Being a tax consultant and preparer for over 20 years, I can tell you that there have been a number of times that I've had clients who were surprised by how much they money they owed at tax time. Why did they wind up owing so much money? There are numerous reasons. What it all comes down to tax planning or the lack of.
Tax planning is very similar to financial planning. It involves taking a close look at your tax situation from one year to the next. People who have financial investments are always checking with their financial advisors to improve their financial situation. If you're going to check with your financial advisor, you should also check with your tax advisor and so see how your financial investments are going to affect your taxes.
Tax planning is not only for those people with financial investments. Tax planning is for everyone, especially if you're undergoing financial changes that could affect your tax situation. Some of these financial changes could be the purchasing of a home, it could be the purchase or sale of rental property, it may be the withdrawal of money from a retirement account, or it may be starting a business. Anyone of those financial changes as well as others could significantly affect your tax situation.
The best time to check with your accountant is before you take any kind of financial action to see how it could affect your taxes. Many times people call their accountant after the fact. That's like closing the door after the horse has left the barn.
There are two things that I always tell my clients. First, I always tell them if that if they have any tax questions to call me. The second thing I tell them is if they are going to do anything that they think could affect their taxes to contact me.
Why is it important to check with your accountant before you do something? It's important because your accountant can advise you of the tax consequences of your actions. They can analyze your tax situation and tell you what action to take so you don't get caught owing a lot of money at tax time.
Here's a story that I always tell my clients to emphasize this point. Several years ago I had a client who took money out of retirement account (which was fully taxable) in late December. I was not aware of this action until he came to see me at tax time. As a result, he ended up owing a lot more money than he anticipated.
I told my client that I wish he had consulted with me prior to making the withdrawal, because I would have advised him to wait until January to take the out the money. Why should he have waited? By waiting until January, the money he withdrew would not have been taxable until the following year. By waiting a few weeks to the next year, we could have done tax planning on ways to reduce his taxes during the year and save him some money. This is why it's important to consult with your accountant during the year.
Tax planning is also important when it comes to paying your taxes. Many people are under the assumption that they have until April 15th to pay their income tax. That is not entirely correct. April 15th is date when your taxes must be paid in full.
The law requires that you pay your taxes as your earn the money during the year. For those of you who are paid as employees, you have your taxes withheld from your paychecks. Your employer withholds the income tax from your paycheck and he pays that money to the government throughout the year. However, for those of you who are self-employed (work for yourselves) or have passive income from investments, you may be required to pay your taxes during the year by making estimated tax payments.
What are estimated tax payments? Estimated tax payments are quarterly tax payments made throughout the tax year (January through December). The law requires that you make an estimate of your tax liability and pay it as you go during the year. The tax laws require that you make your payments on April 15th, June 15th, September 15th and January 15 (of the following year).
The tax laws allow you to base your estimate on your prior year's tax. If you income is basically the same year after year you can do this. However, if your income and tax situation changes from year to year you should consult with your accountant when it comes to estimating your taxes. The IRS has a publication on Estimated Income Tax, it's Publication No. 505 and you can download it for free from the IRS website, http://www.irs.gov.
Tax planning should be done during the year. It should be done by those of you who are self-employed or have passive income from investments, because your income can fluctuate from year to year. For those of you who undergo any financial changes which could affect your tax situation during the year, you should consult your accountant or tax advisor. Tax planning is important because can save you quite a bit of money come tax time.
The Author: Larry Zinamon has been involved with taxes for over 35 years. He is a registered tax preparer and authorized e-filer with the IRS. Larry has had his own tax consulting and preparation business for over 20 years. Prior to starting his own business, Larry worked for the IRS. During his 14 years with them, he worked as a Revenue Officer, Taxpayer Service Specialist and Tax Examiner. Within the past couple of years, Larry has been doing some network marketing.
By: Larry Zinamon
Friday, June 14, 2019
Sunday, May 12, 2019
Taxes: A Suggestion for Ethical Reforms
What is the best tax policy? Most might answer one that taxes them less and others more.
Now that answer falls apart on its own logic, since if applied to everyone, there would be no "others" to tax more. But the answer does bring up a point. The fairness and utility of taxes - and fairness and utility are key ethical concerns - those items are often in the eye of the beholder. So as I described in a companion article ("Taxes: A Calculation in Ethics") establishing an acceptable, and ethical, tax policy involves blending perspectives from across the social and economic spectrum to achieve a common consensus. Almost by definition no one individual can determine the optimum solution.
So, being consistent with my own words, I will add to that blending process by offering a few suggestions of my own.
Principles
What are the goals of a good, dare say ethical, tax policy? Here is what I would say. Taxes should be 1) fair to the individual, while they also 2) promote the general welfare, and 3) augment economic performance. They should also 4) gather sufficient revenue for the government we desire, and 5) be simple, efficient and minimize evasion.
How do I think we best accomplish those goals? Certainly a complete discussion could run not just a number of pages, but a whole book, or several books. But here would be a few ideas.
Credits verses Deductions
Like it or not, America uses taxes to promote social welfare. We promote home ownership by allowing deduction of mortgage interest; we subsidize state and local governments through the tax exclusion for municipal bond interest; we support non-profit institutions through charitable deductions.
Many an argument has been made over what should or should not be excluded or deducted from income for taxes purposes. I won't add to that here. Rather, the focus here is on the manner in which these exclusions or deductions are applied.
For deductions (like home mortgage interest) or exclusions (like municipal bond interest) we apply them as offsets to income, not to the income tax. Deductions and exclusions lower taxable income.
What is the ethical implication? Higher income individuals, in higher tax brackets, receive a greater benefit than the much larger group of individuals in the middle and lower brackets. A wealthy person donates several thousand dollars to their faith, they save twenty to thirty cents on the dollar. The everyday person donates an equivalent amount, they save either nothing, or maybe ten of fifteen cents on the dollars.
By what mechanism do upper income individuals receive greater benefit? First, obviously, upper income individuals are in higher tax brackets, so each dollar excluded or deducted saves a higher percentage. Second, there is the standard deduction. Higher income individuals most often exceed that standard amount, and thus their deductions actually reduce their taxes. Moderate and lower income individuals generally do not have sufficient deductions to exceed the standard amount. Thus, when they give to the church, or the local food bank, or make some expenditure that is deductible, those contributions or deductions save them nothing.
My suggested remedy would be to change deductions and exclusions into credits. Deductions and exclusions would no longer lower taxable income, but rather directly lower taxes, i.e. they would in whole or part become a direct credit against taxes. Thus, if one gives a dollar to charity, taxes are reduced the same regardless of income. If one receives a dollar of municipal interest, the tax savings are the same for everyone.
Minimum Tax Rates
A related step, for fairness, would be minimum tax rates. As income rises, the ability of individuals to participate in tax favored activities increases. Take the mortgage interest deduction. A good percentage of average income individuals might need to rent, while the wealthy can more likely buy a large home. Thus, while under the above "deductions become credits" approach above, mortgage interest credits would benefit all incomes equally, the average person has less financial ability to actually buy a home, much less a large home, and thus take advantage of the "deduction becomes credit".
The approach for this, to maintain fairness, would be a minimum tax. Such a minimum tax would say that when all is said and done, an individual must pay a minimum percentage in income taxes. This would apply to one's straight income, all sources (I would allow the personal exemptions, but that is all), regardless of credits, or anything else.
Credits and Minimum Tax Rates
How would these two ideas work together? Let's take a simple example.
For our example, our regular tax rate will be 25 percent for income above $75 thousand, and our minimum tax rate for the same bracket will be 15 percent. In terms of credits, an individual can take a credit against taxes equal to 50% of eligible expenditures, i.e. the items that are deductible or excluded today, for example charities, mortgage interest, extraordinary medical expenses, municipal interest, and so on.
Let's now take an individual making $175 thousand, with $30 thousand in eligible expenditures. The income amount in the 25 percent bracket is $100 thousand, i.e. $175 minus $75. The regular tax on that amount is $25 thousand (i.e. 25 percent of the $100 thousand), and the credit is $15 thousand (50 percent of the eligible expenditures, which amount to $30 thousand). So the tax, so far, is $10 thousand (i.e. $25 thousand minus the $15 thousand credit).
But we have a minimum tax, set at 15 percent for the bracket, and 15 percent of $100 thousand is $15 thousand. The individual would pay no less than $15 thousand.
Below $75k, our regular tax rate for this example will be 10 percent, and the minimum 5 percent. We will also have a $10K per person exemption. A person earning $40K, married, would pay $2 thousand in taxes before credits; that is $40 thousand minus the exemption for two people, leaving $20 thousand, times the 10 percent. The minimum tax would $1 thousand. The couple rents, so has no mortgage interest deduction, but gives a thousand dollars to the local church. Under current tax regulations, the couple receives no benefit, but if deductions were turned to credits, that contribution would save the couple $500 dollars in taxes, off the $2 thousand.
Our turning deductions into credits thus spreads out the base of individuals who benefit from tax advantaged expenditures, and the minimum rates prevent any one individual from excessively benefiting from the credits.
Abolition of Cash
An unavoidable part of taxes is that individuals seek to avoid them. Each of us actually becomes part of that when we pay a contractor in cash to receive a reduced price, or pay for a restaurant meal and tip with cash. We suspect, and in cases we are correct, that the cash payments are not fully reported for tax purposes. Significant amounts of transactions occur on a cash basis, and some percent, maybe very large, escape taxes.
Is that okay? Possibly, in that within industries with large amounts of cash transactions, say tips, the lack of taxes likely is offset by lower pay. So the waiter's actual pay scale, as well as tip expectations, have been adjusted down, an implicit and tacit recognition that tip income can escape taxation. If this changed, if 100% of tips were suddenly taxed, tip levels would likely, through various social and subtle signals, gradually adjust themselves up, and waiters themselves would argue for a higher base pay.
That being said, a general principle is that all income should receive equal consideration. While we accept the leakage that cash transactions create, fairness indicates that leakage should be minimized or eliminated.
But how?
I would argue for the eventual abolition of cash.
Now this idea is neither new nor unique. In the United States, regulations require reporting cash transactions over $5,000. Beyond that, governments worldwide have and are considering, and have implemented, various limitations and prohibitions on cash transactions.
And controversy exists. Cash transactions provide a mechanism for privacy. We certainly are in an era where our electronic footprints - what we buy, what websites we visit, even our current location - are of substantial and increasing interest to marketers, law enforcement and the like. Abolition of cash thus raises privacy concerns, and privacy concerns are not trivial.
Cash also provides choice, at times necessary. Not everyone desires to use credit or debit cards, and some can't readily obtain them, due to social status, credit issues, etc.
So why suggest this abolition?
Because over the coming years cash will increasingly abolish itself. We see the trend clearly already. Increasing numbers of outlets accept credit cards, including cabs, fast food restaurants, convenience stores, parking meters, and transit systems, along of course with the normal large chain stores. That acceptance will continue to grow, as numerous firms are competing for a breakthrough to convert Smartphones into transaction accepting devices that even the corner hot dog stand can use.
At some point, electronic transactions will become so efficient, so available, so socially expected, so quick, that those wanting to use cash will increasingly be those who do so for a nefarious purpose, i.e. to avoid taxes, to commit a crime, to embezzle funds, to immigrate illegally.
At the same time, privacy issues over electronic information will need some resolution other than cash. If one needs to use cash for privacy, then what would that say concerning the privacy of thousands of non-financial electronic bread crumbs one leaves. These include medical records, employment records, emails, drivers license records, voting registration, social media postings, and on and on.
So fast forward a decade or two or even three. It is not inconceivable that kids will grow up not knowing what cash is. Thus abolition of cash at some point will not hurt the common person, but will create added fairness in taxation by preventing those looking to evade taxes from using cash to do so.
Assessment
At the beginning, I listed five principles: 1) increase fairness, 2) promote social welfare, 3) augment the economy, 4) collect revenue and 5) operate efficiently. How do the ideas above stack up? Let's see.
I would claim that changing deductions and exclusions from income, into credits against taxes, combined with true minimum tax rates, would achieve the first two goals, in spades. Those two changes make available to all income levels tax advantaged expenditures. That promotes fairness across the base of tax payers and widens the reach of the social benefits that accrue from the tax advantaged expenditures.
The abolition of cash achieves the last two. That step allows capture of cash transactions now lost to the tax base, and reduces the enforcement and compliance efforts needed to combat cash-based tax evasion.
The ideas are likely neutral to economic activity. Economic stimulus involves steps like capital investment, or business formation, or job creation. And admittedly, in this short piece, those item aren't directly addressed.
But impacting four out of five goals isn't bad.
So there we have it, a few suggestions to improve and make more ethical our tax structure. Some may agree, others not, but most might concur these ideas are worthy to put on the table as part of the ongoing discussion of the despised reality of taxes.
By: David Mascone
Now that answer falls apart on its own logic, since if applied to everyone, there would be no "others" to tax more. But the answer does bring up a point. The fairness and utility of taxes - and fairness and utility are key ethical concerns - those items are often in the eye of the beholder. So as I described in a companion article ("Taxes: A Calculation in Ethics") establishing an acceptable, and ethical, tax policy involves blending perspectives from across the social and economic spectrum to achieve a common consensus. Almost by definition no one individual can determine the optimum solution.
So, being consistent with my own words, I will add to that blending process by offering a few suggestions of my own.
Principles
What are the goals of a good, dare say ethical, tax policy? Here is what I would say. Taxes should be 1) fair to the individual, while they also 2) promote the general welfare, and 3) augment economic performance. They should also 4) gather sufficient revenue for the government we desire, and 5) be simple, efficient and minimize evasion.
How do I think we best accomplish those goals? Certainly a complete discussion could run not just a number of pages, but a whole book, or several books. But here would be a few ideas.
Credits verses Deductions
Like it or not, America uses taxes to promote social welfare. We promote home ownership by allowing deduction of mortgage interest; we subsidize state and local governments through the tax exclusion for municipal bond interest; we support non-profit institutions through charitable deductions.
Many an argument has been made over what should or should not be excluded or deducted from income for taxes purposes. I won't add to that here. Rather, the focus here is on the manner in which these exclusions or deductions are applied.
For deductions (like home mortgage interest) or exclusions (like municipal bond interest) we apply them as offsets to income, not to the income tax. Deductions and exclusions lower taxable income.
What is the ethical implication? Higher income individuals, in higher tax brackets, receive a greater benefit than the much larger group of individuals in the middle and lower brackets. A wealthy person donates several thousand dollars to their faith, they save twenty to thirty cents on the dollar. The everyday person donates an equivalent amount, they save either nothing, or maybe ten of fifteen cents on the dollars.
By what mechanism do upper income individuals receive greater benefit? First, obviously, upper income individuals are in higher tax brackets, so each dollar excluded or deducted saves a higher percentage. Second, there is the standard deduction. Higher income individuals most often exceed that standard amount, and thus their deductions actually reduce their taxes. Moderate and lower income individuals generally do not have sufficient deductions to exceed the standard amount. Thus, when they give to the church, or the local food bank, or make some expenditure that is deductible, those contributions or deductions save them nothing.
My suggested remedy would be to change deductions and exclusions into credits. Deductions and exclusions would no longer lower taxable income, but rather directly lower taxes, i.e. they would in whole or part become a direct credit against taxes. Thus, if one gives a dollar to charity, taxes are reduced the same regardless of income. If one receives a dollar of municipal interest, the tax savings are the same for everyone.
Minimum Tax Rates
A related step, for fairness, would be minimum tax rates. As income rises, the ability of individuals to participate in tax favored activities increases. Take the mortgage interest deduction. A good percentage of average income individuals might need to rent, while the wealthy can more likely buy a large home. Thus, while under the above "deductions become credits" approach above, mortgage interest credits would benefit all incomes equally, the average person has less financial ability to actually buy a home, much less a large home, and thus take advantage of the "deduction becomes credit".
The approach for this, to maintain fairness, would be a minimum tax. Such a minimum tax would say that when all is said and done, an individual must pay a minimum percentage in income taxes. This would apply to one's straight income, all sources (I would allow the personal exemptions, but that is all), regardless of credits, or anything else.
Credits and Minimum Tax Rates
How would these two ideas work together? Let's take a simple example.
For our example, our regular tax rate will be 25 percent for income above $75 thousand, and our minimum tax rate for the same bracket will be 15 percent. In terms of credits, an individual can take a credit against taxes equal to 50% of eligible expenditures, i.e. the items that are deductible or excluded today, for example charities, mortgage interest, extraordinary medical expenses, municipal interest, and so on.
Let's now take an individual making $175 thousand, with $30 thousand in eligible expenditures. The income amount in the 25 percent bracket is $100 thousand, i.e. $175 minus $75. The regular tax on that amount is $25 thousand (i.e. 25 percent of the $100 thousand), and the credit is $15 thousand (50 percent of the eligible expenditures, which amount to $30 thousand). So the tax, so far, is $10 thousand (i.e. $25 thousand minus the $15 thousand credit).
But we have a minimum tax, set at 15 percent for the bracket, and 15 percent of $100 thousand is $15 thousand. The individual would pay no less than $15 thousand.
Below $75k, our regular tax rate for this example will be 10 percent, and the minimum 5 percent. We will also have a $10K per person exemption. A person earning $40K, married, would pay $2 thousand in taxes before credits; that is $40 thousand minus the exemption for two people, leaving $20 thousand, times the 10 percent. The minimum tax would $1 thousand. The couple rents, so has no mortgage interest deduction, but gives a thousand dollars to the local church. Under current tax regulations, the couple receives no benefit, but if deductions were turned to credits, that contribution would save the couple $500 dollars in taxes, off the $2 thousand.
Our turning deductions into credits thus spreads out the base of individuals who benefit from tax advantaged expenditures, and the minimum rates prevent any one individual from excessively benefiting from the credits.
Abolition of Cash
An unavoidable part of taxes is that individuals seek to avoid them. Each of us actually becomes part of that when we pay a contractor in cash to receive a reduced price, or pay for a restaurant meal and tip with cash. We suspect, and in cases we are correct, that the cash payments are not fully reported for tax purposes. Significant amounts of transactions occur on a cash basis, and some percent, maybe very large, escape taxes.
