IRS Closes Offshore Tax Loophole

The Internal Revenue Service said Tuesday that its Offshore Voluntary Disclosure Programs have exceeded the $5 billion mark and released new details on the latest iteration of the Offshore Voluntary Disclosure Program that began in January, including tightening the eligibility requirements.

 

“We continue to make strong progress in our international compliance efforts that help ensure honest taxpayers are not footing the bill for those hiding assets offshore,” said IRS Commissioner Doug Shulman in a statement. “People are finding it tougher and tougher to keep their assets hidden in offshore accounts.”

Shulman said the IRS Offshore Voluntary Disclosure Programs have so far resulted in the collection of more than $5 billion in back taxes, interest and penalties from 33,000 voluntary disclosures made under the first two programs. In addition, another 1,500 disclosures have been made under the new program announced in January.

 

The voluntary disclosure programs are part of a wider effort by the IRS to stop offshore tax evasion and ensure tax compliance. This includes beefed up enforcement, criminal prosecution and implementation of third-party reporting through the Foreign Account Tax Compliance Act, also known as FATCA.

The IRS also closed a loophole Tuesday that has been used by some taxpayers with offshore accounts. Under existing law, if a taxpayer challenges in a foreign court the disclosure of tax information by that government, the taxpayer is required to notify the U.S. Justice Department of the appeal. The IRS said that if the taxpayer fails to comply with this law and does not notify the U.S. Justice Department of the foreign appeal, the taxpayer will no longer be eligible for the Offshore Voluntary Disclosure Program. The IRS also put taxpayers on notice that their eligibility for the OVDP could be terminated once the U.S. government has taken action in connection with their specific financial institution.

Additional details of these eligibility issues are available in a new set of questions and answers released today on the current OVDP, which was announced in January (see IRS Reopens Voluntary Disclosure Program). The IRS reopened the OVDP following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs.

This program—which helps bring people back into the tax system—will remain open for an indefinite period until otherwise announced. The program is similar to the 2011 program in many ways, but with a few key differences. Unlike last year, there is no set deadline for people to apply.  However, the terms of the program could change at any time going forward.

Under the current OVDP, the offshore penalty has been raised to 27.5 percent from 25 percent in the 2011 program. The reduced penalty categories of 5 percent and 12.5 percent are still available.

For more information: www.onts9.com

 

 

GASB Approves New Pension Accounting and Reporting Standards

The Governmental Accounting Standards Board voted Monday to approve two new standards to improve the accounting and financial reporting of public employee pensions by state and local governments.

 

Pension plans are distinguished for financial reporting purposes in two ways. First, plans are classified by whether the income or other benefits that the employee will receive at or after separation from employment are defined by the benefit terms (a defined benefit plan) or whether the pensions an employee will receive will depend only on the contributions to the employee’s account, actual earnings on investments of those contributions, and other factors (a defined contribution plan).

In addition, defined benefit plans are classified based on the number of governments participating in a particular pension plan and whether assets and obligations are shared among the participating governments. Categories include plans where only one employer participates (single employer); plans in which assets are pooled for investment purposes, but each employer’s share of the pooled assets is legally available to pay the benefits of only its employees (agent employer); and plans in which participating employers pool or share obligations to provide pensions to their employees and plan assets can be used to pay the benefits of employees of any participating employer (cost-sharing employer).

Statement 68 (Employers)
Statement 68 replaces the requirements of Statement No. 27, “Accounting for Pensions by State and Local Governmental Employers” and Statement No. 50, “Pension Disclosures,” as they relate to governments that provide pensions through pension plans administered as trusts or similar arrangements that meet certain criteria. Statement 68 requires governments providing defined benefit pensions to recognize their long-term obligation for pension benefits as a liability for the first time, and to more comprehensively and comparably measure the annual costs of pension benefits. The statement also enhances accountability and transparency through revised and new note disclosures and required supplementary information.

