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The 2015 Income Tax Filing Season: A Tale of Two Cities

The IRS funding was down in fiscal year 2015 about 17 percent from fiscal year 2010 on an inflation-adjusted basis.   In addition to its normal duties involved in collecting about 93 percent of Federal revenues, the IRS was tasked this year with implementing major provisions of the Affordable Care Act and the Foreign Account Tax Compliance Act.  Tax-related identity theft increased.

National Taxpayer Advocate Nina E. Olson released her mid-year report to Congress last week.  As you might surmise, the report does not paint a pretty picture.

“The 2015 filing season was akin to A Tale of Two Cities.  For the majority of taxpayers who filed their returns and did not require IRS assistance, the filing season was generally successful.  For the segment of taxpayers who required help from the IRS, the filing season was by far the worst in memory.”

During the filing season, the IRS answered only 37 percent of taxpayer calls routed to customer service representatives, and the hold time for taxpayers who got through averaged 23 minutes.  This compares to the high water mark in the 2004 fiscal year when the IRS answered 85 percent of taxpayer calls directed to its telephone assistors and hold time averaged three minutes during the filing season.

These are wait times for you amateurs. We tax professionals have a Practitioner Priority Service (“PPS”) hotline.

“Over the course of the filing season, the IRS answered only 45 percent of practitioner calls on this line, and the hold time averaged 45 minutes.  Thus, the use of the term “priority” has understandably evoked a combination of frustration and amusement from tax attorneys, CPAs, and Enrolled Agents, who must decide whether and how much to charge their clients for the time they spend waiting on hold. Of course, the 45-minute hold time represents merely an average. One practitioner told the National Taxpayer Advocate of waiting six hours to reach a telephone assistor. Another practitioner whom the National Taxpayer Advocate knows well forwarded an email from an associate at his law firm reporting on a four-hour and 24-minute telephone call, of which the first four hours and three minutes were spent waiting on hold.”

FYI.  I multi-task while listening to the IRS hold music and don’t charge my clients for the waiting time.  You are welcome.

VKM

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Katy Perry, Travel and Taxes

Got your attention, didn’t I?

Katy Perry graced the cover of the July 20, 2015 edition of Forbes.  In the magazine’s annual survey, she was named the highest earning entertainer with estimated earnings of $135 million over the 12-month measurement period.  The accompanying article portrays her as talented, bright, business-savvy, and intellectually curious.  It highlighted her quest to learn about many of the places on her year-and-a-half-long Prismatic World Tour.   Rather than hide out in her hotel rooms on tour, she donned disguises and retained experts to lead her on educational excursions to local institutions, such as the British Museum in London, the Colosseum in Rome, and Renaissance paintings in Florence.

Of course, I turned my attention to the tax aspects of these personal outings.  I found some guidance in the last two weeks’ editions of Federal Taxes Weekly Alert Newsletter (RIA).

Traveling business people, including entertainers, can mix some pleasure with business travel.  The rules differ some on whether the travel is domestic or foreign.

Generally speaking, in the case of a domestic trip undertaken primarily for business, travel costs under an accountable expense plan to and from the business site are tax deductible as business expenses.  Lodging for the business days is deductible and 50% of meals and entertainment on business days is deductible.  Lodging, meals and entertainment on nonbusiness days are not deductible, except in limited circumstances.  When is a trip undertaken primarily for business?  While the determination is based on “facts and circumstances” of each case, the regulations say that the ways that travelers split their time is an important factor.

Deductibility of travel outside the U.S. has some additional rules.   If a taxpayer undertakes a trip primarily for business reasons, but also takes some personal days while abroad, the travel cost is fully deductible, if the taxpayer meets one of four tests.  Otherwise, the travel costs must be allocated, generally using a daily allocation formula.

There is a myriad of other rules that could impact the deductibility of travel.  For example, if a “common-sense test” would dictate that when a person stays over the weekend at a remote site in order to continue conducting business there in the next week,  weekend lodging and 50% of meals are considered business expenses.  Like this example, most of the rules about international travel are generally taxpayer-friendly.

So, maybe Katy’s education sessions are not deductible, but that should not affect her other deductions.  And, who knows?  Maybe Katy’s edification sessions are integrally linked with development of new products, services, and collaborations – all business-related and rightfully deductible.

Katy, if you don’t have a sharp CPA advisor on your team, call me maybe?

VKM

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Accounting TV Shows – That’s What I Am Waiting For!