Is that okay? Possibly, in that within industries with large amounts of cash transactions, say tips, the lack of taxes likely is offset by lower pay. So the waiter's actual pay scale, as well as tip expectations, have been adjusted down, an implicit and tacit recognition that tip income can escape taxation. If this changed, if 100% of tips were suddenly taxed, tip levels would likely, through various social and subtle signals, gradually adjust themselves up, and waiters themselves would argue for a higher base pay.
That being said, a general principle is that all income should receive equal consideration. While we accept the leakage that cash transactions create, fairness indicates that leakage should be minimized or eliminated.
But how?
I would argue for the eventual abolition of cash.
Now this idea is neither new nor unique. In the United States, regulations require reporting cash transactions over $5,000. Beyond that, governments worldwide have and are considering, and have implemented, various limitations and prohibitions on cash transactions.
And controversy exists. Cash transactions provide a mechanism for privacy. We certainly are in an era where our electronic footprints - what we buy, what websites we visit, even our current location - are of substantial and increasing interest to marketers, law enforcement and the like. Abolition of cash thus raises privacy concerns, and privacy concerns are not trivial.
Cash also provides choice, at times necessary. Not everyone desires to use credit or debit cards, and some can't readily obtain them, due to social status, credit issues, etc.
So why suggest this abolition?
Because over the coming years cash will increasingly abolish itself. We see the trend clearly already. Increasing numbers of outlets accept credit cards, including cabs, fast food restaurants, convenience stores, parking meters, and transit systems, along of course with the normal large chain stores. That acceptance will continue to grow, as numerous firms are competing for a breakthrough to convert Smartphones into transaction accepting devices that even the corner hot dog stand can use.
At some point, electronic transactions will become so efficient, so available, so socially expected, so quick, that those wanting to use cash will increasingly be those who do so for a nefarious purpose, i.e. to avoid taxes, to commit a crime, to embezzle funds, to immigrate illegally.
At the same time, privacy issues over electronic information will need some resolution other than cash. If one needs to use cash for privacy, then what would that say concerning the privacy of thousands of non-financial electronic bread crumbs one leaves. These include medical records, employment records, emails, drivers license records, voting registration, social media postings, and on and on.
So fast forward a decade or two or even three. It is not inconceivable that kids will grow up not knowing what cash is. Thus abolition of cash at some point will not hurt the common person, but will create added fairness in taxation by preventing those looking to evade taxes from using cash to do so.
Assessment
At the beginning, I listed five principles: 1) increase fairness, 2) promote social welfare, 3) augment the economy, 4) collect revenue and 5) operate efficiently. How do the ideas above stack up? Let's see.
I would claim that changing deductions and exclusions from income, into credits against taxes, combined with true minimum tax rates, would achieve the first two goals, in spades. Those two changes make available to all income levels tax advantaged expenditures. That promotes fairness across the base of tax payers and widens the reach of the social benefits that accrue from the tax advantaged expenditures.
The abolition of cash achieves the last two. That step allows capture of cash transactions now lost to the tax base, and reduces the enforcement and compliance efforts needed to combat cash-based tax evasion.
The ideas are likely neutral to economic activity. Economic stimulus involves steps like capital investment, or business formation, or job creation. And admittedly, in this short piece, those item aren't directly addressed.
But impacting four out of five goals isn't bad.
So there we have it, a few suggestions to improve and make more ethical our tax structure. Some may agree, others not, but most might concur these ideas are worthy to put on the table as part of the ongoing discussion of the despised reality of taxes.
By: David Mascone
Friday, April 26, 2019
US Tax Planning for Passive Investments
In her 10/18/06 Wall St. Journal article, Insuring Against Hedge-Fund Taxes, Rachel Emma Silverman stated:
"A small but growing number of wealthy investors have discovered a legal way to invest in hedge funds without paying income taxes on the gains. It's called "private placement" life insurance. These special insurance contracts allow policyholders to invest in a wide range of products, including hedge funds. The main attraction: Because the investments are held within an insurance wrapper, gains inside the policy are shielded from income taxes - as is the payout upon death. What's more, policyholders may be able to access their money during their lifetimes by withdrawing or borrowing funds, tax-free, from the policy... "
"Private-placement insurance policies are essentially variable insurance policies, which allow policyholders to invest a portion of their premiums in separate investment accounts... "
"The strategy's chief advantage is the tax benefits that all life-insurance policies offer: Assets inside a life insurance policy can grow tax-free, and the death benefit can also be paid out free of income tax... "
Tax Planning Strategy for Passive (Portfolio) Investments
U.S. taxpayers can achieve greater net-after tax returns and superior asset protection for their domestic or international investment portfolios by using a tax planning strategy utilizing private placement life insurance. The benefit is perhaps greatest when combined with investments like hedge funds that are taxed at ordinary income rates and also where taxable unrealized income tax and gains are flowed out annually to fund shareholders.
A summary of the benefits are as follows:
1) Taxable ordinary income and short-term capital gains (taxed at 35% federal tax rate) now wholly tax exempted.
2) For Foreign Trusts, investment portfolio income now compounds tax-free annually with no accumulation tax.
3) Pre-empts IRS tax audits on investment portfolio income since there is neither any income tax nor any reporting due on the investment portfolio income.
4) Absent a fraudulent conveyance, investment portfolio assets are immediately exempt from creditor seizure once held by the policy.
5) U.S. tax compliance is minimized for filings: that is, no TDF 90-22.1 ("FBAR" filing), or IRS Form 8938 (Statement of Specified Foreign Financial Assets).
For U.S. taxpayers, the strategy requires that the investments are owned and held by a Puerto Rico issued Life Insurance policy- Puerto Rico is a US Commonwealth Territory and considered "US" for many practical purposes, but with design and investment flexibility typically found "offshore". In turn, the policy could be owned by a U.S. Grantor Trust, domiciled say, in the Bahamas. The Bahamas is particularly well suited in that under local law, insurance is expressly exempt from the claims of creditors, provided that premium(s) used to fund the policy are not subject to any prior claim at the time of transfer.
The tax planning strategy is particularly appropriate to international investors (who are treated as U.S. resident taxpayers) who invest in U.S. hedge funds, but also a very wide variety of portfolio investments.
Reporting Benefits
U.S. Taxable Residents with offshore structures ordinarily must file the following annual U.S. tax compliance:
a) Annual Form 1040: report worldwide income (including hedge fund income)
b) Foreign Financial accounts over $10,000 file form TDF 90-22.1, Report of Foreign Bank and Financial Accounts, "FBAR Filing," due June 30th following tax year (separate tax filing)
c) Foreign Financial Assets valued in excess of $50,000 file form 8938, "Specified Foreign Financial Assets" attached to form 1040 (Foreign Account Tax Compliance Act: "FACTA Filing"
Note: Filing form 8938 (with form 1040) does not relieve U.S. taxable residents of the requirement to file "FBAR," Form TDF 90-22.1 if FBAR filing is otherwise due.
In contrast to these reporting obligations, the aforementioned strategy is not only compliantly tax exempted, but also relieves the taxpayer of all the reporting obligations listed above and thus diminishing the likelihood of IRS audit.
In Greater Detail: U.S. Tax Compliance/Tax & Asset Protection Benefits
1) Income Tax (Form 1040)
Under IRC§72(e)(5), income from assets held under a qualifying life insurance policy (i.e. Puerto Rico Life Insurance policy), is not subject to income tax, nor is there tax reporting. Effectively, the investments otherwise taxable income and gains are not subject to U.S. income tax or tax reporting.
2) Report of Foreign Bank and Financial Account ("FBAR": TDF 90-22.1)
The "FBAR filing" is a financial disclosure for U.S. taxpayer foreign financial accounts (i.e. a report of taxpayer's foreign financial accounts if the account value is over $10,000). As a U.S. territory, an account in Puerto Rico is not considered a foreign account so no "FBAR filing" is due for the Puerto Rico life insurance policy.
3) Statement of Specified Foreign Financial Assets (IRS Form 8938)
The Puerto Rico life insurance policy may be classified as a foreign financial asset (i.e. a foreign financial account maintained by a foreign financial institution, subject to reporting under IRS Form 8938. Since the U.S. taxpayer (IRC§679(a)(1) Foreign Grantor Trust (i.e. Bahamas Discretionary Trust) owns the policy, the U.S. taxpayer may file an abbreviated Form 8938 (only completing Parts 1 and IV) confirming that the specified foreign financial asset (i.e. Puerto Rico Life Insurance policy with more than $50,000 cash value) was reported on the Foreign Grantor Trust (Nassau Trust) tax filings (Forms 3520, 3520-A)
4) Policy lifetime withdrawals may be tax-free and not subject to tax reporting (as either a return of premium/basis or a loan). The Modified Endowment Contract ("MEC") rules may or may not apply depending on policy design.
5) IRS Private Letter Ruling 200244001 (May 2, 2002): IRS audit risks are minimized since assets held under a qualifying life insurance policy are neither subject to investor income tax, nor is there any required income tax reporting (under IRC § 72(e)(5)), reference: Rev. Rul. 81-225 (situation #5), Rev. Rul. 82-54, 1982-1 C.B.11.
In addition to the substantive tax and reporting benefits, for audit purposes there would be no presumed IRS tax avoidance, due to the fact that life insurance has been granted an "angel exception" (i.e., is an IRS approved transaction) (IRS Revenue Procedure 2004-65, 2004-66, 2004-67, 2004-68).
6) As a U.S. territory, Puerto Rico life insurance policies do not require filing of "FBAR" Form TDF 90-22.1 (Report of Foreign Bank and Financial Account). Since taxpayer's foreign Grantor Trust (i.e. Nassau Trust) owns the Puerto Rico Life Insurance policy an abbreviated Form 8938 may be filed (only Parts I and IV).
In contrast, foreign life insurance issued to U.S. persons is subject to "FBAR filings" annually (if valued at more than $10,000) with the report filed directly with the IRS (Treasury Department), and disclosure as a specified foreign financial asset (over $50,000) with the annual filing of Form 8938, a separate tax compliance form filed with annual income tax returns (Form 1040).
7) Additional income tax benefits:
a) Assets inside a life insurance policy grow and compound income tax free.
b) Death benefit paid income tax free. (IRC§101)
8) Short-term capital gains exempt from income tax (41% Federal/California income tax, i.e. Federal 35% tax rate over $379,150, California: 9.3% tax rate over $48,029)
9) Bond interest exempt from income tax (taxed at 41% ordinary income rates Federal/California)
10) Under Puerto Rico law, the cash value benefits of a life insurance policy are expressly exempt from seizure by creditors (absent fraudulent conveyance funding of the policy). Act No. 399 of Sept. 22, 2004, as amended by Act No. 98 of June 20, 2011.
Under Act No. 98 (6/20/11), which amended Act no. 399 (9/22/04), the policy owner and policy beneficiary are statutorily protected from seizure.
In summary, a properly structured US compliant private placement life insurance as issued by a duly licensed Puerto Rican carrier, and as owned by a Bahamian Foreign Grantor Trust is very legitimate and tax effective way to hold portfolio investments (especially hedge funds), while at the same time having a minimal reporting burden associated with it, as well as providing significant asset protection.
By: Gary Wolfe
"A small but growing number of wealthy investors have discovered a legal way to invest in hedge funds without paying income taxes on the gains. It's called "private placement" life insurance. These special insurance contracts allow policyholders to invest in a wide range of products, including hedge funds. The main attraction: Because the investments are held within an insurance wrapper, gains inside the policy are shielded from income taxes - as is the payout upon death. What's more, policyholders may be able to access their money during their lifetimes by withdrawing or borrowing funds, tax-free, from the policy... "
"Private-placement insurance policies are essentially variable insurance policies, which allow policyholders to invest a portion of their premiums in separate investment accounts... "
"The strategy's chief advantage is the tax benefits that all life-insurance policies offer: Assets inside a life insurance policy can grow tax-free, and the death benefit can also be paid out free of income tax... "
Tax Planning Strategy for Passive (Portfolio) Investments
U.S. taxpayers can achieve greater net-after tax returns and superior asset protection for their domestic or international investment portfolios by using a tax planning strategy utilizing private placement life insurance. The benefit is perhaps greatest when combined with investments like hedge funds that are taxed at ordinary income rates and also where taxable unrealized income tax and gains are flowed out annually to fund shareholders.
A summary of the benefits are as follows:
1) Taxable ordinary income and short-term capital gains (taxed at 35% federal tax rate) now wholly tax exempted.
2) For Foreign Trusts, investment portfolio income now compounds tax-free annually with no accumulation tax.
3) Pre-empts IRS tax audits on investment portfolio income since there is neither any income tax nor any reporting due on the investment portfolio income.
4) Absent a fraudulent conveyance, investment portfolio assets are immediately exempt from creditor seizure once held by the policy.
5) U.S. tax compliance is minimized for filings: that is, no TDF 90-22.1 ("FBAR" filing), or IRS Form 8938 (Statement of Specified Foreign Financial Assets).
For U.S. taxpayers, the strategy requires that the investments are owned and held by a Puerto Rico issued Life Insurance policy- Puerto Rico is a US Commonwealth Territory and considered "US" for many practical purposes, but with design and investment flexibility typically found "offshore". In turn, the policy could be owned by a U.S. Grantor Trust, domiciled say, in the Bahamas. The Bahamas is particularly well suited in that under local law, insurance is expressly exempt from the claims of creditors, provided that premium(s) used to fund the policy are not subject to any prior claim at the time of transfer.
The tax planning strategy is particularly appropriate to international investors (who are treated as U.S. resident taxpayers) who invest in U.S. hedge funds, but also a very wide variety of portfolio investments.
Reporting Benefits
U.S. Taxable Residents with offshore structures ordinarily must file the following annual U.S. tax compliance:
a) Annual Form 1040: report worldwide income (including hedge fund income)
b) Foreign Financial accounts over $10,000 file form TDF 90-22.1, Report of Foreign Bank and Financial Accounts, "FBAR Filing," due June 30th following tax year (separate tax filing)
c) Foreign Financial Assets valued in excess of $50,000 file form 8938, "Specified Foreign Financial Assets" attached to form 1040 (Foreign Account Tax Compliance Act: "FACTA Filing"
Note: Filing form 8938 (with form 1040) does not relieve U.S. taxable residents of the requirement to file "FBAR," Form TDF 90-22.1 if FBAR filing is otherwise due.
In contrast to these reporting obligations, the aforementioned strategy is not only compliantly tax exempted, but also relieves the taxpayer of all the reporting obligations listed above and thus diminishing the likelihood of IRS audit.
In Greater Detail: U.S. Tax Compliance/Tax & Asset Protection Benefits
1) Income Tax (Form 1040)
Under IRC§72(e)(5), income from assets held under a qualifying life insurance policy (i.e. Puerto Rico Life Insurance policy), is not subject to income tax, nor is there tax reporting. Effectively, the investments otherwise taxable income and gains are not subject to U.S. income tax or tax reporting.
2) Report of Foreign Bank and Financial Account ("FBAR": TDF 90-22.1)
The "FBAR filing" is a financial disclosure for U.S. taxpayer foreign financial accounts (i.e. a report of taxpayer's foreign financial accounts if the account value is over $10,000). As a U.S. territory, an account in Puerto Rico is not considered a foreign account so no "FBAR filing" is due for the Puerto Rico life insurance policy.
3) Statement of Specified Foreign Financial Assets (IRS Form 8938)
The Puerto Rico life insurance policy may be classified as a foreign financial asset (i.e. a foreign financial account maintained by a foreign financial institution, subject to reporting under IRS Form 8938. Since the U.S. taxpayer (IRC§679(a)(1) Foreign Grantor Trust (i.e. Bahamas Discretionary Trust) owns the policy, the U.S. taxpayer may file an abbreviated Form 8938 (only completing Parts 1 and IV) confirming that the specified foreign financial asset (i.e. Puerto Rico Life Insurance policy with more than $50,000 cash value) was reported on the Foreign Grantor Trust (Nassau Trust) tax filings (Forms 3520, 3520-A)
4) Policy lifetime withdrawals may be tax-free and not subject to tax reporting (as either a return of premium/basis or a loan). The Modified Endowment Contract ("MEC") rules may or may not apply depending on policy design.
5) IRS Private Letter Ruling 200244001 (May 2, 2002): IRS audit risks are minimized since assets held under a qualifying life insurance policy are neither subject to investor income tax, nor is there any required income tax reporting (under IRC § 72(e)(5)), reference: Rev. Rul. 81-225 (situation #5), Rev. Rul. 82-54, 1982-1 C.B.11.
In addition to the substantive tax and reporting benefits, for audit purposes there would be no presumed IRS tax avoidance, due to the fact that life insurance has been granted an "angel exception" (i.e., is an IRS approved transaction) (IRS Revenue Procedure 2004-65, 2004-66, 2004-67, 2004-68).
6) As a U.S. territory, Puerto Rico life insurance policies do not require filing of "FBAR" Form TDF 90-22.1 (Report of Foreign Bank and Financial Account). Since taxpayer's foreign Grantor Trust (i.e. Nassau Trust) owns the Puerto Rico Life Insurance policy an abbreviated Form 8938 may be filed (only Parts I and IV).
In contrast, foreign life insurance issued to U.S. persons is subject to "FBAR filings" annually (if valued at more than $10,000) with the report filed directly with the IRS (Treasury Department), and disclosure as a specified foreign financial asset (over $50,000) with the annual filing of Form 8938, a separate tax compliance form filed with annual income tax returns (Form 1040).
7) Additional income tax benefits:
a) Assets inside a life insurance policy grow and compound income tax free.
b) Death benefit paid income tax free. (IRC§101)
8) Short-term capital gains exempt from income tax (41% Federal/California income tax, i.e. Federal 35% tax rate over $379,150, California: 9.3% tax rate over $48,029)
9) Bond interest exempt from income tax (taxed at 41% ordinary income rates Federal/California)
10) Under Puerto Rico law, the cash value benefits of a life insurance policy are expressly exempt from seizure by creditors (absent fraudulent conveyance funding of the policy). Act No. 399 of Sept. 22, 2004, as amended by Act No. 98 of June 20, 2011.
