Married Filing Separate Taxpayer Has Mortgage Interest Deductions Reduced

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A married taxpayer filing “married filing separate” took the mortgage interest deduction on a house purchased with a family member.  The court recognized that that Congress did not intend for “married filing separate” taxpayers to be able to take the full amount of the interest deductions allowable under Section 163.  The taxpayers deductions for mortgage interest and home equity debt were limited to $500,000 and $50,000.

Bronstein v. Commissioner, 138 TC No. 21, May 17, 2012

Tax Attorney Reports Offer in Compromise Allows IRS to Retain Stimulus Rebates and Refundable Credits

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The taxpayers, attempting to settle taxes with the IRS, signed standard Offer in Compromise (“OIC”) forms, including IRS Form 656, the required form for OIC filers.  The OIC was accepted by the IRS in 2007.  For the 2007 year and on the taxpayer’s 2007 return, filed in 2008, the taxpayer’s claimed an earned income tax credit, a child tax credit.  Additionally, in 2008, the taxpayer’s were authorized an economic stimulus payment.  Under the OIC program, the IRS takes into account “additional consideration” as increases to the OIC amount.  Generally, the IRS will retain any refunds due to the taxpayer in the calendar year in which the IRS accepts the OIC.  As a result, the IRS was allowed to retain the refundable EITC and additional child tax credits as “additional consideration” as they were related to the 2007 tax year.  However, because the rebate was an advance on the 2008 tax year, the taxpayers were allowed to retain the stimulus payment.

See Sarmiento v. United States, Nos. Nos. 11–3752 (Lead), 11–4495(XAP), (2d Cir 2012)

Contributions to LLC Wholly Owned by Charity are Made to Charity

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The IRS  has clarified that contributions to a single member LLC, owned by a charity, are made to the Charity.  The IRS formally recognizes the disregarded status of single member LLCs in the charitable organization context, consistent with the treatment of these single member LLC disregarded entities.

IRS Notice 2012-52.

Louisiana Tax Lawyer Explains Fast TRACK Settlement for Tax Exempt Entities

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The IRS made permanent the fast track settlement program with regard to tax exempt and governmental entities.  Eligible cases under this fast track program will receive the expedited settlement process.  However, a number of exclusions exist with the program.

See IRS Announcement 2012-34

Children Must be US Citizens for Dependency Exemption

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The court, interpreting Section 152, and Reg. Section 1.152-2, held that the couple residing in Israel with non-citizen children were not entitled to the dependency exemptions.

Carlbach and Fried v. Commissioner, 139 TC 1, July 19, 2012.

Masonry Workers held to be Employees, not Independent Contractors

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Applying the common law employee test, the tax court held that masonry workers were employees, and not independent contractors for purposes of federal income tax, FICA and FUTA withholding.  The tax court noted the degree of control was sufficient to indicate an employer / employee relationship.  The workers were paid an hourly wage, were employed at-will, and did not have profit or loss possibilities based on timely performance or quality of work.  Because of increasing scrutiny of the employer / employee relationship, to obtain relief from misclassification of independent contractors, taxpayers are advised to be current on all tax filing obligations, with care paid to the 1099 reporting responsibilities.

See Atlantic Coast Masonry, Inc. v. Commissioner T.C. Memo 2012-233

 

Louisiana Eyes Tax Reform

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With tax reform being a goal of Governor Bobby Jindal in the 2013 Louisiana legislative session, the Louisiana Department of Revenue and Louisiana Economic Development have released a report that outlines the Louisiana tax structure, and offers ideas for possible reform efforts.  Stating what should be obvious, the report concluded that the “ideal tax structure…is…one with a broad base, low and flat rates, multiple revenue sources, and few exemptions.”  Governor Jindal has designated Revenue Secretary Tim Barfield, Jr. as the leader of his administration’s effort to reform the Louisiana tax structure.