A while back, I commented in my blog about a rumored movie in the making that stars Ben Affleck as an accountant with a sideline business – hit man.  The movie doesn’t seem to have made it to the theaters (and may never).   There is just not enough good entertainment featuring the accounting profession.

Last week, the daily online accounting news outlet Accounting Today published “Accounting TV Shows We’d Like to See.”  Who wouldn’t be hooked on “Add Men,” a show about some loose-living Big Eight CPAs set in the 1960’s in Manhattan?  Wouldn’t you set the DVR to record “Bookkeeping Bad,” a series about an accounting teacher who turns to a life of crime – cooking the books for franchisee clients – to support his family?

Check out the other 10 suggestions at: http://www.accountingtoday.com/gallery/photos/accounting-tv-shows-wed-like-to-see-75153-1.html?start=2.

VKM

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Jeb Bush’s Supercharged Retirement Plan

Last week, presidential candidate Jeb Bush released his income tax returns for the last thirty-three years.  News outlets sliced and diced the returns to analyze his income, his tax payments, and the significant wealth he has accumulated over the years.  What caught my attention were the reports of a vaguely-described pension plan in which he was stashing away pre-tax for the last seven or eight years over $300,000 per year from his consulting firm earnings.  That’s a whole lot more than a firm can contribute for an employee or an employee can contribute under most circumstances to better-known qualified retirement plans.

The pension plan must be a cash balance plan, probably combined with a 401(k) and profit-sharing plan.  Some of my clients have used this perfectly legal and powerful savings tool to great advantage.  Some large companies use cash balance plans, primarily as successors to typical defined benefit retirement plans that are frozen.  However, most users are small businesses and, generally, professional service firms.

The cash balance plan is a defined benefit plan.  Instead of promising a defined income stream in retirement, the plan is designed to provide a defined cash balance at retirement.  The cash balance plan is most effective in cases where the employer has a few more mature, highly paid owner/employees and a staff of mostly lower-earning younger workers.  Combined with a defined contribution plan, usually a 401(k) with profit sharing, the cash balance plan allows the firm to contribute for high-paid employees large sums of money, around $300,000 or more for a 60-year old person, over a short period of time for not-so-young high-paid employees.  (I do not consider as old a person who is 60 years of age.)  The payments are deductible by the employer and tax-deferred for the employee.   So, it is pretty easy to see the attractiveness of this plan for doctors, dentists, lawyers and other high-earning professionals.

While the cash balance plan is a wonderful savings tool in the right circumstances, it does come with some burdens.  The overall retirement plan arrangement must cover all eligible employees.  Most commentators say the cost of coverage is in the range of 5%-8% of payroll for the lower paid employees.  The cost of administration is higher than a defined contribution plan.  In any case, I would urge every professional service firm having mission-critical mature high earners to consider a cash balance plan.

So, kudos to Jeb Bush and his tax advisors!

VKM

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RESCISSION: A HANDY TOOL IN THE TAX TOOL CHEST

In the best of all possible worlds, our clients would always consult with us as part of the process of planning a transaction.  When that does not happen and the tax consequences of the transaction are not as intended or not those desired, in some cases we can help you avoid the bad tax results through the application of the judicial doctrine of rescission.  I have used this doctrine several times during my career to good effect.

An article published in June 2015 in The Tax Adviser discusses the doctrine of rescission, which allows the parties to pretend that the original deal never occurred.

The IRS issued Revenue Ruling 80-58, which states that a successful rescission for tax purposes has two characteristics:

  1. The parties to the transaction must be returned to the status quo ante (their positions had no contract been made); and
  2. Very importantly, the restoration must be accomplished within the same tax year as the original transaction. This requirement focuses on the importance of the annual accounting period in determining taxable income.

In the past, the IRS has issued several private letter rulings with respect to rescissions.  While not precedential, these rulings give a great deal of guidance about a number of situations involving rescissions.

Restoration to the status quo ante involves a fairly straightforward analysis.  Reverse engineering a transaction to maintain the transaction and get better tax results, rather than simply “unwinding” the transaction, is a bit trickier and a bit less certain as to its effectiveness.  However, there have been at least a couple of private letter rulings that endorsed that kind of reverse engineering.

The IRS issued a no-ruling policy in the area of rescission in 2014.  While negating the tool of a comfort ruling, the IRS has not indicated that the doctrine of rescission is under siege.

So, if you forget to tell us about a transaction before you close it, we may still be able to fix some tax-broken deals for you.

 

VKM