Tax Planning after the Tax Extension

[kcjenkins]

Tax Planning after the Tax Extension

By Michael Cohn

October 16, 2013

Now that the October 15 filing deadline is out of the way for all those many taxpayers who had to file an extension due to the delayed tax season, there are a number of tax planning options for next year.

Greg Rosica, a tax partner at Ernst & Young and a contributing author to the Ernst & Young Tax Guide, noted that many people are busy finishing their taxes, especially when they receive their K-1 forms within the last few weeks just ahead of the September 16 deadline.

“They obviously have all of their information as of at least that date to be able to finalize and file their tax return,” he said. “As people are going through and pulling those things together, there are some things to think about, both in terms of the 2012 tax filings that they’re doing as well as 2013. With 2012 tax filings that they have been wrapping up, certainly they are thinking about what have they done that they can reconsider."

One thing they might want to reconsider is a Roth IRA conversion.

"If they have done a Roth IRA conversion, that’s something that you can recharacterize up until October 15," Rosica said in an interview last week. "If they did a Roth conversion in 2012, they can look back and reflect on what they have done and decided that perhaps that wasn’t the right financial move for themselves, perhaps because the investments went down significantly in value as of this point in time, or perhaps they thought they would have the cash to make the tax payment on that conversion, but life changes have occurred. Then they could re-evaluate that as well and potentially do a recharacterization, which is undoing what they had done before.”

Those who are self-employed also could make contributions to a Simplified Employee Pension, or SEP, plan until October 15.

The fiscal cliff deal at the beginning of the year also opens up some possibilities for next year’s tax planning. “For the 2012 filing we’re still dealing with the older tax rules the way they were for the most part,” said Rosica. “To the extent that they have done IRA contributions to charity up to $100,000, that remains a provision that exists for both 2012 and 2013. Although you can’t still do it today for last year, you can certainly do it for 2013.”

For those practitioners who have just wrapped up the 2012 tax returns of clients who were on extension, they should take a look at how their clients' income may have changed for 2013. “See what kinds of deductions that you receive a benefit from and how those may change in light of the provisions that come back into play, such as with itemized deductions having some of the phase-out that had occurred previously but had not been in play for the last few years,” Rosica suggested. “That comes back into play in 2013, so higher-income 2013 taxpayers may really want to look at some of their deductions and determine things like real estate taxes and other itemized deductions, as to whether they’re going to get some of the benefit that they’ve received in the past from those, and whether through some timing of when they pay them, they might be able to put themselves in a better situation. Also, as they look toward higher tax rates and increased surcharges and contributions to taxes, are there ways to continue to defer or deflect to other taxpayers or other family members income that’s properly movable into some of the lower tax brackets?”

Taxpayers and tax practitioners can also do some planning around some of the newer taxes imposed by the Affordable Care Act, such as the Additional Medicare Tax or Net Investment Income Tax.

“Really it’s looking at the investable assets that you have and where those are located,” said Rosica. “To the extent you hold investment assets outside your tax-deferred or tax-exempt plans, the interest and dividends and capital gains will be subject to it [taxes]. But items that are inside an IRA or 401(k) are not. It may even be worth looking at what you have. Where are the interest-bearing investments you have, such as bonds, versus where are your capital gains and dividend-producing assets? Depending on where they are in your portfolio—in a taxable or tax-deferred or tax-free account—that might be something that’s worth looking at as to how to minimize the Medicare tax on those types of investments."

Business investors should also examine their tax situation. "If you’re an investor in a partnership, or in an S corporation or some other type of flow-through entity, if you don’t materially participate, which is a tax term for whether something can be considered passive or active, that can have an impact because anything you are passive in will also be subject to the Medicare contribution tax. If it’s possible to increase your level of involvement in that particular investment that you have, such that you can get treated as active, that’s also a way to decrease [your taxes]," said Rosica. "But here we are in October, and if you’re trying to meet the 500 material participation hours [requirement], there’s probably not 500 hours left to work in the year.”

Even though as part of the fiscal cliff deal at the beginning of the year Congress made permanent the patch to keep the alternative minimum tax from spreading to millions more taxpayers, Rosica noted that the AMT continues to be an issue that many people will face. “Depending on what tax bracket you’re in, if you’re in the higher ordinary tax brackets, then the gap between the AMT and the ordinary rates is wider, and therefore there is less potential to be in AMT,” he pointed out. “But certainly if you’re not in the top higher rate, and you’ve been in AMT in the past, there’s a good chance you’ll continue to be in that as well.”

[kcjenkins]

IRS Needs to Fix Taxpayer Correspondence Scanning

Washington, D.C. (October 24, 2013)

By Michael Cohn

The Internal Revenue Service has to do a better job when scanning taxpayer correspondence to avoid errors and repeated requests for information from taxpayers, according to a new report.

