the IRS has released Rev. Proc. 2014-12 which deals with (among other things) the elimination of a right to limited representation presently enjoyed by unlicensed tax preparers (those not subject to Circular 230).  This becomes effective for tax returns signed and filed after December 31, 2015.

What brings this about is the creation, by the IRS, of a “voluntary” Annual Filing Season Program (AFS) which consists of a written exam, completion of CPE, and an agreement that the unlicensed preparer be subject to certain sections of Circular 230.  Since this program is “voluntary”, the IRS considers it to be a done deal and not effectively barred as a result of the Loving decision (which denied the IRS the authority to initiate a mandatory program.

The “voluntary” program magically restores the right to limited representation if you meet the requirements of the program.  Otherwise, you may not represent even though you have prepared and signed the return as a paid preparer.

The American Institute of Certified Public Accountants (AICPA) has filed a civil action in the U.S. District Court for the District of Columbia (the same Court which heard the Loving case) which requests that the Court grant a permanent injunction and kill a program which, according to the AICPA argument, is an attempt to do an end run around the Loving decision.

Your editor’s opinion is that the Court will hear the complaint, even though the typical AICPA member, being a licensee, is not affected by this “voluntary” program, since the complaintant has made an excellent argument for the applicability of Loving to this “voluntary” program, i.e. the IRS lacks the statutory authority to regulate in such a manner those who are not licensed to fully represent taxpayers.   Interestingly, the complaint does not raise the issue of a taking away of an existing practice right
(limited representation), which your editor feels is an important and central matter.

Also, the “voluntary” program requires that one agree to be subject to certain sections of Circular 230 which would not otherwise apply to unlicensed tax preparers.  In view of the recent decision (in response to Loving) by the Office of Professional Responsibility (OPR) to restore practice rights to CPAs who were denied a PTIN renewal and/or otherwise put out of business while attempting to practice as non-licensees (i.e. as persons not subject to Circular 230), it would be a strange twist indeed if the IRS were to succeed in cajoling unlicensed tax preparers into “voluntary” submission to portions of Circular 230.  Talk about an end run around Loving; this would also be an end run around the OPR!  In your editor’s opinion, a federal agency does not have the legal authority to subject you to law, regulation, etc. from which you are most clearly excluded by statute according to the Court in Loving.  Who is writing the law anyway---the Congress or the IRS?

Stay tuned.  This one will be most interesting.

Bill Delaney, Editor

IRS Changes Who Can Represent Taxpayers

This posting touches on two issues.  First, just in case you haven’t heard, IRS lost the Loving case including the Appeal.  IRS has chosen not to appeal the case any further.  Therefore the Registered Tax Return Preparer (RTRP) program no longer exists.  Tax return preparers who are NOT EAs, CPAs, or attorneys no longer have to pass an exam or take continuing education.  (Everyone still has to have a PTIN in order to prepare income tax returns.)

But don’t be misled into thinking that the IRS is done with this issue. The IRS has created a new voluntary program entitled Annual Filing Season Program Record of Completion.  The purpose seems to insure a level of quality among tax professionals.  However, for the unenrolled preparer, the cost of not getting this Record of Completion affects the representation ability of that preparer with regard to the returns he/she has prepared and signed.

** REPRESENTATION RIGHTS – An unenrolled preparer in the past could represent a taxpayer if the unenrolled preparer prepared the return and signed it as the paid preparer.  This right was removed when Circular 230 was changed to include the creation and existence of RTRPs.  This change made sense since all preparers were either enrolled preparers or RTRPs.

Now that RTRPs have been removed from Circular 230, IRS reinstated the representation rights of unenrolled preparer BUT NOT EXACTLY AS BEFORE.  Now an unenrolled preparer can only represent a client if the unenrolled preparer:
a) Prepared the return,
b) Signed the return as a paid preparer, AND
c) Has an ANNUAL FILING SEASON PROGRAM RECORD OF COMPLETION for that calendar year.

Now IRS has released Revenue Procedure 2014-42 (RP 2014-42) which addresses two areas:  1) optional continuing education for unenrolled preparers, and 2) a change in the rights of unenrolled preparers to represent their clients.

We are not going to go into details on the option continuing education except to say it involves 18 CPEs in a year of which 6 must be federal tax law update and 2 must be ethics.  To get the IRS Annual Filing Season Program Record of Completion requires taking and passing a 100-question test at the end of the 6 hours of federal tax law update CPEs.  This program is VOLUNTARY and no preparer is required to participate.  It is open to all preparers.  CPAs, EAs, attorneys, and those that passed the RTRP exam do not need to take the test.  The Revenue Procedure lists a few others who do not have to pass the exam such as those in states where passing an exam is required in order to prepare tax returns.  Check the Revenue Procedure for details.

