Tax Empowerment Zones to Continue Through Year-End

The IRS announced that all the designated empowerment zones where employers and other taxpayers qualify for special tax incentives will remain in effect through the end of the year.

In Notice 2013-38 in May, the IRS had announced that any nomination for an empowerment zone that was in effect on Dec. 31, 2009, would terminate on December 31 of this year, unless  the governing state or municipality declined the extension -– but none did so they will all remain in effect until the end of this year.

Empowerment Zones were created by legislation in 1993, and most zones had an expiration date of Dec. 31, 2009. Subsequent legislation extended the expiration dates to Dec. 31, 2011, and then Dec. 31, 2013.

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IRS Sets Per Diem Rates for Lodging, Meals and Incidental Expenses

The Internal Revenue Service has set the per diem rates that taxpayers can use to substantiate the amount of expenses for lodging, meals and incidental expenses when traveling away from home.

Notice 2013-65 announces the special per diem rates, effective Oct. 1, 2013, which taxpayers may use in the year ahead to substantiate the amount of expenses for lodging, meals, and incidental expenses when traveling away from home. The annually announced rates are the special transportation industry rate, the rate for the incidental expenses only deduction, and the rates and list of high-cost localities for purposes of the high-low substantiation method.

Rev. Proc. 2011-47 provides the rules for using per diem rates, rather than actual expenses, to substantiate the amount of expenses for lodging, meals, and incidental expenses for travel away from home. Taxpayers who may use per diem rates to substantiate the amount of travel expenses under Rev. Proc. 2011-47 may use the federal per diem rates published annually by the General Services Administration, the IRS pointed out. Rev. Proc. 2011-47 allows certain taxpayers to use a special transportation industry rate or rates under a high-low substantiation method for certain high-cost localities.

The IRS announces these rates and the rate for the incidental expenses only deduction in an annual notice.

“Use of a per diem substantiation method is not mandatory,” the IRS pointed out. “A taxpayer may substantiate actual allowable expenses if the taxpayer maintains adequate records or other sufficient evidence for proper substantiation.”

Notice 2013-65 will be published in Internal Revenue Bulletin 2013-42 on Oct. 15, 2013

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Which Moving Expenses are Deductible?


If you moved due to a change in your job or business location, or because you started a new job or business, you may be able to deduct your reasonable moving expenses; however, you may not deduct any expenses for meals. If you meet the requirements of the tax law for the deduction of moving expenses, you can deduct allowable expenses for a move to the area of a new main job location within the United States or its possessions. Your move may be from one United States location to another or from a foreign country to the United States.

Note: The rules applicable to moving within or to the United States are different from the rules that apply to moves outside the United States. These rules are discussed separately.

To qualify for the moving expense deduction, you must satisfy three requirements.

Under the first requirement, your move must closely relate to the start of work. Generally, you can consider moving expenses within one year of the date you first report to work at a new job location. Additional rules apply to this requirement. Please contact us if you need assistance understanding this requirement.

The second requirement is the “distance test”; your new workplace must be at least 50 miles farther from your old home than your old job location was from your old home. For example, if your old main job location was 12 miles from your former home, your new main job location must be at least 62 miles from that former home. If you had no previous workplace, your new job location must be at least 50 miles from your old home.

The third requirement is the “time test”. If you are an employee, you must work full-time for at least 39 weeks during the first 12 months immediately following your arrival in the general area of your new job location. If you are self-employed, you must work full time for at least 39 weeks during the first 12 months and for a total of at least 78 weeks during the first 24 months immediately following your arrival in the general area of your new work location. There are exceptions to the time test in case of death, disability and involuntary separation, among other things. And, if your income tax return is due before you have satisfied this requirement, you can still deduct your allowable moving expenses if you expect to meet the time test.

Note: If you are a member of the armed forces and your move was due to a military order and permanent change of station, you do not have to satisfy the “distance or time tests”.

What Are “Reasonable” Expenses?

You can deduct only those expenses that are reasonable under the circumstances of your move. For example, the cost of traveling from your former home to your new one should be by the shortest, most direct route available by conventional transportation. If during your trip to your new home, you make side trips for sight-seeing, the additional expenses for your side trips are not deductible as moving expenses.

You can deduct the cost of packing, crating and transporting your household goods and personal property, and you may be able to include the cost of storing and insuring these items while in transit. You may also deduct costs of connecting or disconnecting utilities.

Tip: You can include the cost of storing and insuring household goods and personal effects within any period of 30 consecutive days after the day your things are moved from your former home and before they are delivered to your new home.

Tip: You can deduct the cost of shipping your car and your pets to your new home.

Nondeductible expenses. You cannot deduct as moving expenses any part of the purchase price of your new home, the costs of buying or selling a home, or the cost of entering into or breaking a lease. Don’t hesitate to call us if you have any questions about which expenses are deductible.

