IRS Issues Warning on FBAR Filing Deadline
The Internal Revenue Service is reminding anyone who has a bank account or other financial account in a foreign country, or who has signature authority over such an account, that they may be required to report the account to the U.S. Department of the Treasury by June 30 each year.
The IRS has recently been extending the filing deadline for the Report of Foreign Bank and Financial Accounts, also known as an FBAR, under certain circumstances (see IRS Offers Another FBAR Filing Extension and IRS Extends FBAR Filing Deadline for Some Finance Pros). However, the FBAR filing deadline is June 30 each year. Many people in the U.S. have foreign financial accounts, the IRS noted in its announcement last Friday. While there is nothing improper about setting up or maintaining such accounts, many people may mistakenly believe their accounts are not large enough on a combined basis to trigger reporting obligations. Foreign account owners may have to report their accounts to the government, even if the accounts do not generate any taxable income.
U.S. persons are required to file a Report of Foreign Bank and Financial Accounts , or Treasury Department Form TD F 90-22.1, each year if they have a financial interest in or signature authority over financial accounts, including bank, securities or other types of financial accounts, in a foreign country, if the aggregate value of these financial accounts exceeds $10,000 at any time during the calendar year. For 2010, the due date for filing the FBAR is Thursday, June 30, 2011. Unlike with federal income tax returns, requests for an extension of time to file an FBAR cannot be granted.
The FBAR is not an income tax return and should not be mailed with any income tax returns, the IRS noted. It is due by June 30 of the year following the calendar year in which the aggregate value of the foreign accounts, on any one day, exceeds $10,000. But for 2009 and earlier years, the due date is generally Nov. 1, 2011 for individuals whose filing deadline was properly deferred under Notice 2009-62 or Notice 2010-23, and have no financial interest in a foreign financial account but with signature or other authority over that account.
FBARs are filed with the U.S. Department of the Treasury, P.O. Box 32621, Detroit, Mich. 48232-0621. Civil and criminal penalties for non-compliance with the FBAR filing requirements are significant. Civil penalties for a non-willful violation can range up to $10,000 per violation. Civil penalties for a willful violation can range up to the greater of $100,000 or 50 percent of the amount in the account at the time of the violation. Criminal penalties for violating the FBAR requirements while also violating certain other laws can range up to a $500,000 fine or 10 years imprisonment or both. Civil and criminal penalties may be imposed together.
The address for delivery of an FBAR by a method other than U.S. mail is: U.S. Department of the Treasury, Currency Transaction Reporting, 985 Michigan Avenue, Detroit, Mich., 48226.
Tuesday, June 28, 2011
Monday, June 27, 2011
SAVE TAXES BY HIRING YOUR CHILDREN (PART 3)
The Impact of Wages on the Kiddie Tax
Over the last few weeks I have talked about hiring your children. Here is additional information that you need to be aware of.
Keep in mind that bracket-shifting works even if the child is subject to the kiddie tax. The kiddie tax only causes a child’s investment income in excess of $1,900 for 2011 to be taxed at the parent's marginal rate. It has no impact on the child’s wages and other earned income, which can be sheltered by the child’s standard deduction.
As a refresher, the kiddie tax applies to a child who is age 18 or a full-time student age 19 through 23, if the child’s earned income for the year doesn't exceed one-half of his or her support. Thus, employing a child age 18 or a full-time student age 19–23 could also help to avoid the kiddie tax on his or her unearned income.
Over the last few weeks I have talked about hiring your children. Here is additional information that you need to be aware of.
Keep in mind that bracket-shifting works even if the child is subject to the kiddie tax. The kiddie tax only causes a child’s investment income in excess of $1,900 for 2011 to be taxed at the parent's marginal rate. It has no impact on the child’s wages and other earned income, which can be sheltered by the child’s standard deduction.
As a refresher, the kiddie tax applies to a child who is age 18 or a full-time student age 19 through 23, if the child’s earned income for the year doesn't exceed one-half of his or her support. Thus, employing a child age 18 or a full-time student age 19–23 could also help to avoid the kiddie tax on his or her unearned income.