Under Act No. 98 (6/20/11), which amended Act no. 399 (9/22/04), the policy owner and policy beneficiary are statutorily protected from seizure.
In summary, a properly structured US compliant private placement life insurance as issued by a duly licensed Puerto Rican carrier, and as owned by a Bahamian Foreign Grantor Trust is very legitimate and tax effective way to hold portfolio investments (especially hedge funds), while at the same time having a minimal reporting burden associated with it, as well as providing significant asset protection.
By: Gary Wolfe
Wednesday, March 13, 2019
Ultimate Practical Tax Lawyer Secrets to Tax Audit Survival
CRA Income Tax Audit - Toronto Tax Lawyer Introduction
As Toronto tax lawyers we deal with CRA audits and auditors on a daily basis. So what is a tax audit? This article will explain what you can expect to happen if you are audited for taxes.
The Canadian income tax system is based on self assessment. In other words it is up to every Canadian taxpayer to fully and properly report their total income from all sources on their annual T1 or T2 income tax return. The Canada Revenue Agency performs tax audits and issues income tax assessments to ensure that the self-assessment income tax system continues to work properly. While most Canadians are truthful on their tax returns, there are some who are not. CRA is looking for errors or disputable positions or deliberate misstatements on tax returns that have been filed.
What is a Tax Audit?
An income tax audit is an examination of a taxpayer's returns and supporting records to make sure that income and expenses have been properly reported and are supported by accounting records and receipts. The CRA tax auditor will ask to see the individual or corporate books and records and bank account and receipts for expenses. A corporation will normally have to provide its minute book to support any dividends or bonuses. There may be questionnaires to be filled out. Any information that is wrong, even if due to an error, will be used against the taxpayer.
Most audits are done to ensure compliance with the Income Tax Act for income or payroll deductions or under the Excise Tax Act for GST/HST.
Canadian Tax Audit Procedures
CRA auditors will often search for relevant information on the Internet, and a taxpayer's web site or other sources located on Google might contradict information the taxpayer provides to the auditor. This information will then be used for further enquiries possibly including 3rd party requests for information. Furthermore open social media accounts are publicly accessible, and CRA auditors will gather this data from taxpayer social media accounts to build a case against a taxpayer. CRA officials have publicly discussed using taxpayer's social media accounts in this way. If taxpayer lifestyle and reported income don't match up the CRA tax auditor may decide to look into the taxpayer's situation to see what's actually going on.
CRA's practice on income tax audits is to do a GST (and HST) compliance review; if problems are found, the matter is normally forwarded to a GST/HST auditor for a full GST/HST audit. Similarly, an income tax compliance review is often done during GST/HST audits. Combined income tax and GST/HST audits were discontinued in July 2010. These compliance reviews are not always carried out and sometimes income tax audits may miss large GST/HST problems and vice versa.
CRA Audit Statistics
CRA issues an annual report to Parliament. The latest one was released in January 2016. The audit statistics from CRA Annual Report 2014-2015 provide less detailed information than for the previous year.
For small & medium enterprises no statistics were given. CRA reports that they reviewed 12,981 international and large business files and 9,440 aggressive tax planning files that resulted in identifying $1.4 billion in fiscal impact. For international and large business files CRA audited 6,540 income tax and GST/HST underground economy files and identified over $448 million in fiscal impact. In all cases there were fewer audits in 2014/15 that the previous year. Presumably this reflects the results of budget changes.
Reasons for Tax Audit
CRA may choose to audit a taxpayer for several reasons. Amongst them are:
Since 2011 CRA has been auditing high net worth individuals and families, sending questionnaires asking for information about all companies, trusts, etc. that they control.
CRA has also been concentrating additional audit resources on the underground economy in an attempt to deter unreported cash sales.
What is the Tax Auditor Looking For?
The focus of the tax audit is to find errors in tax returns. Here are some examples of typical issues that may arise in a tax audit that would cause a taxpayer to receive a tax assessment at the end of the tax audit and that could result in penalties or a referral for a tax evasion investigation:
Right of CRA to Audit and CRA Audit Policies
Section 231.1 of the Income Tax Act gives CRA the statutory ability to carry out audits. In particular it entitles auditors to request and examine documents including computer records. Section 231.2 is a more formal provision whereby a "demand" or "requirement" is issued, but it need not be used by a tax auditor in the normal course where s.231.1 suffices.
The CRA can choose to audit anyone, but case law has held that such discretion does not permit a vexatious audit made for capricious reasons.
The Canada Revenue Agency has an internal policy in CRA Audit Manual §9.12.3 that audits should normally be limited to "one plus one" years that is to say the most recent year for which a return has been filed and assessed, plus one year back, with limited exceptions. This policy can be pointed out to a tax auditor to try to limit the scope of audit requests, but it has no legal effect and cannot be used in court to challenge a tax assessment that has been issued. Of course this rule of one plus one years does not apply in the case where CRA suspects unreported income. They will typically look at three years, and in some cases even more than 3 years.
In theory, the CRA has no discretion in applying the Act and must "follow it absolutely" by issuing a tax assessment for all taxes wing. The reality is that in practice tax auditors have wide discretion not to assess an amount, however once it is correctly assessed; a Tax Appeals Officer or Tax Court judge will have no power to cancel it on grounds of equity, fairness or compassion.
Tax Audit Assistance from Toronto Tax Lawyer
Our top Toronto tax lawyers fight CRA tax auditors every day. A taxpayer has the right to professional representation at all times. This is specifically provided for in right 15 of the Taxpayer Bill of Rights which says "You can choose a person to represent you and to get advice about your tax and benefit affairs. Once you authorize us to deal with this person, we can discuss your situation with your representative." A taxpayer should never meet with a CRA auditor without a professional Canadian tax lawyer present. Any information that is wrong, even if due to an error, will be used against the taxpayer. The auditor will also take notes and may misunderstand what the taxpayer has said or may wrongly record responses. An Ontario tax lawyer will have his or her own notes to contradict any auditor errors. Contact our Toronto tax law firm for tax help as soon as a CRA tax auditor contacts you.
Founding lawyer, David Rotfleisch is an expert in the realm of income tax law.You might say that income tax is David's passion for David is not only a lawyer, he is a chartered professional accountant. He has helped start-up businesses, resident and non-resident business owners and corporations with their tax affairs, and over the years, he has assisted numerous corporations and individuals with simple and complex tax and estate planning matters as well as tax amnesty and tax litigation issues.
We are Toronto based tax lawyers with more than 25 years of experience. We deal with all tax problems of the Canadian citizens and find out the perfect solution for them in a quick,responsive and efficient way. We fight CRA daily. Share your income tax problems with us and sleep at night.
Phone: 416-367-4222
Email: david@taxpage.com
Fax: 416 367 8649
Address: Rotfleisch & Samulovitch P.C.
2822 Danforth Avenue
Toronto, Ontario M4C 1M1
Website: http://taxlawcanada.com/
By: David Rotfleisch
As Toronto tax lawyers we deal with CRA audits and auditors on a daily basis. So what is a tax audit? This article will explain what you can expect to happen if you are audited for taxes.
The Canadian income tax system is based on self assessment. In other words it is up to every Canadian taxpayer to fully and properly report their total income from all sources on their annual T1 or T2 income tax return. The Canada Revenue Agency performs tax audits and issues income tax assessments to ensure that the self-assessment income tax system continues to work properly. While most Canadians are truthful on their tax returns, there are some who are not. CRA is looking for errors or disputable positions or deliberate misstatements on tax returns that have been filed.
What is a Tax Audit?
An income tax audit is an examination of a taxpayer's returns and supporting records to make sure that income and expenses have been properly reported and are supported by accounting records and receipts. The CRA tax auditor will ask to see the individual or corporate books and records and bank account and receipts for expenses. A corporation will normally have to provide its minute book to support any dividends or bonuses. There may be questionnaires to be filled out. Any information that is wrong, even if due to an error, will be used against the taxpayer.
Most audits are done to ensure compliance with the Income Tax Act for income or payroll deductions or under the Excise Tax Act for GST/HST.
Canadian Tax Audit Procedures
CRA auditors will often search for relevant information on the Internet, and a taxpayer's web site or other sources located on Google might contradict information the taxpayer provides to the auditor. This information will then be used for further enquiries possibly including 3rd party requests for information. Furthermore open social media accounts are publicly accessible, and CRA auditors will gather this data from taxpayer social media accounts to build a case against a taxpayer. CRA officials have publicly discussed using taxpayer's social media accounts in this way. If taxpayer lifestyle and reported income don't match up the CRA tax auditor may decide to look into the taxpayer's situation to see what's actually going on.
CRA's practice on income tax audits is to do a GST (and HST) compliance review; if problems are found, the matter is normally forwarded to a GST/HST auditor for a full GST/HST audit. Similarly, an income tax compliance review is often done during GST/HST audits. Combined income tax and GST/HST audits were discontinued in July 2010. These compliance reviews are not always carried out and sometimes income tax audits may miss large GST/HST problems and vice versa.
CRA Audit Statistics
CRA issues an annual report to Parliament. The latest one was released in January 2016. The audit statistics from CRA Annual Report 2014-2015 provide less detailed information than for the previous year.
For small & medium enterprises no statistics were given. CRA reports that they reviewed 12,981 international and large business files and 9,440 aggressive tax planning files that resulted in identifying $1.4 billion in fiscal impact. For international and large business files CRA audited 6,540 income tax and GST/HST underground economy files and identified over $448 million in fiscal impact. In all cases there were fewer audits in 2014/15 that the previous year. Presumably this reflects the results of budget changes.
Reasons for Tax Audit
CRA may choose to audit a taxpayer for several reasons. Amongst them are:
- Industry audit projects
- Random selection
- Third party tips
- Past history of non-compliance
- Comparison of information on returns to information received from third-party sources - in other words are all T-slips reported
Since 2011 CRA has been auditing high net worth individuals and families, sending questionnaires asking for information about all companies, trusts, etc. that they control.
CRA has also been concentrating additional audit resources on the underground economy in an attempt to deter unreported cash sales.
What is the Tax Auditor Looking For?
The focus of the tax audit is to find errors in tax returns. Here are some examples of typical issues that may arise in a tax audit that would cause a taxpayer to receive a tax assessment at the end of the tax audit and that could result in penalties or a referral for a tax evasion investigation:
- Overstated Expenses
- Overstated Deductions
- Over claimed Income Tax Credits
- Under reported or unreported Earnings
- Unreported cash sales
- Unreported internet income
- Unreported offshore income
- Unreported offshore assets
- Credits, such as for charitable donations, that are not supported by receipts
- Personal expenses deducted for business
- Shareholder loans not repaid within 2 corporate year ends
Right of CRA to Audit and CRA Audit Policies
Section 231.1 of the Income Tax Act gives CRA the statutory ability to carry out audits. In particular it entitles auditors to request and examine documents including computer records. Section 231.2 is a more formal provision whereby a "demand" or "requirement" is issued, but it need not be used by a tax auditor in the normal course where s.231.1 suffices.
The CRA can choose to audit anyone, but case law has held that such discretion does not permit a vexatious audit made for capricious reasons.
The Canada Revenue Agency has an internal policy in CRA Audit Manual §9.12.3 that audits should normally be limited to "one plus one" years that is to say the most recent year for which a return has been filed and assessed, plus one year back, with limited exceptions. This policy can be pointed out to a tax auditor to try to limit the scope of audit requests, but it has no legal effect and cannot be used in court to challenge a tax assessment that has been issued. Of course this rule of one plus one years does not apply in the case where CRA suspects unreported income. They will typically look at three years, and in some cases even more than 3 years.
In theory, the CRA has no discretion in applying the Act and must "follow it absolutely" by issuing a tax assessment for all taxes wing. The reality is that in practice tax auditors have wide discretion not to assess an amount, however once it is correctly assessed; a Tax Appeals Officer or Tax Court judge will have no power to cancel it on grounds of equity, fairness or compassion.
Tax Audit Assistance from Toronto Tax Lawyer
Our top Toronto tax lawyers fight CRA tax auditors every day. A taxpayer has the right to professional representation at all times. This is specifically provided for in right 15 of the Taxpayer Bill of Rights which says "You can choose a person to represent you and to get advice about your tax and benefit affairs. Once you authorize us to deal with this person, we can discuss your situation with your representative." A taxpayer should never meet with a CRA auditor without a professional Canadian tax lawyer present. Any information that is wrong, even if due to an error, will be used against the taxpayer. The auditor will also take notes and may misunderstand what the taxpayer has said or may wrongly record responses. An Ontario tax lawyer will have his or her own notes to contradict any auditor errors. Contact our Toronto tax law firm for tax help as soon as a CRA tax auditor contacts you.
Founding lawyer, David Rotfleisch is an expert in the realm of income tax law.You might say that income tax is David's passion for David is not only a lawyer, he is a chartered professional accountant. He has helped start-up businesses, resident and non-resident business owners and corporations with their tax affairs, and over the years, he has assisted numerous corporations and individuals with simple and complex tax and estate planning matters as well as tax amnesty and tax litigation issues.
We are Toronto based tax lawyers with more than 25 years of experience. We deal with all tax problems of the Canadian citizens and find out the perfect solution for them in a quick,responsive and efficient way. We fight CRA daily. Share your income tax problems with us and sleep at night.
Phone: 416-367-4222
Email: david@taxpage.com
Fax: 416 367 8649
Address: Rotfleisch & Samulovitch P.C.
2822 Danforth Avenue
Toronto, Ontario M4C 1M1
Website: http://taxlawcanada.com/
By: David Rotfleisch
Tuesday, February 12, 2019
Maritime Taxes: Saving Money On The Water
The siren call of boat ownership is easy to understand, here in South Florida. On a hot summer day, or even a crisp winter afternoon, getting out on the water for some sailing, fishing, snorkeling or water skiing can seem like the perfect reason to take the plunge.
Florida, and in particular the Greater Fort Lauderdale area where I live and work, is a major center for the motor yacht and boating industry. In South Florida, about 136,000 people currently work in the industry. According to industry figures for 2014, 19 percent of the over 30,000 boats sold in the U.S. that year were sold in Florida.
If you are ready to invest in a boat of your own, whether a modest fishing boat or a high-end yacht, it is worthwhile to pause and consider the tax implications, wherever you may live. Depending on the ways in which you intend to use your new watercraft, that impact could be minimal, or it could significantly change your overall financial picture.
Taxing Boat Sales
As with any big-ticket purchase, you should keep sales tax in mind when you are ready to buy your vessel of choice. There is no federal vessel tax, and federal luxury tax was repealed in the 1990s, so Uncle Sam does not take any particular interest in whether or not you choose to buy a boat. The states, however, want their cut. Every state is different, so be sure to take the time to understand any particular quirks in state law before you buy.
In Florida, for instance, boats are subject to the state sales tax rate of 6 percent, in addition to any local taxes. However, as of 2010 Florida has capped this tax, limiting it to the first $300,000 of a boat's purchase price. Thus, under current law, Florida will not collect more than $18,000 in sales tax on your new vessel. In addition, many Florida counties impose a discretionary sales surtax, which can apply to the first $5,000 of the purchase price. These sales tax caps make buying a high-end boat more attractive in Florida.
The Florida Legislature's revenue estimating committee projected in 2010 that the tax cap would cost the state as much as $1.4 million in the first year. Instead, tax collections on yacht sales in the state rose more than $13 million in that time. Buyers who previously spent large sums to form offshore companies in order to skirt the state tax found it cheaper and easier to simply pay the Florida tax outright. So before you buy a boat, consider whether you can get a better deal by buying and berthing it in another state.
The cap on boat sales tax was so powerful that other states are competing by passing caps of their own. Recently, Maryland, New Jersey and New York all passed or are considering passing laws to cap the tax on boat sales. Depending on your politics, you may consider this an unnecessary tax break for the wealthy boat-buying class, but based on the increase in tax revenue after Florida's cap went into effect, you can also see how lowering taxes and state competition can sometimes lead to long-term economic benefits. More boat sales in Florida lead to more employment and growth in marine-related industries in the region.
For whatever sales tax you do pay on your boat purchase, you may be able to realize some benefit when filing your federal income taxes. Assuming you itemize your deductions, you can deduct local sales tax in lieu of claiming state and local income taxes. Especially in states - like Florida - that do not levy a personal income tax, this can represent a significant deduction. The main calculation of the general sales tax deduction is based on your adjusted gross income, but you can add sales tax paid specifically on a car or boat purchase to that amount.
Make sure you also understand how a state's use tax may impact you. For the typical recreational vessel, use tax will not matter, because sales and use tax are mutually exclusive - if you pay sales tax on a transaction, you cannot also owe use tax. That said, if you plan to use a watercraft primarily in a different state than the one where it was purchased, it is worth taking the time to make sure you understand your home state's rules and that your documentation is in order so you do not end up a target for overzealous state tax authorities.
You should also educate yourself on state and local taxes related to a watercraft which may apply on an annual or ongoing basis. Certain states and local authorities levy personal property taxes annually on boats docked within their jurisdictions.
On the other hand, some states offer particular tax breaks to boat owners. For example, last year Florida passed a law limiting the sales tax on boat repairs to no more than $60,000, or the first $1 million of repair costs. Like the sales tax cap on boat purchases, the law is intended to allow Florida to maintain its status as a leader in the marine industry. The hope is that the cap on boat repair sales tax will attract and retain repair and refit business for luxury yachts and other high-end boats in the state, thereby increasing revenue and employment, bolstering the local economy. If you own a yacht in a high-tax state, it could make sense to cruise it down to Florida for major repair work to save on taxes. Some states even offer a tax credit on fuel used for recreational boating. Yes, even the boating industry has a strong lobby group to push state legislators for tax breaks.
Living On Your Boat
While it makes sense to think of your vessel in the same way you might think of a car or recreational vehicle, there is another way to characterize it. In some cases, a boat can plausibly serve as a second home, meaning it can offer deductible home loan interest. In order to qualify, the vessel must include cooking, sleeping and toilet facilities; do not try to convince the Internal Revenue Service that you live on your jet ski.
There are a few other caveats. The deduction is on mortgage interest secured by the residence, so the deduction will not affect you if you bought your boat outright or used some personal line of credit, such as a credit card. Also, if you are already deducting interest on a second home, you cannot deduct both it and the boat loan interest in the same year, though you may switch between them from year to year if you wish.