 

Statement 67 (Plans)
Statement 67 (Plans) replaces the requirements of Statement No. 25, “Financial Reporting for Defined Benefit Pension Plans and Note Disclosures for Defined Contribution Plans” and Statement 50 as they relate to pension plans that are administered through trusts or similar arrangements meeting certain criteria. The Statement builds upon the existing framework for financial reports of defined benefit pension plans, which includes a statement of fiduciary net position (the amount held in a trust for paying retirement benefits) and a statement of changes in fiduciary net position. Statement 67 enhances note disclosures and RSI for both defined benefit and defined contribution pension plans. Statement 67 also requires the presentation of new information about annual money-weighted rates of return in the notes to the financial statements and in 10-year RSI schedules.

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IRS Warns of Impending FBAR Deadline

The Internal Revenue Service cautioned tax professionals Friday that their clients need to submit reports of any foreign bank accounts by the June 30 deadline.

“If one of your clients has a bank or other financial account in a foreign country, or has signature authority over such an account, that client may be required to report the account using Form TD F 90-22.1, “Report of Foreign Bank and Financial Accounts,” to the Treasury Department  by June 30,” said the IRS in an email to tax professionals. “Reporting of such accounts may be required, even if they do not generate any taxable income.

“Form TD F 90-22.1 is not a tax form and should not be filed with any income tax return,” the IRS added. “It may be filed either electronically or on paper. However, requests for an extension of time to file this form cannot be granted. Details are on the FBAR page on IRS.gov.”

U.S. citizens, residents and U.S. based entities that have $10,000 or more in foreign bank accounts or offshore financial accounts are required to file the Foreign Bank Account Report, or FBAR, form.

Form TD F 90-22.1 must be received by the IRS on or before June 30, unlike other IRS forms, which can be postmarked on the due date.

Penalties for failure to file an FBAR include hefty fines and, in some cases, jail time, his firm noted. Those who willfully fail to file an FBAR are subject to penalties as high as 50 percent of the total balance of the account. Each year of non-compliance results in a separate violation and penalty i.e. multiple 50 percent penalties, which can equal 300 percent of the foreign account amount.

For citizens, residents and entities that have failed to file the FBAR in the past, there are solutions, however. The Offshore Voluntary Disclosure Initiative was created for taxpayers who wish to comply with tax laws regarding their foreign accounts. Through the OVDI, some taxpayers may be eligible for penalties as low as 5 percent, although many will face a 27.5 percent penalty. To participate in the program, taxpayers must file all original and amended returns (including payment of back taxes and interest) for up to eight tax years.

For more information: www.onts9.com

 

The Best Financial Tool for Business Owners

What if there were a tool that helped you create crystal-clear plans, provided you with continual feedback about how well your plan was working, and that told you exactly what’s working and what isn’t?

Well, there is such a tool. It’s called the Budget vs. Actual Report and it’s exactly what you need to be able to consistently make smart business decisions to keep your business on track for success.

Clarifying Your Plan

The clearer you are about your business goals, the more likely you are to achieve them. Creating a budget forces you to examine the details of your goals, as well as how even a single business decision affects all other aspects of your company’s operations.

Example: Let’s say that you want to grow your sales by 15% this year.

Does that mean you need to hire another salesperson? When will the business start to see new sales from this person? Do you need to set up an office for them? New phone line? Buy them a computer? Do you need to do more advertising? How much more will you spend? When will you see the return on your advertising expenditure?

Navigating the Ship

Once you clarify your goals, then you start making business decisions to help you reach your desired outcome. Some of those decisions will be great and give you better than expected results, but others might not.

This is when the Budget vs. Actual Report becomes an effective management tool. When you compare your budgeted sales and expenses to your actual results, you see exactly how far off you might be with regard to your budget, goals, and plans.

Sometimes you need to adjust your plan (budget) and sometimes you need to focus more attention to the areas of your business that are not performing as well as you planned. Either way, you are gleaning valuable insights into your business.

It’s like sailing a boat. You may be off-course most of the time, but having a clear goal and making many adjustments helps you reach your destination.

