Q. What is an FBAR?

A. An FBAR is a Report of Foreign Bank and Financial Accounts.  The form number is TD F 90-22.1.  FBAR rules were established to protect against international terrorism. The reports filed as a result of this regulation provide leads to investigators that facilitate the identification and tracking of illicit funds or unreported income, as well as providing additional prosecutorial tools to combat money laundering and other crimes.

Q. Who must file an FBAR?

A. Any US person who has a financial interest in or signature authority or other authority over any financial account in a foreign country, if the aggregate value of these accounts exceeds $10,000 at any time during the calendar year.

Q. What constitutes signature or other authority over an account?

A. A person has signature authority over an account if such person can control the disposition of money by delivery of a document containing his or her signature.

Q. When is the FBAR due?

A. The FBAR is due by June 30 of the year following the year that the account holder meets the $10,000 threshold.  An extension to file Federal income tax returns does not extend the due date for filing an FBAR.  Filers cannot request an extension of the FBAR.

Q. What happens if an account holder is required to file an FBAR and fails to do so?

A. Failure to file an FBAR when required to do so may potentially result in civil penalties, criminal penalties or both.

• Failure to File Penalty – up to $250,000 and/or up to 5 years in prison for any person ”willfully violating” the requirements to file.
• Fraud Penalty – up to $500,000 and/or up to 10 years in prison for any person “willfully violating” the requirements to file “as part of a pattern of any illegal activity involving more than $100,000 in a 12-month period.”
• False Information Penalty – fine or up to 5 years in prison for any person providing false, misleading, fictitious, or fraudulent statements on TD F 90-22.1; or up to 8 years in prison if the false information involves domestic or foreign terrorism.

Early in 2011, the IRS launched the VCSP which allows employers to reclassify their workers who were previously labeled “independent contractors” in error as employees for future tax periods.

IRS Update:

1. The VCSP application (or rejection of) will not automatically trigger initiation of a  Federal audit.
2. The VCSP concerns future years only.  A taxpayer that signs a VCSP closing agreement is not admitting liability or wrongdoing for past periods.
3. The VCSP filing of Forms 1099 Requirement states “a taxpayer will be eligible for the VCSP if it files the required Forms 1099 within 6 months of their due date (including extensions).”
4. The VCSP permits taxpayers to reclassify some or all of their workers; However, once a taxpayer chooses to reclassify its workers as employees, all workers in the same class must be treated as employees for tax purposes.
5. The IRS will not share information about VCSP applicants with the Department of Labor or with States.

When an employer provides an employee with a cell phone primarily for non-compensatory business reasons, the business and personal use of the cell phone is generally non-taxable to the employee.  The IRS will not require recordkeeping of business use in order to  receive this tax-free treatment.

The IRS announced a similar administrative approach that applies to small businesses that provide cash allowances and reimbursements for work-related use of personally-owned cell phones.  Under this approach, employers that require employees, primarily for noncompensatory business reasons, to use their personal cell phones for business purposes may treat reimbursements of the employees’ expenses for reasonable cell phone coverage as non-taxable.

However this treatment does not apply to reimbursements of unusual or excessive expenses or to reimbursements made as a substitute for a portion of the employee’s regular wages.

January 16:

• Individuals: Fourth quarter 2011 estimated tax payments due (final Installment).

January 31:

• Employers: Give your employees their copies of Form W-2 for 2011.  File Form 941 for 4th quarter 2011, or annual Form 944.  File Form 940 for 2011.
• Businesses: Distribute Form 1099 to  recipients for 2011.

February 15:

• Employees: Submit a new Form W-4 to your employer.

February 28:

• Employers: File Form W-3 with Copy A of all Forms W-2, and Form 1096 with Copy A of all Forms 1099.  Large food or beverage establishments file Form 8027 to report 2011 tip income, reported tips, and allocated tips.

March 15:

• Calendar-Year Corporations: 2011 income tax return (Forms 1120 and 1120S) due, or file Form 7004 for an automatic six-month extension.  Provide shareholders with copy of Schedule K-1 (Form 1120S.)
• C Corporations & LLCs: File Form 2553 to choose to be treated as an S corporation beginning on January 1, 2012.

Beginning January 1st 2012, the standard mileage rates for the use of a car will be:

• 55.5 cents per mile for business miles
• 23 cents per mile driven for medical / moving
• 14 cents per mile charitable service

When comparing the rental rates for different properties for your business,  it is important to think about the expenses involved.   For example; who is responsible for utilities, real estate taxes and maintenance?  As an enticement to sign a lease, you could negotiate free rent or the landlord might allow you a reduction if you agree to pay for alterations to the space.  Consider these complexities before you sign a lease.

