The Branson’s 2010 federal income tax filing had been extended and, in October of 2011, they attempted to file their tax return electronically. They were expecting an $80,000 refund. Even so, they were surprised but not alarmed when their electronic filing was rejected. They assumed it was a small glitch in the transmission when the IRS claimed that a tax (continue reading...)

]]> True story, fictitious names: Jan and Michael Branson are an affluent couple, living in Florida and nearing retirement. They’re also clients.

The Branson’s 2010 federal income tax filing had been extended and, in October of 2011, they attempted to file their tax return electronically. They were expecting an $80,000 refund. Even so, they were surprised but not alarmed when their electronic filing was rejected. They assumed it was a small glitch in the transmission when the IRS claimed that a tax return for Michael had already been filed.

Michael sent the IRS a paper copy of the couple’s joint tax return in late October and felt the problem was resolved. Then, in December, the Bransons received another IRS notice. This one claimed that Jan hadn’t filed a tax return for 2010. Just another IRS error? Or an indication of a more serious problem?

Unfortunately for the Bransons, they were victims of identity theft. A thief, using Michael’s name and social security number, filed a fictitious tax return with a much smaller refund due and then absconded with the money. The Bronson’s $80,000 refund is still in limbo.

This type of identity theft—filing fraudulent tax returns in order to claim income tax refunds from the IRS—is increasingly prevalent.

According to IRS Deputy Commissioner Steve Miller, last year the agency stopped “more than 260,000 fraudulent tax returns involving confirmed cases of identity theft, preventing an estimated $1.4 billion in refunds from reaching suspected criminals.” This is a dramatic increase from the previous year, when the numbers were just under 50,000 fraudulent returns representing $250 million in refunds.

In 2012, the IRS has been even more aggressive in pursuing fraud and identity theft cases, recently announcing the results of a massive national effort to crack down on suspected identity theft perpertrators as part of a stepped-up effort against refund fraud and other identity theft. “This unprecedented effort against identity theft sends a strong, unmistakable message to anyone considering participating in a refund fraud scheme this tax season,” said IRS Commissioner Doug Shulman. “We are aggressively pursuing cases across the nation with the Justice Department, and people will be going to jail.”

Although the IRS has added a number of unique identity theft indicators and filters to help address such cases, there’s no simple solution to the problem. All a thief needs is your name and social security number to file a fraudulent tax return. Some also generate a false W-2 or 1099 to ensure the IRS can match at least a portion of the income that supports the refund claim.

Typically, the false claims for refunds are for fairly small amounts, as the thief usually isn’t privy to the victim’s financial circumstances and large refunds might draw attention. In the case of Jan and Michael Branson’s problem, however, the fact that the refund claim was less than $10,000 drew the IRS’ attention. The couple had made an estimated payment of well over $100,000 just a few months before and it wasn’t reflected on the fraudulent return.

So what can you do?

The single most important thing you can do to protect yourself from this type of fraud is to protect your social security number. A thief can’t file a fraudulent return in your name without it.

Unfortunately, even if you are careful, there are other ways an unscrupulous person can obtain your social security. Many of the numbers used to file fraudulent tax returns were stolen from businesses that had the numbers on file for legitimate business purposes, such as banks and hospitals.

Significantly, thieves must have filed their tax returns with the IRS before the real returns are filed in order for the scheme to work. Filing your tax return as soon as is reasonably possible may help to reduce the likelihood you’ll be scammed. If your return is processed first, the thief’s return will be the one flagged as a duplicate.

Finally, if you receive a notice from the IRS that you weren’t expecting and don’t understand—particularly anything that indicates you’ve already filed a return when you know you haven’t—contact your Bader Martin tax advisor immediately. We can help you communicate with the IRS to resolve the matter.

The IRS has already collected a total of more than $4.4 billion as a result of two previous offshore voluntary disclosure programs—one in 2009 and a second in 2011. Last month, the IRS reopened the program for persons with undisclosed offshore bank and financial accounts.

If you still have foreign accounts that you haven’t disclosed on your federal tax filings, you have a new opportunity to become current with the IRS. As (continue reading...)