See http://www.thetowntalk.com/article/20121117/NEWS01/211170315/Tax-reform-Louisiana-tops-Jindal-s-2013-agenda?odyssey=mod_sectionstories

IRS’ Continued War with Medical Marijuana Dispensaries

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The IRS disallowed Section 162 ordinary and necessary business deductions to a medical marijuana dispensary authorized under California state law.  Under section 280E, businesses deductions are disallowed when the taxpayer is engaged in the trafficking of controlled substances.  Even if legal under state law, the court disallowed the deductions because the activity is illegal under federal law, which is contemplated by Section 280E.  Olive V. Commissioner, 139 TC 2, August 2, 2012.

The Potential Consequences of Preparing Your Own Tax Returns

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With the advent of tax software programs, more and more people are choosing to prepare their taxes on their own. Tax software does certainly make filing for the do-it-yourselfer much easier and quicker than in the past, but this doesn’t mean there are not still circumstances under which hiring a professional may not make better sense. It’s a good idea to determine whether or not you will prepare your tax return or hire a professional well ahead of the April 15th deadline so you won’t have to scramble to find a CPA or accountant at the last minute.

When Filing Your Own Tax Return Makes Sense

Should your tax return be exceedingly simple, completely straightforward and not incorporate significant deductions then preparing your own tax return could be the way to go. Easy and straightforward mean you have no stocks, savings or securities, property you rent out and you don’t operate your own business. The person who has one job and receives a yearly W-2 from his or her employer and has no other tax situations is a prime candidate for preparing his or her return.

Preparing your own tax return can also make you much better informed regarding your financial situation. If you are forced to work through tax forms it may give you a better idea about donations you’ve made and whether there are sufficient taxes being taken from your monthly pay.  Using a tax software program allows you to prepare your taxes within your own schedule; you can begin your tax return then return to it whenever you have the time and inclination.

If you tend to procrastinate, you can even wait until April 14th to prepare your taxes and file online although this is hardly recommended. Tax software has become both inexpensive and simple and most all of the current software is user-friendly. The program will ask you questions and you will simply fill in the blanks. If your adjusted gross income falls below $57,000 you may even be able to get a free electronic filing.

Negative Aspects to Filing Your Own Tax Returns

Some of the “cons” to preparing your own taxes include the time involved, the potential complexities and the stress of doing it yourself. Believe it or not, the average person will spend 23 hours preparing and filing a 1040 form, so consider what your time is actually worth.  The standard amount to prepare and file a Federal and State return is around $200, so if you consider the time you would spend on your taxes to be worth more than $10 per hour, consider hiring a professional. Further, even with the best software you may miss deductions you are entitled to.

Even with up-to-date tax software on your side, the tax code is ridiculously complex; there have been nearly 3500 changes to the tax laws since the year 2000. If you work for yourself, receive income from freelance work, or are a small business owner, you need a professional to prepare your taxes. In the same vein, if you are a landlord, have real estate assets or investments which produce dividends then by all means, hire a professional tax preparer, CPA or accountant. In any of these situations, an error on your tax return can be costly, and, in the end, hiring a tax professional to prepare your taxes can alleviate much of the stress which accompanies tax season. If you have any doubts about your tax situation or past tax returns, it can be very advantageous to consult a tax attorney to ensure you stay right with the IRS.

 

Louisiana Tax Law Firm Discusses Streamlined FBAR and Tax Return Compliance

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US citizens or taxpayers living abroad, and delinquent in there federal income tax and FBAR compliance responsibilities have a new procedure outlined by the IRS with which to get compliant with US tax filing rules.  The IRS has announced “streamlined filing compliance procedures” for taxpayers that are considered “low risk” under the program.  The program is effective September 1, 2012.  For the “low risk” taxpayers, the IRS program outlines an expedited review of the case without being subject to penalties.  Please note that the definition of “low risk” is very narrow, and the program does not shield the taxpayer from criminal prosecution.  Taxpayer’s with criminal prosecution exposure should consider voluntary disclosure under the program reopened early in 2012.

See IR-2012-65, June 26, 2012