Avoid Three Common Errors in Budgeting

When it comes to budgeting, it's absolutely essential to estimate your spending as realistically as possible. Here are three budget-related errors commonly made by small businesses, and some tips for avoiding them. These errors tend to throw budget estimates out of line with reality, thereby taking away from a budget's usefulness.

1. Not Setting Goals. It's almost impossible to set spending priorities without clear goals for the coming year. It's important to know, in detail, what you want or need to achieve in your business.
2. Cost Underestimation. Every business has ancillary or incidental costs that often don't get budgeted. For example, each time you buy a new piece of equipment or software, you must budget for staff training and for maintenance of the equipment, as well as the actual cost of the equipment.
3. Lack of Flexibility. Don't be afraid to update your forecasted expenditures either several times per year or whenever new circumstances affect your business. Compare estimates to what you actually pay out, and then adjust your budget figures.

Please note, to comply with IRS regulations, we need to advise that any discussion of federal tax issues in this blog is not intended or written to be used, and cannot be used by you, (i) to avoid any penalties imposed under the Internal Revenue Code or (ii) to promote, market or recommend to another party any transaction or matter addressed herein. For more information please go to http://www.lw.com/docs/irs.pdf

How the Bush Tax Cuts Affect Tax-Saving Strategies

Each November, we like to look at the steps you can take to reduce your tax bill. This year, it's a little ambiguous, because the Bush tax cuts and credits are set to expire at the end of 2010. If they do expire, a lot of folks will experience a significant adjustment to their tax situation.

The "Bush tax cuts" refers to legislation enacted in 2001 and 2003. The cuts lowered tax rates on income, dividends, and capital gains; eliminated the estate tax; lowered burdens on married couples, parents, and the working poor; and increased tax credits for education and retirement savings.

Both Republicans and Democrats favor an extension of the tax cuts for the middle class. Where they differ is whether to extend the cuts for Americans in the top 2% of taxpayers.

With this in mind, we're looking at year-end measures separately for these two groups: the middle class - those making less than $200,000 for singles / $250,000 for married filers - and the higher income taxpayers - those making more than $200,000 / $250,000.

But first, let's take a quick look at what's at stake.

If All the Bush Tax Cuts Expire...
Among other things, if the Bush tax cuts were allowed to expire, the following would take place:
1. Tax brackets would change, from 10%, 15%, 25%, 28%, 33%, and 35% to 15%, 28%, 31%, 36%, and 39.6%.
2. Long-term capital gain tax rates would rise from 15% to a maximum of 20%.
3. The child tax credit would be lowered.
4. The alternative minimum tax would cease to be indexed for inflation.
5. The marriage penalty would be reinstated.

Middle-Income Taxpayers
We don't expect Congress to allow the tax cuts to expire for this group. That means middle-income taxpayers can take the same measures this year they have in previous years to reduce their tax burden for 2010.

We recommend the following steps to save on taxes this year: defer income, accelerate your deductions, and plan out your capital gains.

Defer Income
If you are planning to sell an investment on which you have a gain, it may be best to wait until the new year. This will defer payment of the taxes for another year (subject to estimated tax requirements).
• If you are due a bonus at year-end, you may be able to defer receipt of these funds until January. Again, this can defer the payment of taxes (other than the portion withheld) for another year. (Note that deferral of tax generally won't work where the bonus is contractually due in 2010.)
• If your company grants stock options, it may be wise to wait until next year to exercise the option or sell stock acquired by the exercise of an option. (Exercise of the option is often a taxable event; sale of the stock is almost always a taxable event.)
• If you're self-employed, and you can afford the delay in cash inflow, defer sending invoices to clients until the end of December.

Accelerate Deductions
Pay a state estimated tax installment in December instead of at the January due date. Just make sure the payment is based on a reasonable estimate of your state tax.
• Pay your entire property tax bill, including installments due in 2011, by year-end. (This is not applicable to mortgage escrow accounts.)
• Try to bunch threshold expenses, such as medical expenses and miscellaneous itemized deductions. (Threshold expenses are deductible only to the extent they exceed a certain percentage of adjusted gross income.) By bunching these expenses into one year, rather than spreading them out over two years, you have a better chance of exceeding the thresholds, thereby maximizing your deduction. For example, you might pay medical bills and dues and subscriptions in whichever year they would do you the most tax good.

Caution: In most cases, credit card charges are considered paid in the year of the charge regardless of when you pay on the card. But this does not apply to store revolving credit cards. If you charge expenses on a Wal-Mart store credit card, for example, the deduction cannot be claimed until the bill is paid.

Some tax benefits are phased out if you have more than a certain level of adjusted gross income. In these cases, a strategy of deferring income and accelerating deductions may also allow you to claim larger deductions, credits, and other tax breaks for 2010.