Free rent or other expenditures may be spread over the term of the lease to allow you to properly allocate monthly costs.  Comparing different leases, or options in the same lease, can add up to significant savings.  Understand effective rent vs stated rent with help from our office (412-646-4084).

Sole Proprietors: You will need a new EIN if you are subject to a bankruptcy, if you incorporate, take partners or operate as a partnership, or if you purchase or inherit an existing business that you operate as a sole proprietorship.  You will not need a new EIN if you change the name of your business, change your location and/or add other locations, or if you operate multiple businesses.

Corporations: You  will need a new EIN if the corporation receives a new charter from the secretary of state, if you become a  subsidiary of a corporation, you change to a partnership or a sole proprietorship, or if a new corporation is created after a statutory merger.  You will not need a new EIN if you are a division of a corporation, you are the surviving corporation using the existing EIN after a corporate merger, the corporation declares bankruptcy, the corporate name or location changes, or a corporation chooses to be taxed as an S corporation.

Partnerships: You will need a new EIN if you incorporate, your partnership is taken over by one of the partners and is operated as a sole proprietorship, or you end an old partnership and begin a new one.  You will not need a new EIN if the partnership declares bankruptcy, the partnership name changes, you change  or add  locations of the partnership, a new partnership is formed as a result of the termination of a partnership under IRC section 708(b)(1)(B) or 50 percent or more of the ownership of the  partnership (measured by interests in capital and profits) changes hands within a twelve-month period.

1. The organization must qualify: Charitable contributions must be made to “qualified organizations” as provided by  IRS Publication 526.  Remember, you can’t deduct donations to specific individuals or political organizations.
2. You must itemize: Charitable contributions are deductible only if you itemize deductions using Form 1040, Schedule A.
3. What you can deduct: You can  deduct cash contributions and the fair market value of most property you donate.  Clothing and household items must be in “good used condition or better” to be deductible.
4. Receive something in return?: If your contribution entitles you to receive merchandise, goods, or services, you can deduct the amount that exceeds the fair market value of the benefit received.
5. Pledges and payments: Only contributions actually  made during the tax year are deductible.  For example, if you pledged $500 in May but  paid the charity only $200 by year end, you can only  deduct $200.
6. Recordkeeping: You must keep records of the contribution.  Save a cancelled check, bank or credit card statement, or a dated/written  receipt from the charity with the amount of the contribution.  For text message donations, keep your phone bill showing the receiving organization, the date, and the amount.
7. Donations made near year end: Include credit card charges and payments by check in the year you donate to the charity, even if you don’t pay the credit card bill or draft from your bank account  until the next year.
8. Large donations: For contributions of $250 or more, you need more than a bank record.  You need a dated/written receipt from the charity.  Stating the dollar amount donated and whether the organization provided goods or services in exchange for the gift.  If you donated large items, the receipt must include a description of the items and a good faith estimate of  value.  For items valued at $500 or more you must complete a Form 8283,  Noncash Charitable Contributions, and attach the form to your return.  To claim deductions for a contributions of noncash property worth more than $5,000.  You must obtain an appraisal and complete Section B of Form 8283 with your return.

As the year comes to a close, you may find that the amount of tax withheld from your salary or paid in estimated tax vouchers isn’t enough to cover your required estimated tax payments.  Increasing your 4thquarter estimated tax payment will not avoid penalties, since these payments are applied in installments.  You may avoid the penalty by  increasing the income tax withheld by your employer.  This is because the heavy year-end withholding will be treated as paid equally over the four installment due dates.

This year may be the last chance for taxpayers who itemize deductions to deduct state and local sales taxes in lieu of state and local income taxes, since the option to deduct sales taxes is set to expire at the end of 2011.  While it may be extended, individuals who are considering the purchase of a big-ticket item may want to accelerate the purchase into this year to achieve a higher itemized deduction for sales taxes.

Taxpayers who make this election may either deduct actual sales and use taxes, or use the IRS-published tables plus the actual amount of the sales tax for certain “big-ticket” items (vehicles, boats).  This provision primarily benefits taxpayers who live in states without an income tax.

Thanks to legislation enacted at the end of 2010, tax rates are stable for 2011 & 2012. These include ordinary income tax rates for individuals which are 10, 15, 25, 28, 33 and 35 percent; capital gains rates are zero and 15 percent.  However, not all is quiet on the tax front despite no dramatic rate changes until 2013.

