March 6, 2013

Tax Strategies for Asteroid Impacts

by Kenneth Hoffman in Business Counsel, Tax Planning, Tax Counsel

On February 22, 2012, a telescope in Spain discovered an asteroid, 150 feet across, in an orbit that would bring it uncomfortably close to earth. Astronomers reassured us that we would be safe -- this time -- but that it was "a wakeup call for the importance of defending the Earth from future asteroid impacts." Last month, that asteroid, named 2012 DA14, passed within 17,200 miles of earth at a speed of nearly 17,500 miles per hour. That's a hairsbreadth in cosmological terms -- it actually flew under the ring of communications satellites orbiting earth before it headed safely back out into space.

Earth isn't always so lucky. Ironically, on the same day that 2012 DA14 flew by, a meteorite struck outside the remote Russian town of Chelyabinsk with the power of 30 atomic bombs. Amazingly, no one was killed. A century ago, a meteor broke up with similar force over Russia's Tunguska forest, flattening an estimated 80 million trees. Again, amazingly, no one was killed. And just last week, astronomers discovered a comet that could strike Mars next year with an apocalyptic force equal to 25 million times the largest nuclear weapon ever tested on earth.

But what if 2012 DA14 hadn't passed harmlessly by? What if it had struck the earth, with its estimated 3.5 megatons of energy and 200 times the power of the atomic bomb that destroyed Hiroshima? What would our friends at the IRS have done?!?

It probably won't surprise you to learn that the doomsday preppers at the IRS have a well-established disaster plan. Internal Revenue Manual Section 10.2.10 outlines comprehensive continuity planning requirements for all sorts of emergencies, including "natural disasters, accidents, technological failures, workplace violence, and terrorism." The goal, in all cases, is "to ensure the continuation of IRS mission essential functions under all circumstances." And Section 25.16.1, updated just last June, lays out pages of disaster assistance and emergency relief program guidelines

So, what actually happens if a chunk of space rock takes out Washington or another major city? The plan assumes that the IRS will resume assessing and collecting taxes within 30 days of the strike. They might be authorized to make cash grants to survivors, or buy assets destroyed in the disaster (and even pay off any outstanding bank loans or mortgages). IRS employees could be reassigned to any job "regardless of and without any effect on the current positions or grades of the employee."

At one point, the Manual even appeared to give delinquent taxpayers a "Get Out of Jail free" card. "On the premise that the collection of delinquent accounts would be most adversely affected, and in many cases would be impossible in a disaster area, the service will concentrate on the collection of current taxes," it said. Of course, that rule would apply only in the disaster area: "However, in areas where the taxpaying potential is substantially unimpaired, enforced collection of delinquent taxes will be continued." Ouch!

The tax code gives you plenty of breaks if your own stuff gets taken out from space. You can deduct unreimbursed damage caused by a meteor strike or other sudden, unexpected, or unusual event. You'll have to reduce the amount of your loss by $100, then by 10% of your adjusted gross income. Then you'll report the remaining amount on Form 4864.

None of us like paying taxes -- but you don't have to wait for an asteroid strike to pay less. The real answer, of course, is planning. And if "continuity planning" is the answer for the IRS, tax planning is the answer for us. So call usbefore disaster strikes, and see how much you can save!

Kenneth Hoffman counsels Entrepreneurs, Professionals and Select Individuals in taking control of their taxes, and businesses. Discover how I can help you overcome your tax and business challenges.

To start the conversation or to become a client, call Kenneth Hoffman at (954) 591-8290 Monday - Friday between 8:30 a.m. to 1:00 p.m. for a no cost consultation, or drop me a note.

If you found this article helpful, I invite you to leave a commit below and please share it on twitter, facebook or your favorite social media site and with your friends, family and colleagues. Thank you.