Tip: Deferring income into 2011 is an especially good idea for taxpayers who anticipate being in a lower tax bracket next year, either because of much-reduced income or much-increased deductible expenses.

Minimize Taxes on Investments
Judiciously match your capital gains and losses to reduce your tax burden for 2010. Where appropriate, try to avoid short-term gains, which are usually taxed at a much higher tax rate (up to 35%) than long-term gains (15%). You might consider, where feasible, trying to reduce all capital gains and generate short-term capital losses of up to $3,000.

Tip: If you have a large capital gain this year, consider selling an investment on which you have an accumulated loss. Capital losses are deductible up to the amount of your capital gains plus $3,000.

High-Income Taxpayers
Depending on what Congress decides in this legislative session, individuals making more than $200,000 filing singly or $250,000 filing married in 2010 will owe more tax than they have since the 2001 Bush tax cuts were passed. What does this mean for end-of-year tax planning?

Don't Defer Income
If tax cuts for the richest Americans are allowed to expire at the end of the year, then many in the current 33% tax bracket will find themselves in the 36% bracket, and those currently taxed at the 36% rate will be taxed at 39.6%.

For these taxpayers, it makes sense to bump up 2010 income, to take advantage of the current lower rates. Grab that year-end bonus; sell stock acquired by the exercise of a company stock option; bill clients for as much work as possible if you're self-employed.

Take Capital Gains Now
Capital gains and qualified dividends for those in the higher tax brackets would be affected if the tax cuts are allowed to expire for the richest Americans. The capital gains rate would revert to a maximum of 20% for higher income filers (from 15% currently), and qualified dividends would resume being taxed at the regular tax rate of the filer, or as high as 39.6%.

This indicates that now is a good time to take any capital gains or qualified dividends. Selling assets now as opposed to 2011 could have positive tax consequences for higher income filers.

Let Us Help You
As you can see, this is a complicated year for tax planning. Please don't hesitate to come in and meet with us about your situation. There's still a lot we can do to minimize your tax burden for 2010.

Please note, to comply with IRS regulations, we need to advise that any discussion of federal tax issues in this blog is not intended or written to be used, and cannot be used by you, (i) to avoid any penalties imposed under the Internal Revenue Code or (ii) to promote, market or recommend to another party any transaction or matter addressed herein. For more information please go to http://www.lw.com/docs/irs.pdf

Banks Rush to Fix Security Flaws in Wireless Apps

A number of top financial companies and banks such as Wells Fargo & Co., Bank of America Corp. and USAA are rushing out updates to fix security flaws in wireless banking applications that could allow a computer criminal to obtain sensitive data like usernames, passwords and financial information.

Read more: http://tinyurl.com/23y9hsp

NEW PENALTIES FOR FAILURE TO FILE INFORMATION RETURNS

Tax law requires businesses to provide information returns, such a 1099s, to each payee that the business has paid $600 or more for the year. The law also includes penalties for failure to file the same information returns with the IRS.

To ensure compliance with these requirements, there are substantial penalties, and, as part of the recently passed Small Business Jobs Act of 2010, those penalties have been doubled. The penalties are generally based upon how late the returns are filed with the IRS or provided to the recipient of the income and are broken down into three tiers:

Tier 1 – Where the returns are filed or provided late but within 30 days of the prescribed due date.

Tier 2 – Where the returns are filed or provided more than 30 days after the prescribed due date and before August 1 of the calendar year in which the filing was required.

Tier 3 – Where the returns are filed or provided after August 1 of the calendar year in which the filing was required.

In addition, the maximum penalties for the year are based on business size determined by the business’s gross receipts. Businesses with gross receipts of $5 million or less are subject to the small business penalty maximums.

In addition, the minimum penalty for each intentional failure-to-file act increases from $100 to $250.

Rental Owners Included in the Reporting Requirement Effective in 2011 – Effective for 2011 filings due in 2012, the 2010 Small Business Act provides that solely for purposes of filing information returns, a person receiving rental income from real estate will be considered to be engaged in a trade or business of renting property. Thus, recipients of rental income from real estate generally are subject to the same information reporting requirements as taxpayers engaged in a trade or business. In particular, rental income recipients making payments of $600 or more to a service provider (such as a plumber, painter, or accountant) in the course of earning rental income are required to provide an information return (typically Form 1099-MISC) to IRS and to the service provider. The new law does provide the IRS with the ability to permit exceptions to the filing requirement for hardship cases and when minimal rental income is received, but neither “hardship” nor “minimal” are yet defined.

