June 12, 2013

Party Time at the IRS

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

You probably don't think a conference for a bunch of IRS bureaucrats would be much fun. Apparently, though, the IRS knows how to throw a party. Back in 2010, they hosted an event dedicated to "Leading into the Future" for 2,609 executives and managers in the Small Business/Self-Employed division. (You're excited already, aren't you?) It turned into a $4.1 million boondoggle, complete with first-class air travel and Presidential Suites at three different hotels, that even Jay Gatsby might appreciate.

We'll never know how many of our friends at the party woke up hung over the next morning. But predictably, someone blew the whistle on "excessive spending," and now we have another IRS scandal on our hands. Last week, the party poopers at the Treasury Inspector General for Tax Administration released a 56-page report titled "Review of the August 2010 SmallBusiness/Self-Employed Division's Conference in Anaheim, California". Not surprisingly, they found several ways to "enhance controls over conference spending." How's this for genius advice?

Don't spend $50,187 to produce parody videos like the one featuring IRS officials as characters from "Star Trek", boldly going where no government employee has gone before. (New York Representative Carolyn Maloney called the video "an insult to the memory of 'Star Trek'" and said "I could do a better Captain Kirk.")
Don't forget to negotiate with hotels over "details" like room rates, continental breakfasts, wireless internet, or "free" cocktails at a welcome reception with salad, appetizers, fajitas, pasta, and dessert.
Don't spend $17,000 for a keynote speaker to paint portraits of historic figures, including Bono and Michael Jordan, to illustrate lessons on "unlearning the rules, breaking the boundaries, and freeing the thought processes to find creative solutions to challenges."
Don't spend $29,364 to let IRS employees living within 30 miles of the meeting stay at conference hotels "to reduce the demands on local travelers who would otherwise experience lengthy commutes daily during the conference and to foster employee morale and team spirit." (Oh, and while you're at it, would it kill you to issue a W-2 to those local employees so they can pay tax on the value of those stays?)

Does $4.1 million really sound like too much for that sort of fun? Unfortunately, IRS procedures in effect at the time of the conference didn't require management to track or report actual expenses, so the Inspector General can't verify how much the whole thing cost. Reassuring, right? The people who make us track receipts for a $4 coffee can't track their own expenses?

Just two days after the report came out, IRS officials trekked to Capitol Hill to commit hari kari. Faris Fink, who now heads the Small Business/Self-Employed division (and who played Mr. Spock in that infamous "Star Trek" video), apologized and confessed he didn't know his agency could have negotiated for lower hotel room rates. Acting Commissioner Danny Werfel called the whole thing "an unfortunate vestige from a prior era" and reported that spending on travel and training has fallen 80% since then.

We send these emails urging you to come in for tax planning week after week. And usually we just assume you know why our proactive tax-planning service is such an obvious no-brainer. But seriously — don't you think you can do a better job of spending your money than the IRS? If so, then call us today to get started with your plan!

Kenneth Hoffman of K.R. Hoffman & Co., LLC is a highly sought after tax and business counselor. Counseling Entrepreneurs, Professionals and Select Individuals who are struggling with ever changing tax laws and who are paying too much in taxes. All the while he is protecting his clients from the IRS and other taxing authorities using proactive tax planning strategies, ensuring compliance with minimal tax liability.

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.

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May 15, 2013

Who's Afraid of the Big Bad Wolf?

by Kenneth Hoffman in Business Counsel, Tax Counsel

Our federal government devotes millions of man-hours and billions of dollars each year to law enforcement. The FBI, DEA, and Bureau of Alcohol, Tobacco, and Firearms, along with lesser-known agencies like the U.S. FDA's Office of Criminal Investigations (pursuing criminal violations of food and drug laws), the Department of Commerce's Office of Export Enforcement (responsible for keeping dangerous technology out of the wrong hands), and NOAA's Fisheries Office for Law Enforcement (charged with protecting the ecosystem and marine life) all strike fear in at least somebody's heart.

