Are Audit Rates Really Lower?

Funding for enforcement by the IRS is 5% less than last year and audit rates have definitely declined. Total examinations, both field and correspondence have dropped more than 20% since 2010. Taxpayers in the higher brackets still encounter more audits but this rate has also decreased.

But this does not tell the whole story. Many more taxpayers will be caught in computer mis-matches from information forms like W-2s and 1099s. If these are factored in, then about 1 in 25 returns has some question from the IRS.

I always think it’s best to avoid any of these contacts from the IRS. Receiving a letter from the IRS is stressful and could lead to other issues. Be sure to account for all information returns; if you do not receive one that you should, inquire!

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Online Gambling and Payment Accounts Tax Reporting Warning

In a recent court case (Hom, (DC CA 6/4/2014) 113 AFTR 2d ¶ 2014-893), a taxpayer’s online payment and poker accounts were found to be reportable under FBAR. All of the accounts were with companies located outside the United States. The taxpayer had control over them and could deposit and withdraw funds at will, therefore the court decided they were financial accounts. Since the accounts had at times more than $10,000 in them, they should have been reported and the taxpayer was assessed penalties for not doing so.

Interestingly, in this case, the foreign companies did hold some of their customers’ fund inside the US, however the court ruled that the nationality of the company and not where the funds were held determined their reporting requirement.

Also of note, the current regulations specifically mention “bank accounts…[which means] a savings deposit, demand deposit, checking, or any other account maintained with a person engaged in the business of banking.” (31 CFR 1010.350)

The court interpreted the activities that the taxpayer could perform with these accounts to be functionally the same as a banking account.  I think that others will be caught in this same wicket. Taxpayers would probably not think of these types of accounts when asked by their tax preparer if they have any reportable foreign bank accounts.

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Beware the 3.8% Investment Surtax

Plan now to save yourself from this new tax on investment income. If you meet the income thresholds below and have net investment income, an additional 3.8% tax will be due. This tax went into effect on January 1, 2013.

I see this coming into play unexpectedly for taxpayers who have gain on a home sale that is above the exclusion amount and for those selling a business. For those with wage or business income normally near or above the thresholds listed below, we’ll need to do some planning to minimize taxes due in those years.

When Does it Apply:

Filing Status

Threshold Amount

Married filing jointly


Married filing separately




Head of household (with qualifying person)


Qualifying widow(er) with dependent child




Important Points

Consider re-evaluating passive or investment income if you will be above the threshold in the current year. Active participation in a formerly-passive business could turn investment income into regular income, which might be more beneficial. Be mindful of taking investment gains in a year affected by this tax.

This tax is not indexed for inflation. Like the AMT before Congress’ recent fix, the Medicare Tax’s grasp on taxpayers will increase in future years.

Need more details?

Call me to discuss your specific situation. Forbes also has a nice series with more details.

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NJ Homestead Benefit Deadline Extended to 01/31/14

State Treasurer Andrew Sidamon-Eristoff has announced that the deadline for
filing 2012 Homestead Benefit applications has been extended to January 31,
2014. The deadline had previously been extended from November 22 to
December 31.

More information and income requirements can be found here –

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Coping with the Government Shutdown – Tax Problems Edition

Solving tax problems for clients requires lots of interaction with the IRS. Generally, after meeting with a client, I file an authorization form so I can access their data online. Until last month, I filed those online, which presumably would have worked during the government shutdown. Now, we must fax them and wait 2-3 days for approval. Once I had accessed the taxpayer’s transcripts online, I usually call and speak to the IRS, asking for a collection hold, confirming details, and filing forms to resolve the issue.

Essentially, the vital services we perform for taxpayers are on hold. It’s been tough for my clients so here’s what I’ve found out and experienced during the government shutdown.

New Tax Liens and Levies
Officially, new tax liens and levies are not being issued. However, some taxpayers have reported receiving Notices of Intent to Levy during the shutdown. According to reports, the notices will continue but the liens and levies are not being filed.

Regardless, with most of the IRS not available, our options are limited. With my clients, I am preparing overdue returns and getting ready to contact the IRS once they’re open. Since authorizations to access client data are not being approved, it definitely limits our ability to complete tax returns and get an accurate overview of client accounts.

Levies that were filed before the government shutdown are still a huge problem. Normally when a levy is filed, the bank freezes the money. Often, that’s when I get a call from a new client. We have 21 days to solve the tax problem and prevent the bank from sending the money seized to the IRS. We cannot do that, and it appears that banks are still required to forward the money to the IRS.

Ongoing Tax Issues
Basically, we’re in a holding pattern. Clients who are waiting for tax returns to be processed will have to wait longer, while interest and penalties accrue. Clients with garnishments are still having their wages reduced.

Missed Deadlines
Clients who are receiving automated notices with deadlines can miss those narrow windows if their response is not being processed. Will the IRS count the postmark date for these responses or will we have to file in Tax Court? It’s not clear at this point. The Tax Court is officially saying that petitions should still be filed to meet the 90-day deadline but will not be processed until the shutdown is over.