]]> Voluntary disclosure programs work, for the IRS and for U.S. taxpayers.

The IRS has already collected a total of more than $4.4 billion as a result of two previous offshore voluntary disclosure programs—one in 2009 and a second in 2011. Last month, the IRS reopened the program for persons with undisclosed offshore bank and financial accounts.

If you still have foreign accounts that you haven’t disclosed on your federal tax filings, you have a new opportunity to become current with the IRS. As with previous voluntary disclosure programs, you can avoid criminal prosecution and certain penalties by filing new and amended tax returns that include the foreign accounts, and paying all taxes and related penalties and interest.

According to IRS Commissioner Doug Shulman, “Our focus on offshore tax evasion continues to produce strong, substantial results for the nation’s taxpayers. We have billions of dollars in hand from our previous efforts, and we have more people wanting to come in and get right with the government. …As we’ve said all along, people need to come in and get right with us before we find you. We are following more leads and the risk for people who do not come in continues to increase.”

Although the 2012 program mirrors the now-closed 2011 offshore voluntary disclosure program in many ways, there are two important differences, as described below.

  There is no predetermined end date or deadline for the 2012 program, although the IRS can terminate it at any time.

  The program’s miscellaneous penalty—generally equal to 25 percent of the highest aggregate balance under the 2011 program—has been raised to 27.5 percent. However, the new program retains the 2011 program’s 5 percent and 12.5 percent penalties applicable for smaller accounts and in other limited circumstances. The IRS can raise these penalty percentages or change the penalty structure at any time.

For a description of the major provisions of the offshore voluntary disclosure program and the process to become compliant, refer to our previous post on the 2011 program, Own an Offshore Bank Account or Other Financial Account?  

If you think you may have undisclosed financial accounts, it’s critical that you give us a call to discuss your situation—including any possible state tax consequences—as soon as possible. The potential civil and criminal consequences of failing to report offshore accounts are severe and the time to qualify for the offshore voluntary disclosure initiative may be limited.

International tax evasion: In this time of economic crisis for many countries around the world, anti-fraud measures at the individual and corporate level are a major focus for governments and their taxing and regulatory authorities.

Recently, the U.S. government has launched major initiatives to disclose unreported income from foreign assets, which has been estimated to cost the federal Treasury between $40 billion and $70 billion in individual income taxes alone.

If you have a financial interest in, or signature authority over, a (continue reading...)

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International tax evasion: In this time of economic crisis for many countries around the world, anti-fraud measures at the individual and corporate level are a major focus for governments and their taxing and regulatory authorities.

Recently, the U.S. government has launched major initiatives to disclose unreported income from foreign assets, which has been estimated to cost the federal Treasury between $40 billion and $70 billion in individual income taxes alone.

If you have a financial interest in, or signature authority over, a foreign bank or other financial account, you may already be filing Form TD F 90-22.1 Report of Foreign Bank and Financial Accounts — commonly referred to as FBAR. The FBAR filing deadline is in June. (For more information on the FBAR reporting requirement, check out our previous post, Subject to FBAR Reporting? Final Regulations Change the Rules for June 2011 Filings.)

Now, under new and different rules (issued as temporary regulations by the IRS on December 16, 2011) you may also be required to report certain of your foreign financial assets on a new Form 8938 as part of your federal income tax return. Although the regulations were issued last month, the new rules apply to the 2011 tax year and the penalties for failing to file Form 8938 can be quite substantial.

If you owned specified foreign financial assets during 2011 and the aggregate value exceeded certain minimum threshold amounts, this new reporting requirement applies to your 2011 tax return. It does not, however, replace the existing FBAR filing requirement. Depending on the circumstances, you may be required to file both forms.

Who Must Report Foreign Financial Assets on Form 8938?
If you are a person with an interest in reportable foreign financial assets—and you are a  U.S. citizen, a resident alien, or a certain type of nonresident alien—you are potentially subject to the new regulations. That said, if you’re not required to file an income tax return for the year, you’re not required to file Form 8938.