Unfortunately, there are some specific tax provisions that will terminate at the end of 2011 unless Congress and the President agree to extend them:

1. Above-the-line deduction for higher education expenses, up to $4,000
2. The provision to deduct  mortgage insurance premiums
3. Tthe election to deduct state and local sales tax deductions in lieu of state and local income taxes
4. The $250 classroom expense deduction for teachers
5. Non-business energy credits
6. The exclusion for distributions of up to $100,000 from an IRA to charity
7. A higher deduction limit for charitable contributions of appreciated property for conservation purposes

The AMT has been “patched” for 2011.  The exemptions have been temporarily increased from the normal statutory levels to the “patched” levels.  (From $33,750 to $48,450 for single individuals, from $45,000 to $74,450 for married couples filing jointly and surviving spouses and from $22,500 to  $37,335 for married couples filing separately)

The amounts return to the “normal levels” of $33,750/$45,000/$22,500, respectively, in 2012 unless Congress takes action to maintain the patch.  Elimination of the AMT is a goal of long-term tax reform, but the loss of revenue has been considered too high in the past.  Without the “patch,” the Congressional Budget Office estimates that an additional 20 million middle-class taxpayers would suddenly become subject to an AMT once designed only for millionaires.

While planning for the AMT is difficult, taxpayers may want to consider realizing AMT income, such as capital gains, in 2011, when the patch is higher, rather than in 2012.  Call us at 412-646-4084 to discuss your options.

The regular tax laws give special treatment to some types of income, allow special deductions for some types of expenses, and allow credits for certain taxpayers. Taxpayers who are not required to pay tax under the regular tax system may still be liable for tax under the AMT laws.

According to the IRS, these laws create an “equity” in the system, requiring higher income individuals with certain deductions to pay tax.  Without the AMT laws, the IRS says that these individuals would pay little or no tax, while those with lower income levels and no deductions would pay higher tax.  AMT is triggered when a taxpayer has enough preference items and adjustments.  Contact our office at 412-646-4084 to discuss this in more detail.

There are many situations where a business owner or taxpayer can find themselves without complete records.  For example, you sell your business and later get audited by the IRS.  You give your records to your accountant who passes away and his wife transfers the business to a third party.  You have a falling out with your business partner or spouse.  Or a hurricane or other disaster destroyed your records.  While you may get some sympathy from the tax authorities, you’re responsible for your records.  In some cases, the solution is pretty simple:

• Don’t let your accountant or attorney retain original documents unless it’s just for a short period, for example to prepare your tax return.
• Get records back from your spouse or business partner before parting ways.
• Make an electronic backup of important records and store them in a safe place.
• If you’re selling your business, keep whatever the new owner won’t need and make copies of important documents given to the new owner.

The IRS advises taxpayers to take the necessary steps to safeguard their financial and tax records.  Taxpayers should also check the following literature, available on the IRS web site at www.irs.gov

• FS-2006-7, Reconstructing Your Records
• Publication 552, Recordkeeping for Individuals
• Publication 583, Starting a Business and Keeping Record

Distributions from an employer-sponsored retirement plan may or may not be subject to withholding.  In some cases, withholding is mandatory and in others the recipient can elect out.

Eligible Rollover Distributions. In general, the payor of any designated distribution that is an eligible rollover distribution must withhold an amount equal to 20% of the distribution.  The recipient may not elect out of the withholding requirement.

• Exception:  Eligible rollover distributions are not subject to withholding if expected distributions are less than $200 for the year. Also, 20% withholding generally only applies to any previously untaxed amount.  The most important exception by far is that no withholding is required if the plan directly rolls over (in a trustee-to-trustee transfer) the eligible rollover distribution amount to another qualified retirement plan or IRA.
  

Periodic Payments. The payor of a periodic payment (one made at regular intervals for more than one year) that isn't an eligible rollover distribution must withhold from the payment as if it were a wage payment for the appropriate payroll period.

• Exception:  Generally, the plan administrator must withhold at the rate for a married individual with 3 withholding exemptions.  However, recipients have the right  to elect no withholding or elect to have a different amount withheld and revoke the election at any time.
  

Non-periodic Payments. A nonperiodic payment is a distribution that usually isn't made at regular intervals and isn't an eligible rollover distribution.  Non-periodic payments generally are subject to 10% withholding.

• Exception: The recipient may elect no withholding or have a different amount withheld by filing a Form W-4P with the plan administrator.  
  

Reminder: Distributions from designated Roth accounts in 401(k), 403(b), or 457(b) plans have no withholding requirement because the distribution is not taxable.  If a non-qualified distribution is made from such an account, withholding is required only from any distributed earnings that the recipient must include in gross income.