A boat may even be your primary residence. Technically, as long as it meets the bed, bathroom and kitchen (or rather galley) test, you can declare your boat to be your main home. Note that if you use your boat for business, as I'll discuss in the next section, you must divide your home between the part that is your primary residence and the part that is used to generate income. If your boat is your primary residence and it does not dock in the same port regularly, you may face a tricky tax domicile situation too.
Your Boat As A Business
Many boat owners use their boats to earn income, either on the side or as their main business. Depending on your situation, you may decide to use your vessel as a fishing charter, to run scuba or snorkeling tours, or to serve as a private ferry. As with a land-bound venture, you will need to take care to steer clear of the IRS' hobby-loss rules by proving your genuine intention to make a profit, rather than just cover the costs of your time out on the water.
The benefit of establishing your activities as a genuine business is the ability to write off the boat's depreciation, maintenance, equipment and fuel costs. You may not want to devote your boat exclusively to chartering; if not, you will need to keep track of the time and costs spent on private and business pursuits. Either way, you should always keep good business records and institute an accounting system to track your business activity.
As with other forms of self-employment, you will be responsible for income taxes and self-employment taxes. Remember that you may be subject to estimated income tax, which is due quarterly. Many boat owners choose to transfer their boat ownership to a limited liability company (LLC) for liability protection, but since this is a pass-through entity for tax purposes, it will not generally make much difference to your personal tax situation. If you are not used to running your own business, it may make sense to consult a tax professional or a Certified Financial Planner™ to make certain you keep up with your personal and business tax responsibilities.
If your boat business involves crossing state lines, you may need to be particularly careful about documenting the way income is sourced. Many people run up against the complications of conducting business in multiple states, and the water adds another complication. However, under a specific federal law (Chapter 46, U.S.C. Sec 11108(b)), working on navigable waters in the jurisdiction of more than one state is not sufficient to subject you to the states' income tax rules. For example, if you live in Florida but work as a crewman on a vessel that operates in or passes through waterways of other states, only Florida - your state of residency - can impose its income tax laws (or lack thereof, since Florida has no state personal income tax). This law is particularly important for crewmembers on dredging vessels, which may operate in multiple states' waterways (up the Mississippi river, for instance).
If you intend to find yourself operating in more than one state regularly, it may be best to consult a tax professional at the outset to understand what factors could affect your taxes. Where and how often a vessel docks and how much work is conducted on or connected to land can make a difference.
Some boat owners have no interest in running a small business, but would still like to offset the cost of owning a watercraft. An alternative strategy is to place the boat in charter with a reputable charter company. In such an arrangement, you typically retain ownership of the vessel, while the company assists you in managing what is essentially a rental business. Before you go this route, you will want to perform thorough due diligence and make sure your state's business laws support such an arrangement, and you should understand your potential liability exposure.
What if your boat is also your office? The rules will be the same as for a home office ashore. The IRS primarily will consider whether you use your boat office exclusively and regularly for business purposes. For a boat-based office, the tricky requirement is usually the exclusive use test, because boats often have multi-purpose rooms. The IRS wants to see that you maintain a separate room or dedicated workspace that you use exclusively for business purposes.
If you are an employee and you use a part of your boat for business purposes, you may qualify for a deduction for its business use, but in addition to the exclusive and regular use tests, the boat office must also be for the convenience of your employer. You also must not rent any part of your boat to your employer and use the rented portion to perform services as an employee for that employer. If the use of the boat office is merely appropriate and helpful, you cannot deduct expenses for the business use of your boat office.
In many geographic regions it is only practical to use boats seasonally; note that an office aboard a vessel qualifies only for deductions during the time of use. IRS rules prohibit deducting office expenses aboard the boat during the period when you are not using the boat office for business purposes, or when the boat is in dry dock or storage.
A boat of your own can serve as a fun way to enjoy time on the water, a secondary or primary source of income, or even an unconventional place to call home. But besides the high costs of buying and maintaining a vessel, don't overlook the tax considerations when deciding whether to answer the call of the open water.
This article originally appeared in "Sentinel," the Palisades Hudson Financial Group LLC newsletter ( http://palisadeshudson.com/sentinel/ )
For more articles, you can also visit our blog, "Current Commentary," at http://palisadeshudson.com/current-commentary/.
By: Anthony Criscuolo
Florida, and in particular the Greater Fort Lauderdale area where I live and work, is a major center for the motor yacht and boating industry. In South Florida, about 136,000 people currently work in the industry. According to industry figures for 2014, 19 percent of the over 30,000 boats sold in the U.S. that year were sold in Florida.
If you are ready to invest in a boat of your own, whether a modest fishing boat or a high-end yacht, it is worthwhile to pause and consider the tax implications, wherever you may live. Depending on the ways in which you intend to use your new watercraft, that impact could be minimal, or it could significantly change your overall financial picture.
Taxing Boat Sales
As with any big-ticket purchase, you should keep sales tax in mind when you are ready to buy your vessel of choice. There is no federal vessel tax, and federal luxury tax was repealed in the 1990s, so Uncle Sam does not take any particular interest in whether or not you choose to buy a boat. The states, however, want their cut. Every state is different, so be sure to take the time to understand any particular quirks in state law before you buy.
In Florida, for instance, boats are subject to the state sales tax rate of 6 percent, in addition to any local taxes. However, as of 2010 Florida has capped this tax, limiting it to the first $300,000 of a boat's purchase price. Thus, under current law, Florida will not collect more than $18,000 in sales tax on your new vessel. In addition, many Florida counties impose a discretionary sales surtax, which can apply to the first $5,000 of the purchase price. These sales tax caps make buying a high-end boat more attractive in Florida.
The Florida Legislature's revenue estimating committee projected in 2010 that the tax cap would cost the state as much as $1.4 million in the first year. Instead, tax collections on yacht sales in the state rose more than $13 million in that time. Buyers who previously spent large sums to form offshore companies in order to skirt the state tax found it cheaper and easier to simply pay the Florida tax outright. So before you buy a boat, consider whether you can get a better deal by buying and berthing it in another state.
The cap on boat sales tax was so powerful that other states are competing by passing caps of their own. Recently, Maryland, New Jersey and New York all passed or are considering passing laws to cap the tax on boat sales. Depending on your politics, you may consider this an unnecessary tax break for the wealthy boat-buying class, but based on the increase in tax revenue after Florida's cap went into effect, you can also see how lowering taxes and state competition can sometimes lead to long-term economic benefits. More boat sales in Florida lead to more employment and growth in marine-related industries in the region.
For whatever sales tax you do pay on your boat purchase, you may be able to realize some benefit when filing your federal income taxes. Assuming you itemize your deductions, you can deduct local sales tax in lieu of claiming state and local income taxes. Especially in states - like Florida - that do not levy a personal income tax, this can represent a significant deduction. The main calculation of the general sales tax deduction is based on your adjusted gross income, but you can add sales tax paid specifically on a car or boat purchase to that amount.
Make sure you also understand how a state's use tax may impact you. For the typical recreational vessel, use tax will not matter, because sales and use tax are mutually exclusive - if you pay sales tax on a transaction, you cannot also owe use tax. That said, if you plan to use a watercraft primarily in a different state than the one where it was purchased, it is worth taking the time to make sure you understand your home state's rules and that your documentation is in order so you do not end up a target for overzealous state tax authorities.
You should also educate yourself on state and local taxes related to a watercraft which may apply on an annual or ongoing basis. Certain states and local authorities levy personal property taxes annually on boats docked within their jurisdictions.
On the other hand, some states offer particular tax breaks to boat owners. For example, last year Florida passed a law limiting the sales tax on boat repairs to no more than $60,000, or the first $1 million of repair costs. Like the sales tax cap on boat purchases, the law is intended to allow Florida to maintain its status as a leader in the marine industry. The hope is that the cap on boat repair sales tax will attract and retain repair and refit business for luxury yachts and other high-end boats in the state, thereby increasing revenue and employment, bolstering the local economy. If you own a yacht in a high-tax state, it could make sense to cruise it down to Florida for major repair work to save on taxes. Some states even offer a tax credit on fuel used for recreational boating. Yes, even the boating industry has a strong lobby group to push state legislators for tax breaks.
Living On Your Boat
While it makes sense to think of your vessel in the same way you might think of a car or recreational vehicle, there is another way to characterize it. In some cases, a boat can plausibly serve as a second home, meaning it can offer deductible home loan interest. In order to qualify, the vessel must include cooking, sleeping and toilet facilities; do not try to convince the Internal Revenue Service that you live on your jet ski.
There are a few other caveats. The deduction is on mortgage interest secured by the residence, so the deduction will not affect you if you bought your boat outright or used some personal line of credit, such as a credit card. Also, if you are already deducting interest on a second home, you cannot deduct both it and the boat loan interest in the same year, though you may switch between them from year to year if you wish.
A boat may even be your primary residence. Technically, as long as it meets the bed, bathroom and kitchen (or rather galley) test, you can declare your boat to be your main home. Note that if you use your boat for business, as I'll discuss in the next section, you must divide your home between the part that is your primary residence and the part that is used to generate income. If your boat is your primary residence and it does not dock in the same port regularly, you may face a tricky tax domicile situation too.
Your Boat As A Business
Many boat owners use their boats to earn income, either on the side or as their main business. Depending on your situation, you may decide to use your vessel as a fishing charter, to run scuba or snorkeling tours, or to serve as a private ferry. As with a land-bound venture, you will need to take care to steer clear of the IRS' hobby-loss rules by proving your genuine intention to make a profit, rather than just cover the costs of your time out on the water.
The benefit of establishing your activities as a genuine business is the ability to write off the boat's depreciation, maintenance, equipment and fuel costs. You may not want to devote your boat exclusively to chartering; if not, you will need to keep track of the time and costs spent on private and business pursuits. Either way, you should always keep good business records and institute an accounting system to track your business activity.
As with other forms of self-employment, you will be responsible for income taxes and self-employment taxes. Remember that you may be subject to estimated income tax, which is due quarterly. Many boat owners choose to transfer their boat ownership to a limited liability company (LLC) for liability protection, but since this is a pass-through entity for tax purposes, it will not generally make much difference to your personal tax situation. If you are not used to running your own business, it may make sense to consult a tax professional or a Certified Financial Planner™ to make certain you keep up with your personal and business tax responsibilities.
If your boat business involves crossing state lines, you may need to be particularly careful about documenting the way income is sourced. Many people run up against the complications of conducting business in multiple states, and the water adds another complication. However, under a specific federal law (Chapter 46, U.S.C. Sec 11108(b)), working on navigable waters in the jurisdiction of more than one state is not sufficient to subject you to the states' income tax rules. For example, if you live in Florida but work as a crewman on a vessel that operates in or passes through waterways of other states, only Florida - your state of residency - can impose its income tax laws (or lack thereof, since Florida has no state personal income tax). This law is particularly important for crewmembers on dredging vessels, which may operate in multiple states' waterways (up the Mississippi river, for instance).
If you intend to find yourself operating in more than one state regularly, it may be best to consult a tax professional at the outset to understand what factors could affect your taxes. Where and how often a vessel docks and how much work is conducted on or connected to land can make a difference.
Some boat owners have no interest in running a small business, but would still like to offset the cost of owning a watercraft. An alternative strategy is to place the boat in charter with a reputable charter company. In such an arrangement, you typically retain ownership of the vessel, while the company assists you in managing what is essentially a rental business. Before you go this route, you will want to perform thorough due diligence and make sure your state's business laws support such an arrangement, and you should understand your potential liability exposure.
What if your boat is also your office? The rules will be the same as for a home office ashore. The IRS primarily will consider whether you use your boat office exclusively and regularly for business purposes. For a boat-based office, the tricky requirement is usually the exclusive use test, because boats often have multi-purpose rooms. The IRS wants to see that you maintain a separate room or dedicated workspace that you use exclusively for business purposes.
If you are an employee and you use a part of your boat for business purposes, you may qualify for a deduction for its business use, but in addition to the exclusive and regular use tests, the boat office must also be for the convenience of your employer. You also must not rent any part of your boat to your employer and use the rented portion to perform services as an employee for that employer. If the use of the boat office is merely appropriate and helpful, you cannot deduct expenses for the business use of your boat office.
In many geographic regions it is only practical to use boats seasonally; note that an office aboard a vessel qualifies only for deductions during the time of use. IRS rules prohibit deducting office expenses aboard the boat during the period when you are not using the boat office for business purposes, or when the boat is in dry dock or storage.
A boat of your own can serve as a fun way to enjoy time on the water, a secondary or primary source of income, or even an unconventional place to call home. But besides the high costs of buying and maintaining a vessel, don't overlook the tax considerations when deciding whether to answer the call of the open water.
This article originally appeared in "Sentinel," the Palisades Hudson Financial Group LLC newsletter ( http://palisadeshudson.com/sentinel/ )
For more articles, you can also visit our blog, "Current Commentary," at http://palisadeshudson.com/current-commentary/.
By: Anthony Criscuolo
Friday, February 1, 2019
Are Your Prepared for These Year End Income Tax Issues?
Over the course of the year, I'm sure you've noticed the ridiculous way our Congress has acted to update our tax laws. By including tax code provisions in a highway bill, a mass transit bill, and a trade package bill- plus within the Bipartisan Budget Act and the PATH (Protecting Americans from Tax Hikes) Acts. (Those last two were, indeed, logical places to regulate taxes.)
There is a chance that the lame duck Congressional session may act on some tax regulations, but given that these folks work about 1 day a week- and then complain how many lazy folks are out across the US not entering the workforce (that is the pot calling the kettle black)- I am not sanguine they will. So, unless they do- this will be the last year that mortgage insurance will be deductible and foreclosed home debt will not be a taxable situation, among a few other items that expire this calendar year.
But, I figured it would be helpful if I combined all these changes into a coherent mass (which our legislators clearly have not), so you can be prepared for the 2016 tax season. (Remember, you file your taxes for 2016 by April 2017. Oh- and if you are a business, the odds are the date your taxes are due, also changed. More on that below.)
Students and Teachers (PATH Act provisions)
Students got a permanent change for deductibility of tuition via the American Opportunity Tax Credit. This provides up to $ 2500 of tax credit for lower-income filers for the first four years of higher education (with a possibility of 40% of the unused credit being received as a refund- if no other taxes are owed). As long as the students are enrolled at least half time for one term of the year and not convicted of drug violations. The real change is that filers must include the EIN of the college or university involved- and demonstrate that they paid the tuition and fees they claim- not what the institutions may list on the 1098-T form.
On the other hand, the tuition deduction for other students will expire at the end of this year. Oh, and that generous (sic) deduction teachers get for buying supplies for their students that schools don't supply is now permanent- all $ 250 of it. (Most teachers spend at least twice that!)
Pensions and IRA
Folks older than 70.5 years of age no longer have to rush to transfer their IRA (or portions thereof) to charity, because that provision is permanent. (PATH) Please note that the IRS demands that these transfers not be rollovers. One must employ a trustee to transfer the funds; and that trustee cannot hand you the funds to deliver to the charity. If they do, you lose the exemption. No surprises I am sure when I remind you that there must be a contemporaneous acknowledgement (that means a timely receipt) from the charity for that deductible donation or transfer.
Heirs and Estates
While still in the wrong venue, the Highway Bill did fix a big problem. Folks (or entities) that inherit assets from an estate are now required to use the basis filed in the 706 form for their own calculations. (Just so you know, the rules stipulate that estates can value items as per the date of death, or by alternate choice 9 months after that date. Too many "cheaters" would use a different basis for the property they inherited, thereby cheating the tax authorities with alternative valuations.)
To keep this rule in place, executors are now required to stipulate (i.e., file for 8971 and Schedule A of the 706) said value to all heirs and to the IRS. Which means anyone who inherits property- and thought they didn't need to file Form 706 because the value of the estate was below the threshold for Estate Tax better reconsider. Otherwise, the heirs may be hit with a penalty for using the wrong basis for that inherited asset when they dispose of same.
Why? Because if a 706 form is never filed, the basis of all assets inherited is now defined as ZERO!!!!! It gets worse. Because if an asset were omitted from Form 706, the basis of that property is now determined to also be ZERO. (Unless the statute of limitations is still opened, when an Amended 706 can be filed to correct this omission.)
Another kicker. If the 706 form is filed LATE, the basis of all assets that should have been included are also set at ZERO. Some tax advisors feel this one little provision could be challenged in court. But, let's just be prudent and file all those 706 Estate Tax returns in a timely fashion. (Filing a 706 when the estate value is below the filing threshold is called a Protective 706 Filing; we've been doing those for years. And, we strenuously examine the assets often to the consternation of the heirs- to ensure that all the non-worthless assets are included. You know, that 36 diamond tennis bracelet your grandma promised you would inherit when you turned 16.)
Oh, yeah. Another really big kicker for this little item. Under IRC 6501, the IRS has three years to catch cheaters who misstate certain items (like income taxes [except for continuing fraud], employment taxes, excise taxes, and for this provision- estate taxes and the results therefrom). No more. If an asset from an estate is misstated so that it can affect more than 25% of the gross income on a tax return will now have a SIX year statute of limitation.
Mileage Rates
Not surprisingly, the mileage rates for 2016 are lower than they were last year. Business mileage is now deducted as 54 cents a mile; driving for reasons that are medical or moving are only worth 19 cents each. When we drive to help a charity, we only get 14 cents a mile.
As is normally true, we have no clue what those rates will be for 2017. The IRS normally prepares those well into the calendar year.
Real Estate
The PATH ACT made permanent the ability of taxpayers to contribute real property to qualified conservation charities.
Health and Health Insurance
The Highway Bill (yup) came up with a bouquet of flowers for our veterans and folks currently serving in the military. No longer will they be unable to contribute or use HSA (Health Savings Accounts) should they receive VA or armed service benefits.
Along that same vein, the Highway Bill enabled all those who purchase- or are provided by their employers- high deductible insurances (about $ 1500 for a single person) to use HSAs, too.
Oh, and assuming Obamacare is not overturned, there is a permanent exemption from penalties for those receiving VA or TriCare Health Benefits. (For employers, the Highway Bill also exempts all such employees from being included in determining the 50 employee (full-time or equivalent) threshold provisions.)