Filing Tax Returns on Extension
I would recommend filing taxes tomorrow electronically if possible. Paper returns take longer to process and the delays will increase this filing season once the IRS is back in business. For clients expecting a refund, they will not be issued until the government shutdown is over.

Looking Ahead
Once the IRS reopens, I expect increased delays while they process the backlog. If the government shutdown continues, preparing for next tax season could be very bumpy indeed.

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2012 NJ Homestead Benefit Information

Here’s information directly from the NJ Division of Taxation:

The Division of Taxation has begun mailing applications for the 2012
Homestead Benefit. Applications are being mailed to homeowners over the
next three weeks according to the schedule below. The deadline for filing
is Friday, November 22, 2013

The Homestead Benefit application delivery dates by county are:

  • Camden, Hudson, Hunterdon, Salem, Somerset – October 10
  • Bergen, Burlington, Cumberland, Warren – October 12
  • Morris, Ocean – October 15
  • Atlantic, Essex, Monmouth, Sussex – October 18
  • Cape May, Union – October 19
  • Gloucester, Mercer, Middlesex, Passaic – October 22

Homeowners who asked to receive their applications electronically will be
sent an email containing instructions for downloading their 2012
application packet. These messages will also be sent out by county
according to the delivery schedule above.

Because previous State Budgets limited eligibility for senior/disabled
homeowners to those with New Jersey gross income of $150,000 or less
, and
for nonsenior/nondisabled homeowners to those with New Jersey gross income
of $75,000 or less
, homeowners whose 2012 income exceeded these limits will
not receive applications.

With very few exceptions, Homestead Benefit applications must be filed over
the Internet or by phone. Homeowners who receive a packet should read it
carefully and, if they meet the eligibility requirements, complete the
worksheet in the packet prior to filing. The answers to most questions can
be found in the application packet. Homeowners who have already sold the
home that was their principal residence on October 1, 2012, or who plan to
sell should pay particular attention to the instructions regarding sale of
property to ensure they complete the application correctly.

Information on the 2012 Homestead Benefit is available at:

The homeowner benefit Internet filing application on the Division of
Taxation Web site ( and automated
telephone filing system (1-877-658-2972) will be available 24 hours a day,
7 days a week during the filing period. Homeowners who have questions or
need help filing their applications can call the Homestead Benefit Hotline
at 1-888-238-1233. Representatives are available from 8:30 a.m. until 5:30
p.m., Monday through Friday, except holidays.

Most eligible homeowners will receive their Homestead Benefit for 2012 as a
credit on a future property tax bill instead of receiving a rebate check
(or direct deposit). These homeowners can expect to receive a property tax
bill or advice copy from their tax collector that will reflect the amount
of the benefit. Those homeowners who indicate when filing that they no
longer own the property or those whose principal residence was a unit in a
co-op or continuing care retirement community, will have their benefit
issued in the form of a check (or direct deposit).

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NEW S-Corp Late Filing Election Procedure

Filing a late S-Corporation Election is now much easier and has a longer or no deadline for many filers. Previously, if a business intending to be taxed as a Sub-chapter S Corporation failed to to file a timely election, but proceeded as one, relief from this mistake was potentially possible under a few Revenue Procedures (Rev.Proc. 2003-43, 2003-1 C.B. 998; Rev. Proc. 2004-48, 2004-2 C.B. 172; and Rev. Proc.2007-62, 2007-2 C.B. 786), though it was rather unknown and obscure. I had detailed one such method earlier.

However, this is all superseded by the new Revenue Procedure 2013-30. I’ll lay out the new guidelines as to who qualifies, how to apply, and what deadline, if any, applies.


  1. Intended to be classified as an S Corporation
  2. Relief requested within 3 years and 75 days after the Effective Date. This is essentially the day that if the filer had timely filed that the election would have gone into effect. However, see below for an important exception to this deadline.
  3. The failure to qualify as an S Corporation is solely because the election was not filed. In other words, the company must meet all other qualifications and must be acting as an S Corporation.
  4. Reasonable cause for filing to make a timely election and due diligence to correct the error upon discovery must be present. This can include a mistake upon the part of an employee or another entrusted to file the correct paperwork.
  5. No deadline applies if:
  • The corporation is not seeking a late corporate entity classification election;
  • The corporation fails to qualify as an S corporation solely because Form 2553 was not timely filed;
  • The corporation and all of its shareholders reported their income consistent with S corporation status for the year the election should have been made and all later years;
  • At least six months have passed since the corporation filed its first S corporation year tax return;
  • The IRS did not notify the corporation and the shareholders of any problem with the S corporation status within six months after the return was filed; and
  • The completed election form includes statements from all shareholders from the date the election was to have been effective to the date of the filing stating that they have reported their income consistent with S corporation status.