The report , from the Treasury Inspector General for Tax Administration, acknowledged that the IRS is getting faster at scanning taxpayers’ paper correspondence into electronic images. But TIGTA’s report noted that a significant number of documents are being inaccurately coded or improperly scanned, leading to errors and delays.

The IRS designed its Correspondence Imaging System, or CIS, to automate the scanning of taxpayer correspondence. The Image Control Team units in the IRS submission processing sites scanned more than 8.1 million pieces of paper correspondence into the CIS during fiscal year 2012.

For its report, TIGTA reviewed whether the IRS was effectively and efficiently processing and managing taxpayer correspondence. A 2007 audit found delays in the timely scanning of taxpayer correspondence and recommended improvements to track and analyze the timeliness of correspondence scanning.

In its new audit, TIGTA found that the IRS has taken corrective actions to address the concerns raised six years ago after the previous audit about the timeliness of scanning correspondence.

However, TIGTA found there continues to be inaccurate and incomplete data in the CIS. TIGTA compared 118 paper documents received from taxpayers to the images scanned into the CIS and found that 28 of them (or 24 percent) had one or more scan errors. Moreover, documents scanned into the CIS are often incomplete, illegible or inaccurate.

In addition, identity theft correspondence is not always linked to existing cases in the CIS, which can result in multiple cases and different IRS employees working with the same taxpayers and taking conflicting actions to resolve the taxpayer’s case. Nearly 56 percent of the 913,331 open cases in the CIS inventory, as of September 2012, involved correspondence from taxpayers regarding identity theft.

“The continued problems in this area are troubling,” said TIGTA Inspector General J. Russell George in a statement. “Miscoded or illegible scanned documents can result in taxpayers being asked multiple times to provide the same information, delay the issuance of refunds, change the order in which cases are worked, or result in the incorrect calculation of interest owed to taxpayers.”

TIGTA made seven recommendations to the IRS, including ensuring that employees perform required cursory reviews of scanned documents, and that managers verify scan quality. The report also suggested the IRS should ensure that managers monitor their teams’ inventories and reassign cases as needed to ensure that the oldest cases are worked on first.

The IRS agreed to take action to address TIGTA’s recommendations. In response to the report, Peggy Bogadi, commissioner of the IRS’s Wage and Investment Division, pointed out that the CIS offers benefits such as automatic acknowledgment of taxpayer correspondence and improved customer service through instant access to scanned information while assisting taxpayers. The system also enables IRS employees at field locations to access documents without needing to get copies mailed or shipped in bulk to them.

Bogadi also pointed out that while much of TIGTA’s report focuses on the scanning of documents related to identity theft, such cases represent only a small portion of the overall CIS inventory. “The IRS closed over 6.8 million cases in CIS during fiscal year 2012, with only 460,000 cases, or 6.7 percent, representing identity theft cases,” she wrote. She took issue with figures cited in the report indicating that identity theft cases constitute 55.8 percent of all Accounts Management inventory work. But she pointed out that represents only the open individual taxpayer cases, and not the total population of cases. “While the scanning technology is not a seamless process, and errors may occur, it is important to note that none of the errors identified in the report adversely impacted our ability to serve taxpayers,” she wrote.

[Guest Taxed]

I thought we had an earlier thread where I suggested that IRS should not rush to issue refunds within 2 weeks. I mean the W2 and other docs are not even filed by the time they start issuing refunds. Many on this board thought that was a stupid idea to delay the refunds, but IMHO it makes logical sense to verify identity and income source documents before issuing refunds. A six month time frame to issue refunds is appropriate in my opinion.

I know EIC recipients will flip out, but we need to make sure people are not gaming the system.

[kcjenkins]

" A six month time frame"? They won't even make it a six week time frame, because pols [yes, on BOTH sides] don't want the complaints from voters. Remember the screams a few years ago when they held up just the EIC portion of refunds just a few weeks? You'd have thought people were starving in the streets by the thousands.

[SaraEA]

I think the easiest way to eliminate 99% of tax-refund identity theft is to require taxpayers to input last year's AGI when they efile. That's the way efile started, remember? The IRS eventually eliminated that requirement because at that time, they were under pressure to increase efiling and were trying to make it as easy as possible for taxpayers. By now efiling has caught on and the IRS is ahead of its mandated goals. So let's take a step backward and ask filers to report last year's AGI. The identity thieves won't have that info and will be stopped in their tracks.

[Guest Taxed]

That is a good idea and for taxpayers who are served by a regular taxpreparer that info will already be in our client files and the software can pick that up easily. For new clients we have to get a copy of the prior return or pull a transcript.

