If you had a financial interest in a foreign bank or other financial account last year, or had signature authority over a foreign account owned by a domestic entity, you may need to file an FBAR with the Treasury Department.

FBARs must be filed with—and received by—the U.S. Department of the Treasury no later than June 30th of the following year.  In other words, your 2012 FBAR must be received by June 30, 2013. 

As (continue reading...)

]]> The deadline for FBAR filings is fast approaching.

If you had a financial interest in a foreign bank or other financial account last year, or had signature authority over a foreign account owned by a domestic entity, you may need to file an FBAR with the Treasury Department.

FBARs must be filed with—and received by—the U.S. Department of the Treasury no later than June 30th of the following year.  In other words, your 2012 FBAR must be received by June 30, 2013. 

As June 30 is a Sunday this year, ensure that your report arrives at the Treasury Department by Friday, June 28. There is no option to extend the FBAR filing date.

To learn more about the FBAR rules and filing requirements, check out our previous post Subject to FBAR Reporting for Foreign Financial Assets? Know the Federal Rules and Deadlines

Undisclosed foreign financial accounts cost the federal government billions of dollars in lost tax revenue—perhaps as much as $100 billion each year. So it’s not surprising that this type of international tax evasion is being aggressively pursued by the U.S. Department of the Treasury.

If you had a financial interest in a foreign bank or other financial account last year—or had signature authority over a foreign account owned by a domestic entity, such as a (continue reading...)

]]> Updated from original post published June 3, 2011

Undisclosed foreign financial accounts cost the federal government billions of dollars in lost tax revenue—perhaps as much as $100 billion each year. So it’s not surprising that this type of international tax evasion is being aggressively pursued by the U.S. Department of the Treasury.

If you had a financial interest in a foreign bank or other financial account last year—or had signature authority over a foreign account owned by a domestic entity, such as a corporation, partnership or trust—you may be subject to federal reporting requirements commonly referred to as FBAR. 

You may also have been be required to file Form 8938 as part of your federal income tax return if you owned specified foreign financial assets last year and the aggregate value exceeded certain minimum threshold amounts. But filing Form 8938 does not substitute for filing FBAR. Depending on the circumstances, you may be required to file both forms.

The Basic FBAR Reporting Requirements
To identify unreported income from foreign bank accounts and other financial accounts—and to track assets that may be used for illegal purposes—the Bank Secrecy Act of 1970 created reporting requirements for certain U.S. persons and their offshore accounts: Form TD F 90-22.1 Report of Foreign Bank and Financial Accounts, or FBAR.

Under the FBAR reporting rules, each U.S. person is subject to the reporting requirement if the person has a financial interest in, or signature or other authority over, one or more reportable foreign financial accounts–and the aggregate value of all these accounts exceeds $10,000 at any point during the year.

  U.S. Person
According to the FBAR regulations, all of the following are considered to be U.S. persons for reporting purposes:

- United States citizens

- residents of the United States 

-  domestic for-profit and not-for-profit entities, which include corporations and LLCs, partnerships, estates and trusts—even if they’re disregarded for federal tax purposes

Persons simply located in and doing business in the United States may also have been considered U.S. persons with regard to FBAR.

   Foreign Account
FBAR applies to foreign accounts that are maintained in a foreign bank or other financial institution—including checking, savings, demand deposit and time deposit accounts, as well as securities and brokerage accounts. It also applies to commodity and futures accounts, shares in mutual funds or similar pooled funds, and certain insurance policies and annuities. These accounts do not have to produce taxable income to be reportable. 

Generally, accounts maintained with financial institutions located in the U.S. are not subject to FBAR. This is true even if the accounts contain foreign assets, or the institution acts as a global custodian and holds the assets in a pooled account.

Hedge and private equity funds typically are not subject to FBAR. FBAR only applies to such funds if their shares are available to the general public and offer regular net asset value determinations and regular redemptions.  

Insurance policies and annuities must have a cash value to be considered foreign accounts subject to FBAR.

  Financial Interest
You have a financial interest in a foreign financial account if you are the owner of record or have legal title, whether the account is maintained for your benefit or for the benefit of others. You don’t have to be the only person in whose name the account is maintained to have a financial interest.  

Under certain circumstances, you may be considered to have a financial interest in an account even if you aren’t the owner of record and don’t have legal title. For example, the owner of record or title holder of the account may be a person acting on your behalf (such as an agent or an attorney), a corporation in which you hold a greater-than-fifty-percent interest in profits or capital, or a trust in which you have a  greater-than-fifty-percent interest in the assets or income. In such cases, your ownership or control over the owner of record or legal title holder may be sufficient to establish your financial interest in the account.  

If you’ve created an entity to avoid the FBAR reporting rules, you’re considered to have a financial interest in any foreign financial accounts for which the entity is the legal owner or title holder.

  Signature or Other Authority 
Signature authority refers to “the authority of an individual, (alone or in conjunction with another) to control the disposition of money, funds, or other assets held in a financial account by direct communication (whether in writing or otherwise) to the person with whom the financial account is maintained. You have other authority if you can exercise power that is comparable to that of signature authority. 

Only individuals can have signature or other authority over an account.  Entities cannot be considered to have such authority.

Exceptions to FBAR reporting requirements are provided for officers and employees of specified entities that are subject to federal regulation, and where the officer or employee has no financial interest in the account.