This leaves the question of “Since this education and testing is not required, why should someone jump on this program?”  The answer is the second part which is the recent IRS change in the rights of unenrolled preparers to represent their clients.  The most recent revision of Circular 230 removed the representation rights of RTRPs and replaced it with representation rights for tax professionals who have an Annual Filing Season Program Record of Completion.  A tax professional who has this Annual Filing Season Program Record of Completion can represent taxpayers regarding tax returns in front of the Examination Division of IRS but only if the professional prepared and signed the return as the paid preparer.  This representation right only applies to the Examination Division and only applies in connection with returns prepared AFTER the Annual Filing Season Program Record of Completion is issued.

Due to not having these procedures out prior to 2014, there is a transition rule in effect for one year.  For the 2015 calendar year, applicants are required to complete only 11 hours of continuing education during 2014 which must include 2 hours of ethics or professional responsibility, 3 hours of federal tax law topics, and 6 hours of federal tax law update.  Again the refresher course will satisfy the 6 hours of federal tax law update.

This application must be received by IRS by April 15 of the year for which the Record of Completion is sought.  Once issued the Record of Completion is effective for the calendar year and for tax returns and claims for refund prepared and signed from the later of: 1) January 1 of the year covered by the Record of Completion, or 2) the date the Record of Completion is issued until December 31 of that year.  For example if an application is submitted on February 15, 2015, and a Record of Completion is issued on February 25, 2015, the tax return preparer’s 2015 Record of Completion will be effective for tax returns and claims for refund prepared and signed from February 25, 2015 through December 31, 2015.  This makes is sound like preparers should apply for this before the end of the prior year if it is desired to have it effective for the entire upcoming calendar year.

Unenrolled preparers WITHOUT this Annual Filing Season Program Record of Completion can still represent taxpayers if the unenrolled preparer prepared the return and signed it as the paid preparer ON OR BEFORE December 31, 2015.

A copy of the Revenue Procedure can be found at www.irs.gov/pub/ by clicking on irs-drop and then on rp-14-42.

This text has been shared with you courtesy of:  David & Mary Mellem, EAs and Ashwaubenon Tax Professionals, 920-496-1065 (fax 920-496-9111), davidmellem@yahoo.com, davidmellemea@yahoo.com,marymellem@yahoo.com, marymellemea@yahoo.com.

Tips from the Massachusetts DOR Taxpayer Advocate

The MA DOR Taxpayer Advocate’s mission to engage with both taxpayers and tax professionals to identify systemic problems or processes in working with DOR. Tips will focus on common questions or areas of confusion and are meant to help taxpayers and tax professionals better understand both their responsibilities and their rights.

Earned Income Tax Credit (EITC)

One of the key work incentives for individuals and families who earned $51,567 or less last year is the Earned Income Tax Credit (EITC) which allows low and moderate income workers to keep more of what they earn. It’s also the federal and MA refundable tax credit that is most often missed. The IRS estimates that four out of five eligible workers and families get the credit, but millions who could claim it don’t.

Last year more than 27 million workers and families received more than $63 billion in EITC. In Massachusetts, which gives taxpayers who qualify for the federal EITC, 15% of what they received from the federal amount, 425,000 workers claimed the state EITC and received $125.5 million or around $295 per filer.

The amount of EITC varies depending on filing status, income and family size. The IRS has an online EITC calculator www.irs.gov/eitc to help taxpayers and tax preparers determine if they are eligible and estimate their EITC. The refund can range from up to $487 for workers without children (including the self-employed and farmers) and a maximum credit of up to $6,044 for those with three or more qualifying children. Even if a taxpayer didn’t qualify last year for EITC, they should always check their eligibility, especially if personal circumstances have changed.

To get the federal EITC you must file a tax return even if you are not otherwise required to file a return or do not owe any tax. Once a taxpayer gets the amount of the federal EITC they can enter it on line 40 on the Massachusetts state return and multiply by 15%. Taxpayers filing for MA EITC must also include Schedule DI which lists information on qualifying children.

Even if the EITC claim is prepared by a tax preparer, taxpayers are still responsible for the accuracy of the return. Beware of any scams that claim taxpayers don’t need documentation to back up the claim or promises they can increase the amount of the EITC. Scams that create fictitious qualifying children or adjust income levels to get the maximum EITC could leave taxpayers with a penalty.