Just Do It

We often know what we need to do but don’t take the necessary action. It may seem like a huge hassle to create a budget and then create a Budget vs. Actual Report every month, but as with any new skill, it does get easier.

Turn your dreams into reality. Give us a call and we’ll guide you through the budgeting process.

For more information: www.onts9.com

 

Sell Your Home But Keep the Profits

If you’re looking to sell your home this year, then it may be time to take a closer look at the exclusion rules and cost basis of your home in order to reduce your taxable gain on the sale of a home.

The IRS home sale exclusion rule now allows an exclusion of a gain up to $250,000 for a single taxpayer or $500,000 for a married couple filing jointly. This exclusion can be used over and over during your lifetime, as long as you meet the following Ownership and Use tests. However, it cannot be used more frequently than every 24 months.

During the 5-year period ending on the date of the sale, you must have:

  • Owned the house for at least two years – Ownership Test
  • Lived in the house as your main home for at least two years – Use Test
  • During the 2-year period ending on the date of the sale, you did not exclude gain from the sale of another home.

Tip: The Ownership and Use periods need not be concurrent. Two years may consist of a full 24 months or 730 days within a 5-year period. Short absences, such as for a summer vacation, count in the period of use. Longer breaks, such as a 1-year sabbatical, do not.

If you own more than one home, you can exclude the gain only on your main home. The IRS uses several factors to determine which home is a principal residence: place of employment, location of family members’ main home, mailing address on bills, correspondence, tax returns, driver’s license, car registration, voter registration, location of banks you use, and location of recreational clubs and religious organizations you belong to.

Tip: As we mentioned earlier, the exclusion can be used repeatedly, every time you reestablish your primary residence. When you do change homes, let us know your new address so we can ensure the IRS has your current address on file.

Note: Only taxable gain on the sale of your home needs to be reported on your taxes. Further, loss on the sale of your main home cannot be deducted. Ask us for details.

Improvements Increase the Cost Basis

Additionally, when selling your home, consider all improvements made to the home over the years. Improvements will increase the cost basis of the home and thereby reduce the capital gain.

Additions and other improvements that have a useful life of more than one year can be added to the cost basis of your home.

Examples of Improvements
Examples of improvements include: building an addition; finishing a basement; putting in a new fence or swimming pool; paving the driveway; landscaping; or installing new wiring, new plumbing, central air, flooring, insulation, or security system.

Example: The Kellys purchased their primary residence in 2002 for $200,000. They paved the unpaved driveway, added a swimming pool, and made several other home improvements adding up to a total of $75,000. The adjusted cost basis of the house is now $275,000. The house is then sold in 2012 for $550,000. It costs the Kellys $40,000 in commissions, advertising, and legal fees to sell the house.

These selling expenses are subtracted from the sales price to determine the amount realized. The amount realized in this example is $510,000. That amount is then reduced by the adjusted basis (cost plus improvements) to determine the gain. The gain in this case is $235,000. After considering the exclusion, there is no taxable gain on the sale of this primary residence and, therefore, no reporting of the sale on the Kelly’s 2012 personal tax return.

Tip: Residential Energy Efficient Property Credit. This tax credit helps individual taxpayers pay for qualified residential alternative energy equipment, such as solar hot water heaters, solar electricity equipment and wind turbines. The credit expires on December 31, 2016 and is 30 percent of the cost of qualified property. There is no cap on the amount of credit available, except for fuel cell property.

Generally, you may include labor costs when figuring the credit and you can carry forward any unused portions of this credit. Qualifying equipment must have been installed on or in connection with your home located in the United States; fuel cell property qualifies only when installed on or in connection with your main home located in the United States.

Not all energy-efficient improvements qualify so be sure you have the manufacturer’s tax credit certification statement, which can usually be found on the manufacturer’s website or with the product packaging.

Please contact us for more information about residential energy tax credits.

Partial Use of the Exclusion Rules

Even if you do not meet the ownership and use tests, you may be allowed to exclude a portion of the gain realized on the sale of your home if you sold your home because of health reasons, a change in place of employment, or certain unforeseen circumstances. Unforeseen circumstances include, for example, divorce or legal separation, natural or man-made disasters resulting in a casualty to your home, or an involuntary conversion of your home. If one of these situations applies to you, please call us for additional details.

