(UPDATED 12/26/17)

Congress has passed the 2017 Tax Cuts and Jobs Act. There are many significant changes to the tax laws that are very complex in its implications and will affect all taxpayers. As the year 2017 comes to a close, there are a few tax planning ideas you could consider.

(UPDATED 12/26/17)

Congress has passed the 2017 Tax Cuts and Jobs Act. There are many significant changes to the tax laws that are very complex in its implications and will affect all taxpayers. As the year 2017 comes to a close, there are a few tax planning you could consider.

1. Consider prepaying your 2018 real estate taxes before 12/31/17. Many taxpayers will loose the deduction starting next year. However, if you are in AMT in 2017 you might not receive a tax benefit even if you prepay. Please call us to discuss.

2. Consider setting up a Donor Advised (Charitable) Fund before 12/31/17. If you have limited mortgage interest deduction, setting up a Donor Advised Fund for future charitable contribution might provide you with current tax benefits.

3. If you are considering buying a new car for business use before 12/31/17, it might be  beneficial to delay the purchase. Please call us to discuss.

Please remember that everyone’s tax situation is different and we would encourage you to call us to determine whether any of these or other tax planning strategies would be right under your circumstances.

The House and Senate have each passed different versions of the Tax Cuts and Jobs Act. Both bills have a lot in common, including cuts in the corporate tax rates, elimination of a number of tax deductions and changes to the estate tax. Both bills lower the US corporate tax rates and move the United States to a “territorial” dividend exemption rather than a “worldwide” system of international taxation. The House bill replaces the current seven tax brackets with four brackets (highest bracket of 39.6%) while the Senate bill keeps the seven brackets but changes the tax rate in each bracket (highest bracket of 38.5%). Both bills (a) provide a reduced tax rate for pass through entities (partnerships and S corporations) under limited circumstances, (b) increase the individual standard deduction, (c) change the state and local tax deduction, and (d) increase the child tax credit. The House and Senate have to reconcile the two versions of the bills in a conference committee and then pass the final version of the bill in both the House and the Senate. 

As the US Congress is working on tax reform, below are some of the tax planning strategies that are worth considering. The goal is to minimize tax liability both for 2017 and 2018.

Please remember that everyone’s tax situation is different and we would encourage you to call us to determine whether any of these or other tax planning strategies would be right under your circumstances.

Retirement Plans

The maximum IRA contribution is $5,500 (plus $1,000 if you are over 50 before the end of 2017). Consider making non-deductible contributions if you are not eligible to make a contribution to a Roth IRA or a deductible IRA.

Maximize your contributions to 401(k), 403(b) or 457 plans. Participants are permitted to defer up to $18,000 in 2017 and $18,500 in 2018 (plus an additional $6,000 if eligible for catch-up contributions). Your employer may match some of your contributions.

For owners of small businesses, a Defined Contribution Retirement Plan with a 401(k) could be set up so that the key people get a large percentage of the total contribution. The maximum annual addition is $53,000 for 2017 ($59,000 if you are eligible for catch-up contributions). If a similar plan is not set up for your business, please call us to review the options.

Roth Contributions/Conversions

If you are not eligible to contribute to a Roth IRA, you should consider contributing to a nondeductible IRA and then convert the amount to a Roth IRA. However, if you have other IRA accounts, this conversion may be partially taxable. Please call us to discuss if this would apply in your tax situation.

Medicare Taxes

An additional 0.9% Medicare Hospital Insurance tax may apply to wages/self-employment income of individuals and an additional 3.8% Medicare tax on net investment income including interest, dividends, annuities, royalties, rents, capital gains, etc. for adjusted gross income in excess of specified thresholds.  This tax is not applicable to income from self-owned property rented to your trade or business.

For owners of S corporations there is a tax planning opportunity of splitting the income between wages, which are subject to Medicare tax and distributions which are not subject to this tax.

Rental Income Exclusion

Rental income from your primary or second home for less than 15 days is tax-free.