Employers
There were more than a few changes for employers. More than the exemption for the VA and armed service personnel from inclusion in Obamacare provisions mentioned above.
Like ALL 1099s and W-2 are now due by 31 January. That's a big change for many folks who barely get their stuff together to file 1099's. It means that companies need to contact their tax professionals really early- to let them verify that all relevant contractors and consultants receive those 1099s on time. Because the penalties have also increased.
The Work Opportunity Credit has been extended through 2019. This applies to Veterans (which is why you keep hearing Comcast advertising its commitment to hire some 10,000 veterans over the next few years- they're no dummies). Other targeted groups include what are termed those receiving Temporary Assistance for Needy Families (TANF), SNAP (what used to be termed Food Stamp) recipients, ex-felons, and some of those living in "empowerment zones".
Families and Individuals
The PATH ACt made the enhanced child tax credit (up to $ 1000, income dependent) a permanent provision of the code. As well as the Earned Income Tax Credit provisions that were to expire.
Social Security taxes are not going up per se- but the income basis upon which one pays them is. For the last two years, there was a tax holiday for all wage income (or self-employed income) that exceeded $ 118,500. Next year (2017), the taxes will be collected for totals of up to $ 127,200.
If an employee is working overseas and has income and/or a housing allowance, the exclusion provisions have also changed. For 2016, foreign income of $ 101,300 could be excluded from taxation, as could housing benefits that were $ 16,208 or less. Starting 2017, those exclusions become $ 102,100 and $ 16,336, respectively.
There also is further clarification of these foreign exclusions. In particular, these will affect those in the merchant marine or working aboard cruise lines. Because the IRS now holds that when one is in a foreign port, then one is able to claim foreign income. But... when someone operates in international waters, that is NOT a foreign country. That income must be computed (by the number of days one is on said waters) and is not excludable!
Individuals, Businesses, Trusts, Non-Profits that have Foreign Accounts
Some big changes affect those who must file those FBARs (Foreign Bank and Financial Accounts). It used to be you had to report any holdings in a bank, stock account, commodities or future accounts, mutual funds, or [pay attention to this one] poker, gambling or gaming site account that was not a US domicile by 30 June. (This also means a foreign insurance policy that has a cash value or foreign retirement accounts [including inheritances] is a foreign account.) It also covers recent immigrants to the US! These filings are due at the same time as your income tax return. But, while there never was an extension possible for these forms, now there is - for the same six months that obtains for your personal tax filings.
A foreign account does not mean that using the Royal Bank of Scotland to house funds in New York City; but having a Citicorp account that is based in Jerusalem or London does. The critical consideration is where the local branch is situated, where the account was opened. By the way, accessing foreign funds via PayPal means you have a foreign account.
The FBAR filing uses Form 114 and must be now filed electronically. The requirement to file applies to all taxable entities (individuals and businesses) that have $ 10,000 or more of value on any given day during the tax year. And, the conversion rate for said value is no longer allowed to be daily- but determined by the value on the last day of the tax year.
There is a new interpretation, too. The requirement to file applies not just to the account owner(s), but to anyone with signature authority. So, that means people like me that maintain client accounts overseas will now have to file these forms, because I can issue checks on those accounts. (I am not responsible for about 100 of them where I write the checks for the clients- but have no signature authority.) It also means employees of corporations or businesses or estates that have foreign funds and have signature authority must also file Form 114.
All business entities (and trusts and non-profits) should recognize that all entities - and individuals who work for or at those entities- that have signature authority for a foreign bank account, stock account, gaming or gambling account are subject to these provisions. In other words, all foreign money holdings may subject employees, not just officers of the institutions, to these provisions.
Oh. The IRS also requires those foreign entities where you may or may not have money to file Form 8938, a FATCA (Foreign Account Tax Compliance Act) filing. This covers those financial accounts, stocks, securities, contracts, interests- anything that exceeds the filing threshold. These rules also apply to American entities (individuals, businesses, trusts, etc. that have such interests in excess of the filing threshold! (If one resides in the US, those thresholds are $ 50K for individuals, $ 75$ for married folks on the last day of the year- or $ 100K and $ 150K at any time during the tax year. Those numbers increase by a factor of 4 if one doesn't reside in the US; the thresholds are $ 200K, $ 300K, $ 400K, and $ 600K, respectively.)
Businesses
The PATH Act changed the 179 (the capital purchases write-off provisions) Election. For good. The maximum Section 179 write-off is now permanent. (It had been extended for a year or two each time Congress had made a change for a while.) That maximum is also to be adjusted for inflation starting this year, which is why it is now $ 510,000. Moreover, there is a phaseout when the amount of new capitalized property exceeds $ 2.03 million, but not to zero.
Real Estate
For real estate purchases, the maximum Section 179 exclusion is now also $ 500K. (Last year, it was capped at $ 250K.) This includes HVAC (heating, ventilation, and air conditioning), which is a new change. Any recapture of this credit (due to an early sale) is now considered subject to ordinary income taxes.
The time to depreciate real estate is now 15 years for qualified leasehold improvements, restaurants, and retail improvements. Bonus depreciation is also allowed for the first half of said improvement value (through 2017), decreasing in 2018 to only 40%, 30% in 2019 and removed completely by 2020. The PATH Act also let bonus depreciation apply to 39 year property (for improvements that were already in service by the entity).
Automobiles (Luxury)
The depreciation limits for vehicles is limited to $ 3160 or 20% of the basis in 2016. However, this year one can write off up to $ 8000 in bonus deprecation (which is reduced to $ 6400 in 2018, $ 4800 in 2019 and then removed forever by 2020) for new (not used) automobiles. Of course, these numbers apply only to vehicles that are used completely for business. There is a reduction for vehicle use that is not fully attributed to business usage.
Partnerships
The Bipartisan Budget Act (the one that taxes would normally be addressed) has brought a sea change to the way partnerships will be treated, should the IRS find problems with their tax submissions. The changes do not take effect for a few years- but the time to address the changes is really now.
Basically, the Act stipulates that any change that comes about by an audit are to be collected directly from the partnership- unless the partnership elects out of TEFRA (Tax Equity and Fiscal Responsibility Act of 1982). So, it means that partnership formation, operations, new partner admissions, etc. will all have to be reconsidered.
What changed is this- the partnership can decide to accept an IRS decision that the underpayment is due from the partnership itself or it can elect to have that decision divided up among the partners, according to their percentage ownership or liability percentage. Most advisors are telling partnerships to elect the latter process. If the partnership does not so choose, then the IRS will assess the partnership at the highest tax rate allowed- 39.6%. Of course, if the partnership can prove (to the satisfaction of the IRS) that a lower rate is appropriate, based upon the individual tax rates of the partners, then a lower rate may be allowed. (Don't bank on the IRS doing so.) However, this underpayment will not be allowed to change the basis of each of the partner's interests, if the partnership is taxes for the liability.
If the partnership pushes the issues down to the partner level, then each partner is assessed for the tax at its own rate. And, the partnership can issue an adjusted (amended) K-1 for the IRS revisions that will change the basis and avoid the double taxation possibility. The partnership has 45 days from the date of the IRS notice of change to make this election.
There is another change that affects partnerships- the PAL (passive active loss) issue. Why? Because most partners and partnerships do not maintain pristine time records. (This also affects real estate rentals that are reported on Schedule E, page 1.) There are various definitions that set the PAL issues- for real estate professionals it is a minimum of 750 hours of work a year. The IRS has allowed other partnerships to use different designations, such as 500 hours, or the fact that a particular partner does all the work (even if less than 500 hours), or even when a partner spends 100 hours or more on the partnership and no one else does more.
But, the rules to prove how much participation are gelling. One can use a record of cell phone call records, eMails, or credit card charges. Travel itineraries and receipts can prove how much participation was involved. Even affidavits from customers and clients can be used to prove the time one participated in the venture.
Payments Due
The IRS has been starved to death for years by Congress. Partly because one party was angry that the IRS was not automatically granting those "social welfare" organizations (read as political collections and donation farms) tax exemptions without scrutiny. Partly because the IRS is responsible for collecting the penalties for those who don't comply with Obamacare. (Hoping that this lack of funds would make it harder for them to do so.)
But, in my humble opinion, the solution Congress came up with sucks. The IRS has now been authorized to hire those bottom feeders- the outside collection agents, that harass and subject folks to all sorts of intimidation. The logic behind this choice? After all, folks who owe the IRS must be the scum of the earth. (Of course, no one ever considers the fact that the IRS makes mistakes, chooses random numbers to assess non-filing taxpayers who may actually owe nothing, etc.)
Many clients fall short of having sufficient funds to pay their taxes when due. This entails the taxpayer submitting a form 9465 (Installment Agreement Request). These must be automatically approved if the taxpayer [individual] owes (or will owe) the IRS $ 50,000 or less, with the addition of this request- and all tax forms have been timely submitted. (Businesses are limited to a $ 25,000 maximum, with the same provisos.) However, the fees involved to have the IRS process the request have been increased to $ 120, unless the taxpayer agrees to have the IRS zap their bank account automatically each month. Then, the fees are reduced to $ 52. (The IRS has way too many taxpayers "forgetting" to make timely payments. This is a way to incur fewer manpower issues for the service.) However, no matter how the payment is to be processed by the IRS, all low-income taxpayers (a family of 4, with $60K or less in income) won't have to pay more than $ 43 to institute a payment plan.
The biggest issue? Any taxpayer who is not in compliance with IRS code, who has no installment agreement in place, and owes $ 50,000 in taxes, penalties, and interest can find his passport revoked IMMEDIATELY. (If one is not yet issued, don't expect the Department of State to issue one, either.)
Filing Dates
Individuals
There has been no change in the due date for 1040 filing, in that it is still due on 15 April (or the next business day, should the 15th fall on a weekend or legal holiday). Unless you can prove you were out of the country on 15 April- then you have the right to extend the filing date to 15 June. Or, you filed an extension request- that gives you until 15 October (with the same proviso for when it falls on a weekend or legal holiday).
Businesses
Here's where the big changes arrive. And, it is about time. Because too many pass-through entities have been screwing over their partners, their stockholders by delaying their filing. Oh, sure, they may pay a penalty, but that doesn't help the multitudes who can't file their taxes in a timely fashion due to the lassitude of these entities.
So, from now on, all pass through entities- those are partnerships, LLCs, and S entities must no file their tax returns by the 15th day of the 3rd month after the end of their tax year. Recognize that the IRS allows companies that have "good" reasons to not use a natural year (i.e., 1 January to 31 December) to chose another month to end their tax year. But, for most entities, the due date will now be 15 March. Which gives the partners or the stockholders a month to finish their own tax returns. (Firms that operate on the US Government year, which ends 30 September, for example, must file their taxes by 15 November.)
Regular Corporations (C entities) no longer have to file by the 15th day of the 3rd month, but now have until the 4th month. So, for those companies operating on a natural year basis, the due date has been extended (permanently) from 15 March to 15 April. (A similar 15th day of the 4th month after year-end applies for those not operating on a natural year basis.)
Business, Trusts, Non-Profits, and Pension Plan Extensions
There is one more change for C corporations. Their extension is no longer 6 months long- but 5 months. In other words, before when they had to file by 15 March, but could extend the due date until 15 September... still have that same final extended due date, regardless that the original filing date is now 15 April.
Partnerships and S entities still have a 6 month extension- which also falls (for those who use a natural year) on 15 September.
Trusts and Estates of the Deceased file form 1041. The only extension request provided 5 months beyond the due date. Now, the due date is 5.5 months. That means the due date for filing is 15 April, but an extension means the due date can be 30 September.
Non-Profit entities file form 990 on 15 May- or the 15th day of the 5th month after the end of their fiscal year. Extensions used to be provided for 3 months; they now have more time- six month extensions are the new rules.
Employee Benefit Plans (Pension Plans, 401(k), welfare plans) must file their tax returns with the IRS by the last day of the 7th month after their year end. (For natural year plans, that means 31 July). Before the plans could extend that deadline by 2.5 months; now the rule provides for an additional month to 3.5 months.
Late Filing Penalties
The minimum penalty for filing late (more than 60 days) has been increased from $ 135 to $ 205. Except in certain cases, that penalty can be reduced to the amount of tax owed, which ever is smaller. (By 2017, the penalty will go up to $ 210.)
Which entities are affected by this change? Individuals (all forms 1040, including non-citizens). Estates and Trusts (Form 1041). Corporate Files (all forms of the 1120 filing). And, Non-Profit entities that can file a 990-T (they have unrelated business income of $ 1000 or more.)
There are more penalties, too. These were included in the Trade Package Legislation. The act included late filing of 1099 forms, W-2s, and 1095 (Health Care Reporting). You will note that the deadlines for some of these forms have been moved up- so pay attention and file them on time. Because the penalties can be $ 1060 for each delinquent 1099 form- because you have intentionally filed late to the government AND to the payee!
Of course, if you file the 1099 only 30 days late, the penalty is $ 50 (again- for each - the payee and the government). If you get your act together by 1 August, the penalty is $ 100 (again, for each). And, if you miss that date, the penalty is $ 250 each- unless the IRS feels it was intentional (and you know that number is $ 530).
There you have the big changes for the year. Now, you should be ready to file your taxes comes the 1rst of the year. But, don't expect really fast refunds (as one would have expected before). Because the IRS is going to be checking to make sure the taxpayer is legit- they don't want all those identity theft and tax fraud situations to obtain.
Tax Information: http://www.adjuvancy.com/Tax2016.html
By: Roy A. Ackerman, Ph.D.
There is a chance that the lame duck Congressional session may act on some tax regulations, but given that these folks work about 1 day a week- and then complain how many lazy folks are out across the US not entering the workforce (that is the pot calling the kettle black)- I am not sanguine they will. So, unless they do- this will be the last year that mortgage insurance will be deductible and foreclosed home debt will not be a taxable situation, among a few other items that expire this calendar year.
But, I figured it would be helpful if I combined all these changes into a coherent mass (which our legislators clearly have not), so you can be prepared for the 2016 tax season. (Remember, you file your taxes for 2016 by April 2017. Oh- and if you are a business, the odds are the date your taxes are due, also changed. More on that below.)
Students and Teachers (PATH Act provisions)
Students got a permanent change for deductibility of tuition via the American Opportunity Tax Credit. This provides up to $ 2500 of tax credit for lower-income filers for the first four years of higher education (with a possibility of 40% of the unused credit being received as a refund- if no other taxes are owed). As long as the students are enrolled at least half time for one term of the year and not convicted of drug violations. The real change is that filers must include the EIN of the college or university involved- and demonstrate that they paid the tuition and fees they claim- not what the institutions may list on the 1098-T form.
On the other hand, the tuition deduction for other students will expire at the end of this year. Oh, and that generous (sic) deduction teachers get for buying supplies for their students that schools don't supply is now permanent- all $ 250 of it. (Most teachers spend at least twice that!)
Pensions and IRA
Folks older than 70.5 years of age no longer have to rush to transfer their IRA (or portions thereof) to charity, because that provision is permanent. (PATH) Please note that the IRS demands that these transfers not be rollovers. One must employ a trustee to transfer the funds; and that trustee cannot hand you the funds to deliver to the charity. If they do, you lose the exemption. No surprises I am sure when I remind you that there must be a contemporaneous acknowledgement (that means a timely receipt) from the charity for that deductible donation or transfer.
Heirs and Estates
While still in the wrong venue, the Highway Bill did fix a big problem. Folks (or entities) that inherit assets from an estate are now required to use the basis filed in the 706 form for their own calculations. (Just so you know, the rules stipulate that estates can value items as per the date of death, or by alternate choice 9 months after that date. Too many "cheaters" would use a different basis for the property they inherited, thereby cheating the tax authorities with alternative valuations.)
To keep this rule in place, executors are now required to stipulate (i.e., file for 8971 and Schedule A of the 706) said value to all heirs and to the IRS. Which means anyone who inherits property- and thought they didn't need to file Form 706 because the value of the estate was below the threshold for Estate Tax better reconsider. Otherwise, the heirs may be hit with a penalty for using the wrong basis for that inherited asset when they dispose of same.
Why? Because if a 706 form is never filed, the basis of all assets inherited is now defined as ZERO!!!!! It gets worse. Because if an asset were omitted from Form 706, the basis of that property is now determined to also be ZERO. (Unless the statute of limitations is still opened, when an Amended 706 can be filed to correct this omission.)
Another kicker. If the 706 form is filed LATE, the basis of all assets that should have been included are also set at ZERO. Some tax advisors feel this one little provision could be challenged in court. But, let's just be prudent and file all those 706 Estate Tax returns in a timely fashion. (Filing a 706 when the estate value is below the filing threshold is called a Protective 706 Filing; we've been doing those for years. And, we strenuously examine the assets often to the consternation of the heirs- to ensure that all the non-worthless assets are included. You know, that 36 diamond tennis bracelet your grandma promised you would inherit when you turned 16.)
Oh, yeah. Another really big kicker for this little item. Under IRC 6501, the IRS has three years to catch cheaters who misstate certain items (like income taxes [except for continuing fraud], employment taxes, excise taxes, and for this provision- estate taxes and the results therefrom). No more. If an asset from an estate is misstated so that it can affect more than 25% of the gross income on a tax return will now have a SIX year statute of limitation.
Mileage Rates
Not surprisingly, the mileage rates for 2016 are lower than they were last year. Business mileage is now deducted as 54 cents a mile; driving for reasons that are medical or moving are only worth 19 cents each. When we drive to help a charity, we only get 14 cents a mile.
As is normally true, we have no clue what those rates will be for 2017. The IRS normally prepares those well into the calendar year.
Real Estate
The PATH ACT made permanent the ability of taxpayers to contribute real property to qualified conservation charities.
Health and Health Insurance
The Highway Bill (yup) came up with a bouquet of flowers for our veterans and folks currently serving in the military. No longer will they be unable to contribute or use HSA (Health Savings Accounts) should they receive VA or armed service benefits.
Along that same vein, the Highway Bill enabled all those who purchase- or are provided by their employers- high deductible insurances (about $ 1500 for a single person) to use HSAs, too.
