Good Riddance to 2010: Tax Tips for the Close of the Year

     The holiday season—it conjures up thoughts of family and friends, fruitcake, champagne and resolutions.  For you small business owners, it also means the close of another tax year and the beginning of the April 15^th panic.  In order to smooth the transition to 2011, Barbara Weltman for the Wall Street Journal offers some steps to complete before you watch the ball drop: 

       Bring your books up-to-date:  Before you can start tax planning, it is essential to know whether your business made or lost money this year.  This will also save you time come April 15^th.

      

       Consider a retirement plan:  Ms. Weltman notes that profits may be sheltered in an IRS-qualified retirement plan.  For tips and ideas on whether you may qualify and what plan may be best for you and your business, talk to your accountant or financial advisor.  Remember—to get the benefit this year, the retirement accounts must be set up by December 31^st.

       Health insurance:  Some business owners who pay for their health insurance may deduct it, but only as a personal expense and not a business expense.  However, for 2010, if you are self-employed you may use the premiums to offset the amount of net earnings used to calculate your self-employment tax.

Give to charity:  Charitable contributions are tax deductible within the limits allowed by law.  For owners of a C-corporation, charitable deductions are limited to 10% of taxable income.  For 2010, there is no phase-out of itemized deductions for high-income taxpayers.  This is limited to business owners who record business income on personal returns (e.g., owners of LLCs or S-corporations).  Check out IRS Publication 78 for information on whether your entity may qualify.

Upgrade equipment:  There are great tax options in 2010 for deducting or expensing new equipment.  If your business made money this year, you can elect first-year expensing for the cost of the equipment up to $500,000.  If your business lost money, you can rely on 50% bonus depreciation to  write off half the cost. 

To read Ms. Weltman’s entire article, visit www.wsj.com. 

$1.00 of Taxes= $1.17 Worth of Government Spending

            The Wall Street Journal recently published an article discussing the repercussions of higher taxes.  In the late 1980s, Richard Vedder and Lowell Gallaway of Ohio University authored a paper for the congressional Joint Economic Committed (known as the $1.58 study).  This study found that for every new dollar of new taxes raised, more than one dollar was spent by Congress.  The research was updated in 2010 and not much has changed.  Using statistical analyses that factor in inflation, wars, and business-cycle fluctuations, the new research shows that over the entire post-WWII era, each dollar of new tax resulted in $1.17 of new spending.  

            To see the full article, visit www.wsj.com.

Things to Remember When Choosing A Tax Controversy Lawyer: Experience, Experience, Experience!

            With the economy on edge and deficits arising at unprecedented rates, the federal and local revenue agencies have gotten creative, and aggressive, in finding new sources of revenue.  Obviously, the government raises money through taxation, and the pace of taxpayer audits are rising in an attempt to capture the optimal amount of tax.  If you become faced with the prospect of an IRS or state audit, and may have issues within the tax return, your best bet is to retain a tax controversy attorney with knowledge of IRS policies and procedures to represent your interests.  

A tax controversy lawyer is much different from your accountant, estate planner, or transactional lawyer.  An experienced tax controversy lawyer can provide advice on responding to IRS requests for information to limit the breadth and scope of the audit to the auditor’s central issues, which in turn will reduce costs.  If issues are not resolved favorably during the audit, a tax controversy lawyer can guide you through the appeals process, and, most importantly, posture your case appropriately for litigation, if the need arises.  Indeed, most pure tax lawyers have very little appetite or experience for a true adversarial matter entailing litigation.  

So what should you be looking for in a tax controversy lawyer?  

1.      K.I.S.S. – Keep It Simple Stupid.  The critical broad question is “How long have you been practicing law?” Experience usually means something.

2.     Check Background - Ask the attorney if he or she has ever worked for the Internal Revenue Service, the Department of Justice, Tax Division or other government revenue agency.  Again, specific experience with the government pertaining to tax controversy is a very valuable attribute in selecting a tax attorney.  Working for “the other side” provides a leg-up for you as a client because of your attorney’s familiarity with IRS practices and strategies.  Most tax controversy lawyers have not worked for the other side.

3.      Litigation Experience – If you know that an audit issue may lead to further controversy, check to make sure your attorney has experience litigating tax cases either in Federal District Court or Tax Court.  Experience in court is a must. Most tax lawyers are not litigators. 

If you wish to discuss your tax controversy issue, please feel free to contact our Office and schedule a consultation.  This Office usually does not charge for initial consultations if they are kept to 30 minutes or less.

Supplementing FBAR: New 2011 Foreign Asset Disclosure Requirements

       On March 18, 2010, the President signed into law the Hiring Incentives to Restore Employment (HIRE) Act that contains a provision that changes and supplements the FBAR filing requirement.  Section 511 of the HIRE Act added Section 6038D to the Internal Revenue Code which requires individual taxpayers with an aggregate balance of more than $50,000 in “specified foreign financial assets” to file a disclosure statement with his or her income tax return.  26 U.S.C. §6038D.  While an FBAR filing is only required to be filed for individuals who had financial interest in or signature or other authority over any foreign financial accounts if the aggregate value of these financial accounts exceeds $10,000 at any time during the calendar year, the new code section defines a "specified foreign financial asset" to include ownership of:  (1) any financial account maintained by a foreign financial institution;  (2) any stock or security issued by a non-U.S. person;  (3) any financial interest or contract held for investment that has a non-U.S. issuer or counterparty; and (4) any interest in a foreign entity.  The broad language makes the Section 6038D filing requirement more applicable than the FBAR filing.  Some taxpayers will be required to file both next year.

            Unlike FBAR information, which originates under Section 31 of the United States Code and is normally not permitted to be verified against a tax return or tax information due to privacy and disclosure concerns, the new provision under Section 6038D has none of these restrictions.  This change allows the IRS to use its arsenal of tools and resources to verify the information reported. 

The minimum penalty for failing to submit the required disclosure pursuant to Section 6038D  is $10,000, which increases by $10,000 for each 30-day period following receipt of notification of your failure to file from Treasury, with the maximum penalty being $50,000.  There is a 90-day grace period following notification from the Treasury before the additional $10,000 penalties accrue.  The penalty may be waived if the taxpayer is able to demonstrate that the failure to file was due to reasonable cause.  Furthermore, the HIRE Act amends Section 6662 to make the underpayment penalty applicable to understatements attributable to undisclosed foreign financial assets.  For such understatements, the penalty imposed by Section 6662 is 40 percent, rather than the normal penalty of 20 percent.

IRS Commissioner Doug Shulman called Section 6038D “the next big thing” in international tax compliance and enforcement.  He further noted that the President has authorized funding to hire 1600 new people for the IRS’ international operations over the next two years.  (“Tax From the Top: Q&A With IRS Commissioner Doug Shulman,” Journal of Accountancy, April 2010, page 16.)  The reporting requirements are effective beginning in the 2011 taxable year.  The IRS is eager to find assets abroad so remember to disclose these foreign assets or risk incurring a hefty IRS fine.