Income Deferral and Accelerate Deductions

In general, it is advantageous to defer income to a subsequent year and accelerate deductions into the current year. However, if you expect to be in a higher tax bracket in 2018, it may be beneficial to accelerate income to 2017 and delay deductions to next year.

Section 179 Depreciation and Bonus Depreciation

The Section 179 deduction of $510,000 can be used to expense new or used business assets purchased and placed in service in 2017. This deduction has some limited application for an SUV (Sports Utility Vehicle) weighing between 6,000 and 14,000 pounds and used more than 50% for business.

50% bonus depreciation for new business assets is effective for tax year 2017 but phases down to 40% in 2018.

Business Vehicles

In case of a trade-in of a business vehicle at the time of buying a new vehicle, IRS rules dictate that the “tax basis” of the old vehicle should be rolled into the cost of the new vehicle. No gain or loss is recognized at the time of purchase. However, in situations where the tax basis is in excess of the trade-in value, it may be beneficial to sell the old vehicle so as to recognize the loss.

Kiddie Tax

A dependent child’s income may be subject to tax at the parent’s marginal tax rate on the child’s unearned income in excess of $2,100.  The kiddie tax includes dependents under 18 years of age or under 24 years of age if a full time student.

If not subject to kiddie tax, consider taking advantage of the 0% capital gains tax rate by transferring appreciated property to your children. Consideration would have to be given to gift and estate tax consequences.

Health Savings Accounts (HSA)

Discuss with health insurance providers to see if they offer a high deductible policy that qualifies for an HSA. The 2017 contributions limits are $6,750 for a family policy and $3,400 for a single policy. Each spouse can contribute an additional $1,000 if they are at least age 55. Contributions to these accounts can be used as a vehicle for long term tax-free growth and the withdrawals will not be taxable if they are used to pay medical expenses. However, HSA distributions used for other purposes may be subject to additional taxes.

Flexible Spending Accounts (FSA)

Employer-sponsored Flexible Spending Accounts permit you to pay qualified medical expenses on a pretax basis thus reducing your taxable income. Please discuss with your employer to see if this option is available to you.

Family Members as Employees

Consider shifting income to a child or other family member in a lower tax bracket by employing them in your business. Employing your spouse in the business also provides an opportunity to deduct business travel costs, increase contributions to retirement plans and claim child care credit. For unincorporated businesses where the children are working in the business, payroll payments to children (under age 18) of the taxpayer may not be subject to FICA tax.  In addition to a standard deduction, a child with earned income can contribute up to $5,500 of earned income into a traditional or Roth IRA.

Household Employees

If you hire individuals for various household work you would need to determine from a tax perspective whether these individuals are considered independent contractors or employees. If you pay a household employee more than $2,000 in 2017, you could be liable to pay Social Security and Medicare taxes for that individual when you file your personal 2017 income tax returns.

Capital Gains and Losses

Review your taxable investment portfolio for potential gains and losses in 2017. Consider offsetting capital losses with capital gains in your taxable investment portfolio. Capital losses are fully deductible against capital gains and an additional $3,000 only against ordinary income. Any excess capital losses are carried forward and offset against future income.

If you are in the 10% or 15% income tax brackets, long term capital gains may be tax-free subject to certain limits.

Required Minimum Distributions (RMD)

For those who turned 70 ½ in 2017 you should consider taking this year’s distribution before December 31, 2017. Alternatively you could wait until April 1, 2018, but that would require you to take two distributions in 2018. The combined tax liability of 2017 and 2018 should be reviewed when making this decision.

Deductions

In case you have paid business expenses from your personal account, claim reimbursement from your business account. Please make sure to keep supporting documents with your business records.

Charges on a credit card in 2017 are deductible on the 2017 tax return even though the payment to the credit card company will be made in 2018.

Automobile and entertainment expenses

The Tax Court has repeatedly held that vehicle expenses will be disallowed in full unless the taxpayer satisfies strict substantiation requirements which include a contemporaneously completed daily mileage log, with notation regarding person visited and the business purpose of the visit.

