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IRS lost another case recently.  This time the 6th Circuit Court of Appeals refused to reconsider a 2012 decision that payments made to laid off workers aren’t subject to FICA taxes (Social Security and Medicare payroll taxes).  For tax years 2011 and 2012, that’s a tax savings of $56.50 per $1000.00 of compensation per employee, plus the matching payroll savings for their employer.  As the IRS estimates refund claims could hit $1 billion, a Supreme Court appeal is likely.  Stayed tuned to this issue as you may want to apply for a refund should your employer have withheld FICA on your severance pay when you were laid off.

IRS is announcing on Monday, January 28th that they will NOT be processing Form 8863 beginning on January 30th.  Instead, it becomes one of the forms that is being delayed until late February or early March.  This is a fairly common form that will impact many taxpayers.  This form is used to report credits and deducitons related to tuition and education expenses.

In 2003 46% of US Tax Returns were e-filed.  Now, let’s fast forward to the year 2010 where 78% of all US Tax Returns were e-filed.  That’s an incredible leap!  That means more IRS agents available to answer your questions, right.  Don’t hold your breath. 

After reading these stats, three questions came to mind regarding this robust increase to our nation’s electronic tax filing.

1. Does IRS deserve applause for promoting e-file services? 
2. Rather should we high-five private tax software companies, accounting firms, and the general public for their efforts in embracing the modern electronic tax system?             (I would say, give all factions three cheers!)
3. Now for the disturbing question…  How many self-filed electronic returns were done correctly? 

Why is this disturbing to me?  Here’s why.  I just picked up a client that is pretty intelligent.  The tax return was 99% correct, using consumer tax software.  He followed the software’s tax questionnaire, as I imagine most do-it-yourself filers do.  Good so far.  Let’s fast forward 2 years, this is where I come in. 

In reviewing the audit notice and self-prepared tax return sent to me via PDF, I soon discovered that my client had incorrectly filled out the wrong column of one of the business forms.  Although my client used the correct tax form, the figures were in the wrong column.  This was an innocent error and was most likely due to my client not really understanding the tax forms nor the end result of the business deduction that he took.   Tis one little error cost my client a few thousand dollars, interest, penalties, and a bunch of his precious time. 

I always say to new clients, “within any 5 year period – my consulting fees will be paid for by my tax saving advice, or at least by keeping you out an IRS office.”  I’m not advocating everyone use a tax advisor, but hopefully I’ve provided a pause for thought when it’s time to seek professional guidance.

Below are the rest of the 2010 tax return statistics recently published by IRS.

2010 Complete Report estimates:

• 142,892,050 Total, all individual returns filed
• 84,071,480 1040 returns
• 40,810,489 1040A returns
• 18,010,081 1040EZ returns

Estimates of returns filed electronically:

• 111,559,553 Total, all individual returns filed
• 62,427,066 1040 returns
• 35,419,288 1040A returns
• 13,713,200 1040EZ returns

Form 1040 tax debts can be discharged in bankruptcy, that is, only if the tax returns were filed prior to the bankruptcy filing and prior to an IRS assessment.  Even if the Form 1040 is filed late, the “tax return” requirement is deemed to be satisfied for the bankruptcy discharge.  Please note, any tax assessment prior to filing the late tax return cannot be discharged in bankruptcy.  Bankruptcy attorneys, who should be experts in this area of taxation (or at least well versed), do make this mistake. 

Lesson: File all returns prior to your bankruptcy filing and prior to assessment, even if late.  Some or all of your Form 1040 tax debt will then has a chance to be washed away with your bankruptcy filing.

Bankruptcy is a complex issue.  Therefore, this is not intended to be specific legal or tax advice.  Seek an expert for guidance.

Source Document: CC-2010-016

The non-custodial parent must attach a signed (by custodial parent) Form 8832 to claim the child exemption on their tax return.  Tax Court says it will disallow the child exemption deduction if Form 8832 is not signed and attached to the return.  That said, there is an exception to this rule.  Both conditions below must apply:

1. Divorce/Separation Agreement awards the child exemption to the non-custodial parent, if child support is current and paid timely, and
2. This exception only applies to divorces that occurred prior to 2009.

Although this Tax Court Summary Opinion is not an official IRS stance, it does provide guidance to what you would face if your tax return was audited and this form is not attached and signed by the custodial parent.  So please, get Form 8832 signed by the custodial parent.

 The IRS has announced that the 2013 gift tax exclusion increases from 2012’s $13,000 per person per year to $14,000 per person per year for 2013.

WASHINGTON — The Internal Revenue Service today issued the 2013 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

Beginning on Jan. 1, 2013, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

• 56.5 cents per mile for business miles driven
• 24 cents per mile driven for medical or moving purposes
• 14 cents per mile driven in service of charitable organizations

The rate for business miles driven during 2013 increases 1 cent from the 2012 rate.  The medical and moving rate is also up 1 cent per mile from the 2012 rate.

The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs.

Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.

A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle.  In addition, the business standard mileage rate cannot be used for more than four vehicles used simultaneously.

These and other requirements for a taxpayer to use a standard mileage rate to calculate the amount of a deductible business, moving, medical, or charitable expense are in Rev. Proc. 2010-51.  Notice 2012-72 contains the standard mileage rates, the amount a taxpayer must use in calculating reductions to basis for depreciation taken under the business standard mileage rate, and the maximum standard automobile cost that a taxpayer may use in computing the allowance under a fixed and variable rate plan.

Many small business employees may not be familiar with Code Section 1244 or 1202, but they should be.  These are the IRS Code Sections which allow for favorable gain exclusions or larger capital loss allowances on small business stock. 

IRC 1244 – Normally, stock is considered a capital asset and thus the loss is held to no more than $3,000 in any given year.  Section 1244 small business stock allows an owner to take up to a $50,000 loss on his or her stock.  Should both spouses co-own the business, losses up to a $100,000 can be taken.  Utilizing this code section can really help a small business owner’s cash flow!

IRC 1202 – 50% to 100% of the gain on this stock can be excluded from tax.  The rules and tax periods for which this code section can be utilized are tight, but what a great rule!  For example, stock options must be exercised and held for 5 years, not exercised and sold same day for instance.  Thus, one cannot use the grant date as the start date of their stock’s holding period. 

Maybe your stock sale qualifies, or qualified?

Midwest Farmers (MN, IA, SD, ND, NE, MO, AR) have a favorable ruling from 8th Circuit Court Case.  8th Circuit rules in favor of a couple leasing their farm acreage to their “farm corporation”, even though the couple actively participates in the farming activity.  That is, so long as the acreage is rented at it fair market rent.  This structure is set up to minimize the farm corporation’s exposure to self-employment tax and lower overall self-employment tax paid.  IRS disagrees; and will enforce in areas outside the 8th Circuit.

Small Business – S Corporation

 …IRS says, proper administration of your Health Reimbursement Arrangement (HRA) is crucial in obtaining the tax favored treatment when reimbursing shareholders for their medical expenses, including medical insurance premiums. 

 Many are unaware that Medicare premiums are a deductible HRA reimbursement! 

 Also, IRS states the shareholder must include their HRA reimbursements on their Form W-2 to be a valid deduction.