Recordkeeping

Good recordkeeping is essential for determining the adjusted cost basis of your home. Ordinarily, you must keep records for 3 years after the filing due date. However, you should keep records proving your home’s cost basis for as long as you own your house.

The records you should keep include:

  • Proof of the home’s purchase price and purchase expenses
  • Receipts and other records for all improvements, additions, and other items that affect the home’s adjusted cost basis
  • Any worksheets or forms you filed to postpone the gain from the sale of a previous home before May 7, 1997

For more information: www.onts9.com

 

Starting a Business? 3 Things You Must Know

Starting a new business is a very exciting and busy time. There is so much to be done and so little time to do it in. If you expect to have employees, there are a variety of federal and state forms and applications that will need to be completed to get your business up and running. That’s where we can help.

Employer Identification Number (EIN):

Securing an Employer Identification Number (also known as a Federal Tax Identification Number) is the first thing that needs to be done since many other forms require it. The fastest way to apply for an EIN is online through the IRS website or by telephone. Applying by fax and mail generally takes one to two weeks. Note that effective May 21, 2012 you can only apply for one EIN per day. The previous limit was 5.

 

State Withholding, Unemployment, and Sales Tax:

Once you have your EIN, you need to fill out forms to establish an account with the State for payroll tax withholding, Unemployment Insurance Registration, and sales tax collections (if applicable).

 

Payroll Record Keeping:

Payroll reporting and record keeping can be very time consuming and costly, especially if it isn’t handled correctly. Also keep in mind, that almost all employers are required to transmit federal payroll tax deposits electronically. Personnel files should be kept for each employee and include an employee’s employment application as well as the following:

Form W-4 is completed by the employee and used to calculate their federal income tax withholding. This form also includes necessary information such as address and social security number.

Form I-9 must be completed by you, the employer, to verify that employees are legally permitted to work in the U.S.

If you need help setting up the paperwork for your business, give us a call. Letting our experts handle this part of your business will allow you to concentrate on running your business.

For more information: www.onts9.com

 

 

Temp Regs Issued on Portability Election

The Internal Revenue Service has just issued temporary and proposed regulations aimed at simplifying the handling of portability elections in estate tax law.

 

The portability provision currently in the estate tax law allows, in general terms, that if one spouse does not fully utilize their entire $5 million applicable exclusion amount, the unused portion can be used by the surviving spouse’s estate. This provision was added by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 for estates of decedents dying after 2010. It will expire at the end of 2012 unless it is extended.

The temporary and proposed regs in Reg. 141832-11 and T.D. 9593 make the process easier for estate executors.

“The goal is noble,” said Larry Peck, a New York-based estate planning attorney. “The idea is to protect clients who don’t have wills, or who go to lawyers who are general practitioners and end up with no wills or simple wills, and where a sizeable estate can lead to wasting of the exemption of the first-to-die.”

But just because you have portability doesn’t mean you end up ahead, Peck cautioned. “With portability, there’s no inflation adjustment to account for the time value of money between the first and the second death,” he explained. “The answer to that issue is a credit shelter trust, which can be set up in a will or as a revocable trust, at the death of the first spouse to die.

For more information: www.onts9.com

 

Tax Preparers Charged with Hiding Funds in Israeli Banks

A trio of tax preparers have been charged with helping their clients evade taxes by hiding millions of dollars in secret accounts at two Israeli banks.

David Kalai, Nadav Kalai and David Almog were indicted by a federal grand jury in the Central District of California and charged with conspiring to defraud the United States, the Justice Department and the Internal Revenue Service said Friday. A superseding indictment, which was returned late Thursday, was unsealed following the defendants’ arrests.