Meal and entertainment expenses need to be documented by noting who the taxpayer was with, where and when the event took place and what business purpose was served.

Alternative Minimum Tax (AMT) Triggers

Although expenses paid/deemed paid during the year reduce your regular income tax, they could still result in the payment of alternative minimum tax (AMT), a separate tax system. A few of the expenses that could trigger AMT are (1) large deduction for state income taxes and real estate taxes (2) large deduction for unreimbursed employee business expenses (3) interest on mortgage not used to buy, build or improve your home.

Donations

Increase your deductible charitable contributions for the year by using a credit card to make a tax-deductible donation in 2017 that you can pay in 2018.

Instead of donating cash, consider appreciated publicly traded securities held for more than one year. You would be entitled to a charitable deduction for the market value of the securities and not have to pay tax on the capital gains.

Section 529 Qualified Tuition Program

Consider funding a Section 529 Qualified Tuition Program (QTP). Contributions to the QTP are not tax deductible but distributions are tax free if they are used to pay qualified education expenses at most post-secondary educational institutions.

Mutual Funds

Invest cautiously in mutual funds in your taxable accounts at the end of the year. Many funds make distributions towards the end of the year which would be taxable to the investor, unless the investment is held in a tax-sheltered account.

Estate and Gift Tax

If gifting is part of your estate and income tax planning, utilize the 2017 annual exclusion of $14,000 by making the gift before December 31, 2017. Any tuition costs paid directly to the school for a child’s or grandchild’s tuition, and amounts paid to the provider for medical expenses, do not count towards the annual exclusion. If you are paying graduate school costs for a child by selling stocks in a taxable portfolio, gifting the stocks instead to the child may save taxes.

Establishing a Roth IRA for young children/grandchildren has many advantageous if they have earned income. If the children do not want to invest their own money, consider gifting them the amount they are eligible to contribute to the Roth IRA.

It is advisable that your estate plan be reviewed periodically. Please call us if you would like us to assist in setting up or updating your estate plan.

Foreign Income, Foreign Investments and Bank accounts

All US taxpayers are subject to tax on their worldwide income. Also foreign direct investments held by the taxpayers require additional reporting and compliance. These require two common forms: (1) FinCen Form 114 – Report of Foreign Bank and Financial Accounts (FBAR), and (2) Form 8938 – Statement of Specified Foreign Financial Assets. The definition of foreign assets is very broad and includes ownership in foreign entities, brokerage accounts etc. Since the penalties, both civil and criminal, for not complying with these disclosure requirements are very steep, please make sure to compile the necessary information as required to comply with this requirement.

Worker Classification

IRS is continuing its ongoing reviews of worker’s classification between independent contractor and employee status. Both Federal and Massachusetts state law have a very broad definition of “employee” and you should review the current independent contractors in your business to ensure proper classification. Any independent contractor who feels that he/she was misclassified by the taxpayer could file Form 8919 with their federal income tax return to report such misclassification. This could result in a potential audit by the IRS on this issue and could prove to be expensive for your business. In certain instances the IRS has pursued criminal liability against the “employer” business owners.

The House and Senate have each passed different versions of the Tax Cuts and Jobs Act. Both bills have a lot in common, including cuts in the corporate tax rates, elimination of a number of tax deductions and changes to the estate tax. Both bills lower the US corporate tax rates and move the United States to a “territorial” dividend exemption rather than a “worldwide” system of international taxation. The House bill replaces the current seven tax brackets with four brackets (highest bracket of 39.6%) while the Senate bill keeps the seven brackets but changes the tax rate in each bracket (highest bracket of 38.5%). Both bills (a) provide a reduced tax rate for pass through entities (partnerships and S corporations) under limited circumstances, (b) increase the individual standard deduction, (c) change the state and local tax deduction, and (d) increase the child tax credit. The House and Senate have to reconcile the two versions of the bills in a conference committee and then pass the final version of the bill in both the House and the Senate.

