Stopping Identity Theft in Tax Filings

With more than 127 million personal information records exposed in 2011, identity theft has led to a swell of fraudulent tax filings and tens of thousands of honest taxpayers are now subjected to delays in their legitimate refund claims, according to the Internal Revenue Service. The increasing number of data breaches means that CPAs must handle client data even more carefully. Data loss happens. While large businesses are mostly responsible for the more than 500 million personal information records that have been breached since 2005, even CPA firms that are good custodians of client data occasionally lose a laptop or USB (thumb) drive with unencrypted confidential data on it. Those losses give rise to a potential data breach. Data security risk is usually generated by everyday behaviors that eventually catch up with users if they are not constantly handling data in a safe manner.

Data breaches can be expensive for firms; the more cost-effective approach is to implement robust data security measures. Furthermore, firms that become proficient at security will be better able to assist clients with their own data security issues.

Here are some basic loss prevention tips

*Ensure that laptops, desktops, USB drives, servers, smart phones and other devices do not contain any confidential data that is unencrypted.
*Consider remote laptop security measures to prevent access to protected files in the event of theft or loss.
*Ensure that email messages and attachments containing confidential data are encrypted with file encryption and digital certificates.
*Use strong passwords, and do not write them down or share them. Passwords should be “salted” with random bits and symbols such as #, $ and &. Change passwords at least every 90 days.
*Physical security should be provided for computers and endpoints as with any other valuable assets, including building security and access codes and locking up all servers, laptops, desktops and mobile devices.
*Do not download personal software onto business computers because of the risk of downloading viruses or worms along with the software.

Firms should also engage in a continuous data security process that operates in three areas:

1) Risk Assessment.  Utilize software tools for assessing and analyzing the security of most computer systems. Many software companies also provide security updates to protect from threats that have been identified, and most updates can be applied automatically. Have a computer specialist conduct a more thorough assessment and analysis to highlight vulnerabilities and provide risk reduction tips.

2) Comprehensive Written Plan. A written information security plan  outlines the specific ways the firm will protect data; sets forth policies, procedures and staff responsibilities, including what staff members are not allowed to do, and what they are required to do (such as immediately reporting any actual or potential security problems);
covers areas such as the Internet, social media, email usage, and record retention and destruction; and details the reporting and other requirements of the states in question and the state agencies to which breaches are to be reported. Some states require firms to be compliant with the state’s privacy laws if the firm has the privacy data of a resident in that state. Some states require a written security plan by law.

3) Regular Staff Training. Teach the written plan to staff to ensure that each employee knows what the firm is doing and what he or she is required to do, including best practices for addressing new and continuing risks, such as  social engineering, phishing and web application attacks. New laws or regulations should be reflected in changes to the plan. Training sessions to update staff on such changes will make the plan a dynamic, living document that staff uses and relies upon.

Better data security measures will help ensure that private information remains confidential and available only to authorized parties. Firms will avoid or reduce the high costs associated with data breaches, and strong data security measures will become selling points that many clients will appreciate.

For more information: www.onts9.com

 

Small Businesses Confused by 401(k) Fee Notices

Many small business owners are confused by the fee notices and costs of their 401(k) plans and have trouble answering questions from employees, according to a new survey.

 

Over the summer the U.S. Labor Department established new rules to make it easier for 401(k) plan sponsors and participants to understand how much they are paying in 401(k) fees. But a recent national survey of 500 small business owners conducted by ShareBuilder 401k found many plan sponsors are still feeling confused when it comes to understanding the costs within their plans, and are unprepared for questions from their employees.

“Our survey results suggest many small business owners are still in the dark when it comes to their 401(k) plans and costs, demonstrating our industry has more work to do in disclosing fees transparently and in ways that are easy to understand,” said ShareBuilder 401k president Stuart Robertson in a statement. “Everyone has a right to know the fees they’re paying for their 401(k) as over the course of a career, paying an extra percentage point can shrink your nest egg by hundreds of thousands of dollars.”

The survey found that while 92 percent of small business owners claimed to be aware of the new rules requiring 401(k) providers to distribute documents fully disclosing all plan fees, only 60 percent recall receiving the new documents at all.

