IRS Offers Guidance on Flex Spending Account Limits

The Internal Revenue Service has released guidance on the effective date of the $2,500 limit, as indexed for inflation, on salary reduction contributions to flexible spending arrangements for health expenses.

Notice 2012-40 provides guidance on the effective date of the $2,500 limit on health FSAs under Section 125(i) of the Tax Code and on the deadline for amending plans to comply with that limit. This notice also provides relief for certain contributions that mistakenly exceed the $2,500 limit and that are corrected in a timely manner. Finally, the notice requests comments on whether to modify the use-or-lose rule that is currently detailed in the proposed regulations with respect to health FSAs.

Specifically, the IRS notice provides that the $2,500 limit does not apply for plan years that begin before 2013; and the term “taxable year” in Section 125(i) refers to the plan year of the cafeteria plan as this is the period for which salary reduction elections are made. In addition, the IRS noted that plans may adopt the required amendments to reflect the $2,500 limit at any time through the end of calendar year 2014.

In the case of a plan providing a grace period (which may be up to two months and 15 days), unused salary reduction contributions to the health FSA for plan years beginning in 2012 or later that are carried over into the grace period for that plan year will not count against the $2,500 limit for the subsequent plan year.

The IRS is also providing relief for certain salary reduction contributions exceeding the $2,500 limit that are due to a reasonable mistake and not willful neglect and that are corrected by the employer.

The statutory $2,500 limit under Section 125(i) applies only to salary reduction contributions under a health FSA, and does not apply to certain employer non-elective contributions (sometimes called flex credits), to any types of contributions or amounts available for reimbursement under other types of FSAs, health savings accounts, or health reimbursement arrangements, or to salary reduction contributions to cafeteria plans that are used to pay an employee’s share of health coverage premiums (or the corresponding employee share under a self-insured employer-sponsored health plan).

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Self-Proclaimed Alabama Governor Sentenced for Tax Fraud

A man who claimed to be the governor of Alabama in its “original jurisdiction” has been sentenced to 10 years in federal prison for tax fraud.

Monty Ervin and Patricia Ervin, owners of Southern Realty in Dothan, Ala., were sentenced Tuesday for conspiring to defraud the United States and tax evasion. After a two-week trial that began Oct. 25, 2011, a federal jury in Montgomery, Ala., convicted the Ervins of one count of conspiracy and three counts of tax evasion. The jury also convicted Patricia Ervin of one count of structuring transactions to avoid bank reporting requirements.

Monty Ervin, 61, was sentenced to 120 months in prison, while Patricia Ervin was sentenced to five years of probation, with the condition that she spend 40 consecutive weekends in jail. In addition to prison time, U.S. District Judge Myron H. Thompson ordered the Ervins to pay $1,436,508 in restitution to the Internal Revenue Service.

In sentencing the Ervins, the court found that Monty Ervin was the leader and organizer of the conspiracy and exercised control over his ex-wife Patricia.

According to prosecutors, the Ervins amassed hundreds of investment properties over the last decade, receiving more than $9 million in rental income. Despite receiving this income, the couple paid no federal income taxes. When confronted by the IRS in 2006, the Ervins proclaimed that they were not United States citizens, and as “sovereigns,” did not consider themselves subject to federal or state law.

The evidence established that Monty Ervin and Patricia Ervin also filed numerous documents in probate court renouncing their U.S. citizenship. In one such filing, Monty Ervin declared himself the “governor” of Alabama in its “original jurisdiction.” The Ervins had a license plate on their vehicle which law enforcement witnesses testified at trial was associated with a “sovereign citizens” organization.

The couple concealed their assets in the property management company from the IRS by placing their investment properties under the names of nominees, referred to as “trustees.” The “trustees” named on property deeds testified that they were not involved in the sale or purchase of the properties and that the Ervins “stamped” their signatures onto official property records.

Patricia Ervin also structured deposits into Southern Realty’s bank account in an effort to evade federal currency reporting requirements.

In addition to hundreds of real estate investment properties, the evidence also showed that the Ervins had amassed beachfront condominium units in their own names, including a $1.3 million unit they paid for in cash. When they were investigated by the IRS, they allegedly transferred those properties into the names of bogus “trusts” and “trustees.” In addition, the government introduced into evidence $350,000 of gold coins said to have been buried in their yard.

The Ervins were indicted by a federal grand jury in Montgomery in February 2011. In March, Monty Ervin was arrested by a U.S. Marshal’s Service Fugitive Task Force in Naples, Fla., with a notebook containing the latitudinal and longitudinal coordinates of an island off the coast of Honduras.