Final regulations relating to the low-income housing tax credit revise and clarify requirements that low-income housing agencies must follow when conducting physical inspections of low-income units and reviewing low-income certifications and other documentation. The regulations finalize previously issued temporary regulations (T.D. 9753, February 25, 2016).

Final regulations relating to the low-income housing tax credit revise and clarify requirements that low-income housing agencies must follow when conducting physical inspections of low-income units and reviewing low-income certifications and other documentation. The regulations finalize previously issued temporary regulations (T.D. 9753, February 25, 2016).

Sample Inspection Size

The final regulations require the agency to inspect no fewer units than the number specified in the "Low-Income Housing Credit Minimum Unit Sample Size Reference Chart." The reference chart can be found in Rev. Proc. 2016-15, I.R.B. 2016-11, 435, and is borrowed from the U.S. Housing and Urban Development (HUD) Real Estate Assessment Center Protocol (the REAC protocol). Previously, an agency was permitted to inspect 20 percent of the low-income housing units in the project if this was lesser than the number required by the reference chart. This change addresses a concern that limiting physical inspections to 20 percent of units in small projects is not sufficient to ensure overall compliance with habitability and low-income requirements.

All-Buildings Requirement

No change is made to the requirement that an agency must inspect all buildings in a low-income housing project by the end of the second calendar year after the year in which the last building in the project is placed in service unless a project inspection is conducted under the REAC protocol. Suggestions that the IRS dispense with the all-buildings requirement for agencies not using the REAC protocol were not adopted.

Reasonable Notice Time Frame Shortened

A building owner and tenants are allowed a maximum 15 day advance notice that a project will be inspected. The temporary regulations allowed a 30-day notice period. The particular units to be inspected may only be identified on the day of the inspection. The 15 day advance notice limit will also apply to reviews of low-income certifications.

Amendment of Agency’s Qualified Allocation Plan

The final regulations are effective on February 26, 2019. However, an agency only needs to amend it qualified allocation plan by December 31, 2020, to reflect the requirements in the final regulations.

Rev. Proc. 2016-15 is obsolete with respect to an agency as of the date that on which the agency amends its qualified allocation plan.

The Senate’s top Democratic tax writer is calling on the IRS and Treasury to further waive underpayment penalties for the 2018 tax year. Nearly 30 million taxpayers are expected to have underpaid taxes last year, according to the Government Accountability Office (GAO).

The Senate’s top Democratic tax writer is calling on the IRS and Treasury to further waive underpayment penalties for the 2018 tax year. Nearly 30 million taxpayers are expected to have underpaid taxes last year, according to the Government Accountability Office (GAO).

Underpayment Penalty

The IRS announced in IRS News Release IR-2019-3 that it would waive the underpayment penalty for any taxpayer who paid at least 85 percent of their total tax liability during the 2018 tax year. The usual threshold is 90 percent. However, Senate Finance Committee (SFC) ranking member Ron Wyden, D-Ore., has said that the IRS should "do more."

"Instead of penalizing those who paid less than 90 percent of what they owed in 2018, now they’re penalizing those who paid less than 85 percent," Wyden said on February 7 from the Senate floor. "That was one small step in the right direction," he added.

Before the IRS’s news release, Wyden wrote to Treasury and the IRS urging the waiver of underpayment penalties for withholding errors related to the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97). Although the IRS did lower the penalty threshold for the 2018 tax year, Wyden stated on February 7 that "nobody should be penalized for the Trump administration’s mistakes on tax withholding."

Democrats are largely opposed to the TCJA as a whole, and claim that Republicans’ tax code overhaul was rushed. Thus, significant tax withholding errors and underpayments are expected to be incurred. "Change the penalty thresholds. Extend safe harbors. Whatever needs to happen," Wyden said.