But there's one agency that has an almost mythical power in most minds, and that's the IRS. The tax cops put Pete Rose and Wesley Snipes in jail. They put Al Capone in jail, for pete's sake! We'd all better watch out, right? Well, you be the judge. Last week, the IRS Criminal Investigation unit released their Fiscal 2012 annual report -- and the findings might surprise you. Here are some of the highlights:

Investigators cover a wide variety of tax-related crimes beyond the garden-variety tax fraud and celebrity "failure to file" cases that command the biggest headlines. Their work also includes identity theft, offshore tax evasion, tax treaty cases, tax protestors, money laundering, terrorist financing, public corruption, and drug enforcement cases.
Business is booming -- but numbers are still relatively small considering the 100 million+ returns the IRS collects every year. For Fiscal 2012, the Service initiated just 5,125 investigations, up from 4,720 in 2011. Out of those 5,125 investigations, they recommended 3,710 prosecutions (IRS investigators don't actually prosecute offenders themselves; they turn that job over to the Department of Justice.) There were 3,390 indictments and 2,634 convictions -- the Feds generally don't take you to court if they're not already sure they can win. 2,466 lucky winners drew all-expense-paid trips to "Club Fed."
Investigators spend a lot of time chasing down crooked tax preparers. For 2012, they investigated 443 suspicious-looking characters, recommended 276 prosecutions, and won 178 convictions. The average convicted preparer earns 29 months in jail, up from 25 months in 2011.
The IRS continues to uncover people who really just ought to know better. Take Jimmy Dimora, for example, a former Cuyahoga County (Ohio) Commissioner, who found himself looking for ways to supplement his county pay. Dimora took more than $166,000 in bribes to steer contracts to allies, get jobs and raises for associates, intercede with judges on pending cases, and generally abuse his office. Naturally, he forgot to pay tax on those bribes. Jimmy wound up drawing a 336 month sentence for his sideline business. (For those of you who try not to use math on a daily basis, that's 28 years behind bars.)

Do any of these points strike a chord with you? Of course they don't. The average American has nothing to fear from the Criminal Investigations unit. As far as most of us are concerned, the IRS is just the federal government's collection agency, nothing scarier. You've got to do something really outrageous to draw one of those 5,000 case investigations.

We all know taxes are going up this year, and we all know nobody wants to pay. That's the bad news. The good news is you don't have to flirt with IRS Criminal Investigations to pay less. You just need a plan. There's no shortage of court-tested, IRS-approved strategies for minimizing your tax. So if you're still smarting from April 15, and you haven't asked us about our planning service, what are you waiting for?

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May 12, 2013

Internet Sales Tax One Step Closer

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

The Senate has approved, by a 69 to 27 vote, the Marketplace Fairness Act of 2013. The bill would allow a state to enforce collection of state and local sales taxes on most remote sellers.The bill exempts sellers with less than $1 million in annual sales from the rules and requires states to provide information regarding the taxability of items, provide software free of charge for remote sellers that calculates sales and use taxes due on each transaction at the time the transaction is completed, that files sales and use tax returns, and that is updated to reflect rate changes, and among other things, provide simplify administration and reporting requirements. Despite the majority in the Senate, passage is far from assured. The bill is expected to have a harder time in the House.

Now is the time to contact your congress critters to let them know your opinion.

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May 12, 2013

The Importance of Keeping Good Records

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

That's always good advice. But it can be critical in the case of sales tax. Some states are famous for using the one-day observation test of restaurants and many other establishments.

The issue can be a real problem if the day the auditor picks is one of your best days of the week. It can get worse if sales have been growing over the last few years. The auditor could simply take the sales for the day and multiply by 313 (365 days less 52, assuming the business is closed one day a week) then multiply by 3 for a 3-year period. That's a real problem if sales two years ago were significantly less than today. Contesting the assessment could be difficult. You may have to have an expert witness show the test was not statistically correct. In some cases, even that won't get you off the hook. You're fighting from a poor position because you didn't maintain the required records.