February 27, 2013

Cruising In Style

by Kenneth Hoffman in Business Counsel, Tax Counsel, Tax Planning

Cruising the high seas has become an increasingly popular way to travel, with over 14 million Americans cruising in 2010. Cruise fans love the convenience of unpacking just once and letting a floating resort take them from one glamorous destination to another. Cruise critics cringe at the stereotypical cheesy Vegas-style shows, 'round-the-clock buffets, and abbreviated shore excursions to the same chain retailers they can visit at their local mall. But all of us were thoroughly disgusted by this month's sordid tale of the Carnival Triumph, the mega-ship that lost power in the middle of the Gulf of Mexico. Four-hour waits for onion sandwiches sound bad enough from a ship that prides itself on a reputation for all you can eat. But just imagine 4,200 passengers and crew lining up to use 12 working toilets, and you'll immediately understand why observers dubbed the ship a "floating petri dish."

Carnival's spinmeisters clearly recognize a PR disaster when they see a towboat dragging it past them at 5 knots. They've agreed to give passengers a full refund for cruise and transportation costs, plus $500 in cash, plus a credit for a free future cruise. (Wonder how many will take them up on that offer?) That didn't stop passengers from suing, however, with the first action filed mere hours after the boat finally docked in Mobile harbor.

But it turns out the Triumph's passengers aren't the only ones who are less-than-delighted with Carnival. Would it surprise you to learn that our friends at the IRS aren't fans either?

Carnival takes a lot of help from the government. As the New York Times reports, "The Carnival Corporation wouldn't have much of a business without help from various branches of the government. The United States Coast Guard keeps the seas safe for Carnival's cruise ships. Customs officers make it possible for Carnival cruises to travel to other countries. State and local governments have built roads and bridges leading up to the ports where Carnival's ships dock."

Those government subsidies have helped Carnival become the biggest cruise line in the world, based on passengers carried, annual revenue, and total number of ships. The company's "fun ships" earned $11.3 billion in profit over the last five years. So, how much did the IRS get in exchange for all that government help? Well, Carnival's total "cash taxes paid," including federal, state, local, and even foreign taxes, add up to a miserly 1.1%.

How does Carnival do it? Mainly through "offshoring," a popular strategy for corporations in industries as diverse as technology, pharmaceuticals, and even online advertising. Carnival's executives work out of offices in Miami, and the holding company's stock trades on the New York Stock Exchange. But the operating company is incorporated in Panama, and the actual ships are "flagged" in Panama or the Bahamas.

Offshoring has been so successful that Carnival's founder Ted Arison offshored himself -- he renounced his U.S. citizenship and moved back to his native Israel to avoid U.S. estate tax back in 1990. Arison was one of the world's richest men at his death, with an estimated net worth of $5.6 billion. Unfortunately, at least for his heirs, he died nine months before achieving the 10-year absence from the U.S. that was necessary to avoid the tax.

Carnival is hardly the only U.S. corporation to use perfectly legal strategies to cut its tax. The Times reports that over the last five years, Boeing has paid just 4.5% (in part by making outsized contributions to its pension fund and taking advantage of tax breaks for research and development on new planes); Southwest Airlines paid 6.3% (in part through accelerated and bonus depreciation on new plane purchases); and Yahoo paid 7% (in part through net operating losses the company racked up in previous years). But Carnival's planning just seems more shrewd than most.

We can't imagine anything much worse than spending five days in the open sea with no power for lights, air conditioning, or hot water. But paying more tax then you legally have to is no boatload of fun, either. Fortunately, you don't have to spend days adrift at sea to accomplish that. You just need a plan. And we're here to get you shipshape. So call us when you're ready to pay less!

Kenneth Hoffman counsels Entrepreneurs, Professionals and Select Individuals in taking control of their taxes, and businesses. Discover how I can help you overcome your tax and business challenges. To start the conversation or to become a client, call Kenneth Hoffman at (954) 591-8290 Monday - Friday between 8:30 a.m. to 1:00 p.m. for a no cost consultation, or drop me a note.

