October 2, 2013

IRS Announces No Refunds

by Kenneth Hoffman in Tax Counsel, Tax Tips

The IRS announced on its website on Tuesday that, “Tax refunds will not be issued until normal government operations resume.” This marked a change from its shutdown contingency plan, under which 859 employees in its Information Technology Services Enterprise Operations were excepted from the general shutdown furlough to ensure “refunds continue to process” and which said that "Without this support, . . . refunds to America's taxpayers would not occur.”

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 while bringing his clients Peace of Mind.

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.

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

I truly value your business and I appreciate your referrals. Refer your family, friends, acquaintances, and business colleagues to KR Hoffman & Co., LLC.

October 2, 2013

Horsing Around With Tax Preparers

by Kenneth Hoffman in Tax Preparation

This is a big week for taxes and technology. State "insurance exchanges" are scheduled to open for business under the Affordable Care Act, which lets consumers sign up for tax-subsidized individual health insurance. The White House has already announced that technological glitches will delay online enrollment on the small business ("SHOP") and Spanish-language sites. That's a decidedly 21st-century, "first world" problem. So, why on earth is the IRS lassoing an 1884 law dealing with lost Civil War horses to regulate tax preparers?

Right now, there are no industry-wide rules governing tax preparers. So, back in 2011, the IRS announced their new "Return Preparer Initiative," which required preparers to register with the IRS, pass a competency test, and take continuing education classes. The new rules apply to any tax preparer who isn't already regulated as an attorney, Certified Public Accountant (CPA), or Enrolled Agent (EA).

In 2012, a group of preparers sued to stop the program, arguing that the IRS lacked congressional authority to enforce it. Earlier this year, Judge James Boasberg agreed, shutting down the program. Naturally, the IRS appealed. And that brings us to our horses.

After the Civil War, thousands of Americans who had lost horses in the conflict brought war loss claims against the government. A whole stable full of agents emerged to press claims for the victims, usually for a piece of the recovery. Would you be shocked to learn that some of those claims were bogus, with greedy agents representing broken-down old nags as "Sea Biscuit"-class steeds? So the government passed the "Enabling Act of 1884" — also referred to as "the Horse Act of 1884" — to grant the Treasury Department permission to regulate them. (You remember all of this from high-school history, right? OK, neither did we.)

Well, last week, the IRS took their appeal to court, and saddled their argument on the Horse Law. Gil Rothenberg, who argued the government's case, said "I hate to beat a dead horse, especially one from the Civil War." But he argued that tax preparers represent clients just like 19th-century "enrolled agents" represented theirs. Therefore, he says, the 1884 law gives the Treasury the same authority to regulate today's tax preparers.

"Hold your horses," say the tax preparers who filed the case! Today's tax preparers merely provide a service to their clients. They don't actually "represent" them before the government the same way attorneys, CPAs, and EAs all do. That makes the 19th-century law a horse of a different color, with no binding authority to today's case.

Tax experts who observed the oral arguments report the judges sounded skeptical of the IRS's argument. We should know sometime early next year what the final decision will be. Of course, if Congress doesn't like the results, they can simply saddle up new legislation to hobble the Court.

We think the real question isn't who regulates your tax professionals. We think the real question is what sort of attitude a tax professional brings to the table. Are they content to put the right numbers in the right boxes on the right forms, then call it a day? Or do they give you the plan you need to create the savings you really want? So call us for that plan. And remember, we're here for your whole herd!

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

I truly value your business and I appreciate your referrals. Refer your family, friends, acquaintances, and business colleagues to KR Hoffman & Co., LLC.

September 25, 2013

A Sweeter Tax Than Most

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

When you hear the word "tax," you probably think of something the IRS takes out of your paycheck. Or you might think of something they take out of an inheritance. But taxes affect virtually every financial transaction you make. Take, for example, that simple jar of honey lurking on the shelf in your refrigerator.

Americans eat more honey than anyone else in the world — about 400 million pounds of it a year. Most of it goes towards sweetening foods like cereals, cookies, and breads. Even whiskey producers are adding honey to their blends to attract younger drinkers. (The Scotch Whiskey Association just stung Dewars for labeling their new "Highlander Honey" as "scotch" rather than "spirit drink.")

Where does all that honey come from? Well, China is the world's largest honey exporter. But Chinese beekeepers sometimes use pesticides banned here in the U.S. They sometimes dry their honey by machine, which lets the bees produce more, but leaves the honey with a foul taste similar to sauerkraut. Worst of all, Chinese producers sell their honey at prices as low as half of what our domestic producers charge.

Back in 2001, the U.S. government slapped Chinese honey with punitive tariffs, currently set at $2.63/kilogram, to protect American producers. Those taxes can triple the cost of Chinese honey. So today, about 40% of our honey comes from here in the U.S., with the rest coming from Argentina, Brazil, Canada, and other countries.

What's a poor Chinese beekeeper to do? Enter the "honey launderers." Chinese producers send their honey to nearby countries like Malaysia, Vietnam, India, or Korea, and re-label it as coming from those countries. They add rice sugar, molasses, or fructose syrup to hide any unpleasant tastes or smells. (Ick.) They filter the honey to remove the pollen, which palynologists, or pollen specialists, can use like a natural "fingerprint" to track down a honey's origin. And they pocket the savings they create by evading the tax.

How much tax does the illicit honey avoid? A lot. Back in 2008, Immigration and Customs Enforcement officials charged 14 people with a globe-trotting scheme to evade $80 million in payments. And in February of this year, officials busted two of the nation's biggest suppliers for evading $180 million more. In a scene reminiscent of Donnie Brasco, officials launched "Operation Honeygate" and planted an agent "on the inside" for a year. The agent served as one supplier's director of procurement, and the investigation led to five individual guilty pleas, two deferred prosecutions, and $3 million in fines.

What's the lesson? Taxes are baked into the price of everything you buy, whether they're even paid or not!

There's not much we can do to help you avoid hidden tariffs on baked goods. Fortunately, we can help with the taxes that really count — taxes on your income, your payroll, and even your estate. If you're busy as a bee, you deserve to keep everything the law allows. So call us for the plan you need — and remember, we're here for everyone else in your hive!

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

I truly value your business and I appreciate your referrals. Refer your family, friends, acquaintances, and business colleagues to KR Hoffman & Co., LLC.

September 18, 2013

When the IRS Comes a-Knockin'

by Kenneth Hoffman in Tax Counsel, Tax Tips

If you get an IRS audit notice, you probably expect to spend hours responding to endless document requests, visiting bland government offices, and meeting with faceless bureaucrats. You might hope you get lucky and find yourself assigned to a pleasant, friendly examiner, one who acknowledges how intrusive and annoying the audit process can be. But you certainly wouldn't expect to wind up in bed with the auditor!

Vincent Burroughs is a 40ish contractor and amateur motorcycle racer in Fall Creek, Oregon. When the economy collapsed in 2008, his business suffered and he got behind on his taxes. In 2011, the IRS came calling. The auditor, Dora Abrahamson, recognized him from his motorcycle racing, and apparently liked what she saw. Burroughs claims Abrahamson started flirting with him over the telephone and by text message ("[I] need a hug badly, do you have one?"), offered him massages, and even sent him a "selfie" in a revealing pose!

Burroughs figured he had a friend at the IRS, so he didn't stop the flirting. In September 2011, Abrahamson visited him at his house to give him a hand with his papers. She showed up "provocatively attired," he says. She told him she could impose no penalty, or a 40 percent penalty. And she said if he would give her what she wanted, she would give him what he needed. After an awkward series of events that we don't need to detail here, the two wound up in bed. Shortly thereafter, Abrahamson stepped down from the case due to a conflict of interest, and the new auditor told Burroughs he owed $69,000.

Abrahamson's conduct caused Burroughs "to be agitated, depressed, and unable to sleep." It also made his girlfriend unhappy. (Uh oh.) So Burroughs sued Abrahamson and the IRS, seeking unspecified punitive damages. He claimed the IRS failed to properly supervise Abrahamson for, among other things, "permitting her carnal desires to overcome her judgment that it was inappropriate to pursue a sexual relationship with a taxpayer she was auditing," "failing to seek and follow through on getting help for her psychological problems," and "failing to sufficiently train Defendant Abrahamson on how to avoid situations which could lead to the appearance or actuality of sexual conduct with taxpayers being audited or investigated."

Unfortunately for Burroughs, the Federal Tort Claims Act waives immunity for government employees only when the injuries they cause take place within the scope of the employment. U.S. Magistrate Thomas Coffin ruled that Abrahamson's conduct did not occur substantially within the time and space limits authorized by her employment, was not motivated by a purpose to serve the employer, and was not of a kind that she was hired to perform. Therefore, it did not occur within the scope of her employment — so the IRS is off the hook! (News reports are less clear on whether Burroughs is off the hook with his girlfriend.)

The case has naturally attracted all sorts of press. Burroughs appeared on ABC's 20/20. And we thank Tonight Show host Jay Leno for making the obvious IRS joke so we don't have to!

What other lessons can we draw from this week's sad story? Well, if you do ever get an audit notice, call us before you try and handle it yourself! We'll make sure you get all the professional assistance you need to defend your financial interests and even your dignity.

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.

I truly value your business and I appreciate your referrals. Refer your family, friends, acquaintances, and business colleagues to KR Hoffman & Co., LLC.

September 4, 2013

When 20 Is Less Than 20.1 Million Dollars

by Kenneth Hoffman in Business Counsel, Tax Planning

Labor Day has come and gone, and, while fall isn't "officially" here, it's time to put away those summer whites. Never mind that the mercury is still hitting 100 degrees in parts of the country; forget about those pennant races still heating up in the AL West and NL Central. This weekend, the National Football League kicks off regular season play! This week's season opener is just the first step on the road to Super Bowl XLVII, to be played outdoors onFebruary 2, 2014, at the Meadowlands in New Jersey. (If you look hard enough on ESPN, you can find pre-game coverage starting early next week.)

Earlier this year, Baltimore quarterback Joe Flacco won MVP honors in Super Bowl XLVII and signed a new six-year contract worth $120.6 million. It makes him the highest-paid player in the game, just ahead of New Orleans quarterback Drew Brees. But in a surprise twist that NFL statisticians would love, Brees will actually take home more money than Flacco.

How can that be? Taxes, of course — why else would we be talking about it?

Here's how it all works. Flacco plays his home games at M&T Bank Stadium in Baltimore, with his new contract paying him $20.1 million per year. According to Americans for Tax Reform, the IRS will intercept $8.72 million of that paycheck. Maryland and Baltimore County will pick off $1.72 million more, for a total combined tax bill of $10.44 million, or 51.98%. Flacco will also pay a "jock tax" for several of his away games — for example, when he plays the Cincinnati Bengals on November 10, he'll owe Cincinnati's 2.1% earnings tax on his pay for that game. And he'll pay even more tax on his bonuses, endorsements, and other income. It would be hard to blame Flacco for thinking the tax man roughs him up worse than any team's defensive line!

Now, Flacco could take home far more by playing for a team in one of the nine states that don't levy income taxes. The Jacksonville Jaguars (2-14 for 2012) would love a Super Bowl MVP at their helm. So would the 8-8 Dallas Cowboys. Neither Florida nor Texas tackle players with state or local income tax, which means Flacco would have taken home that $1.72 million sack.

Meanwhile, Drew Brees plays his home games at the New Orleans Superdome, with a contract paying him "only" $20 million per year. That's $100,000 less than Flacco makes in Baltimore. Brees pays the same 39.6% income tax and 3.8% Medicare tax as Flacco. But Louisiana's top tax rate is just 6% (on income over $50,000), compared to Maryland's 6.25% (on income over $1 million). That difference might not seem like a lot. But bring out the chains, and it means Brees actually keeps $470,000 more per year than Flacco.

As for the rest of us, this week doesn't just mark the start of football season. It also marks the start of tax-planning season! No NFL team would take the field without a game plan. So why would you think you can beat the IRS without a plan? If you don't have one, the clock is counting down toDecember 31, with no overtime. And remember, we're here for your teammates, too!

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.

August 29, 2013

IRS To Treat Legally Married Same-Sex Couples As Married

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

The Treasury Department and IRS announced today that legally married same-sex couples will be treated as married couples for federal tax purposes. This tax treatment will apply even if a couple lives in a state that does not recognize same-sex marriage so long as they were married in a state that does.

The guidance, stemming from the Supreme Court ruling this summer that overturned the Defense of Marriage Act, says same-sex couples can begin filing tax returns as "married filing jointly" or "married filing separately" for the 2013 tax year.

"Today's ruling provides certainty and clear, coherent tax filing guidance for all legally married same-sex couples nationwide. It provides access to benefits, responsibilities and protections under federal tax law that all Americans deserve," Treasury Secretary Jack Lew said in a statement.

For more information... http://www.politico.com

August 28, 2013

Hit 'Em Where It Hurt

by Kenneth Hoffman in Tax Counsel, Tax Preparation

When people misbehave — badly enough — they go to jail. But when corporations misbehave, they can't go to jail. So they pay fines instead. Recent years have brought a wave of enforcement actions for various corporate offenses, from banks ripping off customers, to investment managers trading on inside information, to drug companies poisoning patients, to energy producers polluting public waters.

Corporations usually find a little bit of silver lining in those monster settlements. They get to deduct the payments on their taxes! You like that? You and I get to help pay the freight for their cheating!

Now, Section 162(f) of the Internal Revenue Code states that "no deduction shall be allowed . . . for any fine or similar penalty paid to a government for the violation of any law." But defining a "fine or penalty" isn't as obvious as you might think (and it gives corporate tax lawyers the chance to bill a lot of hours arguing about it). Few of those settlements, especially in the Wall Street arena, require offenders to admit wrongdoing, and most include some form of restitution or disgorgement of profit. Those amounts aren't considered a fine or penalty, so they remain deductible.

What does that mean for our friends at the IRS? Well, when Exxon-Mobil paid $1.1 billion to settle claims over an oil spill in Alaska, it actually cost them just $524 million after tax. When Bank of America agreed to pay $335 million to settle charges that they had discriminated against black and hispanic borrowers, they got back up to $117 million of it in tax savings. Similarly, when credit card giant Capital One paid $210 million to resolve charges that they had duped customers into paying for credit monitoring and other add-on services, they saved millions in tax.

But now it looks like Uncle Sam is getting fed up with subsidizing the settlements by cutting off those juicy tax breaks. Now he's working to hit 'em where it really hurts!

Back in November, oil producer BP agreed to pay $4 billion to settle the Deepwater Horizon spill. Ordinarily, that might have meant a fat tax deduction to cushion the blow. But no such luck this time — the settlement included language explicitly defining the damages as "punitive," which prohibits BP from deducting any of that amount from their U.S. taxes.
Earlier this month, Swiss bank UBS paid $500 million to settle charges they manipulated the "LIBOR" interest-rate benchmark. Again, that settlement prevents UBS from deducting the penalty on their taxes.
Most recently, hedge fund manager Philip Falcone agreed to admit wrongdoing, accept a five-year ban from the securities industry, and pay an $18 million nondeductible penalty. Denying a tax deduction seems especially appropriate in Falcone's case, since federal regulators said his actions "read like the final exam in a graduate school course in how to operate a hedge fund unlawfully."

Tax policy questions like these can sometimes sound boring and pointless. But this one has real consequences. On the one hand, some experts argue that letting miscreants deduct settlements on their taxes encourages companies to settle out of court and avoids ongoing litigation. On the other hand, consumer advocates respond that tax-deductible settlements are a slap in the face to taxpayers, who wind up footing 35% of the tab. What doyou think? Do the tax deductions still serve a legitimate purpose? Or should Washington keep up the new hard line?

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.

August 4, 2013

Putting for Dough

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

August is almost here, and golf season is in full swing. Duffers are filling the air with curses as colorful as their outfits. Tiger Woods is taking a break from romancing pancake-house waitresses to work on his game. And Phil Mickelson is the latest man of the hour. Earlier this month, he took a one-hole playoff to win the Scottish Open at Inverness. Just one week later, he posted a 3-under 281 to take the British Open at Muirfield. Mickelson's £1,445,000 in winnings translates into almost 2.2 million in U.S. dollars.

So, he's got that going for him, which is nice. But how much will he actually get to keep?

Mickelson has already told the world how he feels about paying taxes. Back in January, he said he might leave his home state of California because of recent hikes in federal and state taxes. These include 39.6% for Uncle Sam (up from 36%), 3.8% for Medicare (up from 2.9%), and 12.3% for the Golden State (up from 9.3%). "If you add up all the federal and you look at the disability and the unemployment and the Social Security and the state, my tax rate's 62, 63 percent," he was quoted as saying in Yahoo Sports. "So I've got to make some decisions on what I'm going to do." Mickelson's remarks landed him some deep rough, and he wound up comparing them to a botched drive that cost him the 2006 U.S. Open.

But Phil's U.S. taxes may look pretty reasonable when you consider what he'll pay on his recent Scottish winnings:

For starters, he'll pay the United Kingdom a wee bit over 44% on his tournament purses.
The U.K. will take a divot out of any bonuses he receives for winning those tournaments. Plus they'll take a chip of the bonuses he gets at the end of the year for his overall tour ranking.
It gets even better from there. The U.K. won't just tax Mickelson on his tournament winnings. It also taxes him on part of his endorsementincome for the two weeks he spent in-country.Forbes estimates he earned $44 million from Callaway, Barclay's, KPMG, Exxon Mobil, Rolex, and others last year, so that extra endorsement tax may leave him wanting a mulligan.
He'll get a credit against his U.S. tax for everything he pays abroad. But there's no credit for the extra Medicare tax he'll pay. And don't forget, California takes a penalty stroke, too.

All in all, Mickelson will pay about 61% tax on his British earnings. That's after his considerable expenses, including travel, meals, agent fees on endorsement income, and 10% to his caddy.

We realize that keeping $800,000 or so for a couple of weeks' work isn't bad — especially when that "work" involves playing two of the most storied courses in all of golf. Still, Mickelson's story emphasizes that it really is what you keep that counts.

If you're a golfer, you've certainly heard the saying "drive for show, putt for dough." Well, our proactive planning service is the tax equivalent of putting for dough. That's because top-line revenue is impressive — but if your short game isn't up to par, those big drives may not actually matter. If you don't have a plan, call us for help sinking that long putt across the IRS green. And remember, we're here for the rest of your foursome, too!

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.

I truly value your business and I appreciate your referrals. Refer your family, friends, acquaintances, and business colleagues to KR Hoffman & Co., LLC.

August 4, 2013

Top 10 List To Protect Your Tax Savings

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

The most important steps in maintaining a tax strategy is proper documentation.

Proper documentation increases the accuracy of the information you provide to your tax advisor. This helps your tax advisor do more for you because they have good information.

Proper documentation also provides the support the government requires in the event you are audited. This means protecting your tax savings and avoiding penalties and interest.

Best of all, when you keep proper documentation, you do a better job of identifying all of your deductions so it's a great way to reduce your taxes.

How does your documentation rank?

Here is my Top 10 list of items to document in your tax strategy.

Annual meeting minutes for your business to support activity reported on your business tax return(s)
Accurate bookkeeping that is up-to-date
Receipts for expenses, particularly travel, meals and entertainment
Loan documents between you and your entities for any loans between you and your entities
Agreements to buy or sale assets (such as real estate, equipment, vehicles, etc.)
Agreements between you and your entities (or businesses) for services performed by or for your entity
Agreements between your entities (or businesses) for services performed by one of your businesses for another one of your businesses
Summary of business activities performed in your home office and the percentage of your home used for home your office
Mileage logs to support the business use of your vehicle
Activity logs to support "real estate professional" status

Of course, not all of the above items may apply to you, but for those that do, you definitely want to have that documentation in place.

And, of course, the above list is not all inclusive, but if you've got this documentation in place, your documentation is well on its way.

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.

I truly value your business and I appreciate your referrals. Refer your family, friends, acquaintances, and business colleagues to KR Hoffman & Co., LLC.

July 17, 2013

Hotties and Notties

by Kenneth Hoffman in Tax Planning, Tax Tips

Junior high school is a difficult time for parents as well as students. It's a time when boys start to discover girls, and girls start to discover boys. (Reports differ on exactly which group discovers the other first, but it's equally terrifying for most parents.) One of the very first things junior high boys and girls start doing when they discover each other israting each other — usually on a scale of 1-10. The 9s and 10s form cliques to congratulate each other on their good fortune, while the 3s and 4s learn to tell jokes, plan on making money, or learn to get by with a "great personality." (In case you've forgotten, junior high school can be really cruel.)

It turns out, though, that junior high kids aren't the only ones rating the world around them. Now comes news that two German economics professors have rated the attractiveness of 100 different countries' corporate tax systems. Their paper, "Measuring Tax Attractiveness Across Countries", develops a new measure, which they call the Tax Attractiveness Index, "reflecting the attractiveness of a country's tax environment and the tax planning opportunities that are offered." And the results aren't nearly as obvious as that cutie you spotted across the locker hall that first day of eighth grade.

The professors identified 16 relevant components of corporate tax systems. They started with obvious factors like statutory tax rates, taxation of dividends and capital gains, and withholding taxes. Then they added more esoteric factors like group taxation regime, loss offset provisions, double tax treaty networks, thin capitalization rules, and controlled foreign company rules. (That's the stuff you pay us to worry about.) Next, they developed methods to quantify each factor from zero (signifying the least favorable conditions, such as high statutory tax rates) to one (signifying the most favorable conditions, such as tax-free capital gains). Finally, they added the values for each condition and divided each country's total score by 16 to yield the final rankings.

Whew! So, what do the results show? Which countries are the hotties and which countries are the notties? Well, generally, Caribbean tax havens like Bermuda and the Bahamas (tied for #1), the Cayman Islands (#3), and British Virgin islands (#4), ranked highest. European nations also fared well, especially European Union nations benefiting from the Parent-Subsidiary Directive and Interest and Royalty Directive abolishing intra-EU withholding taxes.

And what about Uncle Sam? Is he flirting with the "mean girls," or is he waiting to get picked last for kickball? Well, the United States scored 0.2342 out of a possible 1.000. That placed Uncle Sam 94th out of 100 countries. We're trailing Egypt, Japan, and Zimbabwe. But we're still beating the Philippines, Indonesia, Peru, South Korea, Venezuela, and last-place Argentina!

So now you know — tax-wise, at least, Uncle Sam's a dud, averting his eyes from hotties like Bermuda. We confess we don't know the first thing about Cayman Island group taxation regimes or Zimbabwean thin capitalization rules. But we do know the most expensive tax mistake you can make, in this or any country, and that's failing to plan. So call us if you're ready to start saving, whether you want more dollars, euros, shekels, pesos, or yen. And remember, we're here for your family, friends, and colleagues, too!

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.