Company officers or employees who “merely participate in the decision to allocate assets or have the ability to instruct or supervise others with signature authority over a reportable account” are excluded from FBAR reporting requirements unless they can control the account through direct communication with the foreign financial institution. 

FBAR Forms and Instructions
For 2013, you can file your FBAR form on paper or submit it electronically. Beginning July 1, 2013, electronic filing is mandatory.

The paper version of the FBAR form and related instructions is available online from the IRS website. If you and your spouse own a joint account subject to FBAR reporting, you can file the form jointly. 

If you prefer electronic filings, you can file FBAR electronically from the website of the BSA (Bank Secrecy Act) E-Filing System. However, paid preparers cannot use this electronic filing option. They must use the paper version. 

Due Date for FBAR Reporting 
For any year during which you meet the reporting requirement, you must file your FBAR with the U.S. Department of the Treasury by June 30th of the following year. You do not file FBAR with your tax return. 

The FBAR due date is the date by which the Treasury Department must actually receive the form, not the final allowable postmark date. In other words, your 2012 FBAR must be received on or before June 30, 2013.  As this June 30 is a Sunday, ensure that your report arrives at the Treasury Department by Friday, June 28. 

There is no option to extend the FBAR filing date, however you can file an amended FBAR form.

Record Retention Requirements
Generally, you must maintain records for the accounts subject to FBAR reporting for five years from the due date of the FBAR form. However, you’re not required to personally maintain records for an account if you’re an officer or employee that is subject to FBAR as a result of your signature authority over the foreign financial accounts of your employer. 

Your records should include the name of the account owner(s), name or other designation of the account, type of account, the account’s maximum value during the reporting period, and the name and address of the foreign bank or other person with whom the account is maintained.

If you don’t keep adequate records, you may be subject to civil and criminal penalties.

FBAR Penalties
If you violate the FBAR filing requirements, whether or not the violation was intentional, you are subject to potentially severe civil and criminal penalties. Depending on the circumstances, you may be subject to both civil and criminal penalties for the same violation.

FBAR penalties depend on whether the violation was negligent, non-willful or willful. They are determined for each account, not for the sum of the accounts reported on the U.S. person’s FBAR form. They apply to each person with a financial interest or signature authority over the account, and they are applied for each year the account is considered to be in violation.

That said, it is important not to let concern over potential penalties deter you from filing a delinquent FBAR form.

FBAR Voluntary Disclosure Program
If you’ve been delinquent in filing the required FBARs, you can participate in an open-ended voluntary disclosure program that may allow you to limit or avoid certain penalties and criminal prosecution. This federal program, begun in 2012, is modeled after the popular 2009 and 2011 voluntary disclosure programs—although the penalties are now somewhat higher.

Generally, you can also attach a statement to your completed and fully disclosed FBAR form that explains why you are late in filing and, if the Treasury Department finds your explanation to be reasonable given your situation, it may choose to reduce or waive the associated penalty.

As an alternative to participating in the voluntary disclosure program, some taxpayers are also engaging in what has become known as quiet disclosure. They’re filing amended returns or first-time FBAR forms without actually disclosing prior delinquencies. The intent is to begin complying with the rules while avoiding penalties for past noncompliance. Recently, the Government Accountability Office (GAO) urged the IRS to identify and pursue such quiet disclosures, putting those engaging in such practices at higher risk for substantial penalties and perhaps even prison.

The FBAR reporting requirements, including numerous exceptions and special circumstances, are more complex than can be fully described here—and the penalties can be severe. If you have questions about recent changes to the rules or your potential exposure, give us a call.

But then the rationalization begins: It was only five dollars or If they would have given me the raise I deserved, I would have used my own money.

Days go by and nothing happens. The employee recognizes the opportunity, and the fraud continues or escalates.

Studies find this scenario fairly typical. Fraud generally (continue reading...)

]]> Most frauds begin small. Something as simple as an employee forgetting a wallet one day and taking cash out of the register to buy lunch—fully intending to pay it back.

But then the rationalization begins: It was only five dollars or If they would have given me the raise I deserved, I would have used my own money.

Days go by and nothing happens. The employee recognizes the opportunity, and the fraud continues or escalates.

Studies find this scenario fairly typical. Fraud generally requires a combination of three things: a need, an opportunity and a rationalization.

Unfortunately, uncovering such fraud takes effort. Often a great deal of effort. There are entire systems of internal accounting controls designed to prevent it or detect it on a timely basis. And once the fraud is discovered there’s often a significant disruption to the business, including dealing with the fraudster, police, insurance, possible regulatory authorities, and other employees.

By the way, while independent auditors are required to design financial statement audits to detect fraud, it is the responsibility of company management to design and implement the systems and controls that can prevent it.

Because of the effort and expense required to uncover and address fraud, it just makes sense to try to prevent it. It’s difficult to remove the need or rationalization elements, so fraud-prevention efforts generally focus on removing the opportunity, as described in a recent blog post The Best Way to Avoid Fraud is to Remove the Opportunity.

More than a third of Seattle-area homes—including single-family, condos and townhouses—sell in the first week. If you extend the time period to two weeks, the percentage increases to nearly 50 percent. That makes Seattle number ten on Redfin’s April 2013 list of hot residential real estate markets.  

Perhaps even more significant, the average selling price for single-family homes in Seattle has increased by (continue reading...)