If you found this article helpful, I invite you to leave a commit and please share it on twitter, facebook or your favorite social media site and with your friends, family and colleagues. Thank you.

February 20, 2013

Biggest Crybabies Ever!

by Kenneth Hoffman in Business Counsel, Tax Counsel

Here in America, we're used to people running to court every time life throws a curveball. Spill hot coffee in your lap? Sue McDonald's! Get drunk, drive your car into a bay, and drown because you can't open your seat belt underwater? Mom and Dad can still sue Honda and win $65 million! Electrocute yourself trying to rob a bar? There's a lawyer for that! Earlier this month, though, we saw some satisfying comeuppance in one of those cases that makes us roll our eyes in amazement.

First, a little history. UBS is Switzerland's biggest bank -- and, like most Swiss banks, it used strict Swiss secrecy laws to attract depositors. They solicited Americans to open accounts, knowing full well that many of them were using those accounts to cheat the IRS -- and in some cases, even advising them how to do it. In 2007, a disgruntled employee blew the whistle (and earned a record $104 million reward in the process). Two years later, UBS paid $780 million and ratted out 4,700 clients to settle charges. The scandal scared 35,000 taxpayers into joining an IRS amnesty program, coughing up over $5 billion in back taxes to dodge criminal charges.

You would think that people 'fessing up to a pretty serious felony would just slink back home with their tails between their legs. Right? Well, you would be wrong . . . at least here in America. What do we do here? We sue the bank for not stopping us from cheating!

The three plaintiffs in Thomas V. UBS each hid money with the bank, in amounts ranging from $500,000 to $2 million. They didn't report the existence of the accounts on their tax returns, as the law requires. They didn't report the interest they earned on their accounts. And of course, they didn't pay tax on that interest. When the scandal broke, they scurried to the shelter of the amnesty program, paying taxes, interest, and a 20% penalty.

Then, what did they do? They hauled UBS into court to recover the penalties, interest, and other costs they incurred to come clean. Why? Because UBS profited from the fraud and other wrongful acts they committed when they induced depositors to bank with them in the first place!

Fortunately for those of us on the side of common sense, the case ended up before Appeals Court Judge Richard Posner. Posner is one of the judiciary's most colorful characters, author of nearly 40 books, and not afraid to call B.S. when he sees it. His comments dismissing the plaintiffs' complaint are especially scornful -- you can almost hear him literally laughing them out of court:

"Our plaintiffs do not argue that they (or other members of the class) received tax advice from UBS. They argue rather that the bank should have prevented them from violating the law. This is like suing one's parents to recover tax penalties one has paid, on the ground that the parents had failed to bring one up to be an honest person who would not evade taxes and so would not subject himself to penalties. There is in general no common law duty to prevent another person from violating the law.
We needn't discuss the plaintiffs' remaining claims--of negligence and malpractice--as they are frivolous squared. This lawsuit, including the appeal, is a travesty. We are surprised that UBS hasn't asked for the imposition of sanctions on the plaintiffs and class counsel."

The irony here is that none of the plaintiffs who spent their money on alpine vacations had to cheat to pay less tax. They just needed a plan to take advantage of perfectly legal concepts and strategies. We give you that plan to pay less tax, legally. So now you can spend time in Switzerland visiting chocolate factories and cuckoo clocks -- not your hidden bank accounts!

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February 15, 2013

Internet Sales Tax Coming Soon?

by Kenneth Hoffman in Business Counsel, Tax Counsel, Tax Planning

Lawmakers in the House and Senate introduced matching legislation in each chamber Feb. 14 enabling states to require online retailers to collect sales taxes.

The Marketplace Fairness Act of 2013, modeled after divergent bills in the House and Senate in 2012, would help states recover billions of dollars in revenue that they lose each year on remote sales, lawmakers said at a Feb. 14 news conference announcing the legislation.