In order to comply with these requirements and avoid these substantial penalties requires collecting the payee’s name, SSN number and contact information before making payment. If you need assistance setting up a procedure for collecting the required information or filing your information returns for the year, please give us a call at 562-912-4334

OCTOBER 2010 TAX BRIEFING

Informal Claim for Refund:
Informal claims for refund typically arise when the period of time for filing a claim on the appropriate form has expired, but to obtain a refund the taxpayer contends that a letter or some other communication sent or provided to the IRS meets the minimum requirements set forth in Reg. 301.6402-2 . Here, taxpayer and the IRS narrowed their dispute to whether taxpayer's 2004 tax year claim for refund was barred by limitations. In finding for the taxpayer, a New York District Court noted that taxpayer's January 2007 letter, although brief, "put the IRS on notice that he believed his disability pension had been improperly taxed as earned income since 1983. Although [taxpayer] did not use the word refund , the only reasonable construction of his letter is as a request for refunds for tax years since 1983 and an assurance that his pension would not be improperly taxed in the future." McMillan v. IRS , 106 AFTR 2d 2010-XXXX (DC E.D. N.Y.).

SIFL Rates for Employer-provided Aircraft:
Under Reg. 1.61-21(g) , employers can use a special computation rule to value employees' flights on an employer-piloted aircraft. The employer multiplies the Standard Industry Fare Level (SIFL) cents-per-mile rate in effect at the time of the flight by the appropriate aircraft multiple provided in Reg. 1.61-21(g)(7) , then adds the applicable terminal charge. For flights taken from 7/1/10–12/31/10, the SIFL rate will be $.2243 per mile for trips up to 500 miles, $.1710 per mile for trips from 501 to 1,500 miles, and $.1644 per mile for trips over 1,500 miles. The terminal charge will be $41.00. Rev. Rul. 2010-22, 2010-39 IRB .

Changes in 2010 Reporting of Uncertain Tax Positions:
The IRS announced significant changes to its original proposals for the reporting of Uncertain Tax Positions (UTPs) on 2010 corporate returns. The changes include: (1) a five-year phase-in of the reporting requirement based on a corporation's asset size, (2) no reporting of maximum tax adjustment, (3) no reporting of the rationale and nature of uncertainty in the description of the position, and (4) no reporting of administrative practice tax positions. Corporations with assets of $100 million (increased from $10 million for 2010) or more must file Schedule UTP starting with 2010 tax years. Instead of reporting the maximum tax adjustment for each UTP, the corporation will rank all reported positions based on U.S. federal tax reserve. The final schedule and instructions are available at www.irs.gov/businesses/corporations/article/0,,id=221533,00.html . IRS Ann. 2010-75, 2010-41 IRB .

IRS Policy of Restraint for Uncertain Tax Positions:
The IRS announced an expanded policy of restraint in seeking documents related to Uncertain Tax Positions (UTPs) coinciding with the release of newly modified Schedule UTP. Taxpayers may remove the following information from tax reconciliation workpapers provided to the IRS: (1) drafts, revisions or comments concerning the description of tax positions reported on Schedule UTP, (2) the amount of any reserves for tax positions reported on the schedule, and (3) computations determining the ranking of tax positions reported on the schedule. IRS Ann. 2010-76, 2010-41 IRB .

Copyright © 2010 Thomson Reuters/PPC. All rights reserved.

HOW UNFILED TAX RETURNS HINDER YOUR CHANCES OF SETTLEMENT WITH THE IRS

Do you think you're doing yourself justice by living underground and not filing your past year's tax returns? Think again! You may be doing yourself more harm than good. This article explains why you're better off staying current and in compliance with tax tiling requirements and the consequences one faces if one doesn't timely file their income tax returns.

LATE FILING PENALTY
Let's say you want to file but know you owe the IRS and for various reasons cannot pay the tax due with your returns. By not filing timely, you automatically subject yourself to the late filing penalty, IRC 6651(a)(1), unless you have reasonable cause for filing late. The late filing penalty is 5 percent of the amount of the tax required to be shown on the return for each month or fraction thereof, that the failure continues, not to exceed 25 percent. By filing late, you've just added to the taxes you know you already owe.

INTEREST ON PENALTIES
In general. interest on penalties will only be imposed if the penalty or addition to tax is not paid within 10 days after notice and demand, and then only for the period from the date of notice and demand to the date of payment. Most people who procrastinate and file late usually can't pay their taxes and penalties within 10 days of notice and demand to do so. Now in addition to the taxes owed and late filing penalty, you are assessed interest on penalties. This is in addition to regular interest on the balance of taxes due. Fortunately, the IRS doesn't charge excessive rates of interest.

PAYMENT OPTIONS
What are one's payment options when they can't pay their taxes after filing them? Requesting and obtaining an installment plan is one. An Offer In Compromise is another. Another is discharging the taxes through bankruptcy.