Currently, domestic entities are not required to file Form 8983. However, under proposed regulations certain domestic entities formed to hold financial assets may be subject to the filing requirements for tax years beginning after December 31, 2011.

What Are the Reporting Thresholds?
To reduce the filing burden on individuals with small foreign holdings, the regulations establish minimum thresholds below which you aren’t required to file Form 8938. These minimum thresholds are as follows:

If you are living in the U.S. and file your federal income tax return as either single or married filing separately, the total value of your foreign financial assets must exceed $50,000 on the last day of the tax year or have exceeded $75,000 at any time during the tax year. If you’re married and file a joint tax return, the threshold amounts are $100,000 and $150,000, respectively.

The thresholds are somewhat higher if you’re living abroad, although to qualify you must either be a U.S. citizen with a tax home in a foreign country or a U.S. citizen who was physically outside of the U.S. for at least 330 days during the tax year. Under these circumstances, your foreign financial assets must exceed $200,000 on the last day of the tax year or have exceeded $300,000 at any time during the tax year—$400,000 and $600,000 if you’re married and filing a joint return.

Which Foreign Financial Assets Must Be Reported?
The new tax rules for reporting foreign assets on Form 8938 apply only to specified foreign financial assets. These assets generally include the following:

  foreign accounts maintained by a foreign financial institution

  other foreign financial assets that are not in accounts maintained by a foreign financial institution: stock or securities that aren’t issued by a U.S. person, an interest in a foreign entity, and a foreign contract or other financial instrument with an issuer or counterparty that is not a U.S. person

  an interest in a foreign estate or trust, assuming you know or have reason to know of your interest based on readily available information or a past distribution

You do not have to report foreign accounts maintained by a U.S. financial institution or other domestic payer, the U.S. branch of a foreign financial institution, or the foreign branch of a U.S. financial institution.

For those assets that are reportable on Form 8938, it’s important to recognize that you’ll need to provide more detailed information than is required for FBAR reporting purposes—including such things as the names of stocks and the amounts of foreign currencies. You’ll also need to indicate where the income from these assets is reported on the tax return.

Potential Penalties
If you to fail to file Form 8938 as required, you’re subject to a penalty of $10,000. If you still haven’t filed after receiving a notification from the IRS, the penalty increases up to a maximum of $50,000.

You may also be subject to an underpayment penalty equal to 40 percent of any underpaid tax and an extended statute of limitations.

If you have questions about these new filing requirements or believe you may be required to file Form 8938 this year, give us a call. Because the tax rules and forms are new and complex, and because key definitions and reporting requirements differ for Form 8938 and FBAR purposes, it’s critically important to deliver the information necessary to prepare your taxes early this year.

The Tax Relief Act of 2010 restored the federal estate tax for 2010 with a maximum tax rate of 35 percent and a per-person exemption of $5 million. It also provided an option: Estates of persons who died in 2010 could elect an estate tax rate of zero, along with a carryover basis for the assets rather than a stepped-up basis.

To (continue reading...)

]]> As a result of federal legislation passed in 2001, the estate tax was initially repealed for persons dying in 2010.

The Tax Relief Act of 2010 restored the federal estate tax for 2010 with a maximum tax rate of 35 percent and a per-person exemption of $5 million. It also provided an option: Estates of persons who died in 2010 could elect an estate tax rate of zero, along with a carryover basis for the assets rather than a stepped-up basis.

To make the election, the estate must file IRS Form 8939. The filing deadline is January 17, 2012.

If you are the executor or family member of a person who died in 2010 with a sizeable estate — and you have not already made or ruled out this election — contact your advisor at Bader Martin immediately to discuss your options.

With today’s historically low interest rates, refinancing a mortgage makes financial sense for many homeowners. To know if it’s the best possible choice for you, it’s important to base your decision on more that just a lower monthly payment. 

Making the Decision to RefinanceYou’ve probably heard it said that refinancing doesn’t make financial (continue reading...)

]]> Neither a borrower nor a lender be, advised William Shakespeare—and in these volatile times it’s tempting to follow his advice. But even in this economy, borrowing can be the best financial strategy.

