New Investment Tax

The affirmation of President Obama’s healthcare law yesterday by the Supreme Court sent investors scrambling, as the law included a 3.8 percentage-point investment tax on investment income. The new tax affects the net investment income of most joint filers with adjusted gross income of more than $250,000. Beginning January 1, 2013, these earners will see a spike from their 15%, a historic low, to 18.8%, assuming that the current law is extended by Congress.

However, if Congress allows the tax rates set in 2001 and 2003 to expire on December 31, the top rate on capital gains would rise to 23.8% and the top rate on dividends will almost triple, to 43.4%. With the uncertainty over the fate of the 2001-2003, tax advisers are warning clients to begin making plans to minimize the new levy.

According to an article in The Wall Street Journal, the new levy’s ramifications are far-reaching, and will be a “game-changer” for many taxpayers. In order to minimize this tax, says CPA Dave Kautter of American University’s Kogod Tax Center, wealthy investors will have to manage both their adjusted gross income and their investment income. Some of these affluent individuals will likely seek more shelter in assets and structures where the tax doesn’t apply, opines the article. Both municipal-bond income and Roth individual retirement accounts are not subject to the 3.8% tax, making them appealing to those seeking shelter.

If you have any questions regarding how the new law will affect your personal investments, please contact your experienced tax professional.

 

Segal, Cohen & Landis
9100 Wilshire Blvd. Ste. 601E
Beverly Hills, CA 90212
(310) 285-3999

Taxes and Today’s SCOTUS Ruling

In an analysis of today’s Supreme Court ruling by Lyle Deniston of SCOTUSblog, the tax implications of the healthcare ruling become a little less opaque. According to his analysis, the 5-4 SCOTUS ruling that upheld the individual mandate has tax implications in that its provisions would require an individual to who refuses to pay health insurance to pay a tax. He remarks that “the Court brought into full public view—perhaps for the first time—the fact that the nation’s healthcare market is going to have as customers only those who opt to buy insurance rather than pay a tax.”

The decision, though, leaves much in doubt as to how effective the enforcement of this law will be, in terms of compelling individuals to buy health insurance. The concession apparent in the Chief Justice’s opinion reveals how difficult it will be to guarantee an upswing in business for insurers saying that “if one chooses to pay [the tax] rather than obtain health insurance, they have fully complied with the law.” The Chief Justice even suggested individual’s willingness to buy insurance would be dampened when comparing the cost of healthcare and the cost of the tax, the tax assessment being significantly less than the cost of insurance.

If the tax provision does go into effect about two years from now, individuals who do not obtain health care will be assessed a tax that they must pay along with their federal tax income. The taxable amount will be determined by family income. In order to enforce the tax, it must be determined that the individual who refused to buy health insurance did so willingly and with more intent that simply a failure to include the penalty payment in his tax return. The Chief Justice’s opinion was clear in stating that this willful failure to pay the tax could result in criminal prosecution.

According to the Opinion of the Chief Justice, “Those subject to the individual mandate may lawfully forgo health insurance and pay higher taxes, or buy health insurance and pay lower taxes. The only thing they may not do is not buy health insurance and not pay the resulting tax.”

It remains to be seen what effect this law will have on the healthcare and the tax code.

 

Segal, Cohen & Landis
9100 Wilshire Blvd. Ste. 601E
Beverly Hills, CA 90212
(310) 285-3999

IRS Watchdog Warns of 2013 Tax Delay due to Congressional Inaction

According to a report from the Taxpayer’s Advocate Service—the in-house service that assists taxpayers in dealing with the IRS and holds the agency accountable in its bi-yearly reports—there could be a tax delay in 2013 if Congress fails to address major fiscal policy questions soon. Nina Olson, the head of the IRS’ in-house advocate for taxpayer’s rights, remarked in the report that “an aura of uncertainty prevails as the IRS and taxpayers wait for word about what will be the law.”

The uncertainty of which she is referring comes from a slew of policies that have a rapidly approaching end date. The forthcoming expiration date of December 31 for the Bush Tax Cuts is quickly approaching; however, a consciousness of the November 6 elections has stalled Congress’ decision-making.

Further uncertainty stems from the reality that 60 tax breaks expired at the end of 2011 and 41 more are expiring at the end of 2012.

In 2010, last minute congressional action on tax laws forced the IRS to push back the filing start date to February of 2011. The normal start date for return filing is January.

 

Segal, Cohen & Landis
9100 Wilshire Blvd. Ste. 601E
Beverly Hills, CA 90212
(310) 285-3999

IRS Collects More Than $5 Billion from Offshore Tax Disclosures

IRS Collects $5 Billion from Offshore Tax Disclosures

The IRS announced today that disclosures from taxpayers of offshore accounts have resulted in its collection of more than $5 billion dollars.