Oh, and assuming Obamacare is not overturned, there is a permanent exemption from penalties for those receiving VA or TriCare Health Benefits. (For employers, the Highway Bill also exempts all such employees from being included in determining the 50 employee (full-time or equivalent) threshold provisions.)
Employers
There were more than a few changes for employers. More than the exemption for the VA and armed service personnel from inclusion in Obamacare provisions mentioned above.
Like ALL 1099s and W-2 are now due by 31 January. That's a big change for many folks who barely get their stuff together to file 1099's. It means that companies need to contact their tax professionals really early- to let them verify that all relevant contractors and consultants receive those 1099s on time. Because the penalties have also increased.
The Work Opportunity Credit has been extended through 2019. This applies to Veterans (which is why you keep hearing Comcast advertising its commitment to hire some 10,000 veterans over the next few years- they're no dummies). Other targeted groups include what are termed those receiving Temporary Assistance for Needy Families (TANF), SNAP (what used to be termed Food Stamp) recipients, ex-felons, and some of those living in "empowerment zones".
Families and Individuals
The PATH ACt made the enhanced child tax credit (up to $ 1000, income dependent) a permanent provision of the code. As well as the Earned Income Tax Credit provisions that were to expire.
Social Security taxes are not going up per se- but the income basis upon which one pays them is. For the last two years, there was a tax holiday for all wage income (or self-employed income) that exceeded $ 118,500. Next year (2017), the taxes will be collected for totals of up to $ 127,200.
If an employee is working overseas and has income and/or a housing allowance, the exclusion provisions have also changed. For 2016, foreign income of $ 101,300 could be excluded from taxation, as could housing benefits that were $ 16,208 or less. Starting 2017, those exclusions become $ 102,100 and $ 16,336, respectively.
There also is further clarification of these foreign exclusions. In particular, these will affect those in the merchant marine or working aboard cruise lines. Because the IRS now holds that when one is in a foreign port, then one is able to claim foreign income. But... when someone operates in international waters, that is NOT a foreign country. That income must be computed (by the number of days one is on said waters) and is not excludable!
Individuals, Businesses, Trusts, Non-Profits that have Foreign Accounts
Some big changes affect those who must file those FBARs (Foreign Bank and Financial Accounts). It used to be you had to report any holdings in a bank, stock account, commodities or future accounts, mutual funds, or [pay attention to this one] poker, gambling or gaming site account that was not a US domicile by 30 June. (This also means a foreign insurance policy that has a cash value or foreign retirement accounts [including inheritances] is a foreign account.) It also covers recent immigrants to the US! These filings are due at the same time as your income tax return. But, while there never was an extension possible for these forms, now there is - for the same six months that obtains for your personal tax filings.
A foreign account does not mean that using the Royal Bank of Scotland to house funds in New York City; but having a Citicorp account that is based in Jerusalem or London does. The critical consideration is where the local branch is situated, where the account was opened. By the way, accessing foreign funds via PayPal means you have a foreign account.
The FBAR filing uses Form 114 and must be now filed electronically. The requirement to file applies to all taxable entities (individuals and businesses) that have $ 10,000 or more of value on any given day during the tax year. And, the conversion rate for said value is no longer allowed to be daily- but determined by the value on the last day of the tax year.
There is a new interpretation, too. The requirement to file applies not just to the account owner(s), but to anyone with signature authority. So, that means people like me that maintain client accounts overseas will now have to file these forms, because I can issue checks on those accounts. (I am not responsible for about 100 of them where I write the checks for the clients- but have no signature authority.) It also means employees of corporations or businesses or estates that have foreign funds and have signature authority must also file Form 114.
All business entities (and trusts and non-profits) should recognize that all entities - and individuals who work for or at those entities- that have signature authority for a foreign bank account, stock account, gaming or gambling account are subject to these provisions. In other words, all foreign money holdings may subject employees, not just officers of the institutions, to these provisions.
Oh. The IRS also requires those foreign entities where you may or may not have money to file Form 8938, a FATCA (Foreign Account Tax Compliance Act) filing. This covers those financial accounts, stocks, securities, contracts, interests- anything that exceeds the filing threshold. These rules also apply to American entities (individuals, businesses, trusts, etc. that have such interests in excess of the filing threshold! (If one resides in the US, those thresholds are $ 50K for individuals, $ 75$ for married folks on the last day of the year- or $ 100K and $ 150K at any time during the tax year. Those numbers increase by a factor of 4 if one doesn't reside in the US; the thresholds are $ 200K, $ 300K, $ 400K, and $ 600K, respectively.)
Businesses
The PATH Act changed the 179 (the capital purchases write-off provisions) Election. For good. The maximum Section 179 write-off is now permanent. (It had been extended for a year or two each time Congress had made a change for a while.) That maximum is also to be adjusted for inflation starting this year, which is why it is now $ 510,000. Moreover, there is a phaseout when the amount of new capitalized property exceeds $ 2.03 million, but not to zero.
Real Estate
For real estate purchases, the maximum Section 179 exclusion is now also $ 500K. (Last year, it was capped at $ 250K.) This includes HVAC (heating, ventilation, and air conditioning), which is a new change. Any recapture of this credit (due to an early sale) is now considered subject to ordinary income taxes.
The time to depreciate real estate is now 15 years for qualified leasehold improvements, restaurants, and retail improvements. Bonus depreciation is also allowed for the first half of said improvement value (through 2017), decreasing in 2018 to only 40%, 30% in 2019 and removed completely by 2020. The PATH Act also let bonus depreciation apply to 39 year property (for improvements that were already in service by the entity).
Automobiles (Luxury)
The depreciation limits for vehicles is limited to $ 3160 or 20% of the basis in 2016. However, this year one can write off up to $ 8000 in bonus deprecation (which is reduced to $ 6400 in 2018, $ 4800 in 2019 and then removed forever by 2020) for new (not used) automobiles. Of course, these numbers apply only to vehicles that are used completely for business. There is a reduction for vehicle use that is not fully attributed to business usage.
Partnerships
The Bipartisan Budget Act (the one that taxes would normally be addressed) has brought a sea change to the way partnerships will be treated, should the IRS find problems with their tax submissions. The changes do not take effect for a few years- but the time to address the changes is really now.
Basically, the Act stipulates that any change that comes about by an audit are to be collected directly from the partnership- unless the partnership elects out of TEFRA (Tax Equity and Fiscal Responsibility Act of 1982). So, it means that partnership formation, operations, new partner admissions, etc. will all have to be reconsidered.
What changed is this- the partnership can decide to accept an IRS decision that the underpayment is due from the partnership itself or it can elect to have that decision divided up among the partners, according to their percentage ownership or liability percentage. Most advisors are telling partnerships to elect the latter process. If the partnership does not so choose, then the IRS will assess the partnership at the highest tax rate allowed- 39.6%. Of course, if the partnership can prove (to the satisfaction of the IRS) that a lower rate is appropriate, based upon the individual tax rates of the partners, then a lower rate may be allowed. (Don't bank on the IRS doing so.) However, this underpayment will not be allowed to change the basis of each of the partner's interests, if the partnership is taxes for the liability.
If the partnership pushes the issues down to the partner level, then each partner is assessed for the tax at its own rate. And, the partnership can issue an adjusted (amended) K-1 for the IRS revisions that will change the basis and avoid the double taxation possibility. The partnership has 45 days from the date of the IRS notice of change to make this election.
There is another change that affects partnerships- the PAL (passive active loss) issue. Why? Because most partners and partnerships do not maintain pristine time records. (This also affects real estate rentals that are reported on Schedule E, page 1.) There are various definitions that set the PAL issues- for real estate professionals it is a minimum of 750 hours of work a year. The IRS has allowed other partnerships to use different designations, such as 500 hours, or the fact that a particular partner does all the work (even if less than 500 hours), or even when a partner spends 100 hours or more on the partnership and no one else does more.
But, the rules to prove how much participation are gelling. One can use a record of cell phone call records, eMails, or credit card charges. Travel itineraries and receipts can prove how much participation was involved. Even affidavits from customers and clients can be used to prove the time one participated in the venture.
Payments Due
The IRS has been starved to death for years by Congress. Partly because one party was angry that the IRS was not automatically granting those "social welfare" organizations (read as political collections and donation farms) tax exemptions without scrutiny. Partly because the IRS is responsible for collecting the penalties for those who don't comply with Obamacare. (Hoping that this lack of funds would make it harder for them to do so.)
But, in my humble opinion, the solution Congress came up with sucks. The IRS has now been authorized to hire those bottom feeders- the outside collection agents, that harass and subject folks to all sorts of intimidation. The logic behind this choice? After all, folks who owe the IRS must be the scum of the earth. (Of course, no one ever considers the fact that the IRS makes mistakes, chooses random numbers to assess non-filing taxpayers who may actually owe nothing, etc.)
Many clients fall short of having sufficient funds to pay their taxes when due. This entails the taxpayer submitting a form 9465 (Installment Agreement Request). These must be automatically approved if the taxpayer [individual] owes (or will owe) the IRS $ 50,000 or less, with the addition of this request- and all tax forms have been timely submitted. (Businesses are limited to a $ 25,000 maximum, with the same provisos.) However, the fees involved to have the IRS process the request have been increased to $ 120, unless the taxpayer agrees to have the IRS zap their bank account automatically each month. Then, the fees are reduced to $ 52. (The IRS has way too many taxpayers "forgetting" to make timely payments. This is a way to incur fewer manpower issues for the service.) However, no matter how the payment is to be processed by the IRS, all low-income taxpayers (a family of 4, with $60K or less in income) won't have to pay more than $ 43 to institute a payment plan.
The biggest issue? Any taxpayer who is not in compliance with IRS code, who has no installment agreement in place, and owes $ 50,000 in taxes, penalties, and interest can find his passport revoked IMMEDIATELY. (If one is not yet issued, don't expect the Department of State to issue one, either.)
Filing Dates
Individuals
There has been no change in the due date for 1040 filing, in that it is still due on 15 April (or the next business day, should the 15th fall on a weekend or legal holiday). Unless you can prove you were out of the country on 15 April- then you have the right to extend the filing date to 15 June. Or, you filed an extension request- that gives you until 15 October (with the same proviso for when it falls on a weekend or legal holiday).
Businesses
Here's where the big changes arrive. And, it is about time. Because too many pass-through entities have been screwing over their partners, their stockholders by delaying their filing. Oh, sure, they may pay a penalty, but that doesn't help the multitudes who can't file their taxes in a timely fashion due to the lassitude of these entities.
So, from now on, all pass through entities- those are partnerships, LLCs, and S entities must no file their tax returns by the 15th day of the 3rd month after the end of their tax year. Recognize that the IRS allows companies that have "good" reasons to not use a natural year (i.e., 1 January to 31 December) to chose another month to end their tax year. But, for most entities, the due date will now be 15 March. Which gives the partners or the stockholders a month to finish their own tax returns. (Firms that operate on the US Government year, which ends 30 September, for example, must file their taxes by 15 November.)
Regular Corporations (C entities) no longer have to file by the 15th day of the 3rd month, but now have until the 4th month. So, for those companies operating on a natural year basis, the due date has been extended (permanently) from 15 March to 15 April. (A similar 15th day of the 4th month after year-end applies for those not operating on a natural year basis.)
Business, Trusts, Non-Profits, and Pension Plan Extensions
There is one more change for C corporations. Their extension is no longer 6 months long- but 5 months. In other words, before when they had to file by 15 March, but could extend the due date until 15 September... still have that same final extended due date, regardless that the original filing date is now 15 April.
Partnerships and S entities still have a 6 month extension- which also falls (for those who use a natural year) on 15 September.
Trusts and Estates of the Deceased file form 1041. The only extension request provided 5 months beyond the due date. Now, the due date is 5.5 months. That means the due date for filing is 15 April, but an extension means the due date can be 30 September.
Non-Profit entities file form 990 on 15 May- or the 15th day of the 5th month after the end of their fiscal year. Extensions used to be provided for 3 months; they now have more time- six month extensions are the new rules.
Employee Benefit Plans (Pension Plans, 401(k), welfare plans) must file their tax returns with the IRS by the last day of the 7th month after their year end. (For natural year plans, that means 31 July). Before the plans could extend that deadline by 2.5 months; now the rule provides for an additional month to 3.5 months.
Late Filing Penalties
The minimum penalty for filing late (more than 60 days) has been increased from $ 135 to $ 205. Except in certain cases, that penalty can be reduced to the amount of tax owed, which ever is smaller. (By 2017, the penalty will go up to $ 210.)
Which entities are affected by this change? Individuals (all forms 1040, including non-citizens). Estates and Trusts (Form 1041). Corporate Files (all forms of the 1120 filing). And, Non-Profit entities that can file a 990-T (they have unrelated business income of $ 1000 or more.)
There are more penalties, too. These were included in the Trade Package Legislation. The act included late filing of 1099 forms, W-2s, and 1095 (Health Care Reporting). You will note that the deadlines for some of these forms have been moved up- so pay attention and file them on time. Because the penalties can be $ 1060 for each delinquent 1099 form- because you have intentionally filed late to the government AND to the payee!
Of course, if you file the 1099 only 30 days late, the penalty is $ 50 (again- for each - the payee and the government). If you get your act together by 1 August, the penalty is $ 100 (again, for each). And, if you miss that date, the penalty is $ 250 each- unless the IRS feels it was intentional (and you know that number is $ 530).
There you have the big changes for the year. Now, you should be ready to file your taxes comes the 1rst of the year. But, don't expect really fast refunds (as one would have expected before). Because the IRS is going to be checking to make sure the taxpayer is legit- they don't want all those identity theft and tax fraud situations to obtain.
Tax Information: http://www.adjuvancy.com/Tax2016.html
By: Roy A. Ackerman, Ph.D.
Thursday, January 10, 2019
Increasing Tax Planning: A Case of a Wolf in a Sheep Skin?
The effects of tax avoidance and tax planning on the society has been a controversial issue for a long time yet governments the world over still have difficulty addressing it. It is believed that all these started from the beginning when business agreements were written by the government or associates of government to favour their family, friends or associates that are in business. Unfortunately, tax planning schemes are a legally accepted business practices for which tax professionals are paid huge sums of money to offer tax planning advisory services for both personal and corporate decision making.
According to Investopedia, tax planning is the analysis of a financial situation or plan from a tax perspective. It is an exercise undertaken to minimize tax liability through the best use of all available resources, deductions, exclusions, exemptions, etc. to reduce income and/or capital gains (businessdirectory.com). Tax planning therefore encompasses many different considerations, including the timing of income, purchases and other expenditures, the selection of investments and type of retirement plans etc. However, tax fraud or evasion unlike tax avoidance is not tax planning scheme and hence considered illegal in the tax professional.
Firms, both domestic and international employ numerous tax planning strategies to reduce their tax burden. An exhaustive review is impossible because known strategies are numerous and many strategies are likely unknown to tax analysts. Some forms of tax planning include (a) reclassifying business income as non-business income (b) using transfer pricing to shift income from high tax to low tax jurisdictions (c) employing passive investment companies (d) exploiting tax credits, exemptions and/or concessions in Tax Laws (e) treaty shopping (f) use of hybrids etc.
Judge Learned Hand in the case of Commissioner v Newman in 1947 stated:
"Over and over again courts have said that there is nothing sinister in so arranging one's affairs so as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere can't".
Indeed, tax planning has invariably become an integral part of a financial plan, as reducing tax liability and maximizing eligibility to contribute to retirement plans are both crucial for business success as it has gained prominence in today's business planning strategies, all because Tax Laws have different provisions relating to entities based on location, type of activity or time period, thus invariably, every difference offers a planning opportunity to a taxpayer.
Then the question that arises is, does tax planning comes with any benefits?
Proper tax planning is essential in both domestic and international business to reduce the distortions that arises for instance due to the lack of harmonization in domestic tax systems. Without tax planning, entities are likely to suffer from excess tax payments and additional tax compliance costs. Among the reasons argued for tax planning are:
(a) Offers the opportunity to lower the amount of taxable income i.e. where a taxpayer's financial and tax planning strategies are targeted at structuring expenditures to fit into the category of allowable expenses.
(b) Serves as a catalyst to reduce the tax rate at which you are taxed i.e. siting business operations at locations or business to take advantage of the little or no tax rate prevailing in that jurisdictions e.g. tax havens.
(c) It ensures you get all the credits available to you i.e. taking advantage of the tax credits, exemptions and/or concessions available in a tax jurisdiction e.g. the stability agreement provision for a holder of a mining lease in Ghana.
(d) It allows a cashflow forecast to be more effective while minimizing tax liability. A company looking to embark on massive capital or productive investment or re-investment will plan financial transactions with taxes in mind so to avoid making impulsive maneuvers. With a resultant good cashflow, entities positioned to embark on more capital and productive investments. Effective tax and financial planning maximize shareholders' wealth, and improves cashflow for capital and productive re-investment among others.
(e) For the government, the granting of tax reliefs, exemptions and/or concessions is targeted at increasing private sector productivity, create employment and attract investors and improve cross-border trading.
Considering these benefits, won't you recommend for more tax planning practices? Just consider these.
Governments efforts to improve national economy has always been limited due to inadequate tax revenue, which forms a larger percentage of government revenue. This could be attributed to the several tax planning schemes as well as tax evasions. In 2005, the average tax revenue to GDP ratio in the developed countries was approximately 35%. In the developing countries, it was equal to 15% and in the poorest of these countries, the group of low income countries tax revenue was just 12% of GDP and tax planning via tax avoidance are widely believed to be important factors limiting revenue mobilization.
The ActionAid and Tax Justice Network-Africa (TJN-A) in its West African Giveaway report published in August 2005 indicated that West African countries are losing an estimated US$9.6 billion of revenue each year by granting tax incentives to foreign companies and that three countries - Ghana, Nigeria and Senegal - are losing an estimated $5.8 billion a year through the granting of corporate tax incentives with Ghana's portion being around $2.27.
Tax planning approaches like tax avoidance affect the extent to which the government can provide basic need of the population i.e. it results in inadequate supply of basic amenities such as poor infrastructure, poor educational and health systems, inadequate water and power supply as well as poor road networks. This could be one of the reasons why deficit budget financing has become the order of the day in most developing countries.