Complete Form 2553. Include “Filed Pursuant to Rev. Proc. 2013-30” at the top of the form. An officer and anyone who was a shareholder from the Effective Date until the Form 2553 is completed must sign. Include signed statements from all shareholders that all income was reported consistent with the S Corporation election since the Effective Date. The statement indicating the reasonable cause must include this language:

“Under penalties of perjury, I (we) declare that I (we) have examined this election, including accompanying documents, and, to the best of my (our) knowledge and belief, the election contains all the relevant facts relating to the election,and such facts are true, correct, and complete.”

Those also seeking late corporation classification must include further statements relating to that relief.

Current Year 1120S
File Form 2553 with the current year 1120S.  State “Includes Late Election Filed Pursuant to Rev. Proc. 2013-30” at the top of the Form 1120S. If you are subject to the 3 year and 75 day deadline, be aware that an extension of time to file the 1120S does not extend the time under this Revenue Procedure.

Late- Filed Prior Year 1120S
File Form 2553 with the late-filed returns. All overdue returns must be included. State “Includes Late Election Filed Pursuant to Rev. Proc. 2013-30” at the top of the Form 1120S. Again, the 3 year and 75 day deadline, if applicable, is not extended.

Form 2553 Filed Separately
Form 2553 can be mailed alone to the applicable IRS Service Center.

If this Revenue Procedure does not apply, relief may still be possible through a letter ruling. Consult a tax professional for help if you need to go that route.

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Penalty Relief for 1099-K Filers Extended Again

Payment issuers will continue to receive penalty relief for mis-matched Taxpayer Identification Numbers and names on Form 1099-K issued in 2013 and 2014. Notice 2013-56 has the details. Note that the penalty relief is solely for the mis-match errors and does not extend to failing to file Form 1099-K and obviously incorrect TINs.

For those who expect to receive Form 1099-K from their merchant card processor or a third-party network like PayPal, watch for notices from them asking to verify Social Security Numbers or Employer Identification Numbers. Ignoring these notices might trigger backup withholding of funds due to your business.

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Quicker and Better Levy Release News

Under the new IRS Fresh Start Initiative, we have better options for getting a levy released faster for more taxpayers. If your tax debt is less than $50,000, the updated Streamlined Installment Agreement will release the levy and will also not include a lien. Plus, no financial documents need to be filed.  If your tax debt is more than $50,000, you can pay it down to qualify under this program.

The new Streamlined Installment Agreement changed the qualifying tax debt limit from $25,000 to $50,000 for most taxpayers and the time period to pay from 60 months to 72 months. This is great news for our clients because it increases our options for releasing and avoiding a levy.


We’ll analyze your situation to determine if this is your best option. Several factors go into our analysis:

  • We check to make sure the payments under the Streamlined Installment Agreement will be less than what you would pay under a standard installment agreement by providing financial information.
  • We pull the IRS records for the statutes of limitation on your tax debts.
  • We evaluate your qualifications under the new Offer in Compromise rules
  • We calculate your options under a Partial Payment Installment Agreement
  • We examine your situation for Innocent Spouse Claims

All of these options can help release a levy and we’ll help you make the best choice in your situation.

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Offer in Compromise IRS Tax Debt Program Updated

If you owe tax debt that you are struggling with, take a look at the Offer in Compromise program. The IRS just released new guidelines that greatly reduce the amount that needs to be offered to settle your tax debt.

An Offer in Compromise lets you settle with the IRS for a lower amount than what you owe. It is based on your current assets and income.

Let’s go through an example to see if you might benefit. To start working with your own numbers, you can get a rough estimate using my Offer in Compromise Calculator.

First, you need to gather your current assets. This will include all cash and investments on hand and the quick-sale value of the things you own.

Next, we figure your disposable income. Add up your monthly income. Subtract your monthly living expenses.

The IRS sets allowable limits for certain expenses, some of which are based on where you live and the number and ages of family members. Under the new guidelines, we can include credit card payments, bank fees, and some student loans. Also a percentage of back state and local taxes may be allowed. Previously, none of these expenses could be included in the Offer in Compromise calculations. By increasing the allowable monthly expenses, we decrease disposable income, thus decreasing your offer amount.

Once we have your disposable income calculated according to the IRS regulations, we multiply it by 12 or 24 months depending on whether the offer amount will be paid within 5 months or within 6-24 months. This is a significant decrease. Previously, we had to multiply the income amount by 48 or 60 months.

Let’s do some math and see how this might benefit you – If your disposable income came to $300/month, under the previous rules, the income portion of your offer would be $14,400 or $18,000. If your tax debt is less than this amount plus your assets, you would not qualify for an Offer in Compromise. If your tax debt was more than these amounts, you might qualify but would have to pay at least $14,400 to settle your debt.

Under the new rules, in this same scenario, the income portion of your offer would be $3600 – $7200. That’s a big difference. This will make it much easier for struggling taxpayers to make an offer that they can afford and get out from under their tax debt.

Try my updated Offer in Compromise Calculator to see if you qualify and what your settlement amount might be. Call me for a free consultation to discuss your options.

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