CELEBRITY TAX PROBLEM OF THE WEEK
Michael Jackson’s Former Manager Pleads Guilty to Tax Charges
Raymone Bain, a public relations specialist and the former general manager of the late pop star Michael Jackson, has pleaded guilty in federal court in Washington, D.C., to charges that she failed to file federal and District of Columbia income tax returns.
Bain, a resident of Washington, D.C., pleaded guilty Wednesday to two counts of failure to file federal income tax returns (Forms 1040) and District of Columbia income tax returns (Forms D-40). U.S. Magistrate Alan Kay scheduled sentencing for Aug. 31, 2011. The federal criminal violation carries a maximum penalty of 12 months in prison and a $100,000 fine. The District of Columbia criminal violation carries a maximum penalty of six months in prison and $5,000 fine.
According to the evidence presented in court, Bain worked in the sports and entertainment industry in the District of Columbia and founded her public relations firm, Davis, Bain & Associates. Beginning in 2006, Bain became personal general manager for the performer Michael Jackson and president of the Michael Jackson Company. In that capacity, she was responsible for daily operations of the Michael Jackson Company, including financial, public relations and marketing tasks. Bain was compensated for her services.
Despite earning substantial income, Bain knowingly failed to file her federal her District of Columbia income tax returns, and she failed to pay income taxes owed during 2006 through 2008.
According to the plea documents filed in court, the tax loss is between $200,000 and $400,000.
Saturday, June 25, 2011
CELEBRITY TAX PROBLEM OF THE WEEK
The U.S. Tax Court ruled against South African golfer, Retief Goosen in a case last week involving the two-time U.S. Open champion’s royalty income, disagreeing with his claim that only 7 percent of it came from U.S. sources.
Goosen had endorsement agreements with a variety of sponsors, including Acushnet, TaylorMade, Izod, Upper Deck, Electronic Arts and Rolex. They were allowed to use his name, face and likeness in advertising and marketing campaigns worldwide, and he was paid a base endorsement fee by all the sponsors.
Acushnet, TaylorMade and Izod also pro-rated the base endorsement fee if he did not annually play in a specific number of golf tournaments, the court noted. The three companies also paid him a bonus if he achieved a specific finish in a PGA or European Tour tournament, or reached a specific spot on the World Golf Rankings.
Goosen characterized the endorsement fees and bonuses from Acushnet, TaylorMade and Izod as 50 percent services income and 50 percent royalty income on his nonresident federal income tax returns for 2002 and 2003. The endorsement fees from Upper Deck, Electronic Arts and Rolex were characterized as 100 percent royalty income.
The golfer reported approximately 7 percent of the total endorsement income as U.S. source income. The IRS, however, determined that he should have characterized the endorsement fees and bonuses from Acushnet, TaylorMade and IZod as 100 percent personal services income. The IRS also re-allocated a larger percentage of his endorsement fees as U.S. source income. The Tax Court ruled on June 9th that the endorsement fees and bonuses Goosen had received from Acushnet, TaylorMade and Izod should be allocated 50 percent to personal services income and 50 percent to royalty income, and that the royalty income he had received from Acushnet, TaylorMade and Izod was 50 percent U.S.-source income effectively connected with a U.S. trade or business. The court also held that the royalty income he had received from Rolex was 50 percent U.S.-source income not effectively connected with a U.S. trade or business.
However, the royalty income he had received from the Upper Deck was considered by the court to be 92 percent U.S.-source income not effectively connected with a U.S. trade or business. In addition, the royalty he received from Electronic Arts was deemed 70 percent U.S.-source income not effectively connected with a U.S. trade or business. On top of that, the court ruled that Goosen should not benefit from any provision under either the 1975 or the 2001 income tax treaty between the United States and the United Kingdom.
Goosen had endorsement agreements with a variety of sponsors, including Acushnet, TaylorMade, Izod, Upper Deck, Electronic Arts and Rolex. They were allowed to use his name, face and likeness in advertising and marketing campaigns worldwide, and he was paid a base endorsement fee by all the sponsors.
Acushnet, TaylorMade and Izod also pro-rated the base endorsement fee if he did not annually play in a specific number of golf tournaments, the court noted. The three companies also paid him a bonus if he achieved a specific finish in a PGA or European Tour tournament, or reached a specific spot on the World Golf Rankings.