Of the small business owners who did recall receiving new fee disclosure documents, the average time spent reviewing the documents was 16 minutes, and the vast majority (83 percent) walked away with questions about what their company should do now. Additionally, 68 percent said they are not fully prepared to answer employee questions about their plans.

More than a third (37 percent) of the survey’s respondents have hired, or plan to hire, a consultant to help them to understand their options, and nearly as many (34 percent) have gathered, or plan to gather, benchmarking data to help them compare alternate retirement plans for their company. However, despite increased transparency, few business owners are using this as an opportunity to negotiate their plan with their current 401(k) provider (33 percent) or to shop for a new plan provider (26 percent).

Fees are typically based on a percentage of a plan’s total assets. On average, small business owners said they think 4 percent is a fair rate, which is significantly higher than the average 401(k) fee percentage, demonstrating lack of awareness about the options available and the impact that fees can have on long-term savings.

For More information: www.onts9.com

 

What Income Is Nontaxable?

Generally, you are taxed on income that is available to you regardless of whether it is actually in your possession, but there are some situations when certain types of income are partially taxed or not taxed at all.

 

Here are some examples of items that are NOT included in your income:

 

  • Adoption expense reimbursements for qualifying expenses
  • Funding of your Health Savings Account (HSA) with a one-time direct transfer from your qualified individual retirement plan (Roth IRA or IRA, but not an ongoing SEP IRA or SIMPLE IRA), an Archer MSA, health reimbursement account (HRA), or health flexible spending account (FSA), but not from an ongoing SIMPLE IRA and SEP IRA
  • Child support payments
  • Gifts, bequests, and inheritances
  • Workers’ compensation benefits
  • Meals and lodging for the convenience of your employer
  • Compensatory damages awarded for physical injury or physical sickness
  • Welfare benefits
  • Cash rebates from a dealer or manufacturer

 

Here are examples of items that may or may not be included in your income:

 

  • Life Insurance. If you surrender a life insurance policy for cash, you must include in income any proceeds that are more than the cost of the life insurance policy. Life insurance proceeds paid to you because of the death of the insured person are not taxable unless the policy was turned over to you for a price.

 

  • Scholarship or Fellowship Grant. If you are a candidate for a degree, you can exclude amounts you receive as a qualified scholarship or fellowship. Amounts used for room and board do not qualify.
  • Non-cash Income. Taxable income may be in a form other than cash. One example of this is bartering, which is an exchange of property or services. The fair market value of goods and services exchanged is fully taxable and must be included as income on Form 1040 of both parties.

For more information: www.onts9.com

 

Special Tax Benefits for Armed Forces Personnel

Military personnel and their families face unique life challenges with their duties, expenses and transitions. As such, active members of the U.S. Armed Forces should be aware of all the special tax benefits that are available to them.

1. Moving Expenses. If you are a member of the Armed Forces on active duty and you move because of a permanent change of station, you may be able to deduct some of your unreimbursed moving expenses.

2. Combat Pay. If you serve in a combat zone as an enlisted person or as a warrant officer for any part of a month, military pay you received for military service during that month is not taxable. For officers, the monthly exclusion is capped at the highest enlisted pay, plus any hostile fire or imminent danger pay received. You can also elect to include your nontaxable combat pay in your “earned income” for purposes of claiming the Earned Income Tax Credit.

3. Extension of Deadlines. The deadline for filing tax returns, paying taxes, filing claims for refund, and taking other actions with the IRS is automatically extended for qualifying members of the military.

4. Uniform Cost and Upkeep. If military regulations prohibit you from wearing certain uniforms when off duty, you can deduct the cost and upkeep of those uniforms, but you must reduce your expenses by any allowance or reimbursement you receive.

5. Joint Returns. Generally, joint income tax returns must be signed by both spouses. However, when one spouse is unavailable due to military duty, a power of attorney may be used to file a joint return.

6. Travel to Reserve Duty. If you are a member of the US Armed Forces Reserves, you can deduct unreimbursed travel expenses for traveling more than 100 miles away from home to perform your reserve duties.

7. ROTC Students. Subsistence allowances paid to ROTC students participating in advanced training are not taxable. However, active duty pay, such as pay received during summer advanced camp, is taxable.