Reimbursed expenses. If your employer reimburses you for the costs of a move for which you took a deduction, you may have to include the reimbursement as income on your tax return.

Travel Expenses – How to Calculate the Deduction

If you use your car to take yourself, members of your household, or your personal effects to your new home, you can figure your expenses by deducting either:

  1. Your actual expenses, such as gas and oil for your car, if you keep an accurate record of each expense, or
  2. The standard mileage rate is 24 cents per mile for miles driven during 2013 (23 cents per mile in 2012).

Tip: If you choose the standard mileage rate you can deduct parking fees and tolls you pay in moving. You cannot deduct any general repairs, general maintenance, insurance, or depreciation for your car.

You can deduct the cost of transportation and lodging for yourself and members of your household while traveling from your former home to your new home. This includes expenses for the day you arrive. You can include any lodging expenses you had in the area of your former home within one day after you could not live in your former home because your furniture had been moved. You can deduct expenses for only one trip to your new home for yourself and members of your household; however, all of you do not have to travel together.

Member of Your Household

You can deduct moving expenses you pay for yourself and members of your household. A member of your household is anyone who has both your former and new home as his or her home. It does not include a tenant or employee, unless you can claim that person as a dependent.

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Small Biz Not Ready for Obamacare


Accountants don’t think their small-business clients are prepared for the Affordable Care Act, according to a recent survey.

A third of accountants said that their small-business clients were “totally unprepared” for the ACA, significant parts of which come into force on October 1. Almost half (48%) said that their small-business clients were “not very prepared.” (Click to see the full chart.)

Midsized businesses fared slightly better, with 40 percent of accountants saying their clients of this size were “not very prepared,” and 43 percent saying their clients were “somewhat prepared.”

Large businesses are in much better shape: Just over half (51 percent) of accountants think their large clients are “somewhat prepared,” and 24 percent think they are “very” or “completely prepared.”

The survey of Accounting Today’s Executive Research Council drew responses from 277 accountants in public practice at firms of all sizes across the country. Two thirds (66 percent) said that they had been asked for help on the ACA by a client at some point.

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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 Innocent Spouse Relief

The Internal Revenue Service has issued new guidance and streamlined procedures for spouses who are seeking equitable relief from joint income tax liability.

Revenue Procedure 2013-34 supersedes the earlier Revenue Procedure 2003-61. It provides the threshold requirements for any request for equitable relief and sets forth conditions under which the IRS will make streamlined relief determinations granting equitable relief from an understatement of income tax or an underpayment of income tax reported on a joint return, or the operation of community property law.

The revenue procedure also provides a nonexclusive list of factors for consideration in determining whether relief should be granted because it would be inequitable to hold a requesting spouse jointly and severally liable when the original conditions under the Tax Code are not met.

The factors also will apply in determining whether to relieve a spouse from income tax liability resulting from the operation of community property law under the equitable relief provisions.

The revenue procedure applies to spouses who request either equitable relief from joint and several liability under Section 6015(f) of the Tax Code, or equitable relief under Section 66(c) from income tax liability resulting from the operation of community property law.

In 2011, the IRS eliminated the two-year statute of limitations on requests for innocent spouse relief (see IRS Eliminates 2-Year Limit on Innocent Spouse Requests). The new revenue procedure notes that if the requesting spouse is applying for relief from a liability or a portion of a liability that remains unpaid, the request for relief must be made on or before the Collection Statute Expiration Date, or the date the period of limitation on collection of the income tax liability expires, as provided in section 6502. “Generally, that period expires 10 years after the assessment of tax, but it may be extended by other provisions of the Internal Revenue Code.”

The new revenue procedure also provides that if the nonrequesting spouse abused the spouse who is requesting relief from the IRS, or maintained control over the household finances by restricting the requesting spouse’s access to financial information, and because of the abuse or financial control, the requesting spouse was not able to challenge the treatment of any items on the joint return, or to question the payment of the taxes reported as due on the joint return or challenge the nonrequesting spouse’s assurance regarding payment of the taxes, for fear of the nonrequesting spouse’s retaliation, then the abuse or financial control will result in satisfying the factor needed for a streamlined determination even if the requesting spouse knew or had reason to know of the items giving rise to the understatement or deficiency, or knew or had reason to know that the nonrequesting spouse would not pay the tax liability.

Revenue Procedure 2013-34 will be published in Internal Revenue Bulletin 2013-42 on Oct. 7, 2013.

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Former IRS Manager Sentenced on Conflict of Interest Charges for Running Her Own Tax Business

A former Internal Revenue Service manager has been sentenced to a year in prison after she was convicted of accessing IRS computers on behalf of a tax business that she operated on the side.