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IRS Mistakenly Sent Warning Letters to e-File Providers

The Internal Revenue Service mistakenly sent out letters to some electronic filing providers advising them that they needed to contact the IRS in order to continue to participate in the e-file program.

The IRS said in an email to tax professionals that some of the letters were sent by mistake. While authorized IRS e-file providers not need to reapply each year as long as they continue to e-file returns, the IRS will notify the provider of removal from its active provider list. However, the IRS appears to have sent out the notification letters to some providers who in fact had been filing their clients’ tax returns this year or last year.

“Based on a recent review, the IRS sent letters to participants advising them of their inactivity and asking them to contact IRS to continue participation,” said the IRS. “However, some of these letters were issued incorrectly. If you receive the inactivity letter and have filed returns in the last two years, the IRS has corrected the status of these affected participants and no additional action is necessary on your part.”

The IRS also reminded tax professionals that authorized e-file providers can review their IRS e-file Application at IRS.gov using e- services to check on their current status.

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Interest Rates Unchanged for the Third Quarter of 2012

Issue Number:  2012-21

The Internal Revenue Service announced that interest rates will remain the same for the calendar quarter beginning July 1, 2012. The rates will be:
• three (3) percent for overpayments [two (2) percent in the case of a corporation];
• three (3) percent for underpayments;
• five (5) percent for large corporate underpayments; and
• one-half (0.5) percent for the portion of a corporate overpayment exceeding $10,000.

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Small Businesses Report Better Business Conditions

A new survey of small business owners in the U.S. indicates that the percentage who report favorable business conditions has nearly doubled since 2010.

 

The survey, by Citibank, found that 43 percent of small business owners consider business conditions to be positive. That represents a significant increase since August 2010, when 24 percent of small business owners surveyed reported overall positive business conditions.

One-third (33 percent) of the survey respondents said their own business is better than it was a year ago — up from 26 percent in January. Another 33 percent expect their business will grow by more than 10 percent this year.

As part of the reinvention process, small business owners said they have focused on overhauling the products or services they offered (47 percent). This was followed by adjusting their infrastructure, such as technology or staffing (24 percent) and beefing up their sales and marketing (18 percent). A small amount (7 percent) said they reduced pricing and took less profit. Only 3 percent have relocated.

The following steps were cited as ways that small business owners kept their business thriving: 88 percent kept updated and knowledgeable about their field, 70 percent increased face time with customers, 67 percent updated or upgraded their computer systems, 52 percent increased their use of the Internet and social media, and 51 percent built a network of suppliers and partner companies.

As for the steps they plan to take during the remainder of 2012, 65 percent expect to increase marketing, 56 percent will work to get better pricing on expenses, 52 percent expect to work even longer hours, 50 percent will introduce new products or services, and 49 percent will use social media, such as Facebook or Twitter, to market their business.

Part of that reinvention comes from spending, as shown by 38 percent of respondents who increased the amount they spent on capital investments such as computer, inventory and facilities over the past 12 months. Their top two sources of funding have been revenue and profits (75 percent) and personal savings (62 percent).

The past few years have taken a personal toll on small business owners: 63 percent said the major challenge they face owning or running a business was personal stress and being accountable for everyone and everything, second only to the general state of the economy (66 percent).

Despite overall optimism, small business owners report making significant sacrifices to keep their businesses going and growing over the past few years. Not only did 78 percent take less profit to support the business at some point in the past, 66 percent did so to pay employees rather than reduce staff. A significant majority (70 percent) also say they worked more hours than usual, often sacrificing family time and missing vacations.

In addition to using their own money to help their business survive (69 percent), the majority of small business owners (54 percent) said they have gone without a paycheck. Looking back over the history of their businesses, almost one-quarter (23 percent) have gone without pay for one year or more.

Eighty percent of small business owners believe their employees appreciate the sacrifices they made to keep their businesses operating. Demonstrating true commitment, employees showed thanks by their own investment in the success of the company. More than one-third (38 percent) of owners said their employees worked additional hours without pay. Another 18 percent credited their employees with voluntarily missed or delayed paychecks.

To show their own appreciation of employees, small business owners offered additional time off (78 percent), a bonus (74 percent) or a raise (70 percent).

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Many Businesses can qualify for Substantial Payroll Tax Relief

Issue Number:    IR-2012-56

Many businesses can now resolve past worker classification issues at a low cost by voluntarily reclassifying their workers. Better yet, they don’t have to wait for an IRS audit to do so.