8. Transitioning Back to Civilian Life. You may be able to deduct some of the costs you incur while looking for a new job. Expenses may include travel, resume preparation fees, and outplacement agency fees. Moving expenses may be deductible if your move is closely related to the start of work at a new job location, and you meet certain tests.

For more information: www.onts9.com

 

A SIMPLE Retirement Plan for the Self-Employed

Of all the retirement plans available to small business owners, the SIMPLE plan is the easiest to set up and the least expensive to manage.

These plans are intended to encourage small business employers to offer retirement coverage to their employees. SIMPLE plans work well for small business owners who don’t want to spend a lot of time and pay high administration fees associated with more complex retirement plans.

SIMPLE plans really shine for self-employed business owners. Here’s why…

Self-employed business owners are able to contribute both as employee and employer, with both contributions made from self-employment earnings.

SIMPLE plans calculate contributions in two steps:

1. Employee out-of-salary contribution
The limit on this “elective deferral” is $11,500 in 2012, after which it can rise further with the cost of living.

Catch-up. Owner-employees age 50 or over can make an additional $2,500 deductible “catch-up” contribution (for a total of $14,000) as an employee in 2012.

2. Employer “matching” contribution
The employer match equals a maximum of 3% of employee’s earnings.

Example: A 52-year-old owner-employee with self-employment earnings of $40,000 could contribute and deduct $11,500 as employee, and an additional $2,500 employee catch-up contribution, plus $1,200 (3% of $40,000) employer match, for a total of $15,200.

SIMPLE plans are an excellent choice for home-based businesses and ideal for full-time employees or homemakers who make a modest income from a sideline business.

If living expenses are covered by your day job (or your spouse’s job), you would be free to put all of your sideline earnings, up to the ceiling, into SIMPLE retirement investments.

A Truly Simple Plan

A SIMPLE plan is easier to set up and operate than most other plans. Contributions go into an IRA you set up. Those familiar with IRA rules – in investment options, spousal rights, creditors’ rights – don’t have a lot new to learn.

Requirements for reporting to the IRS and other agencies are negligible. Your plan’s custodian, typically an investment institution, has the reporting duties. And the process for figuring the deductible contribution is a bit easier than with other plans.

What’s Not So Good About SIMPLE Plans

Once self-employment earnings become significant however, other retirement plans may be more advantageous than a SIMPLE retirement plan.

Example: If you are under 50 with $50,000 of self-employment earnings in 2012, you could contribute $11,500 as employee to your SIMPLE plus an additional 3% of $50,000 as an employer contribution, for a total of $13,000. In contrast, a 401(k) plan would allow a $29,500 contribution.

With $100,000 of earnings, it would be a total of $14,500 with a SIMPLE and $42,000 with a 401(k).

Because investments are through an IRA, you’re not in direct control. You must work through a financial or other institution acting as trustee or custodian, and you will generally have fewer investment options than if you were your own trustee, as you would be in a 401(k).

It won’t work to set up the SIMPLE plan after a year ends and still get a deduction that year, as is allowed with Simplified Employee Pension Plans, or SEPs. Generally, to make a SIMPLE plan effective for a year, it must be set up by October 1 of that year. A later date is allowed where the business is started after October 1; here the SIMPLE must be set up as soon thereafter as administratively feasible.

If the SIMPLE plan is set up for a sideline business and you’re already vested in a 401(k) in another business or as an employee the total amount you can put into the SIMPLE plan and the 401(k) combined (in 2012) can’t be more than $17,000 or $22,500 if catch-up contributions are made to the 401(k) by someone age 50 or over.

So someone under age 50 who puts $9,000 in her 401(k) can’t put more than $8,000 in her SIMPLE 2012. The same limit applies if you have a SIMPLE plan while also contributing as an employee to a 403(b) annuity (typically for government employees and teachers in public and private schools).

How to Get Started with a SIMPLE Plan

You can set up a SIMPLE account on your own, but most people turn to financial institutions. SIMPLE Plans are offered by the same financial institutions that offer IRAs and 401k master plans.

You can expect the institution to give you a plan document and an adoption agreement. In the adoption agreement you will choose an “effective date” – the beginning date for payments out of salary or business earnings. That date can’t be later than October 1 of the year you adopt the plan, except for a business formed after October 1.