“This is gaining momentum, and this is the year to do it,” said Sen. Richard Durbin (D-Ill.), a chief sponsor in the Senate.

Other lead sponsors are Sens. Mike Enzi (R-Wyo.) and Lamar Alexander (R-Tenn.), as well as Reps. Steve Womack (R-Ark.), Jackie Speier (D-Calif.) and John Conyers (D-Mich.). Durbin said the legislation has 18 sponsors in the Senate and 35 in the House.

The bill is numbered S. 336 in the Senate, and H.R. 684 in the House.

Contact your elected Congress Critter now and let them know how this will affect your business. How much of a burden will this place on your business to collect and remit sales tax in multiple jurisdictions. Will there be one tax rate for all jurisdictions? Will it apply to county and city sales taxes too? Make your voice heard!

If you found this article helpful, I invite you to leave a commit and please share it on twitter, facebook or your favorite social media site and with your friends, family and colleagues. Thank you.

February 13, 2013

Sneaky Sneaker Tax

by Kenneth Hoffman in Business Counsel, Tax Counsel, Tax Planning

Today's tight economy is forcing governments at every level to stretch for new revenue, with varying degrees of success. In Washington, the dysfunctional family known as "Congress" just raised the top income tax rate to 39.6%, and there are new taxes on earned income and investment income as well. But when President Obama proposed cutting loopholes to raise even more money as an alternative to the budget sequester, his idea was met mostly with scorn.

Most state governments are in fiscal hot water, too. But Illinois may be worst off of all. Nearly $100 billion in unfunded pension liability is crushing the state budget. Last week, the bond ratings agency Standard & Poor's downgraded the Land of Lincoln's score to last in the nation. Ratings rival Moodys ranks Illinois at the same level as the African nation of Botswana. (Some observers might ask what else you could expect from a state that defines "bipartisanship" as having both Democratic and Republican ex-governors in jail at the same time.)

The cash crunch has left Illinois's discretionary spending programs gasping for funding. So it's no surprise that beleaguered lawmakers are looking for creative ways to protect favored programs. And one representative thinks he's found a solution. State Rep. Will Davis (D-Hazel Crest) has proposed a 25 cent tax on athletic shoes which would raise $3 million per year for Illinois YouthBuild, a nonprofit organization with 16 programs providing job training for disadvantaged youth.

Targeted taxes are nothing new, of course. The federal gasoline tax raises about $25 billion per year, with most of that dedicated to the Highway Trust Fund. Governments are especially fond of so-called "sin taxes" targeting irresponsible or undesirable behavior. That's why we see cigarette tax revenue going towards lung cancer research, soda taxes targeting obesity, and even a new 10% tax on tanning bed revenue.

And a sneaker tax sounds simple enough -- especially compared to, say, the rules for Alternative Minimum Tax net operating loss carry forwards. (That's a real thing, by the way, and it's every bit as awful as it sounds.) But as is usually the case with taxes, the devil's in the details. Davis's tax would apply to any "shoe designed primarily for sports or other forms of physical activity." So, does "walking" count? What about hiking boots, ski boots, or snowshoes? Will there be refundable credits for sneaker-buying families earning less than the poverty level?

But the real problem is that Rep. Davis's sneaker tax might open the floodgates to imitators. Just consider what other targeted taxes might be next:

A tax on Valentine's Day flowers to support marriage counseling services?
A tax on snowplows to support research into global climate change?
A tax on footballs to keep replacement refs off the field?
A tax on "reality TV" shows to support public broadcasting?

Nobody really wants to see new taxes, of course. But we all know we have to pay something. What sort of new tax could you support, and where would you spend the revenue it raises? Let us know what you think. And remember, no matter what gets taxed, we're here to help you pay less!