Beginning in 2002, the IRS required that innocent spouse requests be filed within two years after the IRS first takes collection action against the requesting spouse. This time limit was designed to encourage prompt resolution while evidence remained available.  In late July 2011, the IRS announced that it will eliminate the 2 year time limit.

Specifically, 

1) The IRS will no longer apply the two-year limit to new equitable relief requests or requests currently being considered by the agency.

2) A taxpayer whose equitable relief request was previously denied solely due to the two-year limit may reapply using IRS Form 8857,  Request for Innocent Spouse Relief, if the collection statute of limitations for the tax years involved has not expired.  Taxpayers with cases currently in suspense will be automatically afforded the new rule and should not reapply.

3) The IRS will not apply the two-year limit in any pending litigation involving equitable relief, and where litigation is final, the agency will suspend collection action under certain circumstances.

Employers are ultimately responsible for the payment of income tax withheld, and both the employer and employee portions of Social Security and Medicare taxes, even if they outsource their payroll responsibilities to a third party.  Outsourcing payroll to a third party can help ensure that filing deadlines and deposit requirements are met and greatly streamline business operations.  However, it's the employer's ultimate responsibility to pay these taxes, even if the failure to pay is entirely due to the payroll service provider's negligence or fraud.

Best Business Practices:

1) DO NOT change the address on file with the IRS to that of the payroll service provider so the IRS will contact the employer.  Changing the address may significantly limit the employer's ability to be timely informed of tax matters involving its business.

2) DO ensure the payroll service provider is using the Electronic Federal Tax Payment System (EFTPS), which maintains a business's payment history for 16 months and can be viewed on-line, allowing the employer to confirm payments electronically.  Employers should register on the EFTPS system to get their own PIN and use this PIN to periodically verify payments.  A red flag should go up the first time a payroll service provider misses or makes a late payment.  Employers with an EFTPS account will also be able to make additional tax payments that their payroll service provider isn't making on their behalf (e.g., estimated tax payments).

The IRS cautions that there have been instances of individuals and companies acting under the guise of payroll service providers who have stolen funds intended for payment of employment taxes.

October 1:  

Businesses: Deadline for establishing a new SIMPLE retirement plan 

October 17:  

Individuals: 2010 Form 1040 due if on extension

November 1:  

Employers: File Form 941 for 3rd quarter 2011 

During November:  

Employers: Request  Form W-4s from employees whose withholding allowances will be different in 2012 

Employers: Request Form W-5 from each eligible employee who wants to receive advance payments of the Earned Income Credit during 2012 

December 15:  

Calendar-year C Corporations: 4th installment of 2011 estimated tax due 

IRS Announces New Voluntary Worker Classification Settlement Program; Past Payroll Tax Relief Provided to Employers Who Reclassify Their Workers

One of the advantages of operating your own business is hiring family members. However, the employment tax requirements for family employees may vary from those that apply to other employees.

How spouses earn Social Security benefits

A spouse is considered an employee if there is an employer/employee type of relationship, i.e., the first spouse substantially controls the business in terms of management decisions and the second spouse is under the direction and control of the first spouse.  If such a relationship exists, then the second spouse is an employee subject to income tax and FICA (Social Security and Medicare) withholding.  

However, if the second spouse has an equal say in the affairs of the business, provides substantially equal services to the business, and contributes capital to the business, then a partnership type of relationship exists and the business's income should be reported on Form 1065, U.S. Return of Partnership Income.

Both  spouses carrying on the business

Generally a qualified joint venture whose only members are a husband and wife filing a joint return are not treated as a partnership for Federal tax purposes.  A qualified joint venture is a joint venture involving the conduct of a trade or business, if (1) the only members of the joint venture are a husband and wife, (2) both spouses materially participate in the trade or business, and (3) both spouses elect to have the provision apply.  Under the provision, all items of income, gain, loss, deduction and credit are divided between the spouses in accordance with their respective interests in the venture.  Each spouse takes into account his or her respective share of these items as a sole proprietor, each filing a Schedule C.  

For purposes of determining net earnings from self-employment, each spouse’s share of income or loss from a qualified joint venture is reported on Form SE.   This generally does not  increase the total tax on the return, but it does give each spouse credit for social security earnings on which retirement benefits are based.

One spouse employed by another

If your spouse is your employee, not your partner, you must pay Social Security and Medicare taxes for him or her.  The wages for the services of an individual who works for his or her spouse in a trade or business are subject to income tax withholding and Social Security and Medicare taxes, but not to FUTA tax.