Every year, the Massachusetts Department of Revenue asks selected taxpayers to verify the EITC claim by requesting such documents as social security cards for qualifying children, receipts, bank account statements and cancelled checks and expense sheets for taxpayers who may be self-employed. All information is then shared with the IRS to be sure that only those workers who are eligible get the credit and the right amount of the refund.

So be sure to claim the EITC if you’re entitled to it, but keep good records to verify your claim.

Buying a Vehicle out of State?

If you are a Massachusetts resident who is spending time in Florida this winter, be aware of this Massachusetts sales tax provision if you happen to buy a new vehicle while out of state.

Under Massachusetts law, when you trade in your vehicle towards the purchase of another vehicle, the trade in allowance is deducted from the final purchase price before the sales tax is calculated at the Registry of Motor Vehicles.  However, only vendors registered with the Massachusetts Department of Revenue are allowed the trade-in allowance.

What does this mean? Well, let’s say you purchase a vehicle for $30,000 and the dealer gives you $10,000 in trade-in allowance. If the dealer is registered with DOR you would pay $1,250 in Massachusetts sale tax when you register the vehicle after returning to the state. If the dealer isn’t registered than you would owe $1,875 as the sales tax would be calculated on the full price.

Fortunately, registration is only a click away on www.mass.gov/dor so the dealer can easily sign up and there are no fees to register. So before you buy, ask the dealership if they are registered with DOR and don’t get caught paying more sales tax than is necessary.

Employee Business Expense Reviews

Tax practitioners, taxpayers and tax return preparers often contact me with questions about DOR’s employee business expense project. Over the last several years, DOR has used automated programs to flag returns that may require further review which generates a form letter to the taxpayer requesting more back-up information on employee business expenses.

Here’s what to expect if you get such a notice of an audit review.  First, for background, download IRS Publication 463 which gives detailed explanations for employee business deductions and what records taxpayers are required to substantiate the claimed expenses.  (It’s always a good idea to review this publication at the start of every tax year for tax planning purposes.)

Second, respond to the letter by mailing the requested documentation to the DOR. If you need more time to put together your response, you must contact the Department of Revenue at the number listed on your notice. If you ignore the letter, remember the clock is ticking and additional tax plus penalty and interest will be due if the expenses are disallowed.

Documents that prove travel, lodging, entertainment or transportation expenses should be quite detailed, listing the amount, time, place and business purpose of each expense.   Expenses must be logged as they are incurred.  Records for mileage expenses must include a mileage log with the date, beginning and ending odometer readings, locations, the name of the person or business you met with, as well as the business purpose of the meeting. Additionally, taxpayers who claim employee business expenses will be asked to submit the written reimbursement policy issued by their employer. Taxpayers who can be reimbursed for employee expenses by their company but choose not to submit claims cannot then claim these expenses on their federal or state tax returns.

For Massachusetts tax purposes, remember that for many employees, only expenses for travel, meals and lodging while away from home or main place of business are allowed.   Outside salespersons are allowed these expenses plus all federally deductible unreimbursed employee business expenses.  (See Directive 89-1: Directive 89-1: Employee Business Expenses).

So before you deduct employee business expenses on Schedule Y of your individual Massachusetts income tax return make sure you can back up your claims with the necessary documentation that’s required.  This will save you time and money should your tax return be selected for review.

NATP National Conference Registration and Chapter Sponsored Social

Don't forget about the NATP National Conference coming up August 11th - August 14th, 2014 in Orlando. Register Online at NATP National Conference & Expo.

While you are there, ALL members from Massachusetts and Rhode Island are invited to the official MA/RI NATP Chapter Social / Get Together. Sponsored by your chapter Board of Directors, you are cordially invited to join us for appetizers and dinner while you are at the National Conference.

Where: High Velocity Restaurant located right in the Orlando Marriott, host hotel for the conference.

When: Wednesday, August 13th, 2014 @ 6pm

Why: This is a great opportunity to meet fellow Chapter members. We all know the days are so filled and we may pass in the hall without even realizing we have passed someone who lives right around the corner from us. Please look for the sign-up sheet on the Chapter Notice Board once you are in Orlando. Hope to see those we know and meet those we don't know yet!