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May 8, 2013

Late Night Taxes

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

Television's late-night hosts have entertained us since Steve Allen first took the mic on The Tonight Show back in 1954. Today's late-night monologues riff on serious topics like international politics and economic policy, and silly topics like the "Real Housewives of Lima, Ohio." Naturally, they've also weighed in on our friends at the IRS. So this week, we present some of our favorite tax wisecracks from late-night television:

"65% of people say that cheating on your income tax is worse than cheating on your spouse. The other 35% were women." (Jay Leno)
"Just taught my kids about taxes by eating 38% of their ice cream." (Conan O'Brien)
"Tax day is the day that ordinary Americans send their money to Washington, D.C., and wealthy Americans send their money to the Cayman Islands." (Jimmy Kimmel)
"President Obama held a press conference earlier today, and he said he still wants to close the Guantanamo Bay prison facility, but he doesn't know how to do it. He should do what he always does: declare it a small business and tax it out of existence. It will be gone in a minute." (Jay Leno)
"Nobody likes taxes, but they've been around forever. Taxes date back all the way back to the year one, when baby Jesus was visited by two wise men and an IRS agent, who demanded half the family's frankincense." (Jimmy Kimmel)
"It's fitting that April 14 is National Pecan Day because today, we recognize nuts. Andtomorrow, on April 15, we pay our taxes to support them." (Craig Ferguson)
"Regis Philbin's back in primetime, hosting 11 new episodes of 'Who Wants To Be a Millionaire.' But because of Obama's tax plan, it's been re-titled 'Who Wants To Win Just Under $250,000.'" (Jimmy Fallon)
"And there are a lot of new taxes coming. California state legislators want to solve our state's giant deficit by taxing marijuana. Meanwhile, Oregon wants to increase a tax on beer, while New York wants to tax Internet porn. You know what this means? By the end of spring break, this whole thing could be paid for." (Jay Leno)

Late-night yucksters make fun of taxes onstage. But you can be sure that offstage, entertainers like David Letterman (2013 salary, $28 million) and Jay Leno ($24 million) think taxes are as funny as a heart attack. They know that proactive planning is the key to paying less. So be sure to call us when you're ready to laugh last with the IRS!

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April 10, 2013

Heeeere's. . . Jimmy!

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

Newsman Edward R. Murrow famously said that television is a vast wasteland. But that doesn't stop millions of Americans from tuning in every night for their favorite comedians. Jay Leno, David Letterman, Conan O'Brien, the two Jimmies (Fallon and Kimmel) and their wannabe imitators squeeze out one last wisecrack before bedtime.

NBC's Tonight Show has been broadcasting since 1954, which makes it the longest-running entertainment program on air. Amazingly, it's had just five hosts since it's inception: Steve Allen from 1954-57, Jack Paar from 1957-1962, the legendary Johnny Carson from 1962-1992, Jay Leno from 1992-2009, and Conan O'Brien for eight short months in 2008-2009. Leno returned in March of 2010, but, in Hollywood's worst-kept secret, announced last week that he would be giving up his chair to current Late Nighthost and Capitol One pitchman Jimmy Fallon. Leno congratulated Fallon in his monologue last Wednesday: "I just have one request of Jimmy. We've all fought, kicked and scratched to get this network up to fifth place, okay? Now we have to keep it there. Jimmy don't let it slip into sixth. We're counting on you."

And more news . . . the show is leaving its studio in "beautiful downtown Burbank," California, where it's made its home since 1972, and returning to New York's 30 Rockefeller Plaza. There are lots of reasons to move back to the East Coast. Lorne Michaels, the producer behind NBC's longtime New York-based Saturday Night Live, is taking over at The Tonight Show, and host Fallon is already headquartered there. But there's one more behind-the-scenes reason that may be more important than all the rest. That's right, the tax man is welcoming The Tonight Show back with open arms!