A Savings Incentive Match Plan for Employees (SIMPLE plan) is a written arrangement that provides your small  business and its employees with a simplified way to make contributions to retirement.  Under a SIMPLE plan, employees can choose to defer as much as $11,500 (for 2011) to the plan rather than receiving these amounts as a part of their regular pay, and there generally is a mandatory employer contribution as well.  Plan assets grow tax deferred until withdrawal and participants have complete direction over their own retirement assets held in their account.

New SIMPLE plans must be set up prior to October 1st

This requirement does not apply if you are a new employer that comes into existence after October 1 of the year the plan is set up and you set up a SIMPLE plan as soon as administratively feasible after you come into existence.

Calendar-Year Corporate returns and Partnership returns (Federal Forms 1120, 1120S, and 1065) are due September 15th!  This is the final deadline to file returns for both corporations and partnerships, as no additional extensions are available.  Late returns will be subject to the following penalties:

C-Corp (Form 1120)  - Minimum penalty for late filing if a return is more than 60 days late is lesser of $135 or 100% of the amount of tax required to be shown on the return.  If tax is due, the late filing penalty assessed is 5% of the unpaid balance per month or part of a month with a maximum of 25% plus interest.  However, the above penalties will not be imposed if the corporation can show the failure was due to reasonable cause and not willful neglect.

S-Corp (Form 1120S) – The penalty for failure to file a return is $195 per month per shareholder up to 12 months and is assessed against the corporation. In addition, if tax is due, a late filing penalty may be imposed similar to the C-Corp, 5% of tax owner per month up to 25%, as well as the minimum penalty of the lesser of $135 or amount of unpaid tax if the return is more than 60 days late.  As with C-Corps, the penalties for failure to file an 1120S will not be imposed if reasonable cause is established.

Partnership (Form 1065) – The penalty for failure to file is $195 per month per partner up to 12 months and is assessed against the partnership. The penalty will be abated if the partnership can show reasonable cause, but please note it is much more difficult for a partnership to qualify for the reasonable cause exception.

The IRS will make streamlined Installment Agreements available.  Small businesses with $25,000 or less in unpaid tax can now participate.  Previously, only those with  $10,000 in liabilities could participate.  Small businesses will have 24 months to pay.

Small businesses that file either as an individual or as a business will need to enroll in a Direct Debit Installment Agreement.  Small businesses with an unpaid assessment balance greater than $25,000 would qualify for the streamlined Installment Agreement if they pay down the balance to $25,000 or less.

Offers in Compromise

The IRS is also expanding a new streamlined  Offer in Compromise (OIC) program to cover a larger group of struggling taxpayers.

This streamlined  OIC will allow  taxpayers with annual incomes of up to  $100,000 to  participate.  In addition, participants must have a tax liability of less than $50,000, doubling the current limit of $25,000 or less.

OICs are subject to acceptance based on legal requirements.  An offer-in-compromise is an agreement between a taxpayer and the IRS that settles the taxpayer’s tax liabilities for less than the full amount owed.  Generally, an offer will not be accepted if the IRS believes that the liability can be paid in full as a lump sum or through a  payment agreement.  The IRS looks at the taxpayer’s income and assets to make a determination regarding the taxpayer’s ability to pay.

Over-analyzing a situation can be as bad as not giving it enough thought.  Most decisions are made on some sort of deadline.  Even very smart individuals examine the data to the point that coming to a conclusion is put off for too long.  It is easy to continue to research in order to make sure a decision is absolutely correct.

Sometimes, the best course of action may be to just make a decision based on the information you have and hope for the best.  You may not always be right, but delaying some decisions could result in lost opportunities.  Don't get caught over-thinking a decision when swift action is what is needed.

Estimated tax is a method used to pay tax on income that is not subject to withholding.  You may need to pay estimated taxes during the year depending on your sources of income.  For example, income from self-employment, interest, dividends, alimony, rent, gains from the sales of assets, prizes or awards, may require you pay estimated tax. For Sole Proprietors, Partners and S Corporation shareholders, you generally have to make estimated tax payments if you expect to owe $1,000 or more in tax when you file your return.

As a general rule, you must pay estimated taxes in 2011 if both of these statements apply:

You expect to owe at least $1,000 in tax after subtracting your tax withholding (if you have any) and credits,

and

You expect your withholding and credits to be less than the smaller of 90% of your 2011 taxes or 100% of the tax on your 2010 return.

To figure your estimated tax, include your expected gross income, taxable income, taxes, deductions and credits for the year on the worksheet for Form 1040ES, Estimated Tax for Individuals.  The year is divided into four payment periods, or due dates, for estimated tax purposes.  Those dates generally are April 15, June 15, Sept. 15 and Jan. 15.

The easiest way to pay estimated taxes is electronically through the EFTPS.  However, you can also pay estimated taxes by check or money order.