With today’s historically low interest rates, refinancing a mortgage makes financial sense for many homeowners. To know if it’s the best possible choice for you, it’s important to base your decision on more that just a lower monthly payment. 

Making the Decision to Refinance
You’ve probably heard it said that refinancing doesn’t make financial sense unless the new interest rate is at least one percentage point lower than your current rate—and some say two percentage points.

The truth is, to know for sure you need to do the math, factoring in more than just the drop in interest rate. Additional factors to consider include the following:

  The Amount You Intend to Borrow
The maximum loan amount for government-backed mortgages from FHA, Fannie Mae and Freddie Mac was reduced from $729,750 to $625,500 as of October 1, 2011. If you intended to refinance a government-backed loan of more than $625,500, you’ll now need to find a private lender and likely pay a somewhat higher interest rate.
 
The alternative is a cash-in mortgage where you pay down the existing principal balance to reduce the amount you are refinancing. 

  Your Equity in the Home
Lenders prefer that you have at least 20 percent equity in your home, even in this period of rapidly declining home values. If you have less than 20 percent equity—in other words, your current mortgage represents more than 80 percent of the home’s value—you’ll generally be required to purchase private mortgage insurance (PMI). PMI protects the lender against default, but will add to the monthly cost of your new mortgage. You may also have to pay a slightly higher interest rate.

Traditional lenders won’t refinance your home if the amount you still owe on your existing mortgage exceeds your home’s market value. However, because it’s estimated that more than 20 percent of homeowners are currently under water on their mortgages, the federal government has developed programs to assist qualified homeowners in this situation as part of its Making Home Affordable (MHA) program. 

  Your Credit Rating (FICO Score)
To get the best interest rate for your refinance, you’ll need an excellent credit rating. Lenders use your FICO score, which ranges between 300 and 850, to determine your credit-worthiness. Generally, to qualify for the lowest interest rates, you’ll need a FICO score in the range of 780.  

If your FICO score is too low to qualify for the best rates, there are things you can do to increase it over time. They including checking your credit reports (Experian, TransUnion  and Equifax) for inaccuracies and requesting corrections where appropriate; paying down or off your existing credit card and other debt; increasing available credit limits; and making sure that you pay all of your bills on time. On the other hand, closing existing accounts can tend to decrease your FICO score, as can applying for new credit accounts.

  The Length of Your Loan
The length of your loan has a major impact on its monthly and overall cost, and shorter loan terms generally offer the lowest interest costs in this economy.

Thirty-year fixed-rate mortgages, while among the most common, typically have the highest interest rates. They provide a lower monthly cost as they’re amortized over the longest period, but you’ll pay more in interest over the life of the loan since you’re carrying it for thirty years. Some also choose this longer term loan as they’d prefer to have less money invested in their homes and use the funds for investments that they believe will yield more in income or capital gains over the long term than the interest they’re charged on the mortgage.

Fifteen and twenty-year fixed-rate mortgages are increasingly popular for homeowners who can afford a somewhat higher monthly payment and want to pay off their mortgages faster—perhaps because of a planned retirement or other change in circumstances. These mortgages generally offer a somewhat lower interest rate and a smaller total interest cost. 

Adjustable-rate mortgages, or ARMs, currently provide the lowest interest rates but they also generate the most risk as the amount you’ll be required to pay after the initial term is uncertain. They’re useful in situations where you know without a doubt that you’ll be moving out of your home before the initial term expires. 

Some loans offer a bi-weekly or other unconventional payment schedule, which is generally the equivalent of making 13 monthly loan payments each year. This approach pays the mortgage off faster, but you should examine the terms carefully. Often you’ll find that your loan is actually being amortized on a monthly basis. A number of the payments you make are simply held as an administrative convenience to ensure you make the extra payment(s) each year—they’re not immediately applied against your mortgage. In other words, you lose access to your money without receiving an immediate reduction in the loan balance and related interest charges. A better alternative may be to simply make higher-than-required payments at your option during the year, with the additional amount applied against principal.