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February 6, 2013

Laissez Les Bons Temps Roulez. And Pay Up!

by Kenneth Hoffman in Business Counsel, Tax Counsel, Tax Planning

Last week's Super Bowl in New Orleans was a week-long "fais do do" featuring world-class food, drinks, and music. Advertisers rolled out their newest, shiniest campaigns and newest, shiniest products (Apparently, Anheuser-Busch thinks they need to remind viewers to drink something called "beer"). Sharp-eyed fans even saw a football game between the AFC champion Baltimore Ravens and NFC champion San Francisco 49ers.

The NFL estimated that the game would bring $434 million to the city. While some economists scoff that the real impact is just a fraction of the official estimate, there's no doubt that the Big Easy was thrilled to host their tenth "Big Game." Most of that revenue goes to the hotels, restaurants, and souvenir vendors who open their cash registers to affluent visitors. (While face value for game tickets was "just" $1,015, the average fan paid $3,000 for his seat.) Millions more goes to the bartenders, waiters, cabbies, and hotel staff that take care of those fans. But some of that money actually goes to the players, too. The NFL gave each of the winning Ravens a ring worth $20,000 plus another $88,000 in cash. The losing 49ers didn't get a ring, but still walked away with $44,000 for their valiant effort.

So . . . with numbers like those on the field, do you really think the tax man can resist throwing a penalty flag or two?

It turns out Super Bowl LXVII was pricier than usual to win. That's because Uncle Sam has drafted three rookie taxes for players to tackle. Last month's "fiscal cliff" bill raised the top tax rate from 35% to 39.6% on ordinary income topping $400,000 ($450,000 for joint filers). The fiscal cliff bill also phases out personal exemptions and itemized deductions for taxpayers earning over $250,000 ($300,000 for joint filers). Considering that the 2012 league minimum ranged from $390,000 for rookies to $925,000 for 10+ year veterans, those new taxes will hit every player on the field. And the 2010 Affordable Care Act adds a new 0.9% Medicare surtax on earned income topping $200,000 ($250,000 for joint filers). The 2012-level tax sacks each winning Raven for $41,000; the 2013 "extras" rough them up for another $4,860 or more.

And Uncle Sam wasn't the only one paying attention. Don't forget the Bayou State and the Crescent City! Much of the money that comes into New Orleans heads right back out to the national corporations that rent hotel rooms, serve those meals, and sell those tacky t-shirts -- but at least it gets taxed locally. On January 30, the Louisiana Department of Revenue issued a helpful two-page bulletin alerting visitors that, "according to Louisiana Revised Statute 47:290, a tax is levied on all nonresident individuals who have income earned within or derived from sources in Louisiana." That "jock tax" reaches 6% on income over $50,000 ($100,000 for joint filers). Louisiana's tax compares with zero in Florida, which has also hosted the Super Bowl 15 times, and a whopping 12.3% in California, which has hosted it 11 times.

Of course, none of the players actually care how much tax they'll pay on their bonuses. They just want that ring! But there's still a lesson here for some of you. We've said before that how you earn your money makes a difference in how you're taxed. It turns out that where you earn it and when you earn it makes a difference, too. Our answer, as always, is proactive planning to help you make the smartest decision. If you don't already have a game plan, the play clock is ticking!

If you found this article helpful, I invite you to leave a commit and please share it on twitter, facebook or your favorite social media site and with your friends, family and colleagues. Thank you.

January 30, 2013

Bad News From Your Friend at the IRS

by Kenneth Hoffman in Business Counsel, Tax Planning, Tax Counsel

You may not realize it, but you have a friend at the IRS. Her name is Nina Olson, and she's the "Taxpayer Advocate." Olson and her 2,000-person staff are an independent organization within the IRS, charged with cutting through IRS red tape when the Service can't get the job done itself. Are you stuck between cogs in the IRS machine? Have you experienced a delay of more than 30 days to resolve your issue? Have you not received a response or resolution to your problem by the date the IRS promised? If so, Nina Olson and her 1,400 Case Advocates throughout the IRS are waiting to help.