Jeanne L. Gavin, 62, was sentenced Thursday in a Louisiana federal court to 12 months in prison, followed by 12 months of supervised release, along with a $20,000 fine. The sentence stems from Gavin’s convictions on charges of exceeding authorized access to a government computer, and engaging in a criminal conflict of interest.

While serving as a supervisory Internal Revenue agent and group manager in the Baton Rouge, La., office of the IRS, Gavin supervised about 10 revenue agents who were responsible for determining federal tax liability and collecting taxes.

Gavin admitted that, while working for the IRS, she engaged in a criminal conflict of interest with her IRS employment by owning and operating a private tax and accounting business that generated over $70,000 (see Former IRS Manager Pleads Guilty to Conflict of Interest after Opening Her Own Tax and Accounting Firm). She also admitted to using her position to improperly cause her subordinates to access IRS databases on over 2,000 occasions for the benefit of her private tax and accounting business.

Gavin worked for 34 years at the IRS. Chief U.S. District Court Judge Brian A. Jackson admonished her at the sentencing, saying, “I think you compromised the public’s trust in the IRS,” according to The Advocate, a local Baton Rouge news outlet.

The prosecutor pointed out that Gavin had defrauded her subordinates by leading them to believe they were accessing tax records for official IRS business, as opposed to doing work on 70 of Gavin’s own tax clients.

The Treasury Inspector General for Tax Administration worked with Acting U.S. Attorney Walt Green’s office and the Federal Bureau of Investigation on the case. “As our voluntary system of tax administration relies heavily upon the public’s confidence in a fair tax system, IRS employees must conduct themselves with the highest level of integrity and their conduct must be above reproach,” TIGTA Inspector General J. Russell George said in a statement. “Our message is loud and clear: TIGTA will vigorously investigate and recommend criminal prosecution for any IRS employee who violates the law.”

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IRS Employees Disciplined for Bypassing Taxpayers’ Representatives

Between October 2011 and September 2012, the Internal Revenue Service investigated 13 complaints of IRS personnel who directly contacted taxpayers instead of going through their designated representatives, but IRS managers disciplined or counseled only two of the employees because of their actions.

The IRS has a number of policies and procedures in place to ensure that taxpayers are given the right to designate a qualified representative, such as a tax practitioner, to act on their behalf in dealing with IRS personnel in a variety of tax matters. IRS personnel are required to stop an interview if the taxpayer asks to consult with a representative, and the IRS may not bypass the representative without a supervisor’s approval.

A report issued Wednesday by the Treasury Inspector General for Tax Administration reviewing the restrictions on directly contacting taxpayers found that between October 2011 and September 2012, TIGTA’s Office of Investigations closed 13 direct contact complaints involving IRS personnel. Of those 13 complaints, two employees were disciplined or counseled for their actions by IRS management officials, the report noted.

Each year, TIGTA focuses on an office or function of the IRS that interacts with taxpayers and their representatives on a routine basis. For this review, TIGTA analyzed how well the IRS’s Office of Appeals has ensured that its personnel are appropriately including taxpayers’ representatives in its activities. A statistical sample of 96 of 72,239 cases closed by Appeals showed that Appeals personnel did not always involve representatives appropriately in some key actions.

In 11 of the 96 sampled cases, Appeals personnel deviated from official procedures by attempting to contact the taxpayer directly by telephone or not ensuring that copies of taxpayer correspondence were sent to the taxpayer’s authorized representative. In addition, no documentation was found in managerial reviews indicating that checks were made to ensure that Appeals personnel were involving representatives in all case actions and providing representatives copies of all original correspondence sent to the taxpayers.

TIGTA recommended that the chief of the IRS Appeals unit provide additional guidance to first-line managers and Appeals personnel that will reinforce the importance of ensuring that taxpayer representatives are involved in all case activities. This will help ensure that the procedures designed to afford taxpayers their right to appropriate and effective representation are followed and properly documented during the appeals process.

The IRS agreed with TIGTA’s recommendation and plans to update the Internal Revenue Manual to clarify the front-line managers’ responsibilities for ensuring that procedures regarding the direct contact provisions of the Tax Code are followed and reinforce the importance of ensuring that representatives are involved in all case activities.

“We appreciate your acknowledgement that a review of your statistical sample of cases closed by Appeals between October 1, 2011, and September 30, 2012, showed that Appeals personnel are generally involving the designated representatives  in case activities,” wrote Kirsten B. Wielobob, deputy chief of the Appeals unit, in response to the report. “We value your recommendation to help us improve our processes.  We have worked and will continue to protect taxpayer rights and earn their confidence in our ability to resolve tax disputes fairly and without litigation.”

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Federal Government Sees Tax Revenues Rise This Year


The Congressional Budget Office is seeing a $400 billion reduction in the federal government’s budget deficit for the current fiscal year, thanks to increased tax revenues due largely to the expiration of the payroll tax cut.