Hosting a program like The Tonight Show is big business, and states naturally compete for it. New York decided to play hardball, and Governor Andrew Cuomo and the New York state legislature passed a sweetheart tax deal, dubbed the "Jimmy Fallon tax credit," to lure The Tonight Show back. The credit is available to "a talk or variety program that filmed at least five seasons outside the state prior to its first relocated season in New York." The show has to have a budget of more than $30 million or drop at least $10 million in capital expenses every year. It has to be filmed before a studio audience of at least 200 people. The credit is worth 30% of production costs. Remember, a tax credit is a dollar-for-dollar reduction in tax, not a deduction from taxable income. Assuming the show spends $30 million on production, that means $9 million in New York tax savings to parent company NBC. That's not a bad little bonus for a program that's estimated to make between $25 and $40 million per year!

That's some suspiciously targeted legislative language, isn't it? It doesn't have the broad reach of, say, "Congress shall make no law . . . abridging the freedom of speech." But it got the job done, and Governor Cuomo issued the following statement: "The original Tonight Show ushered in the modern era of television, broadcast here from New York. It is only fitting that as The Tonight Show returns to our state, it will be headlined by New York's own native son and resident, Jimmy Fallon. Today's announcement builds on the recent surge of television and film production happening here in New York that has restored our state as a global film production capital and driven the creation of new jobs and business growth throughout the state. I welcome The Tonight Show home."

We talk a lot here about tax planning. We're glad to see the folks at The Tonight Show listen! Keeping up with new opportunities is an important part of our job. We can't always find you million-dollar credits, but we can promise a proactive attitude. So call us when you're ready to pay less!

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April 3, 2013

New Audit Risk

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

When it comes to audits, our friends at the IRS are interested in examining returns as accurately as possible. (No, they're not just interested in squeezing out more tax, and some audits actually result in refunds.) So the folks in the Small Business/Self-Employed area have compiled a series of Audit Technique Guides to help examiners with insight into issues and accounting methods unique to specific industries. As the IRS explains, "ATGs explain industry-specific examination techniques and include common, as well as unique, industry issues, business practices and terminology. Guidance is also provided on the examination of income, interview techniques and evaluation of evidence."

There are currently dozens of ATGs available. Some are straightforward and predictable, like attorneys, consultants, and child care providers. Others are more specialized or esoteric, like art galleries, cost segregation studies for real estate investors, and timber casualty losses. At one point, there were even two separate guides for Alaskan commercial fishing activities -- one for the fishermen who catch the fish and another for the vendors who sell it. You can find all of them online -- if you find yourself on the business end of an audit notice, reading your own industry's guide is like taking a sneak peek at your opponent's battle plan!

Naturally, the IRS wants to keep up with new challenges in new industries. And identity theft is one of those new industries playing a growing role in today's electronic and online economy. Identity thieves pretend to be someone else to access resources or obtain credit and other benefits -- like fraudulent tax refunds -- in that person's name. The problem is serious enough that the IRS has put identity theft at the top of its annual "dirty dozen" list of tax scams. And now, this year, the IRS has just issued an Audit Technique Guide for identity thieves.

You might be surprised that the IRS is publishing an audit guide for a clearly illegal business. But U.S. citizens are subject to tax on all worldwide income, from whatever source derived. The IRS really doesn't care how you make your income -- they just want their fair share. (Remember who finally nailed Al Capone?)

The good news is, there are plenty of legitimate deductions you can take to cut the tax on your spoils from identity theft. For example, you can deduct home office expenses if that's where you phish for information. Your home office qualifies if you use it "exclusively and regularly for administrative or management activities of your trade or business" and "you have no other fixed location where you conduct substantial administrative or management activities of your trade or business." To substantiate your deduction, keep a log and take photos to record your business use. It doesn't have to be an entire room -- you can claim any "separately identifiable" space you use for work. Rev. Proc. 2013-13 even offers an optional "safe harbor" method for deducting $5/foot for up to 300 square feet!