Earlier this month, Olson released her 762-page Annual Report to Congress. And it's not pretty. In fact, it probably reads a lot like what your report on the IRS might read if your job was to dig up problems:

The tax system is a mess. It's nearly 4 million words long, with over 4,680 changes since 2001 -- an average of one per day. Complying with tax laws consumes the equivalent of 3 million full-time workers annually. And only 16% of Americans think the tax code is "fair." (That puts the tax code slightly above Congress, at 9%, but still lagging Donald Trump, cockroaches, brussels sprouts, and NFL replacement refs.) That 4-million word code tops the problem list -- her report calls for overhauling the tax laws, eliminating "sunset" clauses like the expiration of the Bush tax cuts that led to the recent "fiscal cliff" crisis, and eliminating phase-outs that deny benefits as your income increases.
The Alternative Minimum Tax, a parallel tax system originally introduced to make sure that high-income taxpayers don't take advantage of too many deductions and credits to skate by without paying their fair share, is an even bigger mess. The AMT was never indexed for inflation until this month's "fiscal cliff" bill, so Congress repeatedly had to "patch" it to keep it from reaching even further into the middle class. The result, Olson writes, "is one law that grants popular tax benefits (the regular tax code), another law that eliminates the benefits (the AMT), and then yet a third law that undoes the elimination of benefits (the patches), usually at the last minute -- a legislative Rube Goldberg contraption of unnecessary complexity." Her recommendation? Scrap it.
"Customer service" is a disgrace. Telephone and correspondence services have deteriorated over the last decade. Online services are primitive. "Processing flaws" and service delays are undermining taxpayers' rights to representation. In some cases, IRS rules actually discourage taxpayers from complying with the law. For example, the Offshore Voluntary Disclosure Program, which lets taxpayers who failed to report foreign financial accounts come clean, actually scares folks who inadvertently failed to report them and keeps them from 'fessing up.
Finally, the IRS is underfunded. (Yeah, we didn't think you would be as happy with this one.) Olson likens the IRS to the government's "accounts receivable" department, and reports that they bring in seven dollars for every extra dollar they spend. "It is ironic and counterproductive that concerns about the deficit are leading to cuts in the I.R.S. budget, when those cuts are making the deficit larger," says Olson. "No business would fail to fund a unit that, on average, brought in $7 for every dollar spent. Shareholders would rebel and bring lawsuits, or at least oust the management or board of directors."

Are you thoroughly depressed yet? It gets worse. That's because these are essentially the same recommendations Olson has made in every Annual Report she's filed with Congress since 2001. And yet, we still have an offensively complicated tax code, a ridiculously ineffective Alternative Minimum Tax, and hideous thickets of bureaucracy that just drain taxpayers' souls.

The solution for you, of course, is a proactive plan takes advantage of the code's hidden opportunities, steers clear of its hidden shoals, and keeps you out of the bureaucracy. If you don't have a plan yet, isn't it time you get one?

Kenneth Hoffman counsels Entrepreneurs, Professionals and Select Individuals in taking control of their taxes, and businesses. Discover how I can help you overcome your tax and business challenges. To start the conversation or to become a client, call Kenneth Hoffman at (954) 591-8290 Monday - Friday between 8:30 a.m. to 1:00 p.m. for a no cost consultation, or drop me a note.

If you found this article helpful, I invite you to leave a commit and please share it on twitter, facebook or your favorite social media site and with your friends, family and colleagues. Thank you.

January 23, 2013

The Best Investment in Today's Economy

by Kenneth Hoffman in Business Counsel, Tax Planning, Tax Counsel

Investing isn't easy these days. Bank savings accounts and money market funds earn next to nothing. Bond yields are at historic lows. The stock market is at a recent high, but full of volatility. And alternative investments like real estate and private equity can be illiquid or bring with them other drawbacks.