Goosen characterized the endorsement fees and bonuses from Acushnet, TaylorMade and Izod as 50 percent services income and 50 percent royalty income on his nonresident federal income tax returns for 2002 and 2003. The endorsement fees from Upper Deck, Electronic Arts and Rolex were characterized as 100 percent royalty income.
The golfer reported approximately 7 percent of the total endorsement income as U.S. source income. The IRS, however, determined that he should have characterized the endorsement fees and bonuses from Acushnet, TaylorMade and IZod as 100 percent personal services income. The IRS also re-allocated a larger percentage of his endorsement fees as U.S. source income. The Tax Court ruled on June 9th that the endorsement fees and bonuses Goosen had received from Acushnet, TaylorMade and Izod should be allocated 50 percent to personal services income and 50 percent to royalty income, and that the royalty income he had received from Acushnet, TaylorMade and Izod was 50 percent U.S.-source income effectively connected with a U.S. trade or business. The court also held that the royalty income he had received from Rolex was 50 percent U.S.-source income not effectively connected with a U.S. trade or business.
However, the royalty income he had received from the Upper Deck was considered by the court to be 92 percent U.S.-source income not effectively connected with a U.S. trade or business. In addition, the royalty he received from Electronic Arts was deemed 70 percent U.S.-source income not effectively connected with a U.S. trade or business. On top of that, the court ruled that Goosen should not benefit from any provision under either the 1975 or the 2001 income tax treaty between the United States and the United Kingdom.
Friday, June 24, 2011
SAVE TAXES BY HIRING YOUR CHILDREN (PART 2)
Last week I talked about hiring your children. Here is additional information that you need to be aware of.
What about income tax withholding?
Your business may have to withhold federal income taxes on your child’s wages. It is possible for the child to avoid withholding by claiming exempt status if he or she:
• had no federal income tax liability for last year, and
• expects to have none for this year.
However, exemption from withholding can't be claimed if:
• the employee's income exceeds $950 for 2011, and includes more than $300 of unearned income (such as dividends), and
• the employee can be claimed as a dependent on someone else's return.
Keep in mind that your child probably will get a refund for part or all of the withheld tax when he or she files a return for the year.
Social security tax savings too.
If your business is not incorporated, you can also save some self-employment (i.e., social security) tax dollars by shifting some of your earnings to a child. That's because employment for FICA tax purposes doesn't include services performed by a child under the age of 18 while employed by a parent.
Example:
Let’s say a sole proprietor who usually takes $120,000 of earnings from the business pays $5,800 to her 17-year-old child in 2011. The sole proprietor's self-employment income would be reduced by $5,800, saving her $168.20 (the 2.9% Medicare portion of the self employment tax she would have paid on the $5,800 shifted to her daughter). This doesn't take into account a sole proprietor's income tax deduction for one-half of his or her own social security taxes.
A similar, but more liberal exemption applies for FUTA, which exempts earnings paid to a child under age 21 while employed by his or her parent.
The FICA and FUTA exemptions also apply if a child is employed by a partnership consisting solely of his parents.
Note that there is no FICA or FUTA exemption for employing a child if your business is incorporated or a partnership that includes non-parent partners. However, there's no extra cost to your business if you're paying a child for work you'd pay someone else to do anyway.
Keep in mind that some of the rules about employing children (such as the maximum amount they can earn tax-free) change from year to year, and may require your income shifting strategy to change too.
What about income tax withholding?
Your business may have to withhold federal income taxes on your child’s wages. It is possible for the child to avoid withholding by claiming exempt status if he or she:
• had no federal income tax liability for last year, and
• expects to have none for this year.
However, exemption from withholding can't be claimed if:
• the employee's income exceeds $950 for 2011, and includes more than $300 of unearned income (such as dividends), and
• the employee can be claimed as a dependent on someone else's return.
Keep in mind that your child probably will get a refund for part or all of the withheld tax when he or she files a return for the year.
Social security tax savings too.
If your business is not incorporated, you can also save some self-employment (i.e., social security) tax dollars by shifting some of your earnings to a child. That's because employment for FICA tax purposes doesn't include services performed by a child under the age of 18 while employed by a parent.