Additionally, several Republicans have also voiced their concern about the expected increase in underpayment related to withholding. SFC Chairman Chuck Grassley, R-Iowa, recently urged the IRS to be "lenient" on underpayment penalties for 2018, as it is the first tax year since tax reform implementation.

AICPA

The American Institute of Certified Public Accountants (AICPA) has likewise urged Treasury and the IRS to provide more extensive penalty relief. "The substantial uncertainty surrounding the implementation of the TCJA and the updated federal tax withholding tables presented a challenge for many taxpayers in understanding and accounting for their tax liability," Annette Nellen, chair of the AICPA’s Tax Executive Committee said in a recent letter to Treasury and the IRS. The AICPA has recommended an 80 percent threshold for the underpayment penalty waiver.

Senators have introduced a bipartisan bill specifically tailored to reduce excise taxes and regulations for the U.S. craft beverage industry. The bill aims to promote job creation and permanently reduce certain taxes and compliance burdens.

Senators have introduced a bipartisan bill specifically tailored to reduce excise taxes and regulations for the U.S. craft beverage industry. The bill aims to promote job creation and permanently reduce certain taxes and compliance burdens.

Craft Beverage Tax Reform

The Craft Beverage Modernization and Tax Reform Bill of 2019 was introduced on February 6 by Senate Finance Committee (SFC) ranking member Ron Wyden, D-Ore., and Sen. Roy Blunt, R-Mo.

"By modernizing burdensome rules and taxes for craft beverage producers, this legislation will level the playing field and allow these innovators to further grow and thrive," Wyden said in a press release. The comprehensive measure is supported by the entire craft beverage industry, according to a summary of the bill.

Generally, the Craft Beverage Modernization and Tax Reform Bill of 2019 would implement the following provisions:

For Brewers:

• Reduce excise taxes to provide more cash flow to reinvest in personal business growth.
• Simplify rules for ingredient approval and brewery collaboration.

For Vintners:

• Expand the wine producer tax credit.
• Expand allowances for tax purposes on carbonation and alcohol content for certain wines.

For Distillers:

• Establish reduced excise taxes for small craft distilleries.
• Reduce restrictions on tax-free transfers of spirits between distillers.

The bill would also exempt beverage producers from certain capitalization rules for aged products.

"The craft beverage industry is driven by small businesses that support thousands of jobs and contribute billions in economic output," Blunt said in the press release.

As of February 6, the bill has 10 bipartisan cosponsors.

The IRS’s proposed 50-percent gross income locational rule on the active conduct of Opportunity Zone businesses is garnering criticism from stakeholders and lawmakers alike. The IRS released proposed regulations, NPRM REG-115420-18, for tax reform’s Opportunity Zone program last October.

The IRS’s proposed 50-percent gross income locational rule on the active conduct of Opportunity Zone businesses is garnering criticism from stakeholders and lawmakers alike. The IRS released proposed regulations, NPRM REG-115420-18, for tax reform’s Opportunity Zone program last October.

50-Percent Locational Rule

Many stakeholders have urged the IRS to reconsider its proposed rule requiring that at least 50-percent of gross income of a Qualified Opportunity Zone (QOZ) business is derived from the active conduct of a trade or business within the QOZ. The IRS heard from several of these stakeholders at a full house public hearing on the proposed regulations held last week at IRS headquarters in Washington, D.C.

"[W]e’re concerned that manufacturing businesses, e-commerce enterprises, and others that have the potential to spur significant economic activity could be excluded inadvertently because of this rule," Stefan Pryor, Rhode Island Secretary of Commerce said at the hearing. Additionally, other stakeholders commented that the proposed rule would go against congressional intent.

Comment. There is no locational-related rule for gross income of QOZ businesses included in the law’s statutory language. However, the statutory language does provide a tangible property test to ensure qualifying businesses are predominantly located within the QOZ.

QOZ Business Congressional Intent

To that end, the bipartisan, bicameral tax writers who drafted the original QOZ bill language, too, have urged the IRS to remove the 50-percent gross income locational requirement.