If you're a corporate treasurer, you might consider investing in a Washington lobbyist. Back in 2009, three professors conducted a study revealing that companies who helped lobby for one particular tax break earned a staggering 22,000% return on every dollar they invested in lobbying! (For those of you who didn't major in accounting, that's $220 dollars coming back on every dollar going in.)

Back in 2004, when Congress was considering the American Jobs Creation Act, an ad-hoc group calling itself the Homeland Investment Coalition lobbied for it to include a "tax repatriation holiday." Multinational corporations often structure their operations to earn profits overseas, then leave those profits overseas to avoid U.S. tax. The repatriation holiday cut the regular tax rate on those profits from 35% to just 5.25%, which encouraged them to bring those profits back home. The stated goal, naturally, was for those companies to reinvest those profits and create new jobs.

More than 800 companies ended up celebrating the "holiday." Together, they saved an estimated $100 billion in tax, which certainly sounds worth celebrating! Winners included pharmaceutical and technology companies (Pfizer, Johnson & Johnson, and Merck), technology companies (Hewlett Packard and IBM), and financial services (Citigroup, J.P. Morgan Chase, Morgan Stanley, and Merrill Lynch). Not all of those companies "invested" in lobbying for the law, but even those that did, won big. For example drugmaker Eli Lilly reported spending $8.5 million to lobby for the tax break in 2003 and 2004 -- and saving more than $2 billion in tax. Not a bad "ROI"! (The jury is still out on whether the law actually created any jobs -- many of its beneficiaries actually cut jobs after the tax break, and most of the money went to stock buybacks or dividends.)

Of course, not every lobbying "investment" pays off. Sometimes lobbyists strike out. And successful lobbying is harder in today's hyper-partisan gridlocked Congress. But shrewd lobbying still pays off. The New York Times reported earlier this week that lobbyists representing Amgen, the world's largest biotechnology firm, completed a "Hail Mary" pass by tucking language into the recent "fiscal cliff" bill. The provision delays a set of Medicare price restraints on a category of drugs that that includes Amgen's own Sensipar. This legislative goodie is estimated to benefit drugmakers by $500 million over the next two years. And it comes just two weeks after Amgen pled guilty to marketing another one of its drugs illegally, agreeing to pay a record $762 million in fines and penalties! And while the new law isn't a tax provision, per se, it still illustrates the power of lobbying.

Individual taxpayers like you and me can't lobby for millions in tax breaks. But we can take advantage of the hundreds of tax breaks that somebody else has already created. The key, of course, is research to find those breaks and planning to take advantage of them. That's why we focus so much effort on proactive planning.

Consider this as the 2013 tax season approaches. Any competent tax preparer can put the "right" numbers in the "right" boxes on the "right" forms. But then, most of them pretty much call it a day. They really just help you record history. Our job is much broader and much more valuable. So call us when you're ready to start writing your own history! And remember, we're here for your family, friends, and colleagues, too.

If you found this article helpful, I invite you to leave a commit and please share it on twitter, facebook or your favorite social media site and with your friends, family and colleagues. Thank you.

January 16, 2013

Her Majesty, the Snoop

by Kenneth Hoffman in Business Counsel, Tax Planning, Tax Counsel

Getting audited by the IRS is rarely anyone's spot of tea -- unless, of course, you're the auditor. But at least our IRS "plays fair" and uses your actual return to decide whether to audit you. Not so for the folks at Her Majesty's Revenue and Customs Service across the pond!

Here in the former colonies, the IRS uses statistical analysis to find most of their audit targets. Every return gets a super-secret score called a Discriminant Information Function, or "DIF." The higher your DIF, the more potential the IRS sees for bringing in additional taxes in an audit. So, with limited resources available for auditing returns, the IRS naturally strives to audit the higher-scoring returns first. (It's like why Willie Sutton robbed banks -- because that's where the money was!) Generally, small businesses organized as sole proprietorships face the greatest chance of audit -- as high as 4% or more -- because they have the greatest opportunity to underreport income and overstate deductions.