Another key document is the Salary Reduction Agreement, which briefly describes how money goes into your SIMPLE. You need such an agreement even if you pay yourself business profits rather than salary.

Printed guidance on operating the SIMPLE may also be provided. You will also be establishing a SIMPLE IRA account for yourself as participant.

For more information: www.onts9.com

 

Employee Relocation in a Down Market

Many companies have questions about what to do with an employee’s home when he or she is moved to a new job location, especially when the real estate market is in a downturn throughout much of the country.

Typically, the employer wants to protect the employee against financial loss on a “forced” sale of the home. Outlined below are some of the most common ways to do that, and the consequences to the employee.

The employer reimburses the employee’s financial loss. Here the employer has the home appraised and agrees to pay the employee the difference between the appraised fair market value and any lesser amount the employee gets on the sale. Such reimbursement would cover the employee’s costs of the sale.

Note: The financial loss here is not the same as a tax loss. The financial loss is the home’s value less what the employee collects under “forced sale” conditions. In the current real estate market, the value is not always clearly determined. The relocating employee might think the home is worth more, based on earlier appraisals or comparative sales. A tax loss is the property’s tax basis (cost plus capital investments) less what’s collected on the sale.

If the employee has a gain on the sale (the amount collected on the sale exceeds the basis), gain can be tax-exempt up to $250,000 ($500,000 on certain husband-wife sales). However, tax loss on the sale of one’s residence is not deductible.

The employer’s reimbursement of the employee’s financial loss is considered taxable pay to the employee. Employers who want to shelter the employee from any tax burden on what is usually an employer-instigated relocation may “gross-up” the reimbursement to cover the tax. But gross-up can be costly. For example, a grossed-up income tax reimbursement for a $10,000 loss would be $15,385 for an employee in the 35% bracket – more where Social Security taxes or state taxes are also grossed-up.

Employer buys the home. Few employers directly buy and sell employees’ homes. But many do this indirectly, effectively becoming the homes’ owners, through use of relocation firms acting as the employers’ agents. An IRS ruling shows how to do this with no tax on the employee:

Option 1. The relocation firm as employer’s agent buys the home for its appraised fair market value, and later resells it. The firm collects a fee from the employer, which covers sales costs and any financial loss to the firm on resale. The IRS now says that this fee is not taxable to the employee. Also, the employee’s gain on the sale to the relocation firm qualifies for the tax exemption under the limits described above ($250,000 or $500,000).

Option 2. The relocation firm offers to buy the home for its appraised value, but the employee can choose to pursue a higher price through a broker he or she chooses from a list provided by the relocation firm. If a higher offer is made, the relocation firm pays that price to the employee (whether or not the home is then sold to that bidder). Here again, the employee is not taxed on the firm’s fee and the gain is tax exempt under the above limits.

Tip: Either option works for the employee, letting him or her realize full value on the sale of the home (with possibly greater value through Option 2), without an element of taxable pay.

Caution: If the deal is structured so that the relocation firm facilitates a sale from the employee to a third-party buyer (rather than to the relocation firm), the employer’s payment of the relocation firm’s fee is taxable to the employee.

The Employer’s Side

Reimbursing the employee’s loss. This is fully deductible as a business expense, as would be any additional amount paid as a gross-up.

Note: It’s fully deductible, but it may be more costly, before and after taxes, than buying the home for resale through the relocation firm.

Note: Paying the relocation fee only, without buying the home, as in the “Caution” above, is also fully deductible, as would be any gross-up amount on that fee.

Buying the home. The change in the IRS rule was good news for employees, but it gave nothing to employers, whose tax treatment wasn’t covered. The official IRS position is that employer costs (other than carrying costs such as mortgage interest, maintenance, and fees to a relocation management company) are deductible only as capital losses, which, for corporate employers, are deductible only against capital gains. Taxpayer advocates tend to argue that employer costs here are fully deductible ordinary costs of doing business.

 

For more information: www.onts9.com

 

Expanded Adoption Tax Credit Still Available for Extension Filers

IRS Summertime Tax Tip 2012-09

 

If you adopted a child last year and requested an extension of time to file your 2011 taxes, you may be able to claim the expanded adoption credit on your federal tax return. The Affordable Care Act temporarily increased the amount of the credit and made it refundable, which means it can increase the amount of your refund.