The Opportunity Zone program was enacted under the Tax Cuts and Jobs Act ( P.L. 115-97) in 2017. The program is housed under new Code Secs. 1400Z-1 and 1400Z-2. Although not a single Democrat voted for the TCJA, the Opportunity Zone program was based on a bicameral measure sponsored by a group of bipartisan tax writers.

"Since many businesses derive income from the sale of goods and services outside of a single census tract, this would significantly limit the ability for local operating businesses to qualify for Opportunity Fund investment, contrary to congressional intent," the lawmakers wrote in a recent letter to Treasury Secretary Steven Mnuchin. "Even for those businesses who might qualify under this rule, it would impose immense new administrative burdens to track and report the location of each source of business income," they added.

Second Round of Proposed Regulations

Currently, the IRS is working on a second batch of proposed regulations for Opportunity Zones. Those proposed rules "hopefully will see the light of day shortly," Scott Dinwiddie, an IRS official in the Income Tax and Accounting division said at last week’s hearing.

The IRS has said that it is postponing its plan to discontinue faxing taxpayer transcripts. The IRS statement came on the heels of a letter sent earlier this week from bipartisan leaders of the Senate Finance Committee urging such a delay.

The IRS has said that it is postponing its plan to discontinue faxing taxpayer transcripts. The IRS statement came on the heels of a letter sent earlier this week from bipartisan leaders of the Senate Finance Committee urging such a delay.

IRS Cybersecurity

The IRS announced in IRS News Release IR-2018-256 last December that it would stop its tax transcript faxing service for individuals and businesses on February 4, 2019. The IRS cited to reasons of taxpayer security for the change in procedure. To that end, ceasing the IRS’s transcript faxing service would better prohibit cybercriminals from obtaining taxpayer data, according to the IRS.

Grassley, Wyden Urge Delay

SFC Chairman Chuck Grassley, R-Iowa, and ranking member Ron Wyden, D-Ore., sent IRS Commissioner Charles Rettig a letter earlier this week expressing concern with the IRS’s original timeline for discontinuing the tax transcript faxing service. The bipartisan leaders did not ask the IRS to eliminate its plan to discontinue the particular service. However, they did encourage the IRS to extend the date of discontinuation for the sake of taxpayers and practitioners in light of the recent partial government shutdown, which included the IRS.

"[W]e encourage the IRS to delay its planned discontinuation of faxing taxpayer information until such time that the agency can reasonably resolve the legitimate concerns of the tax-practitioner community about alternatives to the IRS faxing taxpayer information," Grassley and Wyden wrote. "Of course, such a delay should not compromise the security or privacy of taxpayer information."

IRS Extends Transcript Faxing Service

The IRS’s Wage & Investment Division issued a January 30 statement stating that the IRS will extend its transcript faxing service beyond February 4. Additionally, the IRS said it is reviewing options for a new timeline and will provide taxpayers and practitioners advance notice of the new date.

Everybody knows that tax deductions aren't allowed without proof in the form of documentation. What records are needed to "prove it" to the IRS vary depending upon the type of deduction that you may want to claim. Some documentation cannot be collected "after the fact," whether it takes place a few months after an expense is incurred or later, when you are audited by the IRS. This article reviews some of those deductions for which the IRS requires you to generate certain records either contemporaneously as the expense is being incurred, or at least no later than when you file your return. We also highlight several deductions for which contemporaneous documentation, although not strictly required, is extremely helpful in making your case before the IRS on an audit.

Everybody knows that tax deductions aren’t allowed without proof in the form of documentation.  What records are needed to “prove it” to the IRS vary depending upon the type of deduction that you may want to claim.  Some documentation cannot be collected “after the fact,” whether it takes place a few months after an expense is incurred or later, when you are audited by the IRS.  This article reviews some of those deductions for which the IRS requires you to generate certain records either contemporaneously as the expense is being incurred, or at least no later than when you file your return.  We also highlight several deductions for which contemporaneous documentation, although not strictly required, is extremely helpful in making your case before the IRS on an audit.