The federal government ran a budget deficit of roughly $750 billion for the first 11 months of fiscal year 2013, CBO estimates—a reduction of more than $400 billion from the shortfall recorded for the same period last year, according to a report released Tuesday by the CBO. “Revenues have risen significantly, accounting for more than two-thirds of the decline in the deficit,” said the report.

Tax revenues for the first 11 months of fiscal year 2013, from October 2012 through August 2013 rose 13 percent compared with tax collections during the same period in fiscal 2012. Tax receipts for those first 11 months totaled an estimated $2.47 triillion, $284 billion more than receipts for the same period last year.

Individual income taxes and payroll taxes together increased $251 billion, or approximately 14 percent, according to the CBO. Taxes withheld from workers’ paychecks rose by $160 billion (or 10 percent), mainly because of the expiration of the payroll tax cut in January 2013, along with higher wages and salaries, and increases that began in January in the tax rates for income above certain thresholds as a result of the fiscal cliff deal.

Nonwithheld taxes rose by $91 billion, or approximately 27 percent, according to the CBO. About three-fourths of that increase occurred during the tax-filing season from February through April, mainly because final payments for the 2012 tax year were much larger than their counterparts last year.

Some of the growth in nonwithheld receipts also reflected an increase in estimated payments for the current tax year (made in the spring and the summer) and some payments made at other times for the 2012 tax year, such as the quarterly payments made in January 2013.

The large percentage increase of 53 percent in other receipts of individual income and payroll taxes, which the CBO refers to as “social insurance taxes” and which are net of refunds, occurred because last year’s refunds offset much more of the payments than this year’s tax refunds have.

In addition, net corporate income taxes were higher by $30 billion (or 16 percent), probably because of growth in taxable profits in calendar year 2012 and the first half of calendar year 2013, the CBO pointed out.

The CBO is expecting the federal government to see further tax revenue increases later this month, as the next quarterly estimated payments by individuals and most corporations are due in mid-September.

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Workers Nudged to Health Exchanges Seen Costing U.S. Taxpayers

About $6.7 billion in taxpayer money may be at risk if companies raise premiums by as little as $100 a month. That may spur as many as 2.25 million people to drop company coverage and enroll in plans under the Affordable Care Act, Stanford University researchers say.

International Business Machines Corp. and Time Warner Inc. say that they’ll give retirees a stipend to move to coverage in private health exchanges. Rising health care costs and the availability of new government coverage options may spur companies to similarly shift active workers out of employer-sponsored insurance.

The cost of the ACA “is much more sensitive than people previously appreciated” to employers’ decisions to drop coverage, says Jay Bhattacharya, an economist and Stanford associate professor of medicine. He published a study in the journal Health Affairs this week that shows about 37 million workers would get a better deal in the taxpayer-subsided exchanges next year than through their companies as employers raise or redistribute health costs.

“The taxpayers are going to get hammered,” says Douglas Holtz-Eakin, a former Congressional Budget Office director who is now president of American Action Forum, a Washington-based advocacy group that opposes the health law. “It’s going to be extraordinarily expensive.”

Company fines

The health exchanges established under the ACA are set to open Oct. 1. They are being created to provide medical coverage for most of the 50 million Americans who currently are uninsured. Enrollees will be able to select from a menu of private health plans and in some cases will receive federal tax credits to defray the cost.

Companies with 50 or more workers must pay a fine of as much as $3,000 for every employee who obtains a subsidy for exchange plans, though the penalty in most cases will be less than what the company now pays for health coverage. The Obama administration’s decision in July to delay the penalties until 2015 may encourage more companies to drop coverage next year, Bhattacharya says.

The Congressional Budget Office estimated in May that about 7 million workers will lose employer-sponsored coverage by 2018, either because their companies stop offering it or people choose to go to the exchanges. Tax credits will cost $26 billion next year, rising to $118 billion by 2018, according to the CBO.

A separate analysis of the issue, also published Monday in Health Affairs, argues that labor markets may be improved if more workers than expected enroll through the exchanges. People who otherwise feel locked into their jobs for health coverage may be freed to start businesses or retire early, says Thomas Buchmueller, a professor of risk management and insurance at the University of Michigan’s Ross School of Business.

“We, at a minimum, should not be concerned if people make that transition,” Buchmueller says in a telephone interview. “It just means there’s more good options for people.”

Independent estimates of the number of Americans who may leave their employer-sponsored health plans because of the ACA vary widely. A July study by Craig Garthwaite of Northwestern University’s Kellogg School of Management predicts as many as 940,000. That number is an estimate of how many adults without children are working because of what the researchers call “employment lock.”

“That speaks to what we might see in January,” Garthwaite says. “One of the risks to starting a business is that it’s really hard to get benefits when you’re just a one- or two-person firm and Obamacare is going to change that.”

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