By prospectively reclassifying workers, making a minimal payment and meeting a few other requirements, eligible businesses can achieve greater certainty for themselves, their workers and the government. Already, 540 employers have been approved to participate in the new IRS Voluntary Classification Settlement Program (VCSP) since it was launched last September.

The VCSP is available to many businesses, tax-exempt organizations and government entities that currently treat their workers or a class or group of workers as nonemployees or independent contractors, and now want to correctly treat these workers as employees in the future. To be eligible, an employer must:

•           Consistently have treated the workers in the past as nonemployees,

•           Have filed all required Forms 1099 for the workers for the previous three years

•           Not currently be under audit by the IRS or the Department of Labor or a state agency concerning the classification of these workers

Interested employers can apply for the program by filing Form 8952. Employers accepted into the program will pay an amount effectively equaling just over one percent of the wages paid to the reclassified workers for the past year. It’s that simple. Moreover, employers will not be audited on payroll taxes related to these workers for prior years.

Details on these and other tax benefits are on IRS.gov. In addition, the Small Business Tax Center (www.irs.gov/smallbiz) has links to a variety of useful tax tools for small business, including the Virtual Small Business Tax Workshop, a downloadable tax calendar, common forms and their instructions and help on everything from how to get an Employer Identification Number (EIN) online to how to engage with the IRS in the event of an audit.

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Information on Tax Exempt Bonds

The office of Federal, State and Local Governments (FSLG) strives to provide all government entities with Federal tax information that may be relevant to their situations. We are providing the information below on behalf of the IRS Tax Exempt Bonds office, for the attention of governmental officials who are involved in the tax exempt bond process and in the sale/liquidation of assets that were financed with bond proceeds.

Sale of Assets Financed with Tax-Exempt Bonds by State and Local Governments and 501(c)(3) Organizations

To raise needed funds, state and local governments may plan to sell property financed with tax-exempt bonds.  The sale of such property could cause the bond issue to become taxable.  A timely remedial action, if necessary, will help ensure that the interest on the bond issue remains tax-exempt.

Tax Exempt Bonds (TEB) focuses on providing assistance to bond issuers in understanding their tax responsibilities. TEB has initiated an outreach and educational services program to increase understanding and compliance with tax law applicable to tax-exempt bonds.  As part of this service TEB is providing this article concerning the sale of property financed by tax-exempt bonds. Governmental issuers may use this information to establish practices to monitor tax compliance throughout the period that their bonds are outstanding. For more information please visit the Tax Exempt Bond website.

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IRS Mistakenly Sends Waitress a $434,712 Tax Refund

Ginny Hopkins, a waitress who has worked for nearly two decades at a Cleveland restaurant, received a tax refund check for $434,712 in the mail from the Internal Revenue Service instead of the $754 she had been expecting.

Hopkins heard mixed advice on whether or not to keep the money. But she decided to bring the check to the local IRS office, reasoning she would be arrested if she tried to cash it. “They’ll put me in Alcatraz, waiting on the night shift in Alcatraz,” she told WKYC-TV in Cleveland. “They’ll reopen the place.”

An IRS employee apologized, promising to investigate how the mistake happened, and to get another refund check sent to her quickly. Hopkins had been waiting expectantly for the $754 refund check to arrive as she needed the money for car repairs and other expenses. Her friends at the restaurant where she works, Johnny’s Downtown, and WKYC-TV have lent her the needed funds in the meantime.

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Managing your tax records after you have filed

Issue Number:  2012 – 6

There are many reasons to keep household records, including keeping track of your expenses, maintaining records for insurance purposes or getting a loan. You should have the same approach to managing your tax records.

You should keep all documents that may have an impact on your federal tax return. Records you should keep include bills, credit card and other receipts; invoices; mileage logs; canceled, imaged or substitute checks; proof of payments; and any other records to support deductions or credits you claim on your return.

Normally, you should keep these tax records for three years. It is a good idea to keep some documents longer, such as records relating to a home purchase or sale, stock transactions, IRA and business or rental property documentation. Keeping accurate records after you file your taxes will help you with documentation and substantiation if your tax return is selected for an audit.

You should also keep copies of your tax returns as part of your tax records. They can help you prepare future tax returns, and you will need them if you file an amended return. Copies of your returns and records can be helpful to your survivor or the executor or administrator of your estate. You may also need tax returns from previous years for loan applications, to estimate tax withholding or because records were destroyed in a natural disaster or fire. If your original tax returns were lost or destroyed, you can obtain copies or transcripts. There are three options for obtaining your federal tax return information – on the web, by phone or by mail.

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