Rhode Island Tax News - Quarterly Newsletter Online Now

Available in the Rhode Island Division of Taxation July/August/September 2014 Quarterly Newsletter

• Major Changes to Rhode Island Corporate Taxes
• New Tax Laws Affecting Individuals and Businesses
• The First Phase of the New Division of Taxation Computer System Goes Live
• Welcome to a New Chief Revenue Agent
• Recent Tax Case Summaries
• Question & Answer Section

The Newsletter is Available HERE.

How Do Tax Appeals Work in Massachusetts?

The Massachusetts Department of Revenue's Office of Appeals works with taxpayers to resolve tax disputes involving proposed or final tax assessments, amended returns and other matters. Our mission is to resolve disputes in an informal, expeditious and consistent manner, and to make determinations as to the correct amount of tax at issue.

Depending on the type of appeal, the Office of Appeals will conduct a conference or a hearing with the taxpayers to listen, ask questions, request additional information or documentation, if necessary, and make a determination as to how the dispute should be resolved.

Sometimes, the answer to how a tax dispute should be decided is not always clear. In these situations, the Office of Appeals has the authority to settle tax disputes by accepting less than the full amount of tax in dispute. The Department of Revenue will consider settling a dispute if it is in the best interests of the Commonwealth to accept a lesser amount of tax.

Taxpayers may request settlement consideration at any time during the appeals process. The conference, hearing, and settlement processes are combined at the Office of Appeals to afford taxpayers a single, integrated forum to resolve their disputes.

Additional Information and Frequently Asked Questions

Use of Tax Advice Disclosure on Emails

Do you still have a disclaimer on your emails?  If so, you could be in violation of the latest version of IRS Circular 230.

IRS changed Circular 230 again.  One of the changes this time affects the “covered opinions.”  When an opinion did not include all of the necessary provisions to be a covered opinion, it was required to contain a disclosure that the tax advice could not be relied on to avoid penalties, etc.  Many tax professionals put this disclosure in the signature area of their emails so it automatically was included in every email.

The latest Circular 230 no longer requires such a provision.  This is where you may be violating Circular 230.  Having a phrase saying “IRS requires the following disclosure…” or something similar is where the violation occurs.  Saying IRS requires something when it doesn’t is the violation.

How soon will the Office of Professional Responsibility start going after tax professionals and assessing penalties for such a violation?  If you haven’t already removed this from your emails and other correspondence, it’s time.


This text has been shared with you courtesy of:  David & Mary Mellem, EAs & Ashwaubenon Tax Professionals, 920-496-1065 (920-496-9111).  davidmellem@yahoo.com, davidmellemea@yahoo.com, marymellem@yahoo.com,marymellemea@yahoo.com.

The Cohan Rule Is Still Alive and (Sort of) Well At Least Some of the Time

Written by William Delaney, EA, ATA of Westwood, MA

George M. Cohan was a well-known entertainer in the 1920s and 1930s. He traveled across the U.S. and in many foreign countries. He did not maintain good business records; sometimes he maintained no business records at all. In a well publicized decision issued in 1930, the 2nd poorly documented travel related expenses based upon credible testimony and the obvious fact that if he earned income while appearing at physical location X he must have incurred some expense in traveling to and residing temporarily at physical location X. Thus we have the Cohan Rule. See Cohan v. Commissioner, 39 F. 2nd 1930).

Many years later, the IRS decided to limit the application and impact of the Cohan Rule and it issued temporary regulation 1.274-5T (effective for taxable years beginning on or after 1/1/1986). This “temporary” regulation is still the applicable guideline.

Under the regulation, “...no deduction or credit shall be allowed with respect to---(travel, entertainment, gifts, listed property [editor’s insert])...unless the taxpayer substantiates each element of the expenditure or use...in the manner provided in paragraph (c) [i.e. the substantiation requirements – editor’s insert]...This limitation supersedes the doctrine found in Cohan v. Commissioner...”

Recently, a taxpayer was able to invoke the Cohan Rule to obtain limited relief from an IRS determination that he should not be allowed any expense deductions against his income due to lack of substantiation. It’s a classic example of what not to do and how not to do it.

Taxpayer, Lee A. Baker, was self-employed as an over-the-road truck driver owner/operator. Although Mr. Baker obtained an extension of time for filing his 2009 income tax return, he never filed it and the IRS, in 2012, prepared a substitute return and issued a notice of deficiency. They had all of his income information, via 1099 forms. They had no information regarding deductions so he was allowed none except for the
standard deduction and personal exemption. Self-employment tax was computed on the gross receipts as reported to the IRS.

One complicating factor for the taxpayer was that he had filed for bankruptcy in 2011. He lost his home and all of his business related records (to the extent that they ever existed) as a result of the bankruptcy proceedings. His trucking business ceased operations after February 2010.