You can capitalize equipment like computers and printers that you use for hacking, or choose first-year expensing for faster deductions. You can also deduct day-to-day expenses, like internet access, utilities, and vehicle costs for driving to trash dumpsters to find personal information (mileage allowance or actual expenses). Some aggressive practitioners argue that you can even deduct business-related dry-cleaning expenses for "dumpster diving" outfits; however, there's no formal authority for this position.

We'll finish here with two important warnings. First, remember that identity theft is still a serious crime. If you're caught, you can face crushing fines, serious jail time, or both. And second, be very careful with anything you read around April Fools' Day!

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March 29, 2013

Beware of Intuit Tax Online or SaaS

by Kenneth Hoffman in Business Counsel, Tax Counsel

Intuit Tax Online (ITO) states in it's product literature that it back-ups your account so you do not have to. From their home page; "In the cloud, software is 100% maintenance-free. We'll back up and update everything in real time." Nothing could be further from the truth.

Last night I noticed on a return that I had transposed a number on the EIN. I went into the return to change it and ITO gave me a warning about a duplicate return and wanted to know if I wanted to hide the return. I tried canceling the error notice but it would not cancel. The only way to close the screen was to agree to hide the return. A message displayed said that I could later "unhide" the return. Again, nothing could be further from the truth.

I followed all the directions to unhide the account, but since I am unsure of the actual EIN I used to open the return with, I cannot retrieve the return, which I already paid for.

I contacted tech support via chat, that is the only way to talk to tech support at ITO, another minus. I gave the tech support person the Return ID number, which is system generated. I was told that there is no way to retrieve a return once it has been hidden without the EIN or SSN number. If you do not know the EIN or SSN they only thing that can be done is to rekey the return. The Return ID number is used for billing purposes only.

I asked about the back up ITO makes. According to the tech support person, backups are global in nature and for Intuits use only and they cannot do a client level restore. ITO claims it backs-up your data so you do not have to - that statement is simply inaccurate and a misrepresentation.

I will finish out the year since I've prepaid for several returns, but I will not be back next year. With a desktop product I back-up my data and I CAN recover from a stupid error that I made.

In my opinion Intuit Tax Online is not ready for prime time.

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March 20, 2013

Help Wanted

by Kenneth Hoffman in Business Counsel, Tax Planning

On March 8, the Bureau of Labor Statistics announced that the unemployment rate had edged down to 7.7% for February. That's good news compared to the high of 10.1% registered back in October, 2009. But unemployment is still unacceptably high, and surveys show Democrats and Republicans alike are citing jobs as our most pressing problem.

You might think that with jobs still scarce, employers would have their pick of applicants. In fact, the New York Times recently reported that some employers are requiring bachelors degrees for positions like file clerk, dental hygienist, cargo agent, and claims adjustor that don't require college-level skills. Nevertheless, there's one pretty important organization who's having trouble with jobs -- and that employer, surprise surprise, is our old friend the IRS. It's a cushy enough gig -- air-conditioned offices, great holidays and benefits, no heavy lifting, and flexible schedules that let you hit the road before traffic gets ugly. So, what's the problem?

On January 13, the Treasury Inspector General for Tax Administrations ("TIGTA"), an independent board assigned to oversee IRS operations, issued a riveting report with a can't-miss title: "Improvements Have Been Made to Address Human Capital Issues, but Continued Focus is Needed." (Seriously, if John Grisham could write like this, he'd have a real future.) It turns out the IRS has addressedmost of the issues TIGTA identified four years ago in their last "human capital" audit. But there are still real problems, even in today's "seller's market" for jobs:

Total employment is down 9%, from 107,622 at the end of FY 2010, to 97,717 at the end of FY 2012. Simple common sense says that fewer people processing more tax returns means more problems.
Pending retirements are poised to gut senior staff like a trout. 48% of today's executive managers, 37% of field staff, and 31% of non-executive managers will be eligible for full retirement by the end of next year. This lack of experienced leadership will reverberate throughout the organization.
It takes the IRS an average of 30 days to approve filing open positions, and 54 days to hire anyone from outside the organization. That's down from 157 days in 2009, but still frustratingly long in today's environment.
New hires report they aren't getting enough coaching and mentoring. That means the new kids on the block will be even less effective at cutting through the red tape and bureaucracy!