Here are eight things to know about this valuable tax credit:

1. The adoption credit for tax year 2011 can be as much as $13,360 for each effort to adopt an eligible child. You may qualify for the credit if you adopted or attempted to adopt a child in 2010 or 2011 and paid qualified expenses relating to the adoption.

2. You may be able to claim the credit even if the adoption does not become final. If you adopt a special needs child, you may qualify for the full amount of the adoption credit even if you paid few or no adoption-related expenses.

3. The credit for qualified adoption expenses is subject to income limitations, and may be reduced or eliminated depending on your income.

4. Qualified adoption expenses are reasonable and necessary expenses directly related to the legal adoption of the child who is under 18 years old, or physically or mentally incapable of caring for himself or herself. These expenses may include adoption fees, court costs, attorney fees and travel expenses.

5. To claim the credit, you must file a paper tax return and Form 8839, Qualified Adoption Expenses, and attach all supporting documents to your return. Documents may include a final adoption decree, placement agreement from an authorized agency, court documents and the state’s determination for special needs children. You can use IRS Free File to prepare your return, but it must be printed and mailed to the IRS. Failure to include required documents will delay your refund.

6. If you filed your tax returns for 2010 or 2011 and did not claim an allowable adoption credit, you can file an amended return to get a refund. Use Form 1040X, Amended U.S. Individual Income Tax Return, along with Form 8839 and the required documents to claim the credit. You generally must file Form 1040X to claim a refund within three years from the date you filed your original return or within two years from the date you paid the tax, whichever is later.

7. The IRS is committed to processing adoption credit claims quickly, but must also safeguard against improper claims by ensuring the standards for receiving the credit are met. If your return is selected for review, please keep in mind that it is necessary for the IRS to verify that the legal criteria are met before the credit can be paid. If you are owed a refund beyond the adoption credit, you will still receive that part of your refund while the review is being conducted.

8. The expanded adoption credit provisions available in 2010 and 2011 do not apply in later years. In 2012 the maximum credit decreases to $12,650 per child and the credit is no longer refundable. A nonrefundable credit can reduce your tax, but any excess is not refunded to you.

For more information: www.onts9.com

 

Renting Out a Vacation Home

Tax rules on rental income from second homes can be complicated, particularly if you rent the home out for several months of the year, but also use the home yourself.

There is however, one provision that is not complicated. Homeowners who rent out their property for 14 or fewer days a year can pocket the rental income, tax-free.

Known as the “Master’s exemption”, because it is used by homeowners, near the Augusta National Golf Club in Augusta, GA who rent out their homes during the Master’s Tournament (for as much as $20,000!). It is also used by homeowners who rent out their homes for movie productions or those whose residences are located near Super Bowl sites or national political conventions.

Tip: If you live close to a vacation destination such as the beach or mountains, you may be able to make some extra cash by renting out your home (principal residence) when you go on vacation–as long as it’s two weeks or less. And, although you can’t take depreciation or deduct for maintenance, you can deduct mortgage interest and property taxes on Schedule A.

In general, income from rental of a vacation home for 15 days or longer must be reported on your tax return on Schedule E, Supplemental Income and Loss. You should also keep in mind that the definition of a “vacation home” is not limited to a house. Apartments, condominiums, mobile homes, and boats are also considered vacation homes in the eyes of the IRS.

Further, the IRS states that a vacation home is considered a residence if personal use exceeds 14 days or more than 10% of the total days it is rented to others (if that figure is greater). When you use a vacation home as your residence and also rent it to others, you must divide the expenses between rental use and personal use, and you may not deduct the rental portion of the expenses in excess of the rental income.

Example: Let’s say you own a house in the mountains and rent it out during ski season, typically between mid-December and mid-April. You and your family also vacation at the house for one week in October and two weeks in August. The rest of the time the house is unused.

The family uses the house for 21 days and it is rented out to others for 121 days for a total of 142 days of use during the year. In this scenario 85% of expenses such as mortgage interest, property taxes, maintenance, utilities, and depreciation can be written off against the rental income on Schedule E. As for the remaining 15% of expenses, only the owner’s mortgage interest and property taxes are deductible on Schedule A.