Income inequality is another adverse effect resulting from increasing tax planning. Taxation has an objective to redistribute income but the accumulation of wealth through tax avoidance schemes for instance has further widened the gap between the low-income earners and the high-income earners.
During an international conference jointly organised by OXFAM International and the International Tax Justice Network, Africa in Accra in February 2014 for instance, the Deputy Campaign Manager of OXFAM, Mr. Stephen Hale, indicated among other things that many developing countries faced challenges in their efforts at mobilizing domestic resources due to factors such as regressive tax regimes, wide range of corporate tax incentives etc.
But the question remains that, if the major source of revenue to every government is tax revenue whiles government revenue and capital expenditures are highly dependent on these tax revenue, can we then conclude that Governments efforts to reduce budget deficits and over reliance on development partners to finance national budget is a dead on arrival discussion, as most of the tax revenue loss is attributable to tax planning schemes such as tax avoidance, tax incentives and poor tax education and awareness?
Probably tax planning is not that beneficial to government as we are made to believe but instead a wolf in a sheep skin which is gradually ripping off government of billions of dollars in tax revenue to meet its huge public expenditures and to make reasonable economic policy. But who is to be blamed, the taxpayer, the government or both? I leave you to judge!
Tax planning has indeed come to stay, however, I suggest that (a) accountability on the part of governments and effective use of tax revenue will instill faith in the government thereby encouraging payment of taxes, (b) anti-avoidance provision should be of general application or refer to specific tax havens or tax avoidance devices (c) the concept of ethical and responsible investing should not be limited to companies products/services but also to their impact on society as well as (d) unification of tax rates and (e)The Organisation for Economic Co-operation and Development (OECD) and the United Nations which are famous in their models for international taxation should consider paying more attention to the increasing domestic and international tax planning schemes.
Desmond is a Consultant at Danisa Consult (Accounting, Audit & Tax) and a Facilitator for accounting, tax and audit at Global Institute of Resource Development (GiRD), a Capacity Development and Training Institution. A member of the Institute of Chartered Accountant, Ghana; Chartered Institute of Taxation, Ghana; Association of International Accountants, UK; International Association of Accounting Professionals, UK; Association of Certified Fraud Examiners, US; Southern African Institute of Business Accountants, SA.
All comments and suggestions to dajdesmond1@gmail.com /+233242844114
By: Desmond Aidoo
According to Investopedia, tax planning is the analysis of a financial situation or plan from a tax perspective. It is an exercise undertaken to minimize tax liability through the best use of all available resources, deductions, exclusions, exemptions, etc. to reduce income and/or capital gains (businessdirectory.com). Tax planning therefore encompasses many different considerations, including the timing of income, purchases and other expenditures, the selection of investments and type of retirement plans etc. However, tax fraud or evasion unlike tax avoidance is not tax planning scheme and hence considered illegal in the tax professional.
Firms, both domestic and international employ numerous tax planning strategies to reduce their tax burden. An exhaustive review is impossible because known strategies are numerous and many strategies are likely unknown to tax analysts. Some forms of tax planning include (a) reclassifying business income as non-business income (b) using transfer pricing to shift income from high tax to low tax jurisdictions (c) employing passive investment companies (d) exploiting tax credits, exemptions and/or concessions in Tax Laws (e) treaty shopping (f) use of hybrids etc.
Judge Learned Hand in the case of Commissioner v Newman in 1947 stated:
"Over and over again courts have said that there is nothing sinister in so arranging one's affairs so as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere can't".
Indeed, tax planning has invariably become an integral part of a financial plan, as reducing tax liability and maximizing eligibility to contribute to retirement plans are both crucial for business success as it has gained prominence in today's business planning strategies, all because Tax Laws have different provisions relating to entities based on location, type of activity or time period, thus invariably, every difference offers a planning opportunity to a taxpayer.
Then the question that arises is, does tax planning comes with any benefits?
Proper tax planning is essential in both domestic and international business to reduce the distortions that arises for instance due to the lack of harmonization in domestic tax systems. Without tax planning, entities are likely to suffer from excess tax payments and additional tax compliance costs. Among the reasons argued for tax planning are:
(a) Offers the opportunity to lower the amount of taxable income i.e. where a taxpayer's financial and tax planning strategies are targeted at structuring expenditures to fit into the category of allowable expenses.
(b) Serves as a catalyst to reduce the tax rate at which you are taxed i.e. siting business operations at locations or business to take advantage of the little or no tax rate prevailing in that jurisdictions e.g. tax havens.
(c) It ensures you get all the credits available to you i.e. taking advantage of the tax credits, exemptions and/or concessions available in a tax jurisdiction e.g. the stability agreement provision for a holder of a mining lease in Ghana.
(d) It allows a cashflow forecast to be more effective while minimizing tax liability. A company looking to embark on massive capital or productive investment or re-investment will plan financial transactions with taxes in mind so to avoid making impulsive maneuvers. With a resultant good cashflow, entities positioned to embark on more capital and productive investments. Effective tax and financial planning maximize shareholders' wealth, and improves cashflow for capital and productive re-investment among others.
(e) For the government, the granting of tax reliefs, exemptions and/or concessions is targeted at increasing private sector productivity, create employment and attract investors and improve cross-border trading.
Considering these benefits, won't you recommend for more tax planning practices? Just consider these.
Governments efforts to improve national economy has always been limited due to inadequate tax revenue, which forms a larger percentage of government revenue. This could be attributed to the several tax planning schemes as well as tax evasions. In 2005, the average tax revenue to GDP ratio in the developed countries was approximately 35%. In the developing countries, it was equal to 15% and in the poorest of these countries, the group of low income countries tax revenue was just 12% of GDP and tax planning via tax avoidance are widely believed to be important factors limiting revenue mobilization.
The ActionAid and Tax Justice Network-Africa (TJN-A) in its West African Giveaway report published in August 2005 indicated that West African countries are losing an estimated US$9.6 billion of revenue each year by granting tax incentives to foreign companies and that three countries - Ghana, Nigeria and Senegal - are losing an estimated $5.8 billion a year through the granting of corporate tax incentives with Ghana's portion being around $2.27.
Tax planning approaches like tax avoidance affect the extent to which the government can provide basic need of the population i.e. it results in inadequate supply of basic amenities such as poor infrastructure, poor educational and health systems, inadequate water and power supply as well as poor road networks. This could be one of the reasons why deficit budget financing has become the order of the day in most developing countries.
Income inequality is another adverse effect resulting from increasing tax planning. Taxation has an objective to redistribute income but the accumulation of wealth through tax avoidance schemes for instance has further widened the gap between the low-income earners and the high-income earners.
During an international conference jointly organised by OXFAM International and the International Tax Justice Network, Africa in Accra in February 2014 for instance, the Deputy Campaign Manager of OXFAM, Mr. Stephen Hale, indicated among other things that many developing countries faced challenges in their efforts at mobilizing domestic resources due to factors such as regressive tax regimes, wide range of corporate tax incentives etc.
But the question remains that, if the major source of revenue to every government is tax revenue whiles government revenue and capital expenditures are highly dependent on these tax revenue, can we then conclude that Governments efforts to reduce budget deficits and over reliance on development partners to finance national budget is a dead on arrival discussion, as most of the tax revenue loss is attributable to tax planning schemes such as tax avoidance, tax incentives and poor tax education and awareness?
Probably tax planning is not that beneficial to government as we are made to believe but instead a wolf in a sheep skin which is gradually ripping off government of billions of dollars in tax revenue to meet its huge public expenditures and to make reasonable economic policy. But who is to be blamed, the taxpayer, the government or both? I leave you to judge!
Tax planning has indeed come to stay, however, I suggest that (a) accountability on the part of governments and effective use of tax revenue will instill faith in the government thereby encouraging payment of taxes, (b) anti-avoidance provision should be of general application or refer to specific tax havens or tax avoidance devices (c) the concept of ethical and responsible investing should not be limited to companies products/services but also to their impact on society as well as (d) unification of tax rates and (e)The Organisation for Economic Co-operation and Development (OECD) and the United Nations which are famous in their models for international taxation should consider paying more attention to the increasing domestic and international tax planning schemes.
Desmond is a Consultant at Danisa Consult (Accounting, Audit & Tax) and a Facilitator for accounting, tax and audit at Global Institute of Resource Development (GiRD), a Capacity Development and Training Institution. A member of the Institute of Chartered Accountant, Ghana; Chartered Institute of Taxation, Ghana; Association of International Accountants, UK; International Association of Accounting Professionals, UK; Association of Certified Fraud Examiners, US; Southern African Institute of Business Accountants, SA.
All comments and suggestions to dajdesmond1@gmail.com /+233242844114
By: Desmond Aidoo
Wednesday, December 26, 2018
Dealing With Tax Professionals To Achieve Improved Compliance With The Laws
The majority of taxpayers in EU countries use tax professionals in some shape or form, and for this obvious reason the EU tax administration recognises that they play a very important role in their tax system. As well as helping to make the system run smoothly, they play a key role in influencing and shaping the tax compliance behaviour of their clients. This influence may be positive or negative, because of their professional knowledge of our tax system and its nuances.
Through their representative bodies, tax professionals also have an important role in developing our tax system. They are influential in forming public opinion and general attitudes as to the fairness and equity of the tax system and our administration thereof.
Because of their influential role and the unique position they have in influencing taxpayer behaviour, we recognise that they are one of the primary ingredients in our pursuit of our main corporate goal: "To ensure that everyone complies with their tax and customs responsibilities".
We therefore spend a lot of time engaging with them using a combination of methods and through many different forums in our efforts to achieve improved taxpayer compliance.
WHAT CAN BE TAX STRATEGY ?
Our strategy in relation to dealing with tax professionals can be laid out in our recent Operational Strategic Programme 2007-2010. Because of the fact that the phrase "tax professional" encompasses persons with a variety of roles and responsibilities, the tax administration must prepare a response to ensure that strategy works.
I would like to give you some background on how the building relationships and partnerships strategy will come about. The relationship between taxpayers and tax administration, I must confirm that is very much an adversarial one characterised by mutual distrust and suspicion. Tax administration recognises that albanian tax professionals have a key role and that is why we have developed sophisticated consultative mechanisms to help administration engage with this wide community.
Let me give you some relevant facts about the Albanian tax system.
ALBANIA's TAX SYSTEM
Our tax system is concerned with direct and indirect taxes, customs and duties. Albania has taxes on incomes, as well as taxes on goods and services.
Businesses (limited companies and individuals) pay tax on a self-assessment basis. There are approximately 49,000 self employed individuals and 13,000 limited companies on our register.
The General Taxation Directorate is the sole central tax authority in the Republic of Albania. The General Directorate of Taxes (HQ) and its Branch Offices in the districts possess authority to implement and administer taxes. The General Directorate of Taxes is located in Tirana. The General Taxation Directorate establishes its Local Tax Offices in 36 districts and since 1998 is established in Tirana the Large Taxpayer Office. Local Tax Office Heads are appointed and discharged by the General Director of Taxes. The Local Tax Offices provide taxpayers with tax certificates, prepare draft program of tax revenues for the district, supervise and are accountable for accomplishment of the tax revenues and the program, process tax declarations, assess tax liabilities, preserve and organise documents, audit taxpayers and collect taxes as well as implement special executive decisions.
General Taxation Directorate has recently undergone a major organisational restructuring. Essentially, this agency has rebuilt the organisation around different groups of taxpayers. These groups consist of taxpayers in each of four geographic regions and a national large taxpayer group. Apart from collection and debt management functions which remain centralised every other small taxpayer is managed from 2007 from tax offices of local power, as effect of fiscal decentralization in Albania.
WHO AND WHAT ARE ALBANIAN TAX PROFESSIONALS ?
In aLBANIA, a wide range of tax professionals such as accountants, lawyers, tax consultants, businesses and freight forwarders acting on behalf of their clients, the taxpayers, interacting with tax offices. These tax professionals perform a wide variety of functions.
The variety of professionals providing a great deal of tax advice or engaging in compliance activities is generated on the activities of such professionals. For example, accountants, advising on business transactions and internal audit; lawyers such as solicitors and barristers advising on business transactions, conveyancing, estate administration and litigation; auctioneers and real estate agents advising on capital transactions, and customs agents advising on customs matters. Each of these activities in its own right involves some form of tax advice and each professional can be regarded as a "tax professional", each of which, play a very important part in ensuring that our tax administration and systems work.
Traditionally most VAT businesses and a little number of self-employed persons, i.e., businesses, professions, companies and their directors, use the accountant as tax professional, or "agent", to engage with tax officials. This high level of representation, even for small business, is because we don't operate an imputed income system. All businesses have to prepare business accounts on an "accruals" basis, and this generally requires the services of an accountant.
In Ireland we refer to our mainstream tax professionals as "tax practitioners" or "agents" and there are approximately 2,000 such "agents" registered in tax offices when they act as tax return preparers. As a result of this high level of agent representation, taxpayers in Albania tend not to be inhibited about challenging tax administration, and engage in more sophisticated business transactions and use tax professionals to this end.
Another reason for taxpayer challenges is the recent phenomenon of taxation departments being created in legal firms. Also, many corporations are employing lawyers who specialise in mainstream taxation matters and now lawyers are not just engaged in the traditional legal bastions of capital taxation and inheritance tax matters. Primarily, as a result of our Tax Investigation Department a dedicated part of tax administration which pursues the proceeds of crime, our barrister profession, who traditionally did not advocate in taxation matters, are now representing more and more taxpayers in tax matters in the civil and criminal courts.
This increasing competition from the legal profession has raised some issues as regards a level playing field between the different professions. Accountants see the prospect that lawyers might be able to claim legal professional privilege on behalf of clients against Revenue enquiries in certain circumstances as an unfair competitive advantage.
INFLUENCING COMPLIANCE BEHAVIOUR
One of the obvious benefits for tax administration from the engagements with tax professionals is the extent to which they can get them to influence good compliance behaviour. As already mentioned, tax offices regard tax professionals as being hugely influential in terms of promoting good compliance behaviour; indeed, because they may be the only point of contact that a taxpayer has in his/her interactions with tax administration.
However, it is important that tax professionals also see it as in their interest to do so. Not alone does 'non-compliance' cost money in lost taxes for tax administration, but it also puts the taxpayer, the client, at serious risk of severe consequences if caught. Being able to deal with taxpayers through their agents substantially reduces the cost of tax administration. Think of what life would be like for a tax administration if there were no tax professionals. Some people who work for tax administrations might say that life would be much easier without them. Yes, there might not be so much tax planning, or challenges to taxation, and taxpayers might be more willing to accept tax administration's view. This might make life easier for the tax officials. But given the complexity of tax system for enyone that it's no part of tax administration, despite all the efforts at simplification, think of what the disadvantages might be?
Instead of funnelling the interaction with businesses and corporations through 2,000 tax professionals, it would be necessary to interact directly with an additional 49,000 business and over 13,000 corporate taxpayers. This would have huge cost implications for tax administration, as more employees would be needed to service the substantial additional contacts and queries that would ensue.
It would also be immeasurably harder for tax administration to ensure that all taxpayers understood their obligations and this would adversely affect voluntary compliance.
For these reasons, tax structures try to make it as easy as possible for tax professionals to meet their client's compliance obligations and we provide a variety of support services and measures to support and achieving client's compliance.
SUPPORT AND SERVICE FOR TAX PROFESSIONALS
Tax professionals have a big interest in customer service efforts and are rightly critical when the tax services falls below standard. After all, the tax professional is in business to make a profit. Poor service on the tax offices costs money and the taxpayer does not always understand either.
Here are some examples of how tax administration can support and try to try to make life as easy as possible for tax professionals.
Simpler Organisational Structure
In the albanian tax structure, all taxes pertaining to a taxpayer are handled by one office. Prior to that, a taxpayer (or tax professional) could have to deal with a number of offices depending on the tax.
This tax structure makes it much easier for the tax professional to deal with their client's compliance obligations. However there are problems following the reallocation of all our taxpayer cases in the restructuring period. For some time, tax professionals are unsure which office dealt with their clients. As a result of good contacts with the various professional bodies and in a spirit of openness and co-operation, which is part of taxation strategy of building partnerships, is the possibility for tax officials to engage proactively and positively with a view to implementing practical measures to remedy difficulties.
Some of these initiatives help illustrate this:
o Contact Points
There are special contact points in each of the regions for tax professionals who are experiencing service difficulties in dealing with tax administration. These contact persons are empowered to sort out the difficulty.
o Contact Locator
There is a tool known as 'Contact Locator' ,that in albania is not a function used, but in EU countries he can be used to find out which office deals with a taxpayer.
Information Tools
Tax strategy is to ensure clear and timely communication. Some of the many information tools are ready for providing up to date informatio:
- Tax official website http://www.tatime.gov.al
- Tax Buletin
- Tax leaflets
- Seminars and workshops
o Technology
By exploiting technology opportunities as much as possible such as electronic e-filing service, tax structures are able to provide better service while at the same time reducing compliance and their administrative costs. This makes it easier and cheaper for tax professionals to file and pay.
o Fair procedure
Through mechanisms such as tax procedures and Tax Audit Practice Guidelines and other papers and circulars that help the conduct of tax strutures in confront of taxpayers and tax proffesionals.
CONSULTATION
While, everyone recognises that albanian tax administration has responsibility for the tax system and makes the final decisions, we know that we can do things more effectively, if there is a spirit of cooperation and mutual understanding with tax professionals.
Both tax structures and tax professionals have a mutual self-interest in bringing common sense and clarity to what is a complex area of business and personal life of taxpayers. The consultation is very important - our strategy is that we listen, we exchange views and ideas, and we generate ideas. On the other hand it is important to get the professional's practical business perspectives and learn from their experiences. Sometimes a more informative practical viewpoint, e.g. learning practical insights and difficulties in operating legislation, is a more valuable insight than discussions about proposals or the difficulties in implementation of current legislation in an internal vacuum.
BENEFITS TO TAX ADMINISTRATION
As well as the invaluable role, played by practitioners in promoting and fostering a pro-compliance culture in Albania, they have also been a significant catalyst and facilitator of some of the major changes in tax administration here.