  Closing Costs and Loan Origination Fees
When you refinance your mortgage, you’ll be charged many of the same closing costs that you paid to secure the original mortgage, generally including an appraisal, mortgage broker fees, underwriting, application and administrative fees, title fees, settlement fees and document fees. You may also pay loan origination fees, more commonly referred to as points. It’s important to realize that many of these closing costs are negotiable.

Because closing costs reduce the financial benefit of refinancing, it’s important to know the breakeven point—the point at which your monthly cost savings exactly offsets the closing costs. For example, if refinancing saves you $300 each month and your closing costs are $12,000, it will be roughly 40 months before you recover your closing costs for the refinance. If you sell your home before that time, your refinance cost will exceed the benefit you receive.

Although some lenders offer no-cost refinance options, they may recoup those fees with slightly higher interest rates. Others offer to roll the closing costs into the mortgage, increasing the balance and thus the interest you’ll pay over the life of the mortgage.

  Prepayment Penalties
Although not common, there are mortgages that still charge a penalty if you choose to prepay, or even pay off the entire balance of the mortgage. Such penalties can increase the cost of your refinance.

  Tax Benefits
You can generally deduct the mortgage interest you pay for mortgages taken out on your primary residence and one other qualified residence. You can also deduct any points that you pay, either in the first year or amortized over a longer period. For newer mortgages, you can even deduct the cost of your mortgage insurance premium. Such tax deductions effectively reduce your borrowing costs for the mortgage.

The actual amount of mortgage interest you can deduct for a qualified home may be limited based on several factors:  the amount of the mortgage and the date you acquired it, as well as your reason for taking it out.

In general, interest on mortgages taken out on or before October 13, 1987 is fully deductible.

If you took out a mortgage after that date to buy, build or substantially improve a home, it’s considered home acquisition debt and the interest is deductible on the debt up to $1,000,000 ($500,000 if married and filing separately). When you refinance such a mortgage, it remains home acquisition debt—but only up to the amount of the mortgage immediately before it was refinanced.

If you took out a mortgage after October 13, 1987 for any purpose other than buying, building or substantially improving the home, it’s considered home equity debt and the interest is deductible on the debt up to $100,000 ($50,000 if married and filing separately). It is also generally limited to the fair market value of your home, less other existing mortgages. 

  Investment Opportunities
A mortgage is, above all else, a long-term loan, so the amount you could earn by investing the borrowed funds elsewhere can also impact your decision-making. If you believe you can earn more over the long term by investing your money—for example, earning five percent on investments while paying four percent for the mortgage—you may prefer a longer-term mortgage. If you believe you will earn less, you may prefer a shorter term or even a cash-in refinance, where you reduce the mortgage balance as part of the refinance.

Determining the true after-tax cost of carrying a mortgage, including all of the considerations mentioned above, can be a complicated analysis. We can help you run the numbers to see if refinancing is really the best financial decision for you.

Tips for Selecting and Securing the Best Loan Product
As with any major financial transaction, begin with a goal or strategy in mind. Are you considering refinancing to reduce your monthly payment? Perhaps you want a shorter term to be able to pay off the loan before you retire—or, alternatively, extend the term of the mortgage to provide a low-interest loan and free up funds for more lucrative investments. Or maybe you simply want to move from an adjustable-rate to a fixed-rate loan.

  Prepare Your Supporting Documents
Mortgage rates fluctuate. You can ensure that you’re prepared to take advantage of what may be a very short-term opportunity by having the necessary financial records assembled for your lender or mortgage broker. In most cases, you lock in your rate for between 30 and 45 days. If it takes longer to provide requested documents, you may wind up paying a higher interest rate.

Although there’s been much discussion of tightening mortgage requirements, in many cases the underlying requirements haven’t actually changed—but the amount of documentation necessary to prove you meet those requirements has increased.

The document requirements vary from time to time and lender to lender. Generally, you’ll need to provide supporting documents in the following categories:

  Income If you’re employed, you’ll need the name, period of employment, monthly income and contact information for your most recent employer(s). You’ll also need W-2s and two recent pay stubs, and tax returns for the past two years. 