The IRS also announced new procedures designed to help taxpayers who are living abroad to catch up on their requirements to file returns. The new procedure includes people who have recently learned they are subject to the U.S. tax code.

In a telephone interview with Bloomsberg, IRS Commissioner Douglas Shulman said that the program’s aim was to “crack down” on individuals who are willfully hiding assets overseas and neglecting their taxpayer duties. Those taxpayers who owe less than $1,500 for each of the past few years are eligible for the program, which begins September 1.

 

 

Segal, Cohen & Landis
9100 Wilshire Blvd. Ste. 601E
Beverly Hills, CA 90212
(310) 285-3999

IRS Will Toughen up IRS ITIN Number Application Procedures

From now until the end of the year, the IRS will be working on strengthening its ITIN program. ITINS, which are solely for administrative purposes, are issued to individuals who cannot obtain Social Security numbers. Recently, however, the IRS has been criticized for its issuing of numbers to illegal immigrants and undocumented workers. According to a report by the Treasury Inspector General for Tax Administration, the IRS paid out $4.2 billion in tax credits to individuals not authorized to work in the United States.

During the interim period in which it is making changes to the issuance procedure, the IRS will only issue ITIN numbers to those who can provide the proper original documentation—birth certificates and passport—or a copy of the documentation from the issuing agency.

These changes, the IRS promises, are designed to “strengthen and protect the integrity” of the ITIN procedure.

The IRS will use the interim time period to gather information and sort out any issues that may arise before the beginning of the 2013 filing season, at which time the rules will be solidified. The IRS is attempting to clear up the procedure from danger of fraud or deceit, as the program is vital in the IRS’ collecting of taxes from foreign nationals, non-resident aliens, and others who have filing obligations with the IRS.

While the ITIN Program is in the interim period, filers who need an ITIN number in order to get their returns processed can mail their original documentation or a certified copy of the originals. They may also submit the paperwork at an IRS office, at which time the paperwork will be forwarded to an ITIN center for processing. New applicants must also submit answers to an additional questionnaire that the IRS has prepared.

There are some individuals who are exempted from this new procedure, including US military personnel and their spouses. For further information on these exemptions, please visit the IRS website or speak to your tax professional.

 

Segal, Cohen & Landis
9100 Wilshire Blvd. Ste. 601E
Beverly Hills, CA 90212
(310) 285-3999

IRS Under Pressure to Improve Whistleblower Program

The IRS promises to improve its whistleblower program after outcry ensues over its handling of AlliantGroup’s alleged misdeeds, as reported by two former employees. The firm, which is a politically connected advisory entity that helps clients apply for lucrative tax benefits, was allegedly also helping them sidestep taxes. The former employees submitted a 32-page report with internal emails and documents to the IRS, alleging that the illicit activity resulted in the clients of the firm possibly owing the IRS more than $712 million dollars. Through the whistleblower program, the informants stood to make more than $210 million, as the law offers whistleblowers as much as 30% of what the government recovers from their tips.

The auditors at the IRS never looked at the report, though. The IRS rejected the claim twenty-one months later, despite the absence of a review. The IRS’ decision also disregarded the request by some of its own agents to convene a grand jury, according to internal documents.

The Whistleblower Program of the IRS was created by Congress in 2006 to boost tax revenue through the information brought to the IRS by tipsters; instead, it has become a place where “allegations of tax avoidance go to die,” according to an article in Bloomberg.

After program came under fire this week, the IRS has decided to review the reports in an effort to change its public perception and to tighten up the program to better utilize the information that is coming in from valuable sources. Out of 1,300 claims, just three awards to whistleblowers have been made.

The IRS does not have a problem attracting these whistleblowers, says Senator Charles Grassley, the Iowa Republican who sponsored the law. The issue lies in the processing and compensating of the individuals who are come forward with this information. If the issue continues, sponsors of the law worry that whistleblowers will no longer feel the need to come forward, and millions of more dollars will be lost due to tax evasion.

 

Segal, Cohen & Landis
9100 Wilshire Blvd. Ste. 601E
Beverly Hills, CA 90212
(310) 285-3999

Tax Court: Scottish Power Defeats the IRS

According to a report in Bloomberg Businessweek, ScottishPower PLC defeated a bid from the Internal Revenue Service in U.S. Tax Court to disallow more than $932 million in interest deductions.

Tax Court

The 38-page decisions details the ruling from tax court that stock provided by ScottishPower to one of its units upon the acquisition of a publicly held US utility was not a capital contribution, but a loan under federal tax law.

NA General Partnership and Subsidiaries, the unit in question, made $932 million in payments on $4 billion worth of notes that it issued in exchange for the partnership’s receipt of all outstanding stock in PacifiCorp & Subsidiaries to ScottishPower.

