How Are Late Law Changes Affecting 2012 Tax Return Preparation?

According to a recent article in Deseret News, 2012 tax return preparation has been causing headaches for those individuals filing tax returns because of late law changes that occurred at the beginning of the year. Taxpayers and tax preparers have been receiving notices stating that their returns were rejected after filing them electronically. Unfortunately, the rejection of their 2012 tax return is not something neither taxpayers nor tax preparers have the ability to control.

The approval of the American Taxpayer Relief Act on the second day of the year by Congress necessitated changes to forms that many taxpayers use when filing their 2012 tax returns. Because the changes had to be made so quickly before tax season began, it seems the IRS has not yet completed all required changes its form database.

The article gives the perspective of a local accountant who reported seeing a screen that says, “This return cannot be filed electronically” when he attempted to submit some of the many returns being filed.

The changes in tax law have required around 30 forms to be corrected. With such a significant amount of forms to be changed, the IRS was unable to complete all reprogramming required, despite the delayed start of the tax season.

It is unclear how many individuals will be affected by the issue. According to the accountant, the forms that have not yet been completed deal primarily with businesses, but individual taxpayers can also be affected.

If you have any questions regarding the changes to tax law, the best thing you can do is contact your knowledgeable tax professional.

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

The Payroll Tax Hike and How It Affects Independent Contractors

A recent article in Forbes by Robert W. Wood discusses the affects of the payroll tax hike on individuals in the coming year, particularly independent contractors. As has been addressed in previous blog posts, the deal that settled the fiscal cliff matter for the moment did not extend the payroll tax holiday that decreased the rate from 6.2% to 4.2% for the years 2011 and 2012.

As a result of the 2% increase, millions of Americans were made aware of their shrinking paychecks—whether they are in business, self-employed, or wage-earners. For many, this decrease is not insignificant. The article notes that for an individual making $50,000, the individual will receive $1,000 less a year.

In regards to how the payroll tax hike affects a particular group, Wood poses the central question of the article, “But do higher payroll taxes mean more pressure on independent contractors?” Wood answers with a “perhaps.” There is no withholding for independent contractors, as the contractor is responsible for withholding his own tax). He concludes that while it is not likely that higher taxes on the portion of the tax the workers pay will serve as motivation for employers to designate employees as independent contractors, there will be some connection.

One of the reasons why the IRS likes employees is because employers have the duty to withhold taxes from employees. The duty to withhold allows the IRS to get its share in a manner that is quicker and more reliable.

This could motivate those who use independent contractors and those with employees to take a closer look at their practices. Does it make sense to fight any reclassification? Can revising or improving a contract make the process easier?

Such questions should certainly be answered before an audit or litigation. A recent report claims that the IRS is losing billions of dollars, and a Department of Labor study reports 30% of employers are classifying workers incorrectly. The article is quick to say that such misclassification will continue to decrease, as measures have been put in place to decrease the practice. In 2010, the Department of Labor announced new regulations that would make filing an analysis for each worker in regards to their classification a requirement, not excluding those individuals who are deemed “independent contractors.” The information that all agencies gather—the IRS, the Department of Labor, state governments—is shared among them, making it easier to regulate.

It is important to note that business owners and other “responsible persons” are personally liable. The IRS is not is not easily swayed by excuses.

If you have any questions regarding payroll taxes, contact an IRS tax attorney for the most up-to-date information.

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

IRS Tax Implications for Superbowl MVP Joe Flacco

While Ravens Quarterback Joe Flacco is celebrating the Superbowl win and his MVP award, he will have to remember that there is another group that will be eager to celebrate his win—the IRS. A recent Forbes article discusses the tax issues at hand for the NFL champion.

As MVP of the Superbowl, Flacco was awarded a 2014 Chevrolet Corvette Stingray. The car, worth an estimated $60,000, has tax implications that depend on whether or not Flacco keeps the sporty vehicle. If Flacco decides to keep the car, he will owe around $26,000 in income taxes. On the other hand, if Flacco decides to donate the car, the tax questions become a little more complicated.

If he were to decide to donate the car to charity, there are two options that he may select with differing tax implications. He could either accept the car and donate it to charity, or he may direct Chevrolet to donate the car directly without first receiving the vehicle. While it may seem like the options are the same, they do have subtle distinctions that could mean several thousand dollars difference for Flacco.

If Flacco elects to have Chevrolet donate the car directly, then the IRS will view the car as not existing, which means it will not have to be reported as income. The IRS website details four rules that must be met in order for an award not to be reported as income. Below is a direct list from the Forbes article:

“1. The prize or award was made primarily in recognition of religious, charitable, scientific, educational, artistic, literary or civic achievement;

2. The recipient was selected without any action on his part to enter the contest or proceeding;

3. The recipient is not required to render substantial future services as a condition to receive the prize or award; and

4. The prize or award is transferred by the payor to a government unit or [charitable organization] pursuant to a designation made by recipient.”

Flacco’s award qualifies because the MVP award is designated as a civic achievement that a player receives for doing his job, and that does not tie the recipient to the sponsor in the future (in this case, Chevrolet). The fourth rule is where the distinction between the first option and the second option is clear. If Flacco does not receive the car and instead asks that the car be transferred directly to the charity, the quarterback would be able to exclude the income from his tax return. On the other hand, if Flacco receives the keys and then donates the vehicle, it will cost him.

If he does receive the keys, he will have to report the $60,000 car on his tax return, which will be added to his adjusted gross income, limiting the amount that can be deducted to $1,800 as an itemized deduction. There are other calculations that would go into how much exactly could be deducted, as the outcome depends on whether the charity retains the car or sells it.

In the meantime, Flacco can appreciate the victory and make his tax decisions a little later.

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