In Court, the taxpayer claimed (without any substantiation) that he incurred approximately $63,638 of business-related expenses for truck fuel, maintenance, insurance, taxes and fees, etc. Taxpayer also estimated that he drove approximately 65,000 miles that year using his 1995 Mack Truck. The Court “...found the petitioner to be a credible witness. However, all of his figures were based on rough estimates that were made years after the fact without documentation. Applying the Cohan rule, we bear heavily against the taxpayer whose inexactitude is of his own making.(emphasis added)”

What saved the taxpayer from application of a high standard of proof as required under the temporary regulation (see above) was a ruling by the Court that listed property, which is one of the items subject to a high standard of proof [see Reg. 1.274-5T(a)(4)], “...does not include ‘property substantially all of the use of which is in a trade or business of providing to unrelated persons services consisting of the transportation of persons or property for compensation or hire.’” This moved the 1995 Mack Truck out of the listed property category and “Accordingly, these expenses are not subject to the heightened substantiation requirements of section 274(d)(4).” Claimed (though unsubstantiated) travel expenses of $6,500 were not a part of this exception to the general rule and, as a result, were disallowed in full.

The end result was that the Court allowed $18,000 business related expense and -0- in travel related expense. The decision did not detail how the Court arrived at this calculation. The lesson to take from this decision is that an ounce of prevention is better than a pound of cure (we bear heavily against the taxpayer whose inexactitude is of his own making). Lee A. Baker v. Comm., TC Memo 2014-122.

IRS Webinar - Better Business through Better Records - July 16th

Paper or electronic – get on the right page during the FREE one-hour webinar…

Topic: Better Business through Better Records

Date:  Wednesday, July 16, 2014

Time:  11:00 a.m. (Pacific); Noon (Mountain); 1:00 p.m. (Central); 2:00 p.m. (Eastern)

Highlights of What's Covered:

• Why it’s important to keep good business records
• What kinds of records to keep and how long to keep them
• Employment tax records
• Electronic recordkeeping
• …Plus a live Q&A session

CPE:  Earn One CE Credit – Category: Federal Tax

         

Information & Registration:  

Click on the following link to register: 

http://www.visualwebcaster.com/event.asp?id=99559 

Please share this with your members, staff, colleagues and anyone who may benefit from this information.

NATP Webinar - Implementing the Supreme Court's Ruling on DOMA

Implementing the Supreme Court's Ruling on DOMA

CPE Credits:2 (100 minutes) for EA, CPA, CRTP, CFP

Fees: $52 for Members/$64 for Nonmembers

This webinar will provide you with the most up to date information on the tax complexities that apply to same-sex couples.

It's important to make sure that you recognize any tax traps or opportunities that have prevailed due to the change. Some of the questions this webinar will answer are:

• How do I amend a return from single to MFJ?
• Is it beneficial to amend a past return?
• What is the "marriage penalty"?
• Can a refund of payroll taxes be received?
• What is the impact on employee benefits?
• Which states are impacted?

Bonus materials: In-depth step-by-step example of amending a same-sex couple's return to file jointly

Register today to secure your spot:

Register for July 15 Webinar

Register for July 17 Webinar

Upcoming webinars include:

Overcoming the Hurdles of NOLs

The Dos and Don'ts to Helping a Nonfiler Taxpayer

Taxpayer's Rights - What are they?

View all upcoming webinars

MA Senior Circuit Breaker Credit - Is It Taxable on the Federal 1040 Return?

Under certain circumstances, MA allows a refundable credit to Senior Citizens who are burdened with high cost (in relation to their income) rent payments or local real estate tax payments. If you meet the requirements as to maximum total income and assessed value of the real estate, a taxpayer may qualify for up to a maximum refundable credit of $1,030.

As reported previously, there is an issue as to whether or not this refundable credit is reportable as federally taxable income because it may represent a refund of real estate tax paid (and previously deducted as an itemized deduction on Schedule A).

Now comes the IRS (see Chief Counsel Advice 201423020) which analyzes the way in which the credit is computed and paid. It concludes that the amount of the circuit breaker credit which reduces the state income tax liability is NOT includable in federal gross income, under the theory that such a state credit against a state income tax will generally reduce the federal itemized deduction for state tax under Sec. 164. However,
this creates a timing difference in how a Schedule A deduction is actually calculated.