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IRS Streamlines Tax Compliance Procedures for Nonresident Taxpayers

The Internal Revenue Service has issued new procedures to help nonresident U.S. taxpayers, including dual Canadian citizens, comply with U.S. tax laws even if they have previously undeclared foreign bank accounts.

 

The new rules, which were announced last Friday, eliminate civil penalties and make life easier for taxpayers who follow the IRS’s streamlined disclosure process. The program also provides retroactive elections for certain retirement plans and adds relief for Canadian citizens in the U.S.

The streamlined procedure is designed for taxpayers who present what the IRS considers to be a low compliance risk. All submissions will be reviewed, but the intensity of review will vary according to the level of compliance risk presented by the submission. For those taxpayers who present a low compliance risk, the review will be expedited and the IRS will not assert penalties or pursue followup actions.

Submissions that present higher compliance risk are not eligible for the streamlined processing procedures and will be subject to a more thorough review and possibly a full examination, which in some cases may include more than three years, in a manner similar to opting out of the Offshore Voluntary Disclosure Program.

“The streamlined version of the 2012 program imposes no FBAR penalties and only requires the submission of three years of tax returns,” said Jim Mastracchio, co-chair of the tax controversy practice at the law firm BakerHostetler, in a statement.

However, he noted that taxpayers who fail to report income from offshore accounts face stiff financial penalties and possible criminal prosecution. “We’ve seen cases where a taxpayer is now facing criminal charges after attempting to make voluntary disclosures, but were ineligible because the IRS was already in possession of their foreign account information,” he said.

The streamlined procedure generally requires a submission of a questionnaire, along with the filing of federal income tax returns 2009-11 and submission of FBARs for the last six years.

Canadian citizens also benefit from the IRS’s new policy.

“The streamlined program offers needed relief for Canadian citizens who live in the U.S. and failed to properly report their Canadian Retirement Plan,” said BakerHostetler counsel Jay Nanavati, a former DOJ Tax Division prosecutor.

The new rules follow up on the streamlined filing compliance procedures for nonresident U.S. taxpayers that the IRS announced in June, which were set to take effect on Sept. 1, 2012 (see IRS Pledges to Help Dual Citizens Meet Tax Obligations). The procedures are being implemented in recognition that some U.S. taxpayers living abroad have failed to timely file U.S. federal income tax returns or Reports of Foreign Bank and Financial Accounts, also known as FBARs or Form TD F 90-22.1, but have recently become aware of their filing obligations and now seek to come into compliance with the law.

The new procedures are for nonresidents, including, but not limited to, dual citizens who have not filed U.S. income tax and information returns. They are available for nonresident U.S. taxpayers who have resided outside of the U.S. since Jan. 1, 2009 and who have not filed a U.S. tax return during the same period.

For more information: www.onts9.com

 

 

Intuit Releases QuickBooks 2013

Intuit released new editions Monday of QuickBooks 2013, including Accountant, Pro, and Premier, with numerous key enhancements including an entirely new interface.

 

Of specific interest to accountants, Intuit has added numerous tools to the Accountant edition aimed at helping accountants save time in their workflow, invoicing and navigation. The latest version offers improved centers for key customer information and transactions, along with additional tabs, a “send journal entry” workflow feature, and the ability to batch-enter transactions such as check deposits and credit card charges.

“Every year we ask what are the two or three big things we can add,” said product manager for QuickBooks Accountant Jacint Tumacder. “We also get feedback on lots of little things. While we did the big things, in this version, we said, ‘Let’s go back and make it work really well for all of our users.’ We did that through dozens of ‘delighter’ enhancements, including a completely new interface, which is familiar but optimized for efficiency.”

Other notable improvements in QuickBooks 2013 Accountant include the ability to

• batch enter up to 1,000 transactions from Excel into QuickBooks.
• email journal entries to clients directly from QuickBooks, and clients can click to import the entries automatically from an email attachment.
• edit and format custom financial statements and documents using familiar Microsoft Excel and Word functions. These reports can be created for distinct client business types, and the data is automatically refreshed.

• have one-click access to the tools used the most. This customizable feature includes the new Reconcile Widget, which provides a fresh look at account balances, reconciled balance and last reconciled date all in one place.

For more information: www.onts9.com