Example:
Let’s say a sole proprietor who usually takes $120,000 of earnings from the business pays $5,800 to her 17-year-old child in 2011. The sole proprietor's self-employment income would be reduced by $5,800, saving her $168.20 (the 2.9% Medicare portion of the self employment tax she would have paid on the $5,800 shifted to her daughter). This doesn't take into account a sole proprietor's income tax deduction for one-half of his or her own social security taxes.
A similar, but more liberal exemption applies for FUTA, which exempts earnings paid to a child under age 21 while employed by his or her parent.
The FICA and FUTA exemptions also apply if a child is employed by a partnership consisting solely of his parents.
Note that there is no FICA or FUTA exemption for employing a child if your business is incorporated or a partnership that includes non-parent partners. However, there's no extra cost to your business if you're paying a child for work you'd pay someone else to do anyway.
Keep in mind that some of the rules about employing children (such as the maximum amount they can earn tax-free) change from year to year, and may require your income shifting strategy to change too.
Thursday, June 23, 2011
IRS INCREASES MILEAGE RATE TO 55.5 CENTS PER MILE
WASHINGTON — The Internal Revenue Service today announced an increase in the optional standard mileage rates for the final six months of 2011. Taxpayers may use the optional standard rates to calculate the deductible costs of operating an automobile for business and other purposes.
The rate will increase to 55.5 cents a mile for all business miles driven from July 1, 2011, through Dec. 31, 2011. This is an increase of 4.5 cents from the 51 cent rate in effect for the first six months of 2011, as set forth in Revenue Procedure 2010-51.
In recognition of recent gasoline price increases, the IRS made this special adjustment for the final months of 2011. The IRS normally updates the mileage rates once a year in the fall for the next calendar year.
"This year's increased gas prices are having a major impact on individual Americans. The IRS is adjusting the standard mileage rates to better reflect the recent increase in gas prices," said IRS Commissioner Doug Shulman. "We are taking this step so the reimbursement rate will be fair to taxpayers."
While gasoline is a significant factor in the mileage figure, other items enter into the calculation of mileage rates, such as depreciation and insurance and other fixed and variable costs.
The optional business standard mileage rate is used to compute the deductible costs of operating an automobile for business use in lieu of tracking actual costs. This rate is also used as a benchmark by the federal government and many businesses to reimburse their employees for mileage.
The new six-month rate for computing deductible medical or moving expenses will also increase by 4.5 cents to 23.5 cents a mile, up from 19 cents for the first six months of 2011. The rate for providing services for charitable organizations is set by statute, not the IRS, and remains at 14 cents a mile.
Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.
MILEAGE RATE CHANGES
Rates 1/1 through 6/30/11
Business: 51
Medical/Moving: 19
Charitable: 14
Rates 7/1 through 12/31/11
Business: 55.5
Medical/Moving: 23.5
Charitable: 14
The rate will increase to 55.5 cents a mile for all business miles driven from July 1, 2011, through Dec. 31, 2011. This is an increase of 4.5 cents from the 51 cent rate in effect for the first six months of 2011, as set forth in Revenue Procedure 2010-51.
In recognition of recent gasoline price increases, the IRS made this special adjustment for the final months of 2011. The IRS normally updates the mileage rates once a year in the fall for the next calendar year.
"This year's increased gas prices are having a major impact on individual Americans. The IRS is adjusting the standard mileage rates to better reflect the recent increase in gas prices," said IRS Commissioner Doug Shulman. "We are taking this step so the reimbursement rate will be fair to taxpayers."
While gasoline is a significant factor in the mileage figure, other items enter into the calculation of mileage rates, such as depreciation and insurance and other fixed and variable costs.
The optional business standard mileage rate is used to compute the deductible costs of operating an automobile for business use in lieu of tracking actual costs. This rate is also used as a benchmark by the federal government and many businesses to reimburse their employees for mileage.
The new six-month rate for computing deductible medical or moving expenses will also increase by 4.5 cents to 23.5 cents a mile, up from 19 cents for the first six months of 2011. The rate for providing services for charitable organizations is set by statute, not the IRS, and remains at 14 cents a mile.
Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.