We realize you might think "sequestering" the IRS is a good thing. But the IRS is facing real challenges, and we'll all be in trouble without experienced leadership at the helm. The tax code is getting more complicated. ("Obamacare" alone includes 42 provisions that add to or amend the tax code, including eight that require the IRS to build new processes that don't exist within current tax administration.) And the IRS is under increasing pressure to stop billions of dollars in fraudulent or improper tax refunds due to erroneous claims or identity theft. How can they succeed with their most experienced staffers fleeing like lemmings?

What's the bottom line? "TIGTA made no recommendations in this report; however, key IRS management officials reviewed it prior to issuance." Comforting, right?

Dealing with the IRS is never fun. Fortunately, you've got us here, to fight on your behalf even as the fight gets harder. Let us worry about IRS staffing for you -- 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.

March 13, 2013

A Rate of Your Own

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

On January 1, Congress passed a bill to keep the government from leaping off the so-called "fiscal cliff" -- a set of tax hikes so devastating that Washington insiders warned they would ricochet through the economy, plunge us back into recession, and possibly even send the earth spinning into the sun. That bill included raising the top marginal rate on taxable income over $400,000 ($450,000 for joint filers) from 35%, where it had stood for the last 12 years, to 39.6%.

39.6% may sound like a lot today. But it's still really quite low, as far as top rates are concerned. Back in 1935, the nation was mired in the depths of the Great Depression. Inflation was 3.71% and unemployment stood at a whopping 21.7%. As for taxes, the top rate reached 79% on income over $5 million (roughly $85,672,000 in today's dollars). But -- and this is a pretty big but -- according to tax historian Joseph Thorndike, just one person actually paidthat rate: billionaire John D. Rockefeller, Jr.

So, lots of rich guys still had city mansions and country estates, even in the midst of the Depression. Lots of millionaires had yachts, jewels, and priceless art. But only Rockefeller was rich enough to have his own tax rate. And that got us thinking -- what would some of today's rich and famous pay if they had their own tax rates?

Mitt Romney ran for president on the strength of his business record. He took heat from progressives for using the "carried interest" rules to pay around 14% on his multimillion dollar income. But Romney made bigger headlines for a number he thought he was uttering in private -- so we say his bespoke tax rate should be 47%.
A year ago, British author E.L. James was just a former TV executive, wife and mom of two from the London suburbs. Since then, she's rocketed to fame with three books that some fans prefer to read on their Kindle (to avoid showing the cover). International tax planning leaves room for plenty of shades of grey, so we suggest she pay 50% on her U.S. income.
Baltimore quarterback Joe Flacco has had a bigyear. Last month, he led his underdog team to a Super Bowl victory over the favored San Francisco 49ers. Last week, he signed a $120.6 million contract making him the highest-paid player in NFL history. And it's only March! Flacco wears Number 5 for the Ravens, so we think it's only fair that he pay 5% of his income in tax. (Receiver Anquan Boldin, who wears Number 81, does not like where this discussion is going!)
Reality "star" Kim Kardashian is back in the news again, this time for carrying rapper Kanye West's baby. Kardashian's previous relationship, a marriage to Brooklyn Nets power forward Kris Humphries, lasted 72 days -- so we'll tax Kim at 72%.
Kiefer Sutherland should pay 24%. Morley Safer should pay 60%. And Nick Lachey should pay 98%. (Not just because his band is named 98 Degrees, but because we should try and tax all "boy bands" out of existence.)

Who do you think should have their own tax rate, and what should they pay? Let us know! In the meantime, remember that you don't have to have your own tax rate to pay less. You just need a plan. That's what we're here for. And we're always here for your family, friends, and colleagues, too!

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.