INSTALLMENT PLAN
In order to obtain an installment plan all of one's tax returns must be filed. So if you receive a wage levy at work and want to obtain an installment plan in lieu of the IRS grabbing up to 25 percent of your take home pay. You must have all of your past year's taxes filed. If not, the IRS won't deal with you because you lack -Good Faith" and are not in "compliance."

OFFER IN COMPROMISE
An Offer In Compromise (01C) is an Offer to pay the IRS in settlement of tax liabilities less than 100% on the dollar but as much as they otherwise would expect to collect.

The recent IRS Restructuring And Reform Act of 1998 includes provisions making the IRS more receptive to and even encouraging Offers In Compromise (OIC) in settlement of tax liabilities. However, all tax years must be filed or the IRS won't consider an OIC. By not filing past year's tax returns. you may be missing a great opportunity to settle with the IRS, depending on your current financial position, for substantially less than the total taxes, interest, and penalties you owe them. People think the best time to make an Offer is when they're financially sound. Actually, the best time to make an Offer is when they're financially distressed because the IRS usually accepts OIC's when they otherwise could not expect to collect the full amount owed. One other caveat, if the IRS accepts your OIC, you must remain current for five years by filing on time and paying timely otherwise the IRS can revoke your OIC.

DISCHARGING TAXES THROUGH BANKRUPTCY
In general, you can discharge personal income taxes through bankruptcy if all of the following rules are met:

1. The Three Year Rule — The tax return due date, including extensions, must be more than three years old before the bankruptcy petition date.

2. The Two Year Rule — no discharge will be allowed if a tax return, including extensions, was not filed or a delinquent tax return was filed within two years of the date of the bankruptcy petition.

3. The 240 Day Rule — Any tax must be assessed more than 240 days before the bankruptcy petition date to be dischargeable.

If a Chapter 7 is filed and the three rules above are met for each tax year, one can discharge individual income taxes completely. The rules vary for a Chapter 13. In certain circumstances a taxpayer may completely discharge his/her taxes for a given tax year even though no return was filed for that year.
For the most part, in order to completely discharge individual income taxes through bankruptcy, tax returns need to be filed.

DON'T MAKE THIS MISTAKE
I had a client engage me to prepare seven years back tax returns. Four of the seven years he was due refunds totaling S 10,000. Ile lost those refunds because he filed them too late. Yes, there is a statute of limitations on collecting tax refunds. Generally, if no return was filed, the claim for refund must be filed within two years from the time the tax was paid.

CRIMINAL IMPLICATIONS
Criminal penalties may be incurred when a taxpayer: willfully fails to file a tax return, fails to keep records, fails to supply required information, or fails to pay any tax or estimated tax. You don't want to risk the IRS construing your not filing as being willful. The cost of hiring a criminal tax attorney is expensive and the mental anguish of undergoing a criminal investigation can be devastating.

THE BOTTOM LINE
The bottom line is, if you have unfiled tax returns, stop procrastinating. You may be hurting yourself and ruining your chances of getting an installment agreement, obtaining a refund, getting an Offer In Compromise or having your taxes discharged through bankruptcy. Why live in hiding? It's not pleasant to live without a bank account. If you can't locate income records, you can hire a tax professional, give them a Power of Attorney, and they can request your income records from the IRS under The Freedom of Information Act. There's no better time to get your unfiled tax returns filed and get current. Once you start the process. you'll feel better. Once your returns are filed, your chances of settling your tax liabilities will be enhanced.

SEPTEMBER 2010 TAX BRIEFING

Reporting Receipt of Cash:
The issue in this program manager technical advice is whether a person who receives a check exceeding $10,000 in the course of a trade or business and cashes rather than deposits the check must file Form 8300 (Report of Cash Payments Over $10,000 Received in a Trade or Business). In concluding that the transaction is not reportable under IRC Sec. 6050I , the IRS notes that a personal check is not cash under Reg. 1.6050I-1(c)(1) . Therefore, the person receiving the personal check is not a recipient of cash for Section 6050I reporting purposes. The subsequent cashing of the check was not a receipt of cash for the underlying event (the relevant transaction), nor did it relate to the underlying transaction between the payer and recipient. The cashing of the check was a separate act by the recipient at a check casher. PMTA 2010-012.

Requesting Tax Payment Extension due to Undue Hardship:
An IRS memo addresses the rules for processing Form 1127 (Applications for Extension of Time for Payment of Tax Due to Undue Hardship), which was recently revised. Form 1127 cannot be used to request an extension of time to file a return, and if filed on that basis will be returned as nonprocessible. If the taxpayer is requesting an extension of time to pay a tax due on an upcoming return, Form 1127, with supporting documents, must be filed on or before the due date of that return, excluding extensions. If the taxpayer is requesting an extension of time to pay a deficiency, Form 1127, with supporting documents, must be filed on or before the due date for payment indicated in the tax bill. IRS Memo SB/SE-05-0710-029.

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