MILEAGE RATE CHANGES
Rates 1/1 through 6/30/11
Business: 51
Medical/Moving: 19
Charitable: 14
Rates 7/1 through 12/31/11
Business: 55.5
Medical/Moving: 23.5
Charitable: 14
Wednesday, June 22, 2011
IRS RECOGNIZED FOR CLEAR WRITING
You aren’t going to believe this – The IRS received an award for the written clarity of its official notices, while insurance provider, CareFirst Blue Cross Blue Shield of Maryland received an award for the most confusing language.
Here is an example from the tax code on the “simple” language about the home sale exclusion. Does this look clear to you?
§ 121 Exclusion of gain from sale of principal residence.
________________________________________
(a) New Law Analysis Exclusion.
Gross income shall not include gain from the sale or exchange of property if, during the 5-year period ending on the date of the sale or exchange, such property has been owned and used by the taxpayer as the taxpayer's principal residence for periods aggregating 2 years or more.
(b) Limitations.
(1 In general.
The amount of gain excluded from gross income under subsection (a) with respect to any sale or exchange shall not exceed $250,000.
(2) Special rules for joint returns.
In the case of a husband and wife who make a joint return for the taxable year of the sale or exchange of the property—
(A) $500,000 limitation for certain joint returns. Paragraph (1) shall be applied by substituting “$500,000” for “$250,000” if—
(i) either spouse meets the ownership requirements of subsection (a) with respect to such property;
(ii) both spouses meet the use requirements of subsection (a) with respect to such property; and
(iii) neither spouse is ineligible for the benefits of subsection (a) with respect to such property by reason of paragraph (3).
(B) Other joint returns. If such spouses do not meet the requirements of subparagraph (A) , the limitation under paragraph (1) shall be the sum of the limitations under paragraph (1) to which each spouse would be entitled if such spouses had not been married. For purposes of the preceding sentence, each spouse shall be treated as owning the property during the period that either spouse owned the property.
(3) Application to only 1 sale or exchange every 2 years.
(A) In general. Subsection (a) shall not apply to any sale or exchange by the taxpayer if, during the 2-year period ending on the date of such sale or exchange, there was any other sale or exchange by the taxpayer to which subsection (a) applied.
(B) Pre-May 7, 1997, sales not taken into account. Subparagraph (A) shall be applied without regard to any sale or exchange before May 7, 1997.
Here is an example from the tax code on the “simple” language about the home sale exclusion. Does this look clear to you?
§ 121 Exclusion of gain from sale of principal residence.
________________________________________
(a) New Law Analysis Exclusion.
Gross income shall not include gain from the sale or exchange of property if, during the 5-year period ending on the date of the sale or exchange, such property has been owned and used by the taxpayer as the taxpayer's principal residence for periods aggregating 2 years or more.
(b) Limitations.
(1 In general.
The amount of gain excluded from gross income under subsection (a) with respect to any sale or exchange shall not exceed $250,000.
(2) Special rules for joint returns.
In the case of a husband and wife who make a joint return for the taxable year of the sale or exchange of the property—
(A) $500,000 limitation for certain joint returns. Paragraph (1) shall be applied by substituting “$500,000” for “$250,000” if—
(i) either spouse meets the ownership requirements of subsection (a) with respect to such property;
(ii) both spouses meet the use requirements of subsection (a) with respect to such property; and
(iii) neither spouse is ineligible for the benefits of subsection (a) with respect to such property by reason of paragraph (3).
(B) Other joint returns. If such spouses do not meet the requirements of subparagraph (A) , the limitation under paragraph (1) shall be the sum of the limitations under paragraph (1) to which each spouse would be entitled if such spouses had not been married. For purposes of the preceding sentence, each spouse shall be treated as owning the property during the period that either spouse owned the property.
(3) Application to only 1 sale or exchange every 2 years.
(A) In general. Subsection (a) shall not apply to any sale or exchange by the taxpayer if, during the 2-year period ending on the date of such sale or exchange, there was any other sale or exchange by the taxpayer to which subsection (a) applied.
(B) Pre-May 7, 1997, sales not taken into account. Subparagraph (A) shall be applied without regard to any sale or exchange before May 7, 1997.
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