According to prosecutors, David and Nadav Kalai were principals of United Revenue Service Inc., a tax preparation business with 12 offices across the country. David Kalai worked primarily at URS’s former headquarters in Newport Beach, Calif., and later at URS’s location in Costa Mesa, Calif. Nadav Kalai, who is David Kalai’s son, worked out of URS’s headquarters in Bethesda, Md., along with URS locations in Newport Beach and Costa Mesa, Calif. David Almog was the branch manager of the New York office of URS and supervised tax return preparers for URS’s East Coast locations.

The three men allegedly prepared false individual income tax returns that did not disclose their clients’ foreign financial accounts nor report the income earned from those accounts. To conceal their clients’ ownership and control of assets and conceal the clients’ income from the IRS, they allegedly incorporated offshore companies in Belize and elsewhere and helped clients open secret bank accounts at the Luxembourg locations of two unidentified Israeli banks.

One of them is described as a large financial institution headquartered in Tel-Aviv, with more than 300 branches across 18 countries worldwide, which matches the description of Bank Leumi, and the other is a mid-size financial institution also headquartered in Tel-Aviv, with a worldwide presence on four continents. Bank Leumi did not immediately respond to a request for comment.

The tax preparers allegedly incorporated offshore companies in Belize and elsewhere to act as named account holders on the secret accounts at the Israeli banks. They then facilitated the transfer of client funds to the secret accounts and prepared and filed tax returns falsely reporting the money sent offshore as a false investment loss or a false business expense, according to prosecutors. They also allegedly failed to disclose the existence of their clients’ secret accounts, and the clients’ financial interest in and authority over those accounts, and caused the clients to fail to file FBARs, or reports of foreign bank accounts, with the Treasury Department. If convicted, each of the defendants faces up to five years in prison and a fine of up to $250,000.

For more information: www.onts9.com

 

Allen Stanford Gets 110-Year Sentence

Financier Allen Stanford has been sentenced to 110 years in prison after he was convicted of running a $7 billion Ponzi scheme involving certificates of deposit.

Stanford was convicted in March on 13 counts, including wire fraud, mail fraud, obstruction and conspiracy to commit money laundering.

 

Stanford founded the Houston-based Stanford Financial Group and sold certificates of deposit in an offshore Antiguan bank that he controlled. Only four years ago, Stanford landed a spot on the Forbes list of the wealthiest Americans, with a net worth of $2.2 billion. At his trial, however, he was declared indigent after prosecutors froze his funds.

Before U.S. District Judge David Hittner pronounced sentence in a Houston federal court Thursday, Stanford insisted, “I didn’t run a Ponzi scheme, I didn’t defraud anybody, and there was never any intent to defraud anybody,” according to The Wall Street Journal.

Stanford was arrested in 2009 and accused of telling investors their money would be used for buying stocks and bonds and instead spending much of the money on his real estate holdings and businesses.

For more information: www.onts9.com

 

Tips for Safeguarding Tax Records

Hurricane season has started and the IRS encourages individuals and businesses to safeguard their tax records against natural disasters by taking a few simple steps.

Here are four tips from the IRS to help you prepare in case a disaster strikes.

 

  1. Backup records electronically Taxpayers should keep a set of backup records in a safe place away from the original set. Keeping a backup set of records, bank statements, tax returns, insurance policies, etc is easier now that many financial institutions provide statements and documents electronically. Even if the original record is only available on paper, it can be scanned into an electronic format. With documents in electronic form, taxpayers can download them to a portable backup storage device such as an external hard drive, CD or DVD that you can take with you in the event that you need to evacuate.
  2.  Document valuables Taxpayers should photograph or videotape the contents of their home, especially items of higher value. A photographic record can help an individual prove the market value of items for insurance and casualty loss claims. Photos should be stored at an outside location.
  3. To document your valuables, the IRS has a disaster loss workbook, Publication 584, Casualty, Disaster and Theft Loss Workbook, which can help taxpayers compile a room-by-room list of belongings.
  4. Update Emergency Plans Emergency plans should be reviewed at least once a year. Personal and business situations change over time as do preparedness needs. When employers hire new employees or when a company changes functions, plans should be updated and employees should be informed.

 

For more information: www.onts9.com