Consider this:

W-2 wage report for 2013 includes $3,000 of withheld MA income tax. No other tax paid. MA return for prior year included an underpayment of $200. Total deduction for state tax paid in the current tax year - $3,200. Now, let’s throw-in a calculated circuit breaker credit of $400 on the MA return. Should the $3,200 federal deduction be changed? Answer: NO. Taxpayer is cash basis. A credit calculated and used in 2014 does not change the tax paid in 2013.

Now comes 2014. Same $3,000 of withheld MA income tax. No other tax paid. MA return for 2013 shows liability of $3,500, payments of $3,000 and circuit breaker credit of $600 – resulting in a refund of $100. The CCA concludes that the 2014 federal itemized deduction should be $3,200 ($3,000 withheld plus $200 balance due paid in 2014) less $100 for a net of $3,100. It ignores the non-refunded portion of $300 which was applied against the balance due before credits.

Furthermore, this reasoning applies only to a situation where the homeowner taxpayer itemizes for federal purposes. It neither applies to a rentpayer taxpayer nor to a homeowner who does not itemize for federal purposes. When applicable, the CCA states that the reportable amount (see $100 above) is reported on Line 21 of Form 1040 (i.e. not as a net on Schedule A). However, if reported in this manner, the taxpayer will eventually receive a notification from the Mass. Dept. of Revenue that the state income is under-reported by the amount shown on Federal 1040, line 21. This is a result of matching (or trying to match) information exchanged with the IRS against income reported on MA Form 1.

Therefore, your editor recommends that the amount be netted on Federal Schedule A, since this will avoid a federal/state discrepancy notice from MA, while it is unlikely to create a federal notice.

See the CCA for an explanation of the IRS reasoning in applying the applicable tax benefit rule. It is your editor’s opinion that their reasoning is tenuous at best, in that they view the assessment and collection of local real property tax as granted to the local government by the state. Therefore, they reason that the state is not an unrelated third party (if the state were an “unrelated” third party, the tax benefit rule would not apply). In our assessment scheme, the state reviews and certifies the local assessed values. Once this annual approval and certification is issued, the local taxing entity then may issue a final tax rate (having previously billed using an estimated rate if the approval process is not timely). Thus, reasons the Chief Counsel’s Office, the state has sufficient control over the process so that it is part of the process of assessing and calculating (for purposes of real estate tax and senior circuit breaker credit calculation). It’s a stretch, indeed, in your editor’s opinion.

Dental Practice Denied Management Fee Expense

This dental practice corporation was denied the business expense deduction for management fees it paid to a related organization.  The reasons IRS and the Court denied the expense are important when working with clients who also have management arrangements.

Facts:

1. The dental practice’s two shareholders were Dr. & Mrs. Elick. They were also on the dental practice’s payroll.  Another employee, Ms. McGee, was the bookkeeping and office manager.
2. The practice explored creating an employee benefit plan.  A professional advised Dr. Elick to establish a managment company to manage the dental practice.  The management company would set up an ESOP and purchase all of Dr. Elick’s stock in the management company.  The fees the management company generated would fund the ESOP.  This would give a deduction to the dental practice and theoretically shelter the funds from tax until they were eventually paid out to the ESOP beneficiaries.
3. The dental practice had a signed agreement with SDG, a management services company created and owned by Dr. & Mrs. Elick.  SDG was to perform various activities including annual capital, operating and cashflow budget plans; investigate and document in writing customer complains, develop policies and procedures; recruit, supervise and train petitioner’s employees; perform fiscal services; and ensure regulatory compliance.  The fee for these services was set between 1% and 25% of the dental practice’s monthly receipts, to be paid monthly.
4. Dr. Elick and Ms. McGee testified they provided many of these management services to the dental practice on behalf of SDG but SDG did not have any payroll for the years at question.  There was no record of Dr. Elick’s or Ms. McGee’s duties for SDG nor the hours they performed such duties.
5. The dental practice did not provide any documentation showing that SDG performed any of the contracted services.  The dental practice acknowledged that third parties provided services SDG was supposed to provide.
6. The dental practice never received monthly invoices nor did it pay monthly.  The management fees were paid near the end of each year and amounted to about 10% of gross receipts (roughly $430,000 in one year and $303,000 in the next).  Nothing was provided to show how this percentage was determined.
7. A dental surgery business also owned by the Elicks entered into a similar agreement with SDG.  It paid a fee of $20,000 in one year and nothing in the next.  Again it was unable to show any services were actually provided.
8. The terms of the management agreement appears to have been mostly disregarded.