ScottishPower began the acquisition process for PacifiCorp in 1998. The power supplier—which was a power supplier to California, Washington, Oregon and Utah—was acquired in 1999.

The court’s ruling that the loan notes are deductible as interest constitutes a loss for the IRS.

 

Segal, Cohen & Landis
9100 Wilshire Blvd. Ste. 601E
Beverly Hills, CA 90212
(310) 285-3999

IRS Reaffirms Promise to Come After Illegal Tax Shelters

In a press release on their website, the IRS announced that it had reached a settlement with the accounting firm of BDO USA, LLP. As part of the settlement, BDO will pay slightly more than $34.4 million, a civil penalty handed down as a result of its failure to disclose tax shelters. In an effort to conceal the tax shelters from the IRS, and to assist high-income taxpayers in evading federal income taxes, BDO did not register various tax shelters as required by law.

The firm was charged with one count of engaging in a tax fraud conspiracy in the years spanning 1997 to 2003. Part of the agreement is a deferred prosecution portion for the criminal charge if specific conditions are met.

Along with the civil penalty, BDO will also cooperate with the IRS in civil matters, including IRS audits and litigation. The corporation has also promised to work with the IRS to ensure that it is in compliance with tax shelter provisions of federal tax laws.

According to the commissioner of the IRS Doug Shulman, the “enforcement action is another reminder that taxpayers can’t hide behind complicated schemes or corporate tax shelters.”

 

Segal, Cohen & Landis
9100 Wilshire Blvd. Ste. 601E
Beverly Hills, CA 90212
(310) 285-3999

Disaster Advice from the IRS

For those taxpayers living in geographical zones prone to natural disasters, the IRS has published some disaster advice to help them avert financial disaster. To safeguard individuals and businesses against these disasters, the IRS suggests that they take four simple steps:

First is the creation of a backup set of records electronically. The backup records should be stored away from the original documents. With the statements or documents in an electronic format becoming increasingly accessible in electronic formats, this step could be accomplished with ease. Burning the files to an external hard drive or a CD is a good way to keep them safe and accessible.

The second suggestion has to do with the documenting of valuables. To do this, a taxpayer can photograph or videotape the contents of his or her home, especially items of a higher value. The IRS, in Publication 54, offers a disaster loss workbook that can help taxpayers organize a room-by-room list of belongings. This video or photographic

Next is an updated emergency plan. Whether the taxpayer lives in a disaster-prone area or not, it is always a good idea to have a plan in case of emergency. Plans should be updated regularly, as circumstances within families and businesses are constantly changing.

The final suggestion is to make sure a fiduciary bond is in place. According to the IRS website, employers who use payroll service providers should ask the provider if a fiduciary bond is in place. Having a bond could ensure that an employer would be protected in the event of default by the payroll service provider.

Disasters are hard to predict, but preparing for them could be easy. It is always a good idea to have backup documentation anyway, as the IRS could ask for them should any questions arise regarding your taxes unrelated to natural disasters.

 

Segal, Cohen & Landis
9100 Wilshire Blvd. Ste. 601E
Beverly Hills, CA 90212
(310) 285-3999

IRS Garnishing Legislator’s Salary

For the past seven years, the Idaho State Legislature has been handing over the bi-weekly paychecks addressed to tax-protester Rep. Phil Hart directly over to the IRS. Since 2005, the IRS has been garnishing the $16,000 of wages, which was 100 percent of his annual legislative pay. According to reports, Hart owes more than $600,000 dollars, mainly to the IRS and the State of Idaho Tax Commission.

Hart, who is completing his last term in the Idaho State Legislature after having lost his re-election bid last month as well as his seat on a House tax committee amid an ethics investigation last year, lost his appeal at the state court level, and is now involved in bankruptcy proceedings.

With the IRS and the State Commission demanding payment of the $600,000, Hart has vowed to continue fighting, disputing all but around $7,000 of the claim.

While this may be an extreme case in regards to Rep. Hart, wage garnishment are a very realistic tactic of the IRS to collect the money it believes it is owed.  A wage garnishment, a legal procedure in which the IRS seizes the taxpayer’s wages directly from his employer, can be stopped in several ways. The first two ways are short-term solutions. The first is to promise to pay the amount owed in full, using money borrowed from friends or family. The second is the placement of the taxpayer on an installment agreement plan with the IRS. Long term solutions include filing the missing returns, reaching an offer in compromise, enforcing statute limitations on the IRS. The final solution, which it seems Rep. Hart is utilizing, is filing for bankruptcy.

If you find yourself with a wage garnishment, consult a tax professional for immediate assistance. Wage garnishments are always a priority.

 

Segal, Cohen & Landis
9100 Wilshire Blvd. Ste. 601E
Beverly Hills, CA 90212
(310) 285-3999