Real Estate Investors Watch Out When Preparing Your 2014 Tax Return. Audits and Tax Litigation Involving Real Estate Losses are on the Rise
A highly audited issue that often leads to US Tax Court litigation is whether or not real estate losses can be deducted as ordinary losses rather than having to classify the loss as passive. The disallowance of the passive activity loss has been such a hot tax controversy that it was listed among the Taxpayer Advocate’s “Most Litigated Issues” in its 2014 Annual Report to Congress. Therefore, it is worth paying extra special attention to reporting real estate losses when preparing and filing your 2014 taxes.
Real Estate Tax Controversy Background
As part of its anti-tax shelter agenda in 1986, Congress codified IRC 469. Generally speaking, IRC 469 precludes deducting passive activity losses from trade or business activities in which you do not materially participate. The tax code considers rental activities to be a passive activity.Continue Reading...
Mistakenly, many believe that filing a tax extension is an extension of time to pay your taxes. While a tax extension provides an extension to file your tax return, it does not provide an extension of time to pay taxes owed.
The federal income tax is a pay-as-you-go tax system. If you’re an employee, then your employer will withhold income tax during each pay period in your name and social security number. If you are self-employed, then you would make estimated tax payments throughout the year based on earnings and, generally speaking, have to pay self-employment tax. If you are an employer, then you may have to make federal tax deposits for payroll taxes throughout the year as you are paying your employees.Continue Reading...
Owe New Jersey Back Taxes? The NJ Division of Taxation Offers a Way to Resolve Unpaid Tax Debt with No Penalties
The New Jersey Division of Taxation has offered businesses and individuals a way to resolve back taxes from 2005 through 2013 at a reduced cost. The details of the plan are as follows:
- Most of the penalties that were assessed to your account will be reduced to zero. The Amnesty Penalty (5%) imposed on taxes due on or after 1/1/2002 and before 2/1/2009 is still applicable.
- Interest will be calculated only on the tax and the reduced penalties.
- The 10% recovery fee which is imposed on each tax liability that is forwarded to NJ’s outsourced, collection unit, Pioneer, is waived.
- The 10% cost of collection fee charged for filing a Certificate of Debt (Judgment) may be eliminated.
On June 18, 2013, the IRS announced major changes to the voluntary offshore disclosure program (“OVDP”). OVDP had been criticized by the Taxpayer Advocate and tax attorneys as being too draconian on its participants who failed to disclose their foreign accounts, but were not willful evading their foreign tax obligations.
The 2012 OVDP Terms
Simply stated, the 2012 OVDP deal offered no criminal exposure if you got to the government before it found out about you in exchange for the following:
- You paid a 27.5 percent penalty on the undisclosed offshore accounts with the highest aggregate account balance on the period covered by OVDP (8 years);
- You filed all delinquent FBAR(s) for the period covered by OVDP (8 years); and
- You filed all original and amended tax returns for the period covered by OVDP (8 years)
- You paid all back taxes, interest, and a 20% penalty on the taxes owed (the accuracy related penalty)
The 2012 OVDP offered reduced penalty calculations of 12.5% and 5% of the highest aggregate balance, but these reduced OVDP penalties were based on precise requirements. If you did not satisfy the requirements, OVDP tax agents did not have the discretion to negotiate. If you did not like the program, you could opt out of OVDP.Continue Reading...
Congress may authorize the hiring of private collection agencies to collect back taxes. Congress added a proposal in the Expiring Provisions Improvement Reform and Efficiency (EXPIRE) Act of 2014 which would authorize the IRS to contract with private collection agencies to recover back taxes. Congress believes that it can recover $2.4 billion in unpaid federal tax debt over the next 10 years through the use of private collection agencies. Currently, the NJ Division of Taxation utilizes a private collection agency.
This is not the first time that Congress outsourced private tax collectors. The IRS utilized private tax collectors in 1996 and 2004. Both times the IRS stopped using private tax collectors because they were deemed inefficient in the collection of back taxes. The IRS Oversight Board (Oversight Board), a nine-member independent body charged to oversee the IRS operations, agrees. The Oversight Board believes private collection firms are not as effective as IRS personnel in charge of collection (Revenue Officers and the Automated Collections Unit).
The IRS is missing out on billions of dollars by not collecting taxes within the time frame permitted by Congress. Generally speaking, the IRS has 10 years to collect a back tax or reduce the tax debt to a judgment. Currently, many cases are sitting in the queue waiting to be assigned. If the cases are not assigned, within the 10 year statute, then the tax debt is forgiven. I have witnessed the IRS missing out on hundreds of thousands of dollars in back taxes. For example, last week, I noticed that the IRS missed assessing a trust fund recovery penalty. If the taxpayer’s business does not pay the FICA portion of payroll taxes, then the IRS can pierce through the business and assess the payroll tax owed against an individual.Continue Reading...