]]> The market is red hot. In fact, Seattle’s housing market currently ranks among the fastest-moving in the nation.

More than a third of Seattle-area homes—including single-family, condos and townhouses—sell in the first week. If you extend the time period to two weeks, the percentage increases to nearly 50 percent. That makes Seattle number ten on Redfin’s April 2013 list of hot residential real estate markets.  

Perhaps even more significant, the average selling price for single-family homes in Seattle has increased by 24.9 percent over the previous year, also according to Redfin. This increase in price, combined with low interest rates and a relatively low number of homes for sale, makes Seattle something of a seller’s market.

And that makes people consider selling.

If you’re one of them, a basic understanding of the federal tax consequences can help you determine the economics of selling your home.

Unfortunately, there are many misconceptions about the tax rules for the sale of a home—likely because the rules have changed significantly over the years. For example, you don’t have to be 55 to exclude gain from the sale for tax purposes, the exclusion is not a one-time tax benefit, and you don’t have to reinvest the proceeds in a new home in order to qualify.  

So, what are the current rules? How do you calculate the gain or loss resulting from the sale of your home? And how is it treated for federal tax purposes?

Calculating Your Gain or Loss for Federal Tax Purposes
Your gain or loss on the sale of your home is equal to the amount you realize (selling price less selling expenses) less your basis in the home. If the result is positive, you have a gain. If it’s negative, you have a loss.

  Selling price  Your home’s selling price is the total value you receive in return, not just the cash at closing.

  Selling expenses  Relevant selling expenses include advertising costs, sales commissions, title insurance and legal fees. You cannot deduct the cost of minor repairs or other expenses incurred to make the house more saleable, like painting.

  Adjusted basis  Your basis generally starts with the original cost of your home, including certain closing costs—but there are exceptions. If you inherited your home or received it as a gift, and depending on the circumstances, you’ll start with its fair market value at the date of death or the basis of the person who gifted it to you. If you acquired your home in a trade, you’ll start with the basis of the home you traded for it.

Your basis increases by the value of any significant home improvements you make during the time you own the home. The basis is reduced by any gain you may have deferred under the old rollover rules for homes sold before August 5, 1997.

Selling Your Primary Residence at a Gain
Generally, you can exclude up to $250,000 of gain from the sale of your primary residence—$500,000 if you’re married and file a joint tax return. There are no age restrictions.

To qualify, you must have owned your home and occupied it as your primary residence for two of the last five years—but not necessarily the last two years. If you’re married, both you and your spouse must satisfy the primary residence requirement in order to qualify for the $500,000 exclusion, but the ownership requirement only applies to one of you.

You can qualify for the gain exclusion more than once in your lifetime, but not more frequently than every two years. That means you generally won’t qualify if you excluded gain from the sale of another home within the last two years. If you’re married and intend to claim the $500,000 exclusion, this requirement applies to both of you.

There is an exception to this two-year rule, however, under certain limited circumstances. You may be able to claim a reduced (prorated) exclusion if the sale becomes necessary as a result of unforeseen situations, such as a health issue or a change in your place of employment.

This exclusion is optional. Under certain circumstances, you may choose not to claim the exclusion and, instead, recognize the gain in your gross income. For example, you might intend to sell another qualifying home at a much larger gain in less than two years.

You can also change your decision about using the exclusion at any time within three years of the due date of your tax return for the year of the sale.

There are a number of other situations that can affect how you report the sale of your residence for tax purposes. For example, if your gain is greater than the exclusion amount, the excess is subject to tax—including the 3.8 percent Medicare tax if your income is above the related threshold. The amount of gain you can exclude may be limited if you’ve used a portion of your home for business or as a rental or if you acquired your home in a 1031 like-kind exchange.

It is also important to understand the documentation you must save, and how long to save it. Generally, you should permanently retain all real estate records necessary to substantiate the cost and tax basis of your home—including any blueprints and plans — plus any records relating to the mortgage and mortgage refinancing, settlement and closing costs, cost of improvements, and any casualty losses and related insurance reimbursements. For more information on record retention requirements, you can refer to our previous article Know How Long to Keep Those Digital or Paper Documents? Record Retention Guidelines for People, Businesses and Not-for-Profits.

Selling a Second Home or a Vacation Home at a Gain
Your vacation home or second home doesn’t automatically qualify under the exclusion rules. However, if it subsequently becomes your primary residence for two or more years, you can sell it and qualify for a slightly modified version of the exclusion.

The exclusion calculation changes if the home you’re selling was not your primary residence during the entire time you owned it. In such a case, your gain is first prorated based on the number of years the home served as your principal residence relative to the total number of years you owned it. The resulting prorated gain amount is then eligible for the up-to-$500,000 exclusion, as long as you have lived in the home as your primary residence for two of the last five years.

Selling Your Primary Residence at a Loss
For tax purposes, you can’t claim a loss on the sale of your home.  

Selling a Primary Residence with an Under-Water Mortgage
In spite of recent increases in value, your home may still be under water—meaning that the amount of your mortgage is greater than your home’s selling price.

As a general rule, if you have debt—including mortgage debt—that is reduced, canceled or forgiven, the amount that you are no longer obligated to repay becomes taxable as ordinary income for federal tax purposes.

Under current tax law, there is an exception for a qualified principal residence—set to expire at the end of 2013. If debt on your principal residence is partially or totally forgiven as a result of foreclosure or mortgage restructuring, you can exclude the amount from your taxable income. However, the debt must be secured by your home, and the proceeds must have been used to buy, build or substantially improve your principal residence. If the debt was incurred in refinancing your home, it qualifies only up to the amount of the principal balance before refinancing.

Further, the debt forgiveness must derive from a change in your financial condition or a decline in your home’s value and not from any other circumstance, such as payment for services you provided to your mortgage lender.

The maximum amount excludable is $2 million, or $1 million for married couples filing separate returns.

Work you get paid for. Or you should. And if you’re an S corporation shareholder who also works in the business (providing anything other than minimal services), the IRS will see that you do.

IRS rules require that you receive reasonable compensation for your work. Reasonable compensation in this context is wage income, not distributions or other nonwage payments. In other words, a reasonable (continue reading...)

]]> Work and play are pretty much the same thing, according to Mark Twain — just under different circumstances.

Work you get paid for. Or you should. And if you’re an S corporation shareholder who also works in the business (providing anything other than minimal services), the IRS will see that you do.

IRS rules require that you receive reasonable compensation for your work. Reasonable compensation in this context is wage income, not distributions or other nonwage payments. In other words, a reasonable portion of the cash and property you receive from the corporation each year should be reported on your federal income tax return as wages.

It matters to the IRS because the taxes you owe the federal government depend on how the payments you receive from the corporation are categorized: as compensation or as distributions. Compensation is subject to both income and employment (payroll) taxes — including the new Medicare surtax — while distributions are considered income not subject to employment taxes.

This different tax treatment creates an incentive for S corporation shareholders to keep their compensation low and categorize payments as distributions. That makes it a hot topic and a heavily scrutinized issue for the IRS.

According to the IRS, “S corporations should not attempt to avoid paying employment taxes by having their officers treat their compensation as cash distributions, payments of personal expenses, and/or loans …”

Why should you care? At the risk of being considered glib, because the IRS cares — and it’s watching. The consequences of being found in the wrong can be considerable, including sizeable penalties for late and incomplete tax filings, additional employment tax liabilities and associated penalties, and erroneous 1040s that must be amended, possibly with additional taxes due.

Background
S corporations are, by definition, businesses with limited ownership structures. In fact, nearly three-quarters of all S corporations have only one shareholder. As a result, shareholders in an S corporation have near-total discretion over corporate decisions regarding compensation and distributions.

Many of these shareholders also work in the business as employees, or as officers who are considered employees for tax purposes. Given the tax incentives, they have an understandable tendency to categorize payments from the corporation as distributions. In fact, in a 2009 report the U.S. Government Accountability Office found that S corporations — primarily those with only one or two shareholders — underreported shareholder compensation by more than $20 billion in 2003 and 2004.

An often-cited example is that of an S corporation shareholder-officer who owns 100 per cent of the corporate stock and receives a total of $100,000 from the corporation during the year.

  If the cash paid to the shareholder is considered compensation, the taxable income to the corporation is reduced by $100,000 and the taxable income of the shareholder is increased by $100,000. The corporation pays the employer’s share of payroll taxes on $100,000 of compensation. The shareholder pays both income tax and the employee’s share of payroll taxes on the $100,000.

  If the cash is considered a distribution, the corporation has no expense for wages so its income is $100,000 higher than in the previous scenario. However, for tax purposes that income flows through to the S corporation shareholder’s income tax return, so the shareholder reports $100,000 of taxable income under either scenario. The difference is in the payroll tax liability. As a general rule, a nonwage distribution is not subject to payroll taxes at the corporate or individual level, so no payroll taxes are due. The total payroll savings can be sizeable, including Medicare (2.9 percent) and FICA (12.4 percent on the first $113,700) as well as the Medicare surtax, federal and state unemployment, and state worker’s compensation.

Determining Reasonable Compensation
Not surprising given the amounts involved, there is a history of court rulings against S corporations with shareholders who receive no compensation for their work in the business. The cases including many in the professional services sector where shareholders who are practicing CPAs, attorneys, architects, engineers and consultants make significant contributions to corporate revenue.

Courts have also ruled against S corporation shareholders who were compensated, but in amounts considered to be unreasonably low.

These courts have used a variety of criteria to determine the reasonableness of compensation, including whether the amount of compensation would be approved by an independent investor. In general, courts have looked to such factors as the employee’s qualifications and the scope of his or her work, the nature of the business, the compensation amount as a percentage of corporate income, and comparisons with compensation paid to non-shareholder employees and those in comparable positions with other companies. 

Unfortunately, the tax code doesn’t provide definitive guidelines for determining reasonable compensation. But relatively low salaries — particularly in conjunction with higher corporate income and distributions — will likely be subject to scrutiny.

To aid in determining reasonable compensation, the IRS published a Fact Sheet that summarizes the factors to consider, as follows.

  training and experience

  duties and responsibilities

  time and effort devoted to the business

  dividend history

  payments to non-shareholder employees

  timing and manner of paying bonuses to key people

  what comparable businesses pay for similar services

  compensation agreements

  the use of a formula to determine compensation

Additional Tax Considerations
S corporations that pay accident or health insurance premiums on behalf of certain shareholders — those who own more than two percent of the company — are required to report the amount of these fringe benefits as wages. The amount of insurance premiums paid on behalf of shareholders is deductible by the corporation as a fringe benefit, as long as it is reported on Form W-2.

The shareholder must report the amount of the premiums as gross income on his or her personal income tax return. This amount is subject to income tax withholding, but is not subject to FICA or FUTA.

Note that health insurance premiums can either be paid as part of a company plan or be reimbursed by the company, if the shareholder provides adequate documentation.

Penalties
If the IRS finds that the compensation you’re paid for work as an employee or officer of the S corporation is unreasonably low, it can reclassify (as wages) some or all of the distributions you receive. It can also levy sizeable penalties.

An S corporation that files an income tax return (IRS Form 1120S) without including required information — perhaps omitting or incorrectly reporting shareholder distributions — is subject to penalty and interest. The current amount of the penalty (indexed for inflation) is $195 per shareholder, per month, for a period of up to 12 months.

If the information the S corporation provides its shareholders on Schedule K-1 is incomplete or incorrect, the corporation is also subject to a $100 penalty for each of these K-1s. If the error is intentional, the penalty increases to the greater of $250 per K-1 or 10 percent of the total amount required to be reported.

The S corporation may also be subject to penalties and interest for filing incorrect employment tax returns if it underreports shareholder wages.

Finally, if a shareholder underreports income on his or her personal return as a result, the shareholder must file an amended return and pay any additional income and employment taxes due, plus any applicable penalties and interest.

But in current-day America, it’s increasingly apparent that nothing is more fatal to health than the lack of access to health care. A recent analysis by the Kaiser Family Foundation found that “the consequences of reduced access to care over time can be serious, including preventable hospitalizations, poor overall health, disability, and premature death.”

According to the (continue reading...)

]]> He must have meant it at the time. Benjamin Franklin apparently felt that “nothing is more fatal to health than an over care of it.”

But in current-day America, it’s increasingly apparent that nothing is more fatal to health than the lack of access to health care. A recent analysis by the Kaiser Family Foundation found that “the consequences of reduced access to care over time can be serious, including preventable hospitalizations, poor overall health, disability, and premature death.”

According to the Bureau of Labor Statistics, even many employed people lack health coverage, or their coverage is inadequate for their needs. Factor in the self-employed and it’s easy to conclude that many Americans could benefit from additional options for health care coverage.

It turns out there are a number of alternatives to traditional health care plans that can provide health care benefits. But it’s a complex and changing topic, and the rules and offerings can be different for the employed, self-employed and unemployed.

Background
You’ve probably heard the abbreviations: HSAs, MSAs, FSAs, HRAs. A veritable alphabet soup of alternatives to traditional health care plans.

Few of us really understand the range of options and the eligibility and benefits of each. But a basic understanding can have a significant impact on your access to health care coverage.

Tax-advantaged alternatives to traditional health care options include the following:

  Health Savings Accounts (HSAs)

  Archer Medical Savings Accounts (Archer MSAs)

  Flexible Spending Arrangements for Health Care (FSAs)

  Health Reimbursement Arrangements (HRAs)

Qualifying medical expenses under each plan are generally the same expenses that would qualify for a medical or dental expense tax deduction on your federal individual income tax return.

Health Savings Accounts (HSAs)
HSAs are tax-exempt trusts or custodial accounts — essentially savings accounts — established to cover qualifying medical expenses. If you qualify as an eligible individual, you can establish your HSA with an IRS-approved trustee, such as a bank or insurance company, or your employer can establish the HSA on your behalf. Your HSA may receive contributions from you or any other person, including your employer or a family member.

HSAs are used in conjunction with high deductible health plans, or HDHPs, which typically offer much lower premiums than more traditional health plans. The trade-off is that an HDHP’s annual deductible is much higher, thus the name. The HSA covers you up to the point at which the HDHP coverage kicks in.

The HSA offers a number of tax benefits. Contributions that you make are tax deductible without having to itemize. Contributions from your employer are not considered income. Amounts in the account grow tax-free and distributions for qualifying health care expenses are not taxed. And if you have a balance in the account at the end of the year, you can carry it forward to the next year.

Archer Medical Savings Accounts (Archer MSAs)
Like HSAs, MSAs are tax-deductible savings accounts used in conjunction with HDHPs to pay qualified medical expenses. You may have heard of Medicare Advantage MSAs which are a type of Archer MSA available to those enrolled in Medicare.

Archer MSAs have been largely replaced by HSAs. As a result, unless you were an active participant before 2008, you can only participate if you work for an employer that established its Archer MSA before 2008.

The MSA’s tax advantages are similar to those of the HSA. Your contributions are deductible whether or not you itemize deductions. Your employer’s contributions are not considered income to you. However, you and your employer cannot contribute to the account in the same year. Amounts in the account grow tax-free, distributions for qualifying health care expenses are not taxed, and end-of-year balances carry forward to the next year.

Flexible Spending Arrangements for Health Care (FSAs)
FSAs are established by employers to reimburse their employees for medical expenses, often as part of a cafeteria plan.

If you participate in an FSA, you’ll typically contribute pretax dollars throughout the year via a salary reduction arrangement with your employer, based on an amount determined at the beginning of the year. Your employer can also contribute to the FSA and generally those contributions are not includible in your income. Reimbursements from an FSA that are used to pay qualified medical expenses are not taxed.

FSAs are somewhat unique in that you can have a negative balance at times during the year. In other words, you can withdraw funds for qualified medical expenses before you have contributed the funds, as long as the total withdrawals do not exceed the total contributions you committed to make for the entire year.

The Affordable Care Act now caps annual contributions to an FSA at $2,500. Any balance remaining at the end of the year is generally forfeited.

Health Reimbursement Arrangements (HRAs)
HRA’s are employer-funded accounts and cannot include employee contributions of any kind. The contributions are not includible in income. Distributions to pay qualified medical expenses are not taxed, and can be distributed via debit cards, credit cards and other stored value cards.

The same is often true for businesses and not-for-profit organizations. They can save too little or too much, for too long or not long enough.

So, when it comes to digital and paper records, which documents should you keep and for how long?

Although (continue reading...)

]]> When it comes to saving things, there are really two kinds of people: Those who tend to save everything, forever. And those who throw it all away or delete it at the earliest possible moment — and sometimes before.

The same is often true for businesses and not-for-profit organizations. They can save too little or too much, for too long or not long enough.

So, when it comes to digital and paper records, which documents should you keep and for how long?

Although definitive rules are rare, a set of guidelines can help you answer the question.

The guidelines below describe, in general terms, the records you should keep for federal tax purposes. Each state may also have its own record retention requirements. And there are non-tax record retention requirements that may differ from the tax requirements– for example, an insurance company’s requirements to document casualty losses.

Impact of the Statute of Limitations
As a general rule, you save the digital and paper records that can protect you — or your business or not-for-profit organization — during an IRS audit or help you file an amended return for a refund.

That period of time is governed by the applicable statute of limitations, which establishes the period during which the IRS can review your records and you can file an amended return.

Completed Tax Returns
There is no statute of limitations for failing to file a return. It’s generally wise to keep copies of your prior years’ tax returns forever so that, if an issue ever arises, you can prove to the IRS that you actually did file.

If you’ve lost or misplaced your copy of a previously filed individual tax return, you can request a free tax return transcript from the IRS website. The transcript shows most line items from your tax return as it was originally filed, including accompanying forms and schedules. If you need a complete copy of the tax return, including attachments, you’ll need to file Form 4506 with the IRS. There is a charge for this service. 

Substantiating Paperwork
In most cases, the IRS can audit your tax return for three years after the return is filed (or the due date, if later). You can also file an amended return during this time period if you missed a deduction, overlooked a credit, or misreported your income.

This means you should retain all of the paperwork that backs up the items on your tax return for three years. That paperwork includes receipts (such as those for flexible spending accounts), canceled checks, W-2s and other supporting records

There are, however, certain exceptions to the three-year rule. 

 The IRS has up to six years to conduct an audit if you understate your income by more than 25 percent of the gross income shown on the return. 

 You have up to seven years to amend your return in order to take deductions for worthless securities. Don’t shred any records that would support such deductions. 

 If the IRS alleges your return is fraudulent, there is no statute of limitations. They can come after you at any time.

Guidelines
The first table below provides an overview of common tax-related record retention guidelines for individual taxpayers.

The second table provides guidelines for businesses and not-for-profit organizations, including a Schedule C business reported on the owner’s individual tax return.

The requirements for record retention by a business or not-for-profit organization — whether those records are in paper or digital format — are much more extensive than for an individual.

That might explain the growing incidence of tax-related scams—and why the IRS feels compelled to release a Dirty Dozen list of the the more common scams affecting U.S. taxpayers each year.  

No doubt you’ve heard of identity theft and refund fraud. But, according to IRS Acting Commissioner Steven T. Miller, “The Dirty Dozen list shows that scams come in many forms. Don’t let a (continue reading...)

]]> Someone, probably of the criminal persuasion, said that money spends the same whether you earn it or you scam it. 

That might explain the growing incidence of tax-related scams—and why the IRS feels compelled to release a Dirty Dozen list of the the more common scams affecting U.S. taxpayers each year.  

No doubt you’ve heard of identity theft and refund fraud. But, according to IRS Acting Commissioner Steven T. Miller, “The Dirty Dozen list shows that scams come in many forms. Don’t let a scam artist steal from you or talk you into doing something you will regret later.”

According to this year’s Dirty Dozen list, you should avoid the following scams (excerpted from the IRS announcement).

Identity Theft
Tax fraud through the use of identity theft tops this year’s Dirty Dozen list. Identity theft occurs when someone uses your personal information—such as your name, Social Security number (SSN) or other identifying information—without your permission to commit fraud or other crimes. In many cases, an identity thief uses a legitimate taxpayer’s identity to fraudulently file a tax return and claim a refund.

The IRS has a special section on IRS.gov dedicated to identity theft issues, including YouTube videos, tips and an assistance guide.

If you believe you are at risk of identity theft due to lost or stolen personal information, contact the IRS immediately so the agency can take action to secure your tax account. You can call the IRS Identity Protection Specialized Unit at 800.908.4490.

Phishing
Phishing is a scam typically carried out with the help of unsolicited email or a fake website that poses as a legitimate site to lure in potential victims and prompt them to provide valuable personal and financial information. Armed with this information, a criminal can commit identity theft or financial theft.

If you receive an unsolicited email that appears to be from either the IRS or an organization closely linked to the IRS—such as the Electronic Federal Tax Payment System—report it by sending it to phishing@irs.gov.

It is important to keep in mind the IRS does not initiate contact with taxpayers by email to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels.

Return Preparer Fraud

Although most tax return preparers provide honest service, there are some unscrupulous preparers who prey on unsuspecting taxpayers and the result can be refund fraud or identity theft.

You are legally responsible for what’s on your tax return, even if it is prepared by someone else. Only use preparers who sign the returns they prepare and enter their IRS Preparer Tax Identification Numbers (PTINs).

Hiding Income Offshore

Over the years, numerous individuals have been identified as evading U.S. taxes by hiding income in offshore banks, brokerage accounts or nominee entities, using debit cards, credit cards or wire transfers to access the funds. Others have employed foreign trusts, employee-leasing schemes, private annuities or insurance plans for the same purpose.

Working closely with the Department of Justice, the IRS uses information gained from its investigations to pursue taxpayers with undeclared accounts, as well as the banks and bankers suspected of helping clients hide their assets overseas.

While there are legitimate reasons for maintaining financial accounts abroad, there are reporting requirements that need to be fulfilled. If you have one or more of these accounts and do not comply with reporting and disclosure requirements, you’re breaking the law and risk significant penalties and fines, as well as the possibility of criminal prosecution.

“Free Money” from the IRS and Tax Scams Involving Social Security

These schemes promise refunds to people who have little or no income and normally don’t have a tax filing requirement.

Scammers build false hopes and charge people good money for bad advice, including encouraging taxpayers to make fictitious claims for refunds or rebates based on false statements of entitlement to tax credits.

There are also a number of tax scams involving Social Security. Scammers have been known to lure the unsuspecting with promises of non-existent Social Security refunds or rebates. In another situation, a taxpayer may really be due a credit or refund but uses inflated information to complete the return.

Intentional mistakes of this kind can result in a $5,000 penalty.

Impersonation of Charitable Organizations

Following major disasters, it’s common for scam artists to impersonate charities to get money or private information from well-intentioned taxpayers.

The IRS cautions both victims of natural disasters and people wishing to make charitable donations to avoid scam artists by following these tips:

To help disaster victims, donate to recognized charities.

Be wary of charities with names that are similar to familiar or nationally known organizations. Some phony charities use names or websites that sound or look like those of respected, legitimate organizations. IRS.gov has a search feature, Exempt Organizations Select Check, which allows people to find legitimate, qualified charities to which donations may be tax-deductible.

Don’t give out personal financial information, such as Social Security numbers or credit card and bank account numbers and passwords, to anyone who solicits a contribution from you. Scam artists may use this information to steal your identity and money.

Don’t give or send cash. For security and tax record purposes, contribute by check or credit card or another way that provides documentation of the gift.

False/Inflated Income and Expenses

This scam involves claiming income that was never earned or expenses that were never paid in order to secure or maximize refundable credits, such as the Earned Income Tax Credit. There are serious repercussions, including repaying erroneous refunds plus interest and penalties—and in some cases, even prosecution.

Scammers are also filing excessive claims for the fuel tax credit. Fraud involving the fuel tax credit is considered a frivolous tax claim and can result in a penalty of $5,000.

False Form 1099 Refund Claims

In some cases, scammers have made refund claims based on the bogus theory that the federal government maintains secret accounts for U.S. citizens and that taxpayers can gain access to the accounts by issuing 1099-OID forms to the IRS. In this ongoing scam, the perpetrator files a fake information return, such as a Form 1099 Original Issue Discount (OID), to justify a false refund claim on a corresponding tax return.

Don’t fall prey to people who encourage you to claim deductions or credits to which you are not entitled or willingly allow others to use your information to file false returns. If you’re a party to such schemes, you could be liable for financial penalties or even face criminal prosecution.

Frivolous Arguments

Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish claims to avoid paying the taxes they owe. These arguments are false and have been thrown out of court. While taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the law.

Falsely Claiming Zero Wages

Filing a phony information return is an illegal way to lower the amount of taxes an individual owes. Typically, a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 is used as a way to improperly reduce taxable income to zero. The taxpayer may also submit a statement rebutting wages and taxes reported by a payer to the IRS.

Sometimes, fraudsters even include an explanation that cites statutory language on the definition of wages or make reference to a paying company that refuses to issue a corrected Form W-2 for fear of IRS retaliation. Filing this type of return may result in a $5,000 penalty.

Disguised Corporate Ownership

Third parties are improperly used to request employer identification numbers and form corporations that obscure the true ownership of the business.

These entities can be used to underreport income, claim fictitious deductions, avoid filing tax returns, participate in listed transactions and facilitate money laundering and financial crimes.

Misuse of Trusts

For years, unscrupulous promoters have urged taxpayers to transfer assets into trusts. While there are legitimate uses of trusts in tax and estate planning, some highly questionable transactions promise reduction of income subject to tax, deductions for personal expenses and reduced estate or gift taxes. Such trusts rarely deliver the tax benefits promised and are used primarily as a means of avoiding income tax liability and hiding assets from creditors, including the IRS.

As with other arrangements, you should seek the advice of a trusted professional before entering a trust arrangement.

You may be eligible for a federal small business health care credit through December 31, 2013.

For-profit and not-for-profit organizations must satisfy three requirements to be eligible: fewer than 25 full-time-equivalent employees, average wages of less than $50,000 and a qualifying arrangement for employee health insurance coverage.

