Revenge is a Dish Best Served with Hard Cold Cash

A recent Tax Court Summary Opinion (2014-28) tells a tale of greed, betrayal, and revenge.
It's not that interesting, but we hardly ever run into revenge stories in tax court opinions: greed is a common theme we see all the time in the tax business.

Mr and Mrs Kososki were in the process of terminating their marriage. Shortly before separating they filed a joint return claiming a refund ($7,768). The wife expected to get a portion of the tax refund, but the husband kept it all. The refund was directly deposited into the husband's bank account.

The wife filed another return for the same year (2010), filing not as married-joint but as married-separate.
The IRS audited the husband and changed his filing status to married filing separately.
The result was a refund to the wife with the husband owing taxes and penalties in excess of $5,000.


- Mark Gleason
  www.lakes-cpa.com

Status of Some Expired Income Tax Breaks

A pile of special deductions and credits expired at the end of 2013. We expect most of them to be retroactively re-enacted. Some of these are narrowly targeted at specific industries but some have a broader impact and affect mainstream taxpayers.
These include the ability of individual income taxpayers to deduct their sales taxes instead of their income taxes. This break is important to residents of states that have no income tax like Texas, Florida, Nevada, Washington, South Dakota and Alaska.
Another important expired tax break is the exclusion from taxable income for up to $2 million of forgiveness of indebtedness in relation to foreclosure of a personal residence.
I have at least one client that is hoping for reinstatement of the provision allowing direct distributions from taxpayers individual retirement accounts (IRAs) to charities.
Bonus depreciation and the credit for research and development are important to many businesses, both large and small.
Action by congress on these expired tax provisions is not expected until late in 2014.
I guess that congress likes to keep taxpayers guessing.

- Mark S Gleason CPA
  www.lakes-cpa.com 

IRS and MN Dept of Revenue Announcements on Heartbleed

Both the IRS and the Minnesota Department of Revenue issued announcements proclaiming themselves unaffected by Heartbleed , the recently discovered coding flaw that lets hackers steal passwords from websites.

The IRS announcement:

The IRS continues to accept tax returns as normal. Our systems continue operating and are not affected by this bug, and we are not aware of any security vulnerabilities related to this situation. We continue to monitor the situation and remain in contact with our software partners. The IRS advises taxpayers to continue filing their tax returns as they normally would in advance of the deadline.

The Minnesota Department of Revenue announcement: 

The Minnesota Department of Revenue systems have not been affected by the “heartbleed” virus.  We are accepting tax returns as normal and we encourage taxpayers to file their returns in advance of the April 15 deadline.  We continue to monitor the situation and will remain in contact with the IRS and software vendors.  If the situation changes we will provide an update. 

For those of us who depend on the internet to get our daily work done, this has been an unwelcome distraction, especially coming right before the April 15 tax filing deadline.

- Mark S Gleason CPA
  www.lakes-cpa.com

Who are the One Percent?

We hear about the top 1% all the time.  Who are the 1%?
The most frequently represented occupations of taxpayers in the top 1% of US taxpayers, according to IRS data, includes corporate executives,  financial professionals, doctors, lawyers and a broad category of occupations that including technical, scientific, computer, math and engineering jobs.

In 2011 a taxpayer mades the cut and is included in the top 1% at $379,000 annual income.
Most of these people should be given medals for their productivity and their contribution to society in the form of all the taxes they pay.
The top 1% earned 19% of all the income reported to the IRS (2011) and paid 35% of all federal income taxes.
Thank you!

- Mark S Gleason CPA
  www.lakes-cpa.com

The IRS: A Historical Perspective

A review today in the Washington Post talks about a recent lecture by Donald Korb, a former Chief Counsel for the IRS and former Assistant Commissioner of the Internal Revenue Service.

He talked about some of the changes in our federal income tax system over the years and how the system of taxation has evolved.

Here are some interesting highlights from his talk:

• Today the highest income tax rate for an individual is 43.4% and for a corporation its 35%. Although there is still a lot of whining about our rates, in 1974 the top rates were 70% for individuals and 48% for corporations.
• There are over 5,000 pages in today's Internal Revenue Code when in 1974 there were only about 1,500 pages.
• In 1974 the IRS administered approximately 12,100 pages of Treasury Regulations. Today they have over 44,000 pages of regulations to work with.
• The IRS had about 78,000 employees in 1974. Today there are about 89,500.

Mark S Gleason CPA
- www.lakes.cpa.com

IRS Addresses Virtual Currency (Bitcoin)

As far as I know, none of my existing clients have transacted any business involving bitcoins or other virtual currency.
But just to let the world know that I'm ready to file returns reflecting transactions denominated in bitcoins, my topic for today is virtual currency.

The official guidance issued by the IRS earlier this week (IR-2014-36) on the subject was exactly what I had expected:

• The virtual currency is treated as property for US federal tax purposes.
• General tax principles that apply to property transactions apply to transactions using virtual currency.
• Wages paid to employees using virtual currency are taxagble to the employee, must be reported on form W-2 and are subject to income tax withholding and payroll taxes.
• Payments using virtual currency to independent contractors and other service providers are taxable and general self employment tax rules apply.
• The character of gain or loss form the sale or eschange of virtual currency depends on the status of the virtual currency in the hands of the taxpayer is a capital asset (or not).
• Payments made with virtual currency are subject to information reporting to the same just like any other payment in property.
• Transactions using virtual currency are to be reported in US dollars.
• Taxpayers are to determine the dollar value of their virtual currency in a reasonable manner consistently applied.
• Virtual currency "mined" is includible in a taxpayer's gross income.
• Virtual currency is not treated as a foreign currency that could generate foreign currency gain of loss for US tax purposes.

Other than the fact that this is pretty obvious to anyone that has studied or worked with our tax laws for more than a day or two, these points are a nice top-level summary of general income tax law applicable to most business transactions and to most individual taxpayers.

Notice 2014-36 didn't indicate one way or the other whether the IRS will accept virtual currency in payment of federal taxes.  I guess that's such a dumb question, they just didn't want to go there...


- Mark S Gleason CPA
  www.lakes-cpa.com

Retroactive Minnesota Tax Law Changes

The CPAs that participate in an email tax forum I belong to are whining about changes to the tax law enacted last week. The tax cuts included in this new law affect 2013 tax returns that have already been filed.
Many tax preparers are not happy about this. I think the CPA's should be happy that taxes have been cut for their clients.

The MN Department of Revenue is having a little hand-holding session to comfort the upset tax preparers and "provide you with more information". So the upshot of all this (according to the MN Department of Revenue) is:

If your client has already filed, and the return is affected by the changes, they will receive notification from us.  Please tell them not to do anything until they receive direction from us.
One of three things will happen with the return.  The department:
1. Will fix the return and send the taxpayer a letter explaining how it was fixed.
2. Will send a letter to the taxpayer requesting more information and use that information to fix the return.  They will receive a letter explaining how it was fixed.
3. Will not be able to fix the return.  If this happens, the taxpayer will receive a letter explaining the return can’t be fixed.  If this happens, they will need to file an amended return to get the benefits of the law changes that apply to them.
If your client has not filed…
Please wait to file their return.  We are working to get new forms and instructions to you by April 3.  
Note:  If you use a desktop version of a software product, please be sure to watch for software updates from your software company.
We appreciate the job you do helping taxpayers file their returns and appreciate your patience as we review and implement the law changes.

Meaningful tax savings will be had by very few taxpayers including those suffering the tax consequences of a real estate foreclosure or who incurred adoption expenses. I don't think any of my clients will incur retroactive tax relief of over $50. Some of my clients will be effected by the mortgage insurance deduction, student loan interest and classroom expenses.

The Minnesota Society of Certified Public Accountants has released the following summary of things we tax preparers need to learn all about immediately:

Provisions enacted federally for 2012 and 2013 only and adopted for Minnesota retroactively to tax year 2013:
Deduction in adjusted gross income of up to $250 for classroom expenses paid by a K-12 grade educator
Exclusion for discharge indebtedness income on a principal residence
Itemized deduction for mortgage insurance premiums on a principal residence
F,or taxpayers 70-1/2 or older exclusion from gross income up to $100,000 of IRA distributions made directly to charitable organizations (the amount excluded is not allowed as a charitable deduction)
Increased maximum exclusion for employer provided commuter vehicle or transit pass fringe benefits from $125 per month to $245 per month to obtain parity with the exclusion of fringe parking benefits
Allowed expensing for the first $15 million of production costs of films and television shows
Allowed depreciation of leasehold improvements and qualified restaurant property, including new restaurant property and improvements to retail property over 15 years (rather than 39 years) for property placed in service through 2013
Allowed accelerated depreciation of qualified Indian reservation property for property placed in service through 2013
For contributions made in taxable years beginning through 2013, extension of basis adjustment to S corporation stock when the S corporation donates appreciated property, which is equal to the tax basis of the property rather than the fair market value
Allowed depreciation of certain motorsports entertainment complex property over 7 years rather than 15 or 39 years for property placed in service through 2013
Allowed expensing of 50% of the cost of advanced mine safety equipment for equipment placed in service through 2013
Special rule for charitable contributions of real property for conservation purposes for contributions made in tax years beginning in 2013
Allowance for companies other than C corporations to take a deduction for contributions to a charity equal to the cost basis plus one-half the normal price mark-up of food inventory for contributions made through 2013

Provisions enacted at the federal level for tax year 2013 and future years to which Minnesota would conform retroactively to tax year 2013 and for future years:
Increased contribution limits from $500 to $2,000 per year and allowed use of education savings accounts for elementary and secondary school expenses
Increased income limits and allowance of unlimited time period for the deduction of student loan interest
Exclusion from gross income for amounts paid or expenses incurred (up to $5,250 annually) by an employer in providing educational assistance to employees under an educational assistance program
Exclusion from income for awards under the National Health Service Corps scholarship program and related awards for health-care professionals
Exclusion for employer provided adoption assistance

Forgive the sloppy formatting of this post.  I am short of time today and this is what happens when cutting and pasting long quotations. My comments in this post are bold, the rest of this has been cut and pasted from the sources I identified.

- Mark S Gleason CPA
  www.lakes-cpa.com