But back in the old country, HMRC is getting a little more aggressive. They're not just looking at tax returns. They've just announced a new program to use credit checks to find suspected tax cheats. The plan is to cross-check details of the income people report on their return against their actual spending, to identify those at risk of both legal and illegal tax avoidance. Officials have just finished a pilot program involving 20,000 people -- but they expect to expand it to as many as two million. Blimey!

The program sounds straightforward enough. Let's say you operate Ye Olde Cock & Bull Pub in a small town somewhere outside London. You report £20,000 in income. But your credit file shows you spending closer to £30,000. Now ye olde tax authorities have reason to believe you're not reporting all those pints of Boddingtons you've served -- and they have actual evidence to make their case.

The problem, of course, comes when the program finds stashes of suspicious but legitimate assets. Let's say you're Robert Crawley, the 6th Earl of Grantham. Your own family money, which dated back to the Wars of the Roses, is long since gone. So you marry an American heiress. You make a genteel living managing Downton Abbey and occasionally sitting in Parliament. But if HMRC reviews your credit file, they're likely to find spending way out of line with your stated income! You can explain it, of course, as part of your wife Cora's inheritance. But who wants to have to explain that sort of thing to the tax man, even if you are paying your fair share?

Of course, the program also raises enormous privacy concerns. It's fashionable to say that in today's internet age, privacy is a relic of the past. But it's also hard to see a program like that flying here in the United States -- at least not without howls of protest.

We all know that proactive planning is the key to paying the least amount of tax allowed by law. But did you know that planning can also cut your chance of getting audited? Reorganizing your sole proprietorship as a partnership or subchapter-S corporation, for example, can cut your risk of audit by as much as 90%. So call us when you're ready for a plan that lets you pay less tax and attract less attention!

If you found this article helpful, I invite you to leave a commit and please share it on twitter, facebook or your favorite social media site and with your friends, family and colleagues. Thank you.

January 9, 2013

Tax Season Delayed

by Kenneth Hoffman in Business Counsel, Tax Due Dates, Tax Preparation, Tax Planning

Following the January tax law changes made by the United States Congress within the American Taxpayer Relief Act (ATRA), the Internal Revenue Service (IRS) has announced that it plans to open the 2013 filing season and begin processing individual income tax returns on January 30.

The opening of the filing season follows passage by Congress of an extensive set of tax changes in ATRA on January 1, 2013, with many affecting tax returns for 2012. While the IRS worked to anticipate the late tax law changes as much as possible, the final law required that the IRS update forms and instructions as well as make critical processing system adjustments before it could begin accepting tax returns.

The IRS will therefore begin accepting tax returns on January 30, after updating forms and completing programming and testing of its processing systems, to reflect the bulk of the late tax law changes. The announcement means that the vast majority of tax filers - more than 120m households - should be able to start filing tax returns on that date.

The IRS will be able to accept tax returns affected by the late Alternative Minimum Tax patch as well as the three major "tax extender" provisions for taxpayers claiming the state and local sales tax deduction, higher education tuition and fees deduction and educator expenses deduction.

It is estimated that the remaining households will be able to start filing in late February or early March, because of the need for more extensive form and processing systems changes. This group includes people claiming residential energy credits, depreciation of property or general business credits. Most of those in this group file more complex tax returns and typically file closer to the April 15 deadline, or obtain an extension.

"We have worked hard to open tax season as soon as possible," said IRS Acting Commissioner Steven Miller. "This date ensures we have the time we need to update and test our processing systems."

The IRS has also emphasized that taxpayers will receive their tax refunds much faster by using e-file with direct deposit. The IRS had originally planned to open electronic filing this year on January 22; more than 80% of taxpayers filed electronically last year.

Although tax season has been delayed, there is no automatic extension to file or pay any taxes that may be due by March 15th for corporate filers and April 15th for every one else. If an extension is needed, call us ASAP at 954.591.8290.

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