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Missing Contractor SS#

A client called recently with the dilemma of a contractor who did excellent work refusing to provide a social security number. The contractor had just finished dealing with the after effects of identity theft and did not want to risk it again.

It was understandable someone who has dealt with identity theft did not want to risk suffering through the fear, expense, and inconvenience again. However; the Internal Revenue Code requires the contractor provide his or her Tax Identification Number (TIN) to those who have paid for his services..

The client did not want to stop using the contractor, many business owners do not want to end business relationships because of the contractor has refused to provide a TIN. Yet she as the employer of the contractor is responsible for reporting payments made to him.

The solution provided by the IRS when the contractor refuses to provide a social security or taxpayer identification number (TIN) is for the payer to immediately start backup withholding at 28%. This makes it imperative to request the TIN when the relationship starts and to start the withholding when the contractor fails to provide it.

It is best to give the contractor the W-9 before employing the contractor making employment conditional on its return. If it is returned incomplete or is missing the identifying number (social security/TIN) keep that copy for your records. Before December 31st send a second Form W-9 by registered mail requiring a return receipt.  And most importantly begin backup withholding and continue backup withholding until you receive the TIN.

If the registered letter is returned with an incomplete W-9 file or unopened file with the contractor’s records that you do have and the green postal receipt as proof you requested the information and did not intentionally ignore the requirement to file complete reports.

For each year the person works for you make a request for the information using Form W-9 and keep track of the responses. For those that do not provide a TIN withhold 28% of the payment and submit the payment to the IRS by the end of the quarter by check or EFTPS. Next time I will cover how to report this to the IRS.


What are Statutes of Limitations?

Statutes of Limitations are deadlines established by Congress in the Internal Revenue Code for the assessment of taxes and the making of credits or refunds to taxpayers to ