WHAT YOU SHOULD LEARN FROM A RECENT TAX COURT CASE

A recent court case - Lewis, TC Memo 2017-117 – brings attention to the importance of keeping good records of your tax deductions.

Willie Lewis was a minister and an author who occasionally performed weddings, attended meetings, and conducted seminars.  He timely filed a federal return that claimed a deduction for unreimbursed employee business expenses.  The IRS audited the return and disallowed the deductions for the business expenses.

The Tax Court found that Lewis was not engaged in a trade or business for profit under Internal Revenue Code Sec. 162.  So the deductions related to his ministry and book writing activities were limited to the gross income he derived from these activities. However, because Mr. Lewis derived no gross income from the activities, he wasn't entitled to any deductions.

But the more important take away from this decision is the fact that the Court concluded that even if Mr. Lewis were found to have engaged in a trade or business for profit, the claimed deductions, which consisted mostly of automobile and travel-related expenses, would not be allowed because the taxpayer failed to properly substantiate them.  Lewis produced no accounting records, bank statements, invoices, or any other records traditionally associated with a business operating for a profit. He only submitted credit card statements and a summary showing certain expenses.  

As per IRC Sec. 6001 taxpayers are required to substantiate their claimed deductions. In addition, per IRC Sec. 274, additional substantiation is required for -

1. Any traveling expense, including meals and lodging away from home.

2. Any item with respect to an activity in the nature of entertainment, amusement, or recreation.

3. Any expense for gifts.

4. The use of "listed property", such as a passenger automobiles.

The taxpayer must substantiate expenses by adequate records or by sufficient evidence corroborating -

1. the amount of the expense,

2. the time and place of the travel, use of the property, etc.,

3. the business purpose of the expense, and

4. the business relationship to the taxpayer.  

The bottom line – it is vitally important to keep proper contemporaneous documentation of all business-related expenses, whether claimed as employee business expenses on Schedule A or trade or business expenses on Schedule C.

Actually it is vitally important to keep proper contemporaneous documentation for ALL items deducted on your tax return.

TTFN

 

 

 

 

 

 

 

 

 

 

 

WHAT’S THE BUZZ, TELL ME WHAT’S A HAPPENNIN’

* No surprise here.  Kay Bell gives us the word that “Bill collectors accused of using financially dubious tactics to collect unpaid IRS debts” at DON’T MESS WITH TAXES (highlight is mine) -

“During a recent U.S. House hearing, Internal Revenue Service watchdogs told Representatives that, less than two months on the job, private tax bill collectors were already breaking collection and consumer protection rules.”

Kay reports (again, highlights are mine) –

“ . . . Pioneer is, according to the letter, ‘pressuring taxpayers to use financial products that could dramatically increase expenses, or cause them to lose their homes or give up their retirement security’.

In addition to making general suggestions about how to pay their overdue taxes, such as getting a bank loan or cashing in investments, the letter says that one of Pioneer's collection scripts also advises its agents to give taxpayers repayment options that are ‘extraordinarily dangerous for taxpayers' financial security’."

I told you this would happen!  Outside collection agencies could care less about the individual taxpayer or about ethical behavior – they are only interested in earning fees by collecting as much money as possible, whether or not it is truly owed, any way they can.  

Forcing the IRS to use outside collection agencies is, and has always been, a stupid idea.  It did not work properly in the past, so why did the idiots in Congress think it would work this time?  Oh well, I guess that is why they are idiots!

* At MARKET WATCH Bill Bischoff asks us to “Take a look at this real-life tax horror story”.

It is indeed a horror story – but the horror could have been avoided.

Bill’s bottom line –

“. . . pay attention to details, don’t procrastinate when a tax problem is identified, and consult a competent tax pro to help you resolve the situation unless the problem is a really simple one.”   

Every person who is thinking of starting a business should consult a competent tax pro, and, once the business has been started, immediately give all paperwork related to the business, especially from a state agency, to that tax pro!

FYI – if you are thinking about starting a business you may want to check out my AN INTRODUCTION TO SELF-EMPLOYMENT: THEBASICS OF SCHEDULE C.

* I am going to “go to press” with my THE JOY OF AVOIDING NEW JERSEY TAXES at the end of June.  So you don’t have much time left to take advantage of my “pre-publication” offer (click here).  This offer will only apply to orders postmarked before July 1, 2017.

* Jason Dinesen begins a new post series on "Managing Cash Flow and Working Effectively with Banks" at DINESEN TAX TIMES.  Check out “Part 1”.

* A reminder from the IRS – “IRS Warns of New Phone Scam Involving Bogus Certified Letters; Reminds People to Remain Vigilant Against Scams, Schemes this Summer”.

THE FINAL WORD

A typical example of nut job loser Trump’s delusional narcissism from an interview with Michael J Fox in the AARP magazine –

“This was about an episode of SPIN CITY {late 1990s sitcom – rdf}.  Since it was about New York, you had to have all the New Yorkers in it, right?  He {Trump} came in, did his stuff, did it well – he was pure Trump.  Great.  We enjoyed having him on the show.  But every time I’ve seen him since then, the same thing has happened.  If I walked out that door right now and he happened to be right there, it would happen again.  He’d say, ‘When I was on your show it was the highest rating you ever got!’”

And you know he would not be joking - the buffoon sincerely believes it.

He certainly hasn’t changed.  What an arsehole!

TTFN

 

 

 

 

 

 

 

 

 

 

SO YOU WANT TO BE A TAX PREPARER

Last month I offered some tax advice for new college graduates (see “Dear Graduate”).  Now some advice for graduates who are considering becoming a paid tax preparer, either full-time or part-time.

As you may know, I have been preparing 1040s as a professional tax preparer since February of 1972.  I love my profession, and share my advice and comments on the tax preparation business in a new e-book SO YOU WANT TO BE A TAX PREPARER.

As a potential new tax preparer, as my colleague Andy Frye of Pronto Tax School put it, “you don’t know what you don’t know”.  This book will help you to know what you don’t know and will provide the answers.

This book can also provide help to tax preparers who would like to expand their practice.

In this book I discuss in detail -

·         LEARNING HOW TO PREPARE TAX RETURNS

·         THE PTIN

·         TAX PREPARER MEMBERSHIP ORGANIZATIONS

·         CONTINUING PROFESSIONAL EDUCATION

·         ETHICAL STANDARDS AND PRACTICES

·         BUILDING A PRACTICE

·         USING A BLOG TO PROMOTE YOUR TAX PRACTICE

·         GETTING A CREDENTIAL

·         STRUCTURING YOUR TAX PRACTICE

The APPENDIX includes copies of a Code of Ethics, Standards of Professional Conduct, a sample Engagement Letter and the TAX PROFESSIONAL’S ONLINE RESOURCE GUIDE.

The cost of this book is only $5.45 delivered as a pdf email attachment, or only $9.45 for a print version sent via postal mail.

To order your copy of this book send your check or money order payable to TAXES AND ACCOUNTING, INCORPORATED, and your email or postal address, to –

SO YOU WANT TO BE A TAX PREPARER

TAXES AND ACCOUNTING, INC

POST OFFICE BOX A

HAWLEY PA 18428

TTFN

 

 

 

 

 

 

 

 

 

 

 

TAX REFORM UPDATE

Will there be tax reform legislation passed in 2017 (the actual question is, with the current nut job loser in the White House, will there be any legislation successfully passed in 2017)?  You betcha, according to Paul Ryan.

 

Speaking to the National Association of Manufacturers the other day Ryan said, “I’m here to tell you – we are going to get this done in 2017.”  According to Ryan the end of calendar year 2017 would be a realistic timeline, but he hoped to get it done sooner.

 

Ryan did not provide any real details (similar to the scribblings on a cocktail napkin idiot Trump released as his “tax plan”), but he did call for eliminating the dreaded Alternative Minimum Tax (AMT), the federal Estate Tax and “special interest carveouts and deductions”, doubling the Standard Deduction, lower and fewer tax rates, and making any reforms permanent – all good things.

 

My only concern with eliminating the federal Estate Tax has always been how this will affect the current step-up in basis of inherited assets.  Taxpayers have a hard enough time remembering what they paid for stock purchased three years ago – knowing what their deceased parents paid for stock purchased in the 1960s will be impossible.

 

Ryan also continued to put forth the ridiculous idea that taxpayers could file a tax return the size of a postcard.  This would only be possible if the taxpayer was single, had only W-2 income, and could not itemize – similar to the current Form 1040EZ filer.  Providing a postcard option would discourage taxpayers from taking full advantage of available tax deductions and credits.

 

Tax reform legislation will probably not be introduced until the fall – so it is possible that it could be passed by the end of the year (assuming, of course, that idiot Trump, if he is still in office, does not fuck it up).  But even if reform is enacted by year-end, tax law changes would most probably not take effect until at least calendar year 2018.

 

I truly hope that real and substantive tax reform is enacted this year – but, to be honest, I am not holding my breath.

FYI, the CCH Headline News email newsletter tells us "IRS Supports Tax Reform that Simplifies Tax Code, Koskinen Says".

 

Click here to check out a compilation of my recommendations for tax reform.  Let me know what you think of my ideas.

 

A tax-related bill, supported by both Republicans and Democrats, has actually passed in the House - “The Mobile Workforce State Income Tax Simplification Act of 2017”. 

 

According to the bill’s summary -

 

“This bill prohibits the wages or other remuneration earned by an employee who performs employment duties in more than one state from being subject to income tax in any state other than: (1) the state of the employee's residence, and (2) the state within which the employee is present and performing employment duties for more than 30 days during the calendar year in which the wages or other remuneration is earned.”  

 

So if you lived and worked in New Jersey, but spent 23 days working at the branch office in Kansas and 15 days working at the branch office in New York, you would not have to pay state income tax to Kansas or New York on your wages for those days.  But if you spent 35 days in Kansas you would.

 

This law would not apply to professional athletes and headline entertainers.  They would still have to pay income tax to each state in which they appear during the year, regardless of the actual number of days physically in the state.

 

This involves the issue of “nexus”, which affects both individuals and businesses.

 

When it comes to both individual and business state income tax nexus it is my belief that it should be totally eliminated.  An individual should only be taxed by the state in which he or she lives or the non-resident state where his or her job or business is physically located (i.e. live in NJ and work in NYC).  And a corporation or other business should only pay state income tax on net income to the state in which it is organized and physically located.

 

State income tax nexus rules, and they differ from state to state, are truly a PITA and waste lots of time and money for employers and businesses.

 

Individual states benefit from nexus laws by receiving income from non-residents, but residents who must pay income tax to other states receive a credit on the resident state return for taxes paid to other states.  So I expect the actual net cash benefit to the states is really not substantial (to be fair, I have not actually investigated nexus tax statistics).  

 

TTFN

 

 

 

 

 

 

 

 

 

 

 

 

 

WHAT’S THE BUZZ, TELL ME WHAT’S A HAPPENNIN’

Before I get to taxes - please join me in my campaign to enact a TRAVEL BAN on Trump by writing to your representatives in Washington.  Read, share, and send my OPEN LETTER TO THE MEMBERS OF CONGRESS.

Also read and share THE TRUTH ABOUT DONALD TRUMP.

* Tony Nitti of FORBES.COM provides some excellent and important tax information for couples who are considering marriage in “It's Wedding Season: Here Are Five Tax Reasons Not To Say 'I Do'” –

“There is a nuance within the current body of tax law called the ‘marriage penalty’, and it is a very real, very painful thing. So be warned, if your big day is planned for this summer, you'll be paying for it next April.”

Tony only touches on the tax consequences of being married.

The post also gives some hints for wedding guests to look for to predict if the couple will be divorced within three years.

* Staying with FORBES.COM, TaxGirl Kelly Phillips Erb lists “11 Signs That It's Time To Find A New Tax Professional”.

Perhaps one of the most important reason to go elsewhere is her #4 – “Your tax pro won't sign your return”.

A point of information – whatever you do, do not turn to me to be your new tax pro.  Read my lips – I do not accept ANY new clients.

* Information on a new phone scam from NATP -

“Beware of New Phone Scam: Targets EFTPS Users

The IRS is warning people to beware of a new scam linked to the Electronic Federal Tax Payment System (EFTPS), where fraudsters call to demand an immediate tax payment through a prepaid debit card. This scam is being reported across the country, so taxpayers should be alert to the details.

In the latest twist, the scammer claims to be from the IRS and tells the victim about two certified letters purportedly sent to the taxpayer in the mail but returned as undeliverable. The scam artist then threatens arrest if a payment is not made through a prepaid debit card. The scammer also tells the victim that the card is linked to the EFTPS system when, in fact, it is entirely controlled by the scammer. The victim is also warned not to contact their tax preparer, an attorney or their local IRS office until after the tax payment is made.

EFTPS is offered free by the U.S. Department of Treasury and does not require the purchase of a prepaid debit card. Since EFTPS is an automated system, taxpayers won’t receive a call from the IRS.”

* I am almost ready to “go to press” with my truly unique book of planning and preparation advice, information, and resources on NJ state income taxes - THE JOY OF AVOIDING NEW JERSEY TAXES.  There is still time to take advantage of the special 60% discount pre-publication offer if you order today!

* Donna Holm answers the question “When is it OK to throw out old tax documents?” at ACCOUNTING TODAY.

I discuss this topic in the May 2017 premiere issue of ROBERT D FLACH’S 1040 INSIGHTS.  In the item I state –

“I firmly believe that you should keep the paper copy of your Form 1040, or 1040A, plus all supporting Schedules and Forms, and copies of all your Form W-2s, forever.” 

* Also from ACCOUNTING TODAY, Michael Cohn tells us “Hatch asks for input on Senate Republicans' tax reform plan”.

I sent the committee my booklet A TAX PROFESSIONAL FOR TAX REFORM.

THE FINAL WORD

Write to your Congresspersons to show support for H.R. 2414, the Stop Waste And Misuse by the President (SWAMP) Act.   

The SWAMP Act was introduced by Representative Ted Lieu (D-CA) on May 11, 2017. If enacted, this legislation would compel President Trump to reimburse the Department of the Treasury for any costs associated with travel to a commercial entity, in which he has a financial interest, along with any associated protection costs by the U.S. Secret Service.

TTFN

 

 

 

 

 

 

 

 

 

 

 

STUFF

ü  Despite being in “the business” for 45 years, I usually learn one or two new things from the various monthly and quarterly print publications of the National Association of Tax Professionals.  The latest issue of TAXPRO MONTHLY provided the following –

“Did you know that ‘CP’ stands for ‘Computer Paragraph’?  So CP2000 stands for Computer Paragraph 2000, an automated letter that is triggered by discrepancies on the tax return.” 

The form letter that you receive from the IRS indicating something may be wrong or missing on, or requesting additional information for, your 1040 (or 1040A) is identified by numbers, or numbers and letters, preceded by “CP”.  I actually never, until now, actually knew what the “CP” stood for.

The article in this issue about responding to a CP2000 reminded me of the importance of properly dealing with IRS and state tax agency letters, notices and statements.  If you receive a form letter or notice from the IRS or your state DO NOT IGNORE IT – the issue will not just go away!  And DO NOT PUT IT ASIDE TO DEAL WITH IN THE FUTURE.  Review it immediately.  If the return in question was prepared by a professional tax preparer SEND THE LETTER OR NOTICE TO YOUR TAX PREPARER IMMEDIATELY!

In my experience at least 2/3, if not 3/4, of all such notices are wrong – more with state notices than federal ones – but they definitely do need to be responded to promptly.

And, while the IRS or state wants you to respond promptly, do not expect a prompt response to your reply from the government.  In about 45 days after you rely to an IRS notice or letter you will receive a form letter from “Sam” saying that they need an additional 45 days to properly review and process your response.  45 days later you will receive a second letter telling you they need another 45 days.  When dealing with any government agency you need patience.

ü  As a point of information, all my writings about federal tax planning and preparation, here at TWTP or in any of my electronic or print publications, applies to a taxpayer who lives in a “non-community property state”, which most states are. 

The specific rules and regulations that apply to community property states are, to be honest, somewhat FU-ed.  In my 45 years as a paid preparer I have never had to deal with community property state issues, and certainly never will going forward.  So I have never had the need, or desire, to research community property state rules and regulations.

FYI, the current community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.  Alaska is an opt-in community property state that gives both parties the option to make their property community property.  So if you live in one of these states you may need to check on some of what I discuss here at TWTP with a local tax professional.

ü  A recent discussion with a client and friend had me do some research to verify what I had believed to be true regarding the tax basis of jointly-held investments for a surviving spouse.

What I had believed to be true was indeed true –

If investments are jointly owned by a married couple in a non-community property state (important) – stock, bonds, and mutual fund shares held in a joint brokerage account, or real estate jointly owned - and one spouse passes, the deceased spouse’s half of the investments will receive an automatic “step-up” in basis to the federal estate tax value, even if no federal estate tax return is filed or no estate tax is due.  This is generally the market value of the investment on the date of death of the deceased spouse, but could also be the market value 6 months from the date of death if this alternate valuation is elected on a federal return.    

My discussion with the friend and client, a stock broker, also verified what I suspected.  If a beneficiary sells a stock that he or she inherited, the cost basis reported on the Form 1099B issued by the brokerage, whether or not the sale involves a “covered” investment, will not necessarily report the correct tax basis of the investment – the “date of death” value – even if the deceased and the beneficiary had the same broker.  It may – but only if the individual broker has made the proper adjustment to the cost basis in the internal brokerage reporting system.

So it is very important for your tax professional, or you if you are self-preparing, to independently verify the correct cost basis for inherited investments sold to determine if any adjustments are needed to the Form 1099B numbers.

TTFN

 

 

 

 

 

 

 

 

 

 

 

 

 

WHAT’S THE BUZZ, TELL ME WHAT’S A HAPPENNIN’

* VERY IMPORTANT!  Please read, and share, my “Open Letter to the Leaders of the Republican Party” in the June “issue” of THE LIBERTY TIMES.

 

* BENTO FOR BUSINESS lists “6 Reasons Why You Shouldn’t Mingle Small-Business and Personal Banking”.

 

An excellent bottom line –

 

“When it comes to running a business, it’s imperative to open a business checking account and make your bookkeeping process as clean as possible. This helps you secure business loans and run your business professionally.”

 

* It is the only book of its kind (that I know of) in existence!  THE JOY OF AVOIDING NJ TAXES discusses in detail NJ state income tax return preparation and tax planning strategies.  It is a “must buy” for NJ taxpayers and tax pros who prepare NJ state income tax returns.  Click here to check out the special “pre-publication” offer.  

 

* The IRS announces “Tax Relief for Victims of Severe Storms, Tornadoes, Straight-line Winds, and Flooding in Missouri”.

 

* Jean Murray gives us “Employer's Guide: Paying Employee Moving Expenses” at THE BALANCE.

 

* Jim Blankenship discusses two options for tax-deferred savings for college in “IRA or 529?” as GETTING YOUR FINANCIAL DUCKS IN A ROW.

 

* Kay Bell tells us “IRS online data retrieval tool now available for certain student aid applicants”.

 

* Jason Dinesen explains “Home Office Deductions and the 'Exclusive Use' Rule”.  A truly important rule indeed.

 

“One of the basic truths for any taxpayer wanting to claim a deduction for business use of the home is, the office area must be used 100% for business purposes. And 100% business use means 100%.”

 

THE FINAL WORD

 

It has been said that the Russia investigation has distracted nut job loser Trump from concentrating on his “agenda”.

 

Just what is Trump’s “agenda” as President?  It is the same agenda he has had all of his life –

 

1. Feed ego.

 

2. Line pockets.

 

TTFN