NJ Sales and Use Tax Relief for Tattooing and Cosmetic Makeup Services in Reconstructive Breast Surgery
The New Jersey Assembly Budget Committee approved a bill, A-4526, that provides a sales tax exemption for permanent cosmetic make-up services provided in conjunction with reconstructive breast surgery. The new law, known as “Jen’s Law” became effective on January 17, 2014. The law was named after Jennifer Dubrow Weiss of Vorhees, NJ who had a double mastectomy upon discovery of genes that lead to a high risk of cancer.
Under the old New Jersey tax law, procedures for permanent cosmetic make-up to create the appearance of a pre-mastectomy breast were subject to sales tax. Many insurance companies had excluded sales tax from coverage for cosmetic services which caused large out of pocket costs for the insured.
Assembly woman Caroline Casagrande, who sponsored the bill, expressed the following in a press release:
“Women who are at a high risk for getting breast cancer often take preventative measures to reduce that risk. A mastectomy is an extremely traumatic event for a woman,” “In addition to the physical pain, the psychological effects are often devastating. Reconstructive surgery is often an important step in the healing process. Requiring women to pay out of pocket sales tax for ensuing cosmetic services is an additional burden they should not have to bear.” She further stated that “During the final stages of breast reconstruction surgery, women often decide to use tattoos to create the appearance of a pre-mastectomy breast.”
On March 21, 2014, the NJ Division of Taxation issued a reminder that sellers of tattooing, permanent body art, or permanent cosmetic make-up application services should not charge a sales tax in connection with reconstructive breast surgery if the customer provides a doctor’s prescription to the seller.
If you have been assessed with a sales tax on or after January 17, 2014, you should apply for a tax refund from either the service provider or the Division of Taxation. New Jersey tax law requires that you file your claim for a refund on the Form A-3730 within four years from the date the sales tax was paid.Continue Reading...
The hotly contested severance compensation, tax dispute has been resolved and it’s a victory for the government. The nations’ highest court has spoken: Severance pay is subject to FICA tax.Continue Reading...
On February 12, 2014, the United States District Court granted the United States’ motion for summary judgment which entitled the US to foreclose upon a taxpayer’s properties for back payroll and income taxes.
In US v. DeSerio, a couple owned two properties in Cornville, Arizona. The couple owed outstanding federal employment, unemployment, and income tax liabilities covering multiple tax years from the early 1990s through 2007. In the aggregate the couple owed the IRS over 1 million in back taxes. The IRS utilized the powers authorized in IRC §6321 and §6322 and filed a notice of federal tax lien in favor of the United States. The notice of federal tax lien attached to all of the taxpayers property rights including two Arizona properties owned solely by the taxpayer.Continue Reading...
Answer: Yes! This is a question that that I’m always asked around tax season and the tax extension deadlines.
Putting aside that it is a misdemeanor to fail to file a tax return and a felony for the willful failure to file a tax return, it can be financially devastating to not file on time.
One of the biggest IRS penalties is the failure to file a tax return by its due date plus extensions. The failure to file penalty runs at 5% per month up to maximum of 25% of the total tax due. For example, if the tax return is reporting a balance $100,000.00 and its five months late, the IRS will assess an additional $25,000.00 in tax penalties. Therefore, by filing the return timely, you would avoid criminal exposure and the costly failure to file penalty.
In addition to the failure to file penalty, the IRS would assess the failure to pay penalty on the amount owed plus statutory interest. The failure to pay penalty is assessed at .5% per month up to a maximum of 25% for the late payment of tax. The failure to file penalty is reduced by the failure to pay penalty when both penalties run concurrently. If the government issues a notice of intent to levy and you do not pay within 10 days from the notice, then the penalty increases to 1% per month. Therefore, if you have any money available, even if the amount is less than what is reported, then submit the funds with your tax return. That way, you reduce the exposure to the failure to pay penalty which is based on the amount of back taxes owed.
In addition to the tax penalties and the taxes owed, the IRS assesses statutory interest on both the tax reported and the tax penalties assessed. In the aggregate, penalties and interest could inflate your back taxes by 55%-75%. Therefore, by timely filing and paying what you can, you can significantly reduce the amount of back taxes owed.
The disadvantage of filing a tax return without payment is that the IRS collection cycle will begin. However, if you are proactive, you can negotiate for additional time to pay taxes, request an IRS payment plan, place your account in forbearance (i.e. currently not collectible, CNC, or Status 53), apply to settle your tax debt for less than what is owed (i.e. offer in compromise or OIC), or propose to the IRS another alternative that would resolve your back taxes.Continue Reading...
Be Careful in the 2013 Tax Season…
A recent criminal conviction serves as a reminder that you must be careful when hiring a tax return preparer to prepare your 2013 tax return.
Verlean Hollins, a Chicago tax preparer plead guilty to aiding and assisting in the preparation of 3,200 false federal income tax returns. Hollins admitted that during the 2009 through 2011 tax season, she filed 3,193 income tax returns in which she falsely claimed the eligibility of higher education tax credits for her clients.Continue Reading...