If you’re a qualifying for-profit business, the maximum credit is 35 percent of your share of the premiums for your employees. If you’re a not-for-profit organization, you (continue reading...)

]]> Need help in providing your employees with health care?

You may be eligible for a federal small business health care credit through December 31, 2013.

For-profit and not-for-profit organizations must satisfy three requirements to be eligible: fewer than 25 full-time-equivalent employees, average wages of less than $50,000 and a qualifying arrangement for employee health insurance coverage.

If you’re a qualifying for-profit business, the maximum credit is 35 percent of your share of the premiums for your employees. If you’re a not-for-profit organization, you can qualify for up to 25 percent of your share of the premiums.

To help you determine if you qualify, and to provide you with an estimate of your credit for tax years 2010 through 2012, the IRS has created an online tool: the Small Business Health Care Credit Estimator with accompanying instructions.

 You might also want to check out our previous blog post Eligible for the New Small-Employer Health Care Credit? that explains the eligibility requirements and various calculations in more detail.

Given the state of the job market, you can no-doubt find an unemployed college student, recent grad or career changer that would welcome an internship for the work experience.

Seems like a fair trade.

But what can you legitimately offer interns? Are you required to pay the prevailing minimum wage, or are unpaid internships really legal? And if they are, why are employers—including the Hearst Corporation, Elite Model Management, Fox Searchlight (continue reading...)

]]> It’s tempting. You could really use some inexpensive—perhaps even free—help this summer.

Given the state of the job market, you can no-doubt find an unemployed college student, recent grad or career changer that would welcome an internship for the work experience.

Seems like a fair trade.

But what can you legitimately offer interns? Are you required to pay the prevailing minimum wage, or are unpaid internships really legal? And if they are, why are employers—including the Hearst Corporation, Elite Model Management, Fox Searchlight Pictures and the Charlie Rose Show, to name a few—being sued by their unpaid interns?

To answer these and other questions, you need to know about federal and state rules for the internship programs of for-profit and not-for-profit employers. 

Background
Between 500,000 and 1,000,000 interns work without pay each year, or roughly half of all interns working in the U.S. Research indicates the majority of employers prefer students to have completed at least one internship before graduation.

On the other hand, some argue the ethics of unpaid internship programs — especially in a recessionary economy. They claim unpaid interns are actually displacing full-time, low-wage-earning workers, and without much hope of landing a job at the end of the internship. A number of interns agree, filing a slew of lawsuits against the organizations for which they interned—even causing some companies to convert to paid internships or stop their internship programs altogether.

So what are the federal and state rules?

Federal Rules for For-Profit Businesses
In April of 2010, the U.S. Department of Labor (DOL) published Fact Sheet #71. This document addresses the issue of whether the Fair Labor Standards Act (FSLA) mandates that interns who work for private-sector for-profit employers must be paid the minimum wage and overtime.

The fact sheet concludes that there are circumstances under which unpaid internships and training programs are permissible. In doing so, it cites the Supreme Court which held that persons whose work serves only their own interests aren’t necessarily employees of another person or entity that provides aid or instruction. Ultimately, the determination depends on the specific facts and circumstances of each case.

To guide companies in making the paid vs. unpaid determination, the DOL provides six criteria that must all be met to qualify for an unpaid internship.

Failing to satisfy even one of these criteria means the intern must be paid.

Federal Rules for Not-for-Profit Organizations
Not-for-profit organizations are in a slightly different position than for-profit businesses: They can accept the unpaid services of volunteers.

According to the FSLA, “an individual who performs hours of service for a public agency for civic, charitable, or humanitarian reasons, without promise, expectation or receipt of compensation for services rendered is considered to be a volunteer during such hours.”

Nevertheless, some experts urge caution with regard to the use of unpaid volunteers by not-for-profit organizations. Volunteers serving in the organization’s commercial activities—a gift shop, for example—have been considered to be employees and not volunteers by courts and the DOL. Likewise, the volunteer status of employees who also volunteer for their employers has been questioned.

Pending additional guidance from the DOL—and excluding volunteers—not-for-profit organizations may be held to the same rules for unpaid internships as are for-profit businesses.

Washington State Rules
According to the Washington State Department of Labor and Industries, there are “limited circumstances” under which unpaid internships are exempt from state minimum wage and workers’ compensation rules.

Generally, Washington mirrors the federal rules for unpaid internships with a for-profit business—including the FSLA requirements and the six DOL criteria. If the business does not satisfy all criteria, it is subject to state minimum wage and workers’ compensation requirements.

Not-for-profit, charitable, educational and governmental organizations are permitted to use the unpaid services of volunteers and are not subject to minimum wage or workers’ compensation rules for those volunteers.

Washington defines a volunteer as follows:

“Individuals who volunteer or donate their services, usually on a part-time basis, for public service or for humanitarian objectives, not as employees and without contemplation of pay, are not considered employees of the entities that received their services. However, if these people are paid for their services beyond reimbursement for expenses, reasonable benefits or a nominal fee, they are employees and not volunteers. Individuals do not lose their volunteer status if they receive a nominal fee or stipend.”

The consequences of getting it wrong and ultimately having to reclassify unpaid interns as employees can be significant, including back wages and related employment taxes and benefits, as well as legal fees. If you have concerns, seek advice.