Tax administration has make changes to keep pace with one of the fastest growing economies in the mediterranean region over the last 5 years which has brought enormous challenges for us on many fronts, but particularly in terms of:
- Growing number of taxpayers
- Taxpayers with increasingly complex and financial and investment profiles
All of the changes have occurred while resources have remained static. With the support (and sometimes the forbearance) of tax professionals, tax administration has managed to transform itself from an organisation that was focused on process and procedure, structurally frozen, averse to change and largely indifferent to its customers' needs to one which is trying now to customer focused, more effective in its core businesses, structurally flexible, risk driven and looking forward with enthusiasm to the challenges ahead.
I would like to illustrate this by mentioning just a few of these major changes and the role of tax professionals in facilitating them:
The near future tax declaration-on-line filing service in Albania, it's aspected to be a phenomenal success. In industrialised countries of EU, even though e-filing is not mandatory, over 53% of self employed taxpayers filed on-line last year, in order to be increased to over 60%. This is because so many of the returns are filed by tax professionals who have been active partners in our e-filing success. As a result, there have been huge benefits for both Revenue and practitioners in terms of service and cost. Tax professionals have been the most enthusiastic supporters of our on-line filing system and we are continuing to work closely with them in developing it to ensure that it continues to meet their needs and concerns re service, security and confidentiality.
CHALLENGES AHEAD
There are some serious challenges ahead for the Tax Administration -Tax Professional relationship. Some of the main ones are that come to mind are:
Tax Planning and Avoidance
It would be wrong to give the impression that tax structures accept everything that the tax professional engages in. One of the main areas of contention is 'avoidance' or aggressive tax planning. While professionals have a key role to play in relation to promoting compliance, there are problems sometimes when tax planning steps over the line. Of course tax offices understands the motive for tax planning. Naturally, all taxpayers want to pay less tax and if there are ways of avoiding tax, and some are willing to pay a lot of money for it. The problem is when such schemes have the potential to undermine the integrity and legitimacy of the tax system in the wider community.
There is an ongoing debate with tax professionals as to where that line is - what's acceptable and what's unacceptable. The tax administration's objective is to move tax professionals and their clients away from getting involved in unacceptable tax planning schemes. On the other hand, albanian tax administration are closely monitoring new developments in other countries to establish the best approach to take to change behaviour in this regard.
Integrated Revenue view of Taxpayer and Risk
The tax administration approach to tackling risk, in tax structures, is to analyse risks for a taxpayer across all taxes. This makes it more difficult for the general tax professional who may act in relation to some of the taxes only. It may present particular problems when preparing for a revenue audit when the full range of taxes and duties, from income tax to excise duties, could be reviewed.
More Professional Regulation
It's not just tax administration that tax professionals have to deal with. They have to contend with more and more statutory reporting requirements from other bodies such as the Prosecutor, money laundering department, Customs, and many other public agencies regarding company law offences, to illustrate just a few regulatory bodies. The whole compliance environment is becoming more difficult for the practitioner and this is not being made easier by duplication of requirements from the various public bodies. However, we are working with other agencies to try and streamline matters where possible.
Finishing off Legacy Business
In the last four years, tax investigation units have carried out a number of large investigation projects aimed at dealing with tax evaded on funds hidden by way of various means, such as money laundering in the registered businesses, under reporting or missing declarations of incomes etc .
As mentioned earlier, there is a new investigation scheme underway into undeclared funds hidden. Because of the numbers of taxpayers involved, approximately 1, 000 over the last 2 years, tax professionals are complaining about the strain that all this extra work is placing on them which is in addition to their normal advisory and returns preparation work. The timing and management of some of these special investigations has been a bone of contention with them and this has caused some difficulties in their relationship with tax administration.
CONCLUSION
Tax professionals sometimes ask hard questions which tax officials may not have asked themselves and, which tax administration has to answer. This ultimately is of benefit to tax administration as it focuses them on dealing with and addressing difficult issues, which may have been overlooked.
As key stakeholders they want tax professionals to have a sense of ownership in the tax system. This partnership approach with them also helps to counter relationships of distrust and enables tax administration to create real relationships. To this end, the good relationship with tax professionals can help in building public confidence in the tax administration. In terms of our objectives, we have benefited from our approach with them. However, tax officials should not get carried away. While they have a long engagement, the marriage has been more one of convenience than of love for each other. Paying tax will never be popular and there will no doubt be serious difficulties ahead. This relationship overall is on a sound footing and capable of withstanding whatever troubles lie ahead. In this conclusion I can pronounce the sentence that I'm carrying in my mind always "Tax administration need tax professionals and they need tax administration".
By Eduart Gjokutaj
Through their representative bodies, tax professionals also have an important role in developing our tax system. They are influential in forming public opinion and general attitudes as to the fairness and equity of the tax system and our administration thereof.
Because of their influential role and the unique position they have in influencing taxpayer behaviour, we recognise that they are one of the primary ingredients in our pursuit of our main corporate goal: "To ensure that everyone complies with their tax and customs responsibilities".
We therefore spend a lot of time engaging with them using a combination of methods and through many different forums in our efforts to achieve improved taxpayer compliance.
WHAT CAN BE TAX STRATEGY ?
Our strategy in relation to dealing with tax professionals can be laid out in our recent Operational Strategic Programme 2007-2010. Because of the fact that the phrase "tax professional" encompasses persons with a variety of roles and responsibilities, the tax administration must prepare a response to ensure that strategy works.
I would like to give you some background on how the building relationships and partnerships strategy will come about. The relationship between taxpayers and tax administration, I must confirm that is very much an adversarial one characterised by mutual distrust and suspicion. Tax administration recognises that albanian tax professionals have a key role and that is why we have developed sophisticated consultative mechanisms to help administration engage with this wide community.
Let me give you some relevant facts about the Albanian tax system.
ALBANIA's TAX SYSTEM
Our tax system is concerned with direct and indirect taxes, customs and duties. Albania has taxes on incomes, as well as taxes on goods and services.
Businesses (limited companies and individuals) pay tax on a self-assessment basis. There are approximately 49,000 self employed individuals and 13,000 limited companies on our register.
The General Taxation Directorate is the sole central tax authority in the Republic of Albania. The General Directorate of Taxes (HQ) and its Branch Offices in the districts possess authority to implement and administer taxes. The General Directorate of Taxes is located in Tirana. The General Taxation Directorate establishes its Local Tax Offices in 36 districts and since 1998 is established in Tirana the Large Taxpayer Office. Local Tax Office Heads are appointed and discharged by the General Director of Taxes. The Local Tax Offices provide taxpayers with tax certificates, prepare draft program of tax revenues for the district, supervise and are accountable for accomplishment of the tax revenues and the program, process tax declarations, assess tax liabilities, preserve and organise documents, audit taxpayers and collect taxes as well as implement special executive decisions.
General Taxation Directorate has recently undergone a major organisational restructuring. Essentially, this agency has rebuilt the organisation around different groups of taxpayers. These groups consist of taxpayers in each of four geographic regions and a national large taxpayer group. Apart from collection and debt management functions which remain centralised every other small taxpayer is managed from 2007 from tax offices of local power, as effect of fiscal decentralization in Albania.
WHO AND WHAT ARE ALBANIAN TAX PROFESSIONALS ?
In aLBANIA, a wide range of tax professionals such as accountants, lawyers, tax consultants, businesses and freight forwarders acting on behalf of their clients, the taxpayers, interacting with tax offices. These tax professionals perform a wide variety of functions.
The variety of professionals providing a great deal of tax advice or engaging in compliance activities is generated on the activities of such professionals. For example, accountants, advising on business transactions and internal audit; lawyers such as solicitors and barristers advising on business transactions, conveyancing, estate administration and litigation; auctioneers and real estate agents advising on capital transactions, and customs agents advising on customs matters. Each of these activities in its own right involves some form of tax advice and each professional can be regarded as a "tax professional", each of which, play a very important part in ensuring that our tax administration and systems work.
Traditionally most VAT businesses and a little number of self-employed persons, i.e., businesses, professions, companies and their directors, use the accountant as tax professional, or "agent", to engage with tax officials. This high level of representation, even for small business, is because we don't operate an imputed income system. All businesses have to prepare business accounts on an "accruals" basis, and this generally requires the services of an accountant.
In Ireland we refer to our mainstream tax professionals as "tax practitioners" or "agents" and there are approximately 2,000 such "agents" registered in tax offices when they act as tax return preparers. As a result of this high level of agent representation, taxpayers in Albania tend not to be inhibited about challenging tax administration, and engage in more sophisticated business transactions and use tax professionals to this end.
Another reason for taxpayer challenges is the recent phenomenon of taxation departments being created in legal firms. Also, many corporations are employing lawyers who specialise in mainstream taxation matters and now lawyers are not just engaged in the traditional legal bastions of capital taxation and inheritance tax matters. Primarily, as a result of our Tax Investigation Department a dedicated part of tax administration which pursues the proceeds of crime, our barrister profession, who traditionally did not advocate in taxation matters, are now representing more and more taxpayers in tax matters in the civil and criminal courts.
This increasing competition from the legal profession has raised some issues as regards a level playing field between the different professions. Accountants see the prospect that lawyers might be able to claim legal professional privilege on behalf of clients against Revenue enquiries in certain circumstances as an unfair competitive advantage.
INFLUENCING COMPLIANCE BEHAVIOUR
One of the obvious benefits for tax administration from the engagements with tax professionals is the extent to which they can get them to influence good compliance behaviour. As already mentioned, tax offices regard tax professionals as being hugely influential in terms of promoting good compliance behaviour; indeed, because they may be the only point of contact that a taxpayer has in his/her interactions with tax administration.
However, it is important that tax professionals also see it as in their interest to do so. Not alone does 'non-compliance' cost money in lost taxes for tax administration, but it also puts the taxpayer, the client, at serious risk of severe consequences if caught. Being able to deal with taxpayers through their agents substantially reduces the cost of tax administration. Think of what life would be like for a tax administration if there were no tax professionals. Some people who work for tax administrations might say that life would be much easier without them. Yes, there might not be so much tax planning, or challenges to taxation, and taxpayers might be more willing to accept tax administration's view. This might make life easier for the tax officials. But given the complexity of tax system for enyone that it's no part of tax administration, despite all the efforts at simplification, think of what the disadvantages might be?
Instead of funnelling the interaction with businesses and corporations through 2,000 tax professionals, it would be necessary to interact directly with an additional 49,000 business and over 13,000 corporate taxpayers. This would have huge cost implications for tax administration, as more employees would be needed to service the substantial additional contacts and queries that would ensue.
It would also be immeasurably harder for tax administration to ensure that all taxpayers understood their obligations and this would adversely affect voluntary compliance.
For these reasons, tax structures try to make it as easy as possible for tax professionals to meet their client's compliance obligations and we provide a variety of support services and measures to support and achieving client's compliance.
SUPPORT AND SERVICE FOR TAX PROFESSIONALS
Tax professionals have a big interest in customer service efforts and are rightly critical when the tax services falls below standard. After all, the tax professional is in business to make a profit. Poor service on the tax offices costs money and the taxpayer does not always understand either.
Here are some examples of how tax administration can support and try to try to make life as easy as possible for tax professionals.
Simpler Organisational Structure
In the albanian tax structure, all taxes pertaining to a taxpayer are handled by one office. Prior to that, a taxpayer (or tax professional) could have to deal with a number of offices depending on the tax.
This tax structure makes it much easier for the tax professional to deal with their client's compliance obligations. However there are problems following the reallocation of all our taxpayer cases in the restructuring period. For some time, tax professionals are unsure which office dealt with their clients. As a result of good contacts with the various professional bodies and in a spirit of openness and co-operation, which is part of taxation strategy of building partnerships, is the possibility for tax officials to engage proactively and positively with a view to implementing practical measures to remedy difficulties.
Some of these initiatives help illustrate this:
o Contact Points
There are special contact points in each of the regions for tax professionals who are experiencing service difficulties in dealing with tax administration. These contact persons are empowered to sort out the difficulty.
o Contact Locator
There is a tool known as 'Contact Locator' ,that in albania is not a function used, but in EU countries he can be used to find out which office deals with a taxpayer.
Information Tools
Tax strategy is to ensure clear and timely communication. Some of the many information tools are ready for providing up to date informatio:
- Tax official website http://www.tatime.gov.al
- Tax Buletin
- Tax leaflets
- Seminars and workshops
o Technology
By exploiting technology opportunities as much as possible such as electronic e-filing service, tax structures are able to provide better service while at the same time reducing compliance and their administrative costs. This makes it easier and cheaper for tax professionals to file and pay.
o Fair procedure
Through mechanisms such as tax procedures and Tax Audit Practice Guidelines and other papers and circulars that help the conduct of tax strutures in confront of taxpayers and tax proffesionals.
CONSULTATION
While, everyone recognises that albanian tax administration has responsibility for the tax system and makes the final decisions, we know that we can do things more effectively, if there is a spirit of cooperation and mutual understanding with tax professionals.
Both tax structures and tax professionals have a mutual self-interest in bringing common sense and clarity to what is a complex area of business and personal life of taxpayers. The consultation is very important - our strategy is that we listen, we exchange views and ideas, and we generate ideas. On the other hand it is important to get the professional's practical business perspectives and learn from their experiences. Sometimes a more informative practical viewpoint, e.g. learning practical insights and difficulties in operating legislation, is a more valuable insight than discussions about proposals or the difficulties in implementation of current legislation in an internal vacuum.
BENEFITS TO TAX ADMINISTRATION
As well as the invaluable role, played by practitioners in promoting and fostering a pro-compliance culture in Albania, they have also been a significant catalyst and facilitator of some of the major changes in tax administration here.
Tax administration has make changes to keep pace with one of the fastest growing economies in the mediterranean region over the last 5 years which has brought enormous challenges for us on many fronts, but particularly in terms of:
- Growing number of taxpayers
- Taxpayers with increasingly complex and financial and investment profiles
All of the changes have occurred while resources have remained static. With the support (and sometimes the forbearance) of tax professionals, tax administration has managed to transform itself from an organisation that was focused on process and procedure, structurally frozen, averse to change and largely indifferent to its customers' needs to one which is trying now to customer focused, more effective in its core businesses, structurally flexible, risk driven and looking forward with enthusiasm to the challenges ahead.
I would like to illustrate this by mentioning just a few of these major changes and the role of tax professionals in facilitating them:
The near future tax declaration-on-line filing service in Albania, it's aspected to be a phenomenal success. In industrialised countries of EU, even though e-filing is not mandatory, over 53% of self employed taxpayers filed on-line last year, in order to be increased to over 60%. This is because so many of the returns are filed by tax professionals who have been active partners in our e-filing success. As a result, there have been huge benefits for both Revenue and practitioners in terms of service and cost. Tax professionals have been the most enthusiastic supporters of our on-line filing system and we are continuing to work closely with them in developing it to ensure that it continues to meet their needs and concerns re service, security and confidentiality.
CHALLENGES AHEAD
There are some serious challenges ahead for the Tax Administration -Tax Professional relationship. Some of the main ones are that come to mind are:
Tax Planning and Avoidance
It would be wrong to give the impression that tax structures accept everything that the tax professional engages in. One of the main areas of contention is 'avoidance' or aggressive tax planning. While professionals have a key role to play in relation to promoting compliance, there are problems sometimes when tax planning steps over the line. Of course tax offices understands the motive for tax planning. Naturally, all taxpayers want to pay less tax and if there are ways of avoiding tax, and some are willing to pay a lot of money for it. The problem is when such schemes have the potential to undermine the integrity and legitimacy of the tax system in the wider community.
There is an ongoing debate with tax professionals as to where that line is - what's acceptable and what's unacceptable. The tax administration's objective is to move tax professionals and their clients away from getting involved in unacceptable tax planning schemes. On the other hand, albanian tax administration are closely monitoring new developments in other countries to establish the best approach to take to change behaviour in this regard.
Integrated Revenue view of Taxpayer and Risk
The tax administration approach to tackling risk, in tax structures, is to analyse risks for a taxpayer across all taxes. This makes it more difficult for the general tax professional who may act in relation to some of the taxes only. It may present particular problems when preparing for a revenue audit when the full range of taxes and duties, from income tax to excise duties, could be reviewed.
More Professional Regulation
It's not just tax administration that tax professionals have to deal with. They have to contend with more and more statutory reporting requirements from other bodies such as the Prosecutor, money laundering department, Customs, and many other public agencies regarding company law offences, to illustrate just a few regulatory bodies. The whole compliance environment is becoming more difficult for the practitioner and this is not being made easier by duplication of requirements from the various public bodies. However, we are working with other agencies to try and streamline matters where possible.
Finishing off Legacy Business
In the last four years, tax investigation units have carried out a number of large investigation projects aimed at dealing with tax evaded on funds hidden by way of various means, such as money laundering in the registered businesses, under reporting or missing declarations of incomes etc .
As mentioned earlier, there is a new investigation scheme underway into undeclared funds hidden. Because of the numbers of taxpayers involved, approximately 1, 000 over the last 2 years, tax professionals are complaining about the strain that all this extra work is placing on them which is in addition to their normal advisory and returns preparation work. The timing and management of some of these special investigations has been a bone of contention with them and this has caused some difficulties in their relationship with tax administration.
CONCLUSION
Tax professionals sometimes ask hard questions which tax officials may not have asked themselves and, which tax administration has to answer. This ultimately is of benefit to tax administration as it focuses them on dealing with and addressing difficult issues, which may have been overlooked.
As key stakeholders they want tax professionals to have a sense of ownership in the tax system. This partnership approach with them also helps to counter relationships of distrust and enables tax administration to create real relationships. To this end, the good relationship with tax professionals can help in building public confidence in the tax administration. In terms of our objectives, we have benefited from our approach with them. However, tax officials should not get carried away. While they have a long engagement, the marriage has been more one of convenience than of love for each other. Paying tax will never be popular and there will no doubt be serious difficulties ahead. This relationship overall is on a sound footing and capable of withstanding whatever troubles lie ahead. In this conclusion I can pronounce the sentence that I'm carrying in my mind always "Tax administration need tax professionals and they need tax administration".
By Eduart Gjokutaj
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