[BulldogTom]

I think the easiest way to eliminate 99% of tax-refund identity theft is to require taxpayers to input last year's AGI when they efile. That's the way efile started, remember? The IRS eventually eliminated that requirement because at that time, they were under pressure to increase efiling and were trying to make it as easy as possible for taxpayers. By now efiling has caught on and the IRS is ahead of its mandated goals. So let's take a step backward and ask filers to report last year's AGI. The identity thieves won't have that info and will be stopped in their tracks.

And don't forget the biggest benefit, that our clients will be coming back to us because we have the info they need to e-file. A client asking for last year's AGI will be a huge tip off that they are looking to go elsewhere. You can get a few extra bucks from them for a prior year return reprint.

Tom

Hollister, CA

[SaraEA]

Clients who are looking for last year's AGI (or depreciation schedules for that matter) have already decided to go elsewhere. I would have no qualms about giving them what they want and saying goodbye. Why make it hard when the relationship seems to be broken? They want to use a preparer who is closer to where they live, who their friend uses, whose price is perceived to be lower, or who will let them deduct the suits they buy for work that you would never allow them to write off.

Sometime they come back with their tail between their legs. Sometimes when they try to come back you gleefully tell them you're not accepting new clients. Most often you never hear from them again. I would never do anything to force them to stay. What's the point?

[Guest Taxed]

SaraEA you are correct. Why make it difficult if the relationship is broken or if they have found another preparer that they like.

This tax season I lost a good paying client of 4 years because last year I stopped her from deducting wash sale losses. Before that she use to give me a spreadsheet directly but last year she directed her broker to give me the complete spreadsheet. We went back and forth on this issue and then this year she leaves me a message that her broker has recommended another preparer more in line with her liking.

If she decides to come back to me, I will take her back but my fees would go up a bit and I will have a frank talk with her if she is still day trading.

[JohnH]

If she continues day trading for very long, it's likely that she won't be able to afford your fees no matter what they are.

[Guest Taxed]

If I remember correctly her investment portfolio were valued close to $2M when I was preparing her returns. She is the ex wife of the CEO of a medium sized company and used to getting her way! I still do her parent's returns.

[JohnH]

I think I'm going to write a book someday.

The title will be "How to Make A Small Fortune Day Trading"

Chapter 1: Start With A Large Fortune

Chapter 2: Begin Day Trading

Chapter 3: Stop When You Have A Small Fortune

Chapters 4, 5, and 6 : Go Back to Chapter 3 !!!

Chapter 7: Self-Explanatory

[Guest Taxed]

I think I am going to write a book about taxpayers who were hoodwinked into cashing their 401(k), IRA and other pension accounts to buy Gold at the top of the market.

I have one client that lost close to $20K because of his stupidity. He and I were invested in similar funds and I told him not to do it.

I got my 3Q statement the other day and YTD I made 18.9%. I am satisfied because I have roughly 50% in stable value funds.

[JohnH]

A couple of years back a client called asking me about that same matter. He had been told to convert all his retirement money to gold. Not gold funds or anything of that sort, , but to actually buy gold to keep on hand. When I asked him why he would do that, he began to describe some sort of scenario whereby the dollar becomes worthless, the social order breaks down, and nothing has any value.

I told him if that happens he won't need gold - the only metal which would have any value would be lead.

[jklcpa]

This past year one of my wealthier clients fell for one of those newspaper ads and purchased gold coins, the kind that are collectible and that there is no market for. He called and asked what I thought, but he'd already done it, although he didn't tell me. His wife told me later on at another meeting.

[Guest Taxed]

Another scam in my opinion is buying Iraqi dinar (their currency) in physical form in the hope that the value will more than double in a short period. I have not idea what their basis is but I have 2 clients that did that through a website.

[JohnH]

Absolutely! For some reason the Iraqi Dinar scam got entrenched among some church groups, and I had to stifle my laughter when trying to rationally explain to several people the folly of listening to that garbage.

A couple of times I told people they would get a longer-lasting return by investing in "diners" (or even "dinners") rather than "dinars". Generally speaking, they didn't appreciate the humor, but (as one would guess) that didn't stop me.

[Guest Taxed]

And if you have noticed once such a scam gets entrenched in a Church or social group, the most vulnerable of that group who can least afford to lose fall prey. I just wished Church leaders and other leaders of social groups would voice their opposition in much stronger terms.

One of my clients who fell for this scam is a single mother with 3 kids, barely making it. I hate to see what she will do when the bubble bursts. She tells me she is doing it for her kids. I told her to look at 529 plans if that was indeed her goal.

[JohnH]

Sadly, many times these are the same people squandering money they really can't afford to waste on Lottery Tickets, all in the vain hope of scoring the big jackpot.