Charitable contributions.  For cash contributions (including checks and other monetary gifts), the donor must retain a bank record or a written acknowledgment from the charitable organization. A cash contribution of $250 or more must be substantiated with a contemporaneous written acknowledgment from the donee.  “Contemporaneous” for this purpose is defined as obtaining an acknowledgment before you file your return.  So save those letters from the charity, especially for your larger donations.

Tip records.  A taxpayer receiving tips must keep an accurate and contemporaneous record of the tip income.  Employees receiving tips must also report the correct amount to their employers.  The necessary record can be in the form of a diary, log or worksheet and should be made at or near the time the income is received.

Wagering losses.  Gamblers need to substantiate their losses. The IRS usually accepts a regularly maintained diary or similar record (such as summary records and loss schedules) as adequate substantiation, provided it is supplemented by verifiable documentation.  The diary should identify the gambling establishment and the date and type of wager, as well as amounts won and lost. Verifiable documentation can include wagering tickets, canceled checks, credit card records, and withdrawal slips from banks.

Vehicle mileage log.  A taxpayer can deduct a standard mileage rate for business, charitable or medical use of a vehicle.  If the car is also used for personal purposes, the taxpayer should keep a contemporaneous mileage log, especially for business use.  If the taxpayer wants to deduct actual expenses for business use of a car also used for personal purposes, the taxpayer has to allocate costs between the business and personal use, based on miles driven for each.

Material participation in business activity.  Taxpayers that materially participate in a business generally can deduct business losses against other income.  Otherwise, they can only deduct losses against passive income.  An individual’s participation in an activity may be established by any reasonable means.  Contemporaneous time reports, logs, or similar documents are not required but can be particularly helpful to document material participation.  To identify services performed and the hours spent on the services, records may be established using appointment books, calendars, or narrative summaries.

Hobby loss.  Taxpayers who do not engage conduct an activity with a sufficient profit motive may be considered to engage in a hobby and will not be able to deduct losses from the activity against other income.  Maintaining accurate books and records can itself be an indication of a profit motive.  Moreover, the time and activities devoted to a particular business can be essential to demonstrate that the business has a profit motive.  Contemporaneous records can be an important indicator.

Travel and entertainment.  Expenses for travel and entertainment are subject to strict substantiation requirements. Taxpayers should maintain records of the amount spent, the time and place of the activity, its business purpose, and the business relationship of the person being entertained. Contemporaneous records are particularly helpful.

The number of tax return-related identity theft incidents has almost doubled in the past three years to well over half a million reported during 2011, according to a recent report by the Treasury Inspector General for Tax Administration (TIGTA). Identity theft in the context of tax administration generally involves the fraudulent use of someone else’s identity in order to claim a tax refund. In other cases an identity thief might steal a person’s information to obtain a job, and the thief’s employer may report income to the IRS using the legitimate taxpayer’s Social Security Number, thus making it appear that the taxpayer did not report all of his or her income.

In light of these dangers, the IRS has taken numerous steps to combat identity theft and protect taxpayers. There are also measures that you can take to safeguard yourself against identity theft in the future and assist the IRS in the process.  

IRS does not solicit financial information via email or social media

The IRS will never request a taxpayer’s personal or financial information by email or social media such as Facebook or Twitter. Likewise, the IRS will not alert taxpayers to an audit or tax refund by email or any other form of electronic communication, such as text messages and social media channels.

If you receive a scam email claiming to be from the IRS, forward it to the IRS at phishing@irs.gov. If you discover a website that claims to be the IRS but does not begin with 'www.irs.gov', forward that link to the IRS at phishing@irs.gov.

How identity thieves operate

Identity theft scams are not limited to users of email and social media tools. Scammers may also use a phone or fax to reach their victims to solicit personal information. Other means include:

-Stealing your wallet or purse
-Looking through your trash
-Accessing information you provide to an unsecured Internet site.