Wiley M Elick DDS, Inc, TC Memo 2013-139

This text has been shared with you courtesy of:  David & Mary Mellem, EAs & Ashwaubenon Tax Professionals, 920-496-1065 (920-496-9111).  davidmellem@yahoo.com, davidmellemea@yahoo.com, marymellem@yahoo.com,marymellemea@yahoo.com.

Massachusetts Legislature Approves Hiring Tax Credit Bill

The Massachusetts legislature on June 30 approved a bill that would provide a tax credit to employers who hire welfare recipients.

Massachusetts Governor
Deval Patrick (D)

The Democrat-controlled House voted 151 to 0 in favor of accepting the conference report of S 2211 ; the Senate had accepted the conference report on June 26 on a voice vote. Both chambers on June 30 then enacted the measure on voice votes and sent it to Gov. Deval Patrick (D).

Technically, the bill revives the state's long-dormant "Full Employment Program," which was adopted in 1995 to provide full-time employment in place of welfare benefits that a recipient collected from the state's Department of Transitional Assistance.

Under S 2211, employers who hire from the full employment program would be eligible for a healthcare subsidy. After receiving the healthcare subsidy for one year, employers would be eligible for a tax credit of $100 per month worked, per program participant hired, according to a legislature summary.

The maximum credit allowed for all years for the employment of each qualifying program participant would be $1,200; excess credit could be carried forward for up to five years, according to the 1995 law. The credit could be used against the personal income tax or the corporate income tax (also known as the corporate excise tax).

Nancy Kwan, spokeswoman for Senate President Therese Murray (D), told Tax Analysts on June 18 that the full employment program had remained on the books since enactment nearly 20 years ago but had not been fully funded. If the legislation is signed into law by Patrick, the program would be revived with $11 million in funding.

The tax credit is part of broader legislation aimed at overhauling the state's welfare system. "Through these reforms, we are helping recipients to get the tools and resources they need to live independently outside of welfare and closing existing loopholes in our system," Murray said in a joint legislative statement issued June 30. "However, as past experience shows us, we must remember that this is an issue we need to continuously revisit if we are to ensure a healthy system."

The bill also would:

• provide an exception from state tax confidentiality statutes by allowing the Department of Revenue to disclose to another state agency the tax return information for individuals or households "if the agency certifies that the information is relevant to determining the eligibility of an individual or household for benefits which are provided by the agency"; and
• require the Secretary of Administration and Finance to study current benefit systems and programs, including extending the earned income tax credit and the child and dependent care tax credit, "and any other programs deemed appropriate by the secretary that move individuals out of poverty and into situations of economic independence and autonomy." The report is due by January 5, 2015.

IRS to Introduce Direct Deposit Limits

The IRS is to put in place new procedures next January to limit the number of refunds electronically deposited into a single financial account or pre-paid debit card to three, as part of an effort to combat fraud and identity theft. As part of the new procedures next tax season, the fourth and subsequent refunds will automatically convert to a paper refund check and be mailed to the taxpayer. In addition, taxpayers will receive a notice informing them that their account has exceeded the direct deposit limits and that they will receive a paper refund check in approximately four weeks if there are no other issues with the return. “The vast majority of taxpayers will not be affected by this limitation, and we would encourage taxpayers and tax preparers to continue to use direct deposit,” said the IRS. “It is the fastest, safest way for taxpayers to receive refunds.”

A Special Article on a Sticky Out-Of-State Tax Situation

MARYLAND INCOME TAX LAW ALLOWS THE STATE TO DOUBLE DIP AND ASSESS A RESIDENT’S OUT-OF-STATE INCOME WHILE NOT ALLOWING A CREDIT FOR TAX PAID TO ANOTHER STATE ON THE SAME INCOME. READ ON...

William Delaney

Written by William Delaney, EA, ATA of Westwood, MA 

Maryland has a somewhat unique income tax system in that it imposes a state income tax; a county income tax; and a special non-resident tax in lieu of the county tax. Both the income tax and the applicable county or special non-resident tax are collected on the one income tax form (MD Code, Sec. 10-101 et seq.)

The MD Code allows a credit against a taxpayer’s MD state tax liability for taxes paid to another state on the same income taxed by MD. However, the MD Code was amended in 1975 to uncouple the allowable credit from the county income tax portion of the state income tax. Thus, that credit cannot be taken against the portion of the MD income tax known as the county income tax.

