May 15, 2013

Who's Afraid of the Big Bad Wolf?

by Kenneth Hoffman in Business Counsel, Tax Counsel

Our federal government devotes millions of man-hours and billions of dollars each year to law enforcement. The FBI, DEA, and Bureau of Alcohol, Tobacco, and Firearms, along with lesser-known agencies like the U.S. FDA's Office of Criminal Investigations (pursuing criminal violations of food and drug laws), the Department of Commerce's Office of Export Enforcement (responsible for keeping dangerous technology out of the wrong hands), and NOAA's Fisheries Office for Law Enforcement (charged with protecting the ecosystem and marine life) all strike fear in at least somebody's heart.

But there's one agency that has an almost mythical power in most minds, and that's the IRS. The tax cops put Pete Rose and Wesley Snipes in jail. They put Al Capone in jail, for pete's sake! We'd all better watch out, right? Well, you be the judge. Last week, the IRS Criminal Investigation unit released their Fiscal 2012 annual report -- and the findings might surprise you. Here are some of the highlights:

Investigators cover a wide variety of tax-related crimes beyond the garden-variety tax fraud and celebrity "failure to file" cases that command the biggest headlines. Their work also includes identity theft, offshore tax evasion, tax treaty cases, tax protestors, money laundering, terrorist financing, public corruption, and drug enforcement cases.
Business is booming -- but numbers are still relatively small considering the 100 million+ returns the IRS collects every year. For Fiscal 2012, the Service initiated just 5,125 investigations, up from 4,720 in 2011. Out of those 5,125 investigations, they recommended 3,710 prosecutions (IRS investigators don't actually prosecute offenders themselves; they turn that job over to the Department of Justice.) There were 3,390 indictments and 2,634 convictions -- the Feds generally don't take you to court if they're not already sure they can win. 2,466 lucky winners drew all-expense-paid trips to "Club Fed."
Investigators spend a lot of time chasing down crooked tax preparers. For 2012, they investigated 443 suspicious-looking characters, recommended 276 prosecutions, and won 178 convictions. The average convicted preparer earns 29 months in jail, up from 25 months in 2011.
The IRS continues to uncover people who really just ought to know better. Take Jimmy Dimora, for example, a former Cuyahoga County (Ohio) Commissioner, who found himself looking for ways to supplement his county pay. Dimora took more than $166,000 in bribes to steer contracts to allies, get jobs and raises for associates, intercede with judges on pending cases, and generally abuse his office. Naturally, he forgot to pay tax on those bribes. Jimmy wound up drawing a 336 month sentence for his sideline business. (For those of you who try not to use math on a daily basis, that's 28 years behind bars.)

Do any of these points strike a chord with you? Of course they don't. The average American has nothing to fear from the Criminal Investigations unit. As far as most of us are concerned, the IRS is just the federal government's collection agency, nothing scarier. You've got to do something really outrageous to draw one of those 5,000 case investigations.

We all know taxes are going up this year, and we all know nobody wants to pay. That's the bad news. The good news is you don't have to flirt with IRS Criminal Investigations to pay less. You just need a plan. There's no shortage of court-tested, IRS-approved strategies for minimizing your tax. So if you're still smarting from April 15, and you haven't asked us about our planning service, what are you waiting for?

Kenneth Hoffman of K.R. Hoffman & Co., LLC is a highly sought after tax and business counselor. Counseling Entrepreneurs, Professionals and Select Individuals who are struggling with ever changing tax laws and who are paying too much in taxes. All the while he is protecting his clients from the IRS and other taxing authorities using proactive tax planning strategies, ensuring compliance with minimal tax liability.

Discover how I can help you overcome your tax and business challenges. To start the conversation or to become a client, call Kenneth Hoffman at (954) 591-8290 Monday - Friday between 8:30 a.m. to 1:00 p.m. for a no cost consultation, or drop me a note.

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May 12, 2013

Internet Sales Tax One Step Closer

by Kenneth Hoffman in Business Counsel, Tax Counsel, Tax Planning

The Senate has approved, by a 69 to 27 vote, the Marketplace Fairness Act of 2013. The bill would allow a state to enforce collection of state and local sales taxes on most remote sellers.The bill exempts sellers with less than $1 million in annual sales from the rules and requires states to provide information regarding the taxability of items, provide software free of charge for remote sellers that calculates sales and use taxes due on each transaction at the time the transaction is completed, that files sales and use tax returns, and that is updated to reflect rate changes, and among other things, provide simplify administration and reporting requirements. Despite the majority in the Senate, passage is far from assured. The bill is expected to have a harder time in the House.

Now is the time to contact your congress critters to let them know your opinion.

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May 12, 2013

The Importance of Keeping Good Records

by Kenneth Hoffman in Business Counsel, Tax Counsel, Tax Tips

That's always good advice. But it can be critical in the case of sales tax. Some states are famous for using the one-day observation test of restaurants and many other establishments.

The issue can be a real problem if the day the auditor picks is one of your best days of the week. It can get worse if sales have been growing over the last few years. The auditor could simply take the sales for the day and multiply by 313 (365 days less 52, assuming the business is closed one day a week) then multiply by 3 for a 3-year period. That's a real problem if sales two years ago were significantly less than today. Contesting the assessment could be difficult. You may have to have an expert witness show the test was not statistically correct. In some cases, even that won't get you off the hook. You're fighting from a poor position because you didn't maintain the required records.

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May 8, 2013

Late Night Taxes

by Kenneth Hoffman in Business Counsel, Tax Counsel, Tax Planning

Television's late-night hosts have entertained us since Steve Allen first took the mic on The Tonight Show back in 1954. Today's late-night monologues riff on serious topics like international politics and economic policy, and silly topics like the "Real Housewives of Lima, Ohio." Naturally, they've also weighed in on our friends at the IRS. So this week, we present some of our favorite tax wisecracks from late-night television:

"65% of people say that cheating on your income tax is worse than cheating on your spouse. The other 35% were women." (Jay Leno)
"Just taught my kids about taxes by eating 38% of their ice cream." (Conan O'Brien)
"Tax day is the day that ordinary Americans send their money to Washington, D.C., and wealthy Americans send their money to the Cayman Islands." (Jimmy Kimmel)
"President Obama held a press conference earlier today, and he said he still wants to close the Guantanamo Bay prison facility, but he doesn't know how to do it. He should do what he always does: declare it a small business and tax it out of existence. It will be gone in a minute." (Jay Leno)
"Nobody likes taxes, but they've been around forever. Taxes date back all the way back to the year one, when baby Jesus was visited by two wise men and an IRS agent, who demanded half the family's frankincense." (Jimmy Kimmel)
"It's fitting that April 14 is National Pecan Day because today, we recognize nuts. Andtomorrow, on April 15, we pay our taxes to support them." (Craig Ferguson)
"Regis Philbin's back in primetime, hosting 11 new episodes of 'Who Wants To Be a Millionaire.' But because of Obama's tax plan, it's been re-titled 'Who Wants To Win Just Under $250,000.'" (Jimmy Fallon)
"And there are a lot of new taxes coming. California state legislators want to solve our state's giant deficit by taxing marijuana. Meanwhile, Oregon wants to increase a tax on beer, while New York wants to tax Internet porn. You know what this means? By the end of spring break, this whole thing could be paid for." (Jay Leno)

Late-night yucksters make fun of taxes onstage. But you can be sure that offstage, entertainers like David Letterman (2013 salary, $28 million) and Jay Leno ($24 million) think taxes are as funny as a heart attack. They know that proactive planning is the key to paying less. So be sure to call us when you're ready to laugh last with the IRS!

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May 1, 2013

Play Ball !

by Kenneth Hoffman in Tax Counsel, Tax Planning

The 2013 baseball season is barely a month old, and fans are already bickering over the first twists and turns. That's because rabid fans are never content to just watch a game. They have to discuss it -- among friends, at the local tavern, and on talk radio. If a pop fly drops for a single behind Cubs center fielder David DeJesus, and no one is there to argue he should have caught it, does it really make any noise?

Statisticians have always delighted in analyzing baseball -- some would say, analyzing it to death. So-called "sabermetricians" (followers of the Society of American Baseball Research, or SABR) pore over arcane stats like "batting average on balls in play" (a measure of how many balls in play against a pitcher go for hits, excluding home runs, used to spot fluky seasons) or "value over replacement player" (a measure of how much a player contributes to their team in comparison to a fictitious replacement player who is an average fielder at his position but below-average hitter).

Now there's a whole new category of relevant statistics for fans to debate. The Journal of Sports Management has just accepted a paper from Fordham University business professor Stanley Veliotis, titled Salary Equalization for Baseball Free Agents Confronting Different State Tax Regimes. And this one will blow the lid right off Moneyball! Here's the abstract:

"This paper derives equivalent gross salary for Major League Baseball free agents weighing offers from teams based in states with different income tax rates. After discussing tax law applicable to professional sports teams' players, including 'jock taxes' and the interrelationship of state and federal taxes, this paper builds several models to determine equivalent salary. A base-case derivation, oversimplified by ignoring non-salary income and Medicare tax, demonstrates that salary adjustment from a more tax expensive state's team requires solely a state (but not federal) tax gross-up. Subsequent derivations, introducing non-salary income and Medicare tax, demonstrate full Medicare but small federal tax gross-ups are also required. This paper applies the model to equalize salary offers from two teams in different states in a highly stylized example approximating the 2010 free agency of pitcher Cliff Lee. Aspects of the models may also be used to inform other sports' players of their after-tax income if salary caps limit the ability to receive adequately grossed-up salaries."

Aren't you glad you've got us to make sense of this stuff? (And this is baseball -- it's supposed to be fun.)

Taxes have always dogged professional athletes. What basketball fan hasn't wondered what role Florida's sunny tax-free climate played in luring superstar LeBron James to the Miami Heat? And really, who can blame golfing great Phil Mickelson for threatening to abandon California to escape a 63% tax rate?

But just imagine the debates this paper will inspire! How will interleague play affect equivalent gross salaries for NL East teams playing even more games in tax-heavy New York? Does A-Rod really come out ahead by sticking with the Yankees? Will fists fly when Canadians realize none of this has any meaning for the lowly Toronto Blue Jays?

You may think the tax code is harder to understand than the infield fly rule. (You may even be right.) But there's one very important difference between baseball and taxes. Stats geeks can use measures like the "player empirical comparison and test algorithm" to guess how players might perform for the rest of the season. But proactive tax planners like us can use proven strategies like the medical expense reimbursement plan, S-corporation, or home office deduction to guarantee less tax. So call us when you're ready to measure some savings that count!

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April 25, 2013

Tips to Start Planning Next Year's Tax Return

by Kenneth Hoffman in Tax Planning, Tax Counsel

For most taxpayers, the tax deadline has passed. But planning for next year can start now. The IRS reminds taxpayers that being organized and planning ahead can save time and money in 2014. Here are five things you can do now to make next April 15 easier.

Adjust your withholding. Each year, millions of American workers have far more taxes withheld from their pay than is required. Now is a good time to review your withholding to make the taxes withheld from your pay closer to the taxes you’ll owe for this year. This is especially true if you normally get a large refund and you would like more money in your paycheck. If you owed tax when you filed, you may need to increase the federal income tax withheld from your wages.
Store your return in a safe place. Put your 2012 tax return and supporting documents somewhere safe. If you need to refer to your return in the future, you’ll know where to find it. For example, you may need a copy of your return when applying for a home loan or financial aid. You can also use it as a helpful guide for next year's return. At K.R. Hoffman & Co., LLC, we provide a secure digital portal to store your tax records.
Organize your records. Establish one location where everyone in your household can put tax-related records during the year. This will avoid a scramble for misplaced mileage logs or charity receipts come tax time.
Shop for a tax professional. If you use a tax professional to help you with tax planning, start your search now. You’ll have more time when you're not up against a deadline or anxious to receive your tax refund. Choose a tax professional wisely. You’re ultimately responsible for the accuracy of your own return regardless of who prepares it.
Consider itemizing deductions. If you usually claim a standard deduction, you may be able to reduce your taxes if you itemize deductions instead. If your itemized deductions typically fall just below your standard deduction, you can ‘bundle’ your deductions. For example, an early or extra mortgage payment or property tax payment, or a planned donation to charity could equal some tax savings. See the Schedule A, Itemized Deductions, instructions for the list of items you can deduct. Planning an approach now that works best for you can pay off at tax time next year.

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April 24, 2013

Very Serious Stuff

by Kenneth Hoffman

When most of us think "taxes," we think of federal taxes -- the IRS, Form 1040, and everyone's favorite holiday, April 15. It's true that the IRS is full of Very Serious People collecting Very Serious Taxes. But we can't forget state and local governments either. They collect their fair share of serious taxes -- but they impose some pretty silly tax laws, too. Here are some of our favorites:

California offers a tax exemption for income you receive to settle claims arising out of the Armenian genocide. If you or your ancestors were persecuted by the Ottoman Turkish Empire between 1915 and 1923, your income from that settlement is tax-exempt. But sadly, if the persecution occurred in 1924 or later, your friends in Sacramento want a share.
California also imposes a 33% tax on fresh fruit bought from vending machines. Apparently, the folks in charge of promoting healthy lifestyles would rather see you buy cookies or potato chips!
Maryland imposes a $5.00/month "Chesapeake Bay Restoration Fee" on homeowners and businesses to raise funds to improve sewer treatment plants that discharge into the bay. Naturally, taxpayers have dubbed it the "flush tax."
Minnesota and several other states impose a tax on marijuana -- in Minnesota, it's $3.50 per gram. But wait, you say . . . pot isn't even legalin Minnesota, is it? Well, no, it's not . . . but if dealers don't pay the tax, the state has another way to bust them. (Remember who finally got Al Capone?) So . . . genius? Or evilgenius?
New York lets you buy bagels and take them home to eat without paying sales tax. But let the counter man slice it, and now it's a "prepared" meal for on-premises consumption -- and subject to an 8% sales tax.
Oregon generously gives double amputees a $50 tax credit. But lose just one limb and you're out of luck. (Apparently, it costs an armand a leg to be disabled in Oregon!)
South Carolina offers a $50 per carcass "Venison for Charity" credit, with an actual form (SC Schedule TC-51) for licensed butchers and meat packers who donate deer meat for distribution to the needy. (We're not making this up.)
Washington's King County, which includes Seattle, imposes a new $50 fee to report a death to the Medical Examiner's office. Officials call it a crime-prevention measure to give the government enough money to look at more questionable deaths for evidence of crime.

Governments have always found silly ways to nickel-and-dime their citizens. And some of those are just plain unavoidable. (If you live in Maryland's Chesapeake Bay watershed and you've got to go, well, you've just got to go.) But there's nothing silly about wasting money on taxes you don't have to pay. That's why we specialize in proactive tax planning to help pay less. Do you think you paid too much on April 15? Give us a call and let's see if we can save you some serious money!

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April 17, 2013

More Gossip About Presidents and Taxes

by Kenneth Hoffman

If you saw your 2012 tax return splashed all over the internet, you'd probably be pretty unhappy. Maybe you don't want your family, friends, or colleagues to know just how well you did last year. Or maybe you'd want them all to think you had done better than in reality. (Donald Trump is famous for pestering the folks who compile the Forbes 400 list of the richest Americans to rank him higher than they do.) But most of us would rather put our most embarrassing eighth-grade class photo online than our taxes.

Well, President Obama and his family don't have that luxury. Legally, presidential tax returns are as private as anyone else's. However, presidents, vice-presidents, and major party nominees dating back to Richard Nixon have released at least some of their tax return information. The Obamas released their 2012 returns on Friday, and they reveal an intriguing snapshot of presidential finances.

For 2013, the Obamas reported $608,611 in adjusted gross income. This included $400,000 for leading the Free World, $258,772 in book royalties, $11,462 in interest, and a whole $2 in dividends. They also reported $3,000 in long-term capital losses, with an additional $115,516 to carry over to future years or offset future gains. Of course, they enjoy some nifty tax-free perks, too -- helicopters, airplanes, personal chefs and other staff. They also enjoy the use of a 132-room mansion in the heart of Washington, DC, which has been appraised at anywhere from $110 million to $302,021,348.

On the "deduction" side, the Obamas stashed $50,000 into a retirement plan. (That should be reassuring in the event they can't support themselves on the speaking circuit.) They also deducted $45,046 in mortgage interest, $63,305 in state and local tax, and a total of $150,034 in charitable gifts to 33 separate organizations. (The largest single gift, $103,871, went to the Fisher House Foundation, which provides free or low-cost lodging to veterans and military families receiving treatment at military medical centers.)

The Obamas finished up with $335,026 in taxable income. The regular tax on that amount is $87,465, which is more than most voters make in a year. But they got whacked for another $21,221 in Alternative Minimum Tax, plus $6,930 in self-employment tax on the book royalties. Subtract $3,402 in foreign tax credits, and the total bill settles in at $112,214.

What's ahead for next year? Well, if the Obamas report the same income and expenses in 2013, they'll avoid the new 39.6% bracket that kicks in for taxable incomes over $450,000. But they'll lose 3% of their itemized deductions and 2% of their personal exemptions for each dollar of adjusted gross income over a $300,000 threshold. They'll pay an extra 0.9% payroll tax on earned income over $250,000, plus a 3.8% "unearned income Medicare contribution" on their investment income.

Presidents usually find themselves solidly in the "top 1%" that dominated the conversation in last year's election. George W. and Laura Bush reported $784,219 in AGI in the fourth year of his presidency, including nearly $400,000 in interest and dividends. Bill and Hillary Clinton reported $1,065,101 in AGI in the fourth year of his presidency, including $742,852 in Hillary's book royalties that went to charity. And who can forget 1991, when George and Barbara Bush's dog Millie "earned" $889,176 in royalties for "her" memoir, Millie's Book? Of course, the big money comes after leaving office -- these days, Bill Clinton earns as much as $10 million per year from speaking.

We prepare every return to stand up to the same level of scrutiny as the President's. But we understand our real value comes from tax planning. And you don't have to earn a presidential income to take advantage of our proactive approach. So call us when you're ready to pay less!

April 10, 2013

Heeeere's. . . Jimmy!

by Kenneth Hoffman in Business Counsel, Tax Planning, Tax Counsel

Newsman Edward R. Murrow famously said that television is a vast wasteland. But that doesn't stop millions of Americans from tuning in every night for their favorite comedians. Jay Leno, David Letterman, Conan O'Brien, the two Jimmies (Fallon and Kimmel) and their wannabe imitators squeeze out one last wisecrack before bedtime.

NBC's Tonight Show has been broadcasting since 1954, which makes it the longest-running entertainment program on air. Amazingly, it's had just five hosts since it's inception: Steve Allen from 1954-57, Jack Paar from 1957-1962, the legendary Johnny Carson from 1962-1992, Jay Leno from 1992-2009, and Conan O'Brien for eight short months in 2008-2009. Leno returned in March of 2010, but, in Hollywood's worst-kept secret, announced last week that he would be giving up his chair to current Late Nighthost and Capitol One pitchman Jimmy Fallon. Leno congratulated Fallon in his monologue last Wednesday: "I just have one request of Jimmy. We've all fought, kicked and scratched to get this network up to fifth place, okay? Now we have to keep it there. Jimmy don't let it slip into sixth. We're counting on you."

And more news . . . the show is leaving its studio in "beautiful downtown Burbank," California, where it's made its home since 1972, and returning to New York's 30 Rockefeller Plaza. There are lots of reasons to move back to the East Coast. Lorne Michaels, the producer behind NBC's longtime New York-based Saturday Night Live, is taking over at The Tonight Show, and host Fallon is already headquartered there. But there's one more behind-the-scenes reason that may be more important than all the rest. That's right, the tax man is welcoming The Tonight Show back with open arms!

Hosting a program like The Tonight Show is big business, and states naturally compete for it. New York decided to play hardball, and Governor Andrew Cuomo and the New York state legislature passed a sweetheart tax deal, dubbed the "Jimmy Fallon tax credit," to lure The Tonight Show back. The credit is available to "a talk or variety program that filmed at least five seasons outside the state prior to its first relocated season in New York." The show has to have a budget of more than $30 million or drop at least $10 million in capital expenses every year. It has to be filmed before a studio audience of at least 200 people. The credit is worth 30% of production costs. Remember, a tax credit is a dollar-for-dollar reduction in tax, not a deduction from taxable income. Assuming the show spends $30 million on production, that means $9 million in New York tax savings to parent company NBC. That's not a bad little bonus for a program that's estimated to make between $25 and $40 million per year!

That's some suspiciously targeted legislative language, isn't it? It doesn't have the broad reach of, say, "Congress shall make no law . . . abridging the freedom of speech." But it got the job done, and Governor Cuomo issued the following statement: "The original Tonight Show ushered in the modern era of television, broadcast here from New York. It is only fitting that as The Tonight Show returns to our state, it will be headlined by New York's own native son and resident, Jimmy Fallon. Today's announcement builds on the recent surge of television and film production happening here in New York that has restored our state as a global film production capital and driven the creation of new jobs and business growth throughout the state. I welcome The Tonight Show home."

We talk a lot here about tax planning. We're glad to see the folks at The Tonight Show listen! Keeping up with new opportunities is an important part of our job. We can't always find you million-dollar credits, but we can promise a proactive attitude. So call us when you're ready to pay less!

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April 3, 2013

New Audit Risk

by Kenneth Hoffman in Business Counsel, Tax Counsel, Tax Planning, Tax Tips

When it comes to audits, our friends at the IRS are interested in examining returns as accurately as possible. (No, they're not just interested in squeezing out more tax, and some audits actually result in refunds.) So the folks in the Small Business/Self-Employed area have compiled a series of Audit Technique Guides to help examiners with insight into issues and accounting methods unique to specific industries. As the IRS explains, "ATGs explain industry-specific examination techniques and include common, as well as unique, industry issues, business practices and terminology. Guidance is also provided on the examination of income, interview techniques and evaluation of evidence."

There are currently dozens of ATGs available. Some are straightforward and predictable, like attorneys, consultants, and child care providers. Others are more specialized or esoteric, like art galleries, cost segregation studies for real estate investors, and timber casualty losses. At one point, there were even two separate guides for Alaskan commercial fishing activities -- one for the fishermen who catch the fish and another for the vendors who sell it. You can find all of them online -- if you find yourself on the business end of an audit notice, reading your own industry's guide is like taking a sneak peek at your opponent's battle plan!

Naturally, the IRS wants to keep up with new challenges in new industries. And identity theft is one of those new industries playing a growing role in today's electronic and online economy. Identity thieves pretend to be someone else to access resources or obtain credit and other benefits -- like fraudulent tax refunds -- in that person's name. The problem is serious enough that the IRS has put identity theft at the top of its annual "dirty dozen" list of tax scams. And now, this year, the IRS has just issued an Audit Technique Guide for identity thieves.

You might be surprised that the IRS is publishing an audit guide for a clearly illegal business. But U.S. citizens are subject to tax on all worldwide income, from whatever source derived. The IRS really doesn't care how you make your income -- they just want their fair share. (Remember who finally nailed Al Capone?)

The good news is, there are plenty of legitimate deductions you can take to cut the tax on your spoils from identity theft. For example, you can deduct home office expenses if that's where you phish for information. Your home office qualifies if you use it "exclusively and regularly for administrative or management activities of your trade or business" and "you have no other fixed location where you conduct substantial administrative or management activities of your trade or business." To substantiate your deduction, keep a log and take photos to record your business use. It doesn't have to be an entire room -- you can claim any "separately identifiable" space you use for work. Rev. Proc. 2013-13 even offers an optional "safe harbor" method for deducting $5/foot for up to 300 square feet!

You can capitalize equipment like computers and printers that you use for hacking, or choose first-year expensing for faster deductions. You can also deduct day-to-day expenses, like internet access, utilities, and vehicle costs for driving to trash dumpsters to find personal information (mileage allowance or actual expenses). Some aggressive practitioners argue that you can even deduct business-related dry-cleaning expenses for "dumpster diving" outfits; however, there's no formal authority for this position.

We'll finish here with two important warnings. First, remember that identity theft is still a serious crime. If you're caught, you can face crushing fines, serious jail time, or both. And second, be very careful with anything you read around April Fools' Day!

If you found this article helpful, I invite you to leave a commit and please share it on twitter, facebook or your favorite social media site and with your friends, family and colleagues. Thank you.