How do I know if I am a victim?

Your identity may have been stolen if a letter from the IRS indicates more than one tax return was filed for you or the letter states you received wages from an employer you don't know. If you receive such a letter from the IRS, leading you to believe your identity has been stolen, respond immediately to the name, address or phone number on the IRS notice. If you believe the notice is not from the IRS, contact the IRS to determine if the letter is a legitimate IRS notice.

If your tax records are not currently affected by identity theft, but you believe you may be at risk due to a lost wallet, questionable credit card activity, or credit report, you need to provide the IRS with proof of your identity. You should submit a copy of your valid government-issued identification, such as a Social Security card, driver's license or passport, along with a copy of a police report and/or a completed IRS Form 14039, Identity Theft Affidavit, which should be faxed to the IRS at 1-978-684-4542.

What should I do if someone has stolen my identity?

If you discover that someone has filed a tax return using your SSN you should contact the IRS to show the income is not yours. After the IRS authenticates who you are, your tax record will be updated to reflect only your information. The IRS will use this information to minimize future occurrences.

What other precautions can I take?

There are many things you can do to protect your identity. One is to be careful while distributing your personal information. You should show employers your Social Security card to your employer at the start of a job, but otherwise do not routinely carry your card or other documents that display your SSN.

Only use secure websites while making online financial transactions, including online shopping. Generally a secure website will have an icon, such as a lock, located in the lower right-hand corner of your web browser or the address bar of the website with read “https://…” rather than simply “http://.”

Never open suspicious attachments or links, even just to see what they say. Never respond to emails from unknown senders. Install anti-virus software, keep it updated, and run it regularly.

For taxpayers planning to e-file their tax returns, the IRS recommends use of a strong password. Afterwards, save the file to a CD or flash drive and keep it in a secure location. Then delete the personal return information from the computer hard drive.

Finally, if working with an accountant, query him or her on what measures they take to protect your information.

The Foreign Account Tax Compliance Act (FATCA), enacted in 2010, requires certain U.S. taxpayers to report their interests in specified foreign financial assets.  The reporting requirement may apply if the assets have an aggregate value exceeding certain thresholds. The IRS has released Form 8938, Statement of Specified Foreign Financial Assets, for this reporting requirement under FATCA.

Reporting

For now, only specified individuals are required to file Form 8938, but specified U.S. entities will eventually also have to file the form. Taxpayers who do not file a federal income tax return for the year do not have to File Form 8938, even if the value of their foreign assets exceeds the normal reporting threshold.

Individuals who have to file Form 8938 include U.S. citizens, resident aliens for any part of the year, and nonresident aliens living in Puerto Rico or American Samoa.

Reporting applies to specified foreign financial assets. Specified foreign financial assets include:

• A financial account maintained by a foreign financial institution;
• Other foreign financial assets, such as stock or securities issued by a non-U.S. person, or an interest in a foreign entity.

The aggregate value of the individual’s specified foreign financial assets must exceed specified reporting thresholds, as follows:

• Unmarried U.S. taxpayers, and married U.S. taxpayers filing a separate return – more than $50,000 on the last day of the year, or more than $75,000 at any time during the year;
• U.S. married taxpayers filing a joint return – more than $100,000 on the last day of the year, or more than $150,000 at any time during the year; or
• Taxpayers living abroad: if filing a joint return, more than $400,000 on the last day of the year, or more than $600,000 during the year; other taxpayers, more than $200,000 on the last day of the year, or more than $300,000 at any time during the year.

Taxpayers who report assets on other forms, such as Form 3520, do not have to report the asset on Form 8938, but must use Form 8938 to identify other forms on which they report.

Filing

Reporting applies for tax years beginning after March 18, 2010, the date that FATCA was enacted. Most taxpayers, such as those who report their taxes for the calendar year, must start filing Form 8938 with their 2011 income tax return.

If you have any questions about Form 8938, please contact our office.