Now comes Brian and Karen Whynne, taxpayer residents of Howard County, MD. Brian Whynne is a shareholder in an S corporation and reported K-1 pass-through income on his MD state income tax return. A substantial portion of that income was subject to tax in other states (the S corporation filed income tax returns in 39 states). The Wynne’s paid income tax on this income to the other states (these other taxing entities did not assess a county or similar type tax) and claimed credit for taxes paid on their MD return.

Protecting Your Financial Records From Disaster

Jeffrey Schweitzer

Written by Jeffrey N. Schweitzer, EPA, CEP, ATP, RTRP of Wrentham, MA

Among other worthy causes, July is Bioterrorism/Disaster Education and Awareness Month. With all of the unexpected happenings in the world, it is important that we are prepared for an emergency disaster. Take this time to educate yourself and your whole family on what to do in any type of disaster. Get a plan ready and have needed supplies handy if you ever need them.

Identification. If you suddenly find yourself standing in a pile of rubble that was once your home and your worldly possessions, establishing your identity will be of paramount importance. Access to personal identification documents such as your Social Security card, driver's license, marriage license, birth certificate, passport and any citizenship papers will help you quickly establish your identity and speed up the co-ordination of your efforts with insurance companies, construction contractors, bankers and other entities involved in rebuilding and recovery.


Create a Backup Set of Records Electronically. Individuals and businesses should keep a set of backup
records in a safe place. The backup should be stored away from the original set. Keeping a backup set of records - including, for example, bank statements, tax returns, insurance policies, etc. - is easier now that many financial institutions provide statements and documents electronically, and much financial information is available on the Internet. Even if the original records are provided only on paper, they can be scanned, which converts them to a digital format. Once documents are in electronic form, taxpayers can download them to a backup storage device, like an external hard drive, or burn them onto a CD or DVD.

You should also consider online backup, which is the only way to ensure data is fully protected. With online backup, files are stored in another region of the country - so if a hurricane or other natural disaster occurs in your area, documents remain safe.

Document Valuables.  Another step you can take to prepare for disaster is to photograph or videotape the contents of your home, especially items of higher value. A photographic record can help prove the market value of items for insurance and casualty loss claims. Photos should be stored with a friend or family member who lives outside the area, or in the above mentioned online backup solution. Such proof can include photographs or videos of personal possessions; remember, digital cameras and camcorders make it possible to quickly and easily create a complete home inventory record.

Update Emergency Plans. Emergency plans should be reviewed annually. Personal and business situations change over time, as do preparedness needs. When employers hire new employees or when a company or organization changes functions, plans should be updated accordingly and employees should be informed of the changes.

Make sure you have a means of receiving severe weather information; if you have a NOAA Weather Radio, put fresh batteries in it. Make sure you know what you should do if threatening weather approaches.

Rebuilding your life in the wake of a disaster is a daunting task. However, advanced preparation can go a long way toward making recovery easier. If you don't have your documents in order, there's no time like the present to get started. Once you have everything in its proper place, remember to update it. If you lack the time or energy to keep your files updated on an ongoing basis, schedule a yearly checkup and use it as an opportunity to put the latest version of everything into your files. Even the most well-organized disaster recovery materials will be of no use to you if they are out-of-date.

Happy 4th of July from the Massachusetts / Rhode Island Chapter of NATP

The board of directors want to wish everyone Happy 4th of July!! Stay safe and celebrate our freedom!!

This nation will remain the land of the free only so long as it is the home of the brave.  ~Elmer Davis

Massachusetts Senate passes sales tax holiday on Aug. 9 and 10

The Senate voted on Tuesday to authorize a sales tax holiday to be held on Aug. 9 and 10. Throughout the holiday weekend, the 6.25 percent sales tax will not be applied to certain purchases up to $2,500.

Richard Ross
Rep Sen - Wrentham MA

The holiday will save Massachusetts consumers nearly $25 million, according to State Sen. Richard Ross, R-Wrentham.

"The sales tax holiday always provides an incredible relief to our hardworking taxpayers in the summer months," said Sen. Ross. "I'm glad the Senate was able to pass this amendment to drive economic growth, stimulate small businesses, and especially help Massachusetts consumers."

The sales tax holiday does not apply to certain purchases, including restaurant meals, tobacco, telecommunications, gas, steam, electricity, motor vehicles or boats.
Sen. Ross additionally joined with the Senate in passing legislation on Tuesday to promote economic development and provide incentives to create jobs and stimulate the commonwealth's economy.

The Senate bill and the House bill, passed June 11, will now go to a conference committee to produce a compromise bill for final passage and consideration of Gov. Deval Patrick.