If you’re self-employed, you’ll need signed copies of your federal income tax returns for the last few years, as well as your business license and a year-to-date income statement.

Finally, if you’ve asked your lender to consider other income—overtime or bonus income, social security, investment or pension income, or child support, for example—you’ll need canceled checks, bank or brokerage statements, tax returns, or other similar documents as verification. You may also need court records to document the child support you’re entitled to receive.

  Assets and Investments Assemble all supporting documents for major assets and investments, including two months of statements for mutual funds, brokerage accounts and bank accounts. 

  Creditors Prepare a list of all of the money you owe—including the balance and required minimum payments—for your credit cards and consumer debt, car loans, student loans and any other indebtedness. Also include any child support payments you’re required to make. 

  Compare Quotes from a Number of Lenders
To get the best interest rate and other terms for your refinance, it’s important to shop around.

According to a recent study reported by the Harvard Business Review, women’s mortgage rates are, on average, 40 basis points higher than men’s rates. The disparity can’t be explained by differences in market conditions, loan products or borrower characteristics. Instead, researchers found that while men tended to shop for lower-rate mortgages, women relied on personal recommendations without considering other options.

If you don’t have the time to request and compare quotes from a number of lenders yourself, consider using a mortgage broker or other service that will do so on your behalf. 

   Review Your Loan Documents in Advance
As many homeowners have found to their detriment in recent years, you shouldn’t agree to anything you don’t fully understand.

That means you should never sign any legal document, financial or otherwise, without reading it through yourself, thoroughly. If there are aspects that you find confusing, ask your loan officer for an explanation. If you’re still concerned, speak with us, your attorney and/or another knowledgeable person that you trust to act in your best interests.

It’s hard to gain a thorough understanding of a long legal document during the typical brief appointment to sign the final loan documents. Ask for copies of the documents in advance, so you can review them carefully at your home or office and then discuss them with your advisors.

If you have questions about the financial or tax implications of refinancing your home—or would like to see and discuss comparative amortization schedules for different loan products—give us a call.

Join us in celebrating our anniversary at our annual open house on Thursday, November 17 between 4:00 p.m. and 7:00 p.m.

An RSVP for the open house is required. Please phone Megan at 206.621.1900 or email us at rsvp@badermartin.com.

Validated parking will be available in both of the parking garages in our building. You can enter from either Spring or Madison, between Second and Third Avenues.

Click here for driving and transit directions.

Recently, the IRS published the federal tax amounts for the coming calendar year. Unlike last year, many of the inflation-adjusted tax amounts have been adjusted upward.

As taxes impact most of your business and financial decisions―and many of your personal ones―planning for them is crucial to your tax and transaction planning for the coming year.

The following guide includes many of the most important tax amounts for 2012 and compares them to the (continue reading...)

]]> Change is in again, at least when it comes to the federal tax code. 

Recently, the IRS published the federal tax amounts for the coming calendar year. Unlike last year, many of the inflation-adjusted tax amounts have been adjusted upward.

As taxes impact most of your business and financial decisions―and many of your personal ones―planning for them is crucial to your tax and transaction planning for the coming year.

The following guide includes many of the most important tax amounts for 2012 and compares them to the amounts applicable for 2011.

Quick Reference Guide for 2012 Federal Income Taxes

That makes the next few months a great time to replace doors or windows in your home, add insulation, or even install a new furnace or a heat pump. It’s an even better idea when you consider that a federal income tax credit designed to foster such energy-efficient home (continue reading...)

]]> We’re in for a cold, stormy winter in the Pacific Northwest according to the National Oceanic and Atmospheric Administration (NOAA) Climate Prediction Center, as well as a variety of other long-term forecasts.

That makes the next few months a great time to replace doors or windows in your home, add insulation, or even install a new furnace or a heat pump. It’s an even better idea when you consider that a federal income tax credit designed to foster such energy-efficient home improvements—the nonbusiness energy property tax credit—expires December 31, 2011, concluding a one-year extension passed as part of the Tax Relief Act of 2010.

This tax credit is available to individual taxpayers, not businesses. It is equal to 10 percent of the cost of qualified energy efficiency improvements installed during the year—plus the amount of residential energy property expenditures paid or incurred during the year, subject to certain limitations.

Qualified energy efficiency improvements are enhancements to building envelope components, including certain metal roofs, exterior windows and doors, storm windows, skylights and insulation. They must have an expected life of at least five years. With the exception of windows, doors and skylights, qualifying costs include labor.

Qualified residential energy property includes certain furnaces, circulation fans and water heaters.

Generally, the improvements must meet certain performance and safety standards, such as ENERGY STAR qualification, IECC requirements, or minimal expected life or warranty period, among others. Some improvements may also require a manufacturer’s certification.

These improvements must be made to your existing primary residence located in the United States—not a second home or vacation home—and the original use of the improvements must commence with you.

The tax credit is limited to a maximum aggregate credit of $500 for all qualifying improvements that you placed in service after 2005. If you’ve already claimed credits of $500 or more between 2006 and 2010, you cannot claim a credit in 2011.

No more than $200 of the credit can be attributable to windows. There are additional limits for such things as furnaces, hot water boilers, biomass-fueled heaters, air circulating fans and heat pumps.

There is no income limit to qualify and, if you’re subject to the alternative minimum tax (AMT), you can use the credit to offset your AMT.

If your business provides employees with cell phones for business use—or reimburses employees for the business use of their personal cell phones—you’ve been subject to tax rules and recordkeeping requirements mandated by the IRS. If you’re an employee, the value of the cell phone (continue reading...)

]]> Virtually unheard of just 30 years ago, cell phone use in the U.S. has exploded since the first 150-user trial in D.C. and Baltimore in 1981. Now, for most of us, it’s unimaginable to function without one.

If your business provides employees with cell phones for business use—or reimburses employees for the business use of their personal cell phones—you’ve been subject to tax rules and recordkeeping requirements mandated by the IRS. If you’re an employee, the value of the cell phone provided or reimbursed by your employer has potentially been taxable.

Now the IRS has issued Notice 2011-72 and many of the rules have changed.

Background
The federal tax laws governing employer-provided cell phones—as well as reimbursement for employee-owned cell phones—changed as a result of the Small Business Jobs Act of 2010. For tax years beginning after 2009, the Act removed cell phones from the category of listed property, which meant they were no longer subject to burdensome recordkeeping requirements in order to substantiate business use.

Unfortunately, the Act left many other questions regarding their tax treatment unanswered.

Last month, the IRS published Notice 2011-72 providing additional guidance for federal income tax purposes, retroactive to the beginning of 2010. 

New Guidance from the IRS
As a general rule, the value of a cell phone provided to an employee for noncompensatory business reasons is not considered taxable wages to the employee, but is deductible by the employer.

Business use of the phone is excluded from the employee’s income as a working condition fringe benefit and the documentation requirements that would otherwise apply are considered to have been met.

Any personal use is excluded as a de minimis fringe benefit, as long as certain conditions are met. The phone plan should be appropriate for the business purpose and the reimbursement can’t exceed actual expenses or substitute for a portion of the employee’s regular wages.

Noncompensatory business reasons are defined as substantial reasons that relate to the employer’s business. Examples provided by the IRS include situations where the employee must be reachable at all times for work-related emergencies, or to speak with clients while away from the office, or to speak with clients in other time zones outside of normal work hours.

Noncompensatory business reasons do not include situations where the cell phone is provided (or reimbursed) to enhance morale, increase compensation or attract potential employees. In these cases, employers are subject to detailed recordkeeping requirements and the value of the cell phone is generally considered to be taxable as compensation

This month,  Seattle joined Washington, D.C., San Francisco and the State of Connecticut in mandating paid sick leave. Similar legislation is proposed in California and Massachusetts, (continue reading...)

]]> As many as 200,000 people in Seattle work without paid sick leave. A controversial new ordinance addresses the concern of some that employees without sick leave can’t afford to stay home when they or their family members are ill, and therefore risk prolonging or intensifying their illnesses or spreading infectious diseases to those around them. 

This month,  Seattle joined Washington, D.C., San Francisco and the State of Connecticut in mandating paid sick leave. Similar legislation is proposed in California and Massachusetts, and Denver residents are voting on paid sick leave this November.

According to a new Seattle ordinance, “To safeguard the public welfare, health, safety, and prosperity of the city of Seattle, all persons working in our community should have access to adequate paid sick and safe leave, because doing so will ensure a more stable workforce in our community, thereby benefiting workers, their families, employers, and the community as a whole.”

This new mandate was not passed without opposition. Opponents generally expressed support for the principals involved, but disagreed with the details of the implementation. Nevertheless, this month the Seattle City Council passed the ordinance mandating  ”paid sick time and paid safety time” and it was subsequently signed by Seattle Mayor Mike McGinn. 

Although the new requirements don’t become effective until September 1, 2012, business may need the intervening period to review their own policies for compliance and, potentially, adapt their recordkeeping procedures or collective bargaining agreements. 

Sick Time and Safe Time Defined
The new ordinance defines paid sick time and safe time as accrued hours of leave for which the employee is compensated at the same hourly rate and with the same benefits, including health care benefits, as the employee would have earned during the time the paid leave was taken.

In general, this leave can be used by employees for preventive care or the diagnosis, care or treatment of a mental or physical illness—provided either to the employee or a member of the employee’s family. It can also be used to enable the employee or a family member to seek legal or law enforcement assistance or remedies for domestic violence, sexual assault or stalking.

The New Paid Sick/Safe Time Mandate
Business must meet minimum standards for paid sick/ safe time for their employees working in Seattle-including temporary and part-time employees. Employees who do not work exclusively in Seattle are considered to work in Seattle for the purpose of the new mandate if they perform “more than 240 hours of work in Seattle within a calendar year.”

New businesses—those in the first two years of operation—and small businesses with fewer than five employees are exempt from the new rules.

The provisions of the new mandate are established in three distinct tiers, based on the size of the employer. Size is determined by the number of full time equivalent employees (FTEs) and generally calculated based on an eight-hour day and a five-day work week. Importantly, the calculation to establish the employer’s tier includes all of the business’ employees, whether or not they work in Seattle.

The paid/sick time accrual begins with the employee’s first date of employment or the effective date of the ordinance, whichever is later. Employees can begin to use this accrued time after their first 180 days of employment.

Although the accrued leave carries over to the following year, under the minimum standards, employers aren’t required to allow employees to use more hours in any one year than that established by the annual cap. Employers are also not required to pay an employee for unused accrued leave at the end of the employee’s employment.

Exceptions
In addition to the new and small employers previously cited, there are exceptions to the mandate.

Generally, employers with PTO policies or other universal paid leave policies aren’t required to provide additional paid sick/safety leave as long as the provisions of their policies are generally consistent with the minimum requirements of the ordinance. 

Employees who are covered by collective bargaining agreements are generally not covered by this ordinance, as long as the ordinance’s provisions are specifically waived in the agreement—for example, when other benefits are negotiated instead of paid sick leave. Because collective bargaining agreements must specifically waive the new paid sick/safely leave mandates to be exempt from them, many agreements may need to be modified or rewritten before the September 1, 2012 effective date.

Recordkeeping and Notification Requirements
Employers are required to maintain historical records of the hours worked and paid leave taken by their employees for a two-year period.

Medical records and documents for employees that are created as a result of this mandate must remain confidential and be maintained separately from the employees’ personnel records.

Employers must notify their employees as to their rights under the new ordinance. They can comply by conspicuously and accessibly displaying a poster created for this purpose. Employers who fail to meet this requirement are subject to civil penalties of up to $250 per violation-$125 for the first violation. 

Penalties
Employers who willfully violate the provisions of the ordinance are subject to a civil fine or forfeiture of up to $500. The ordinance also establishes a process by which specific alleged violations can be investigated and resolved.

For More Information
You can view a copy of new ordinance on the Seattle City Council Bills and Ordinances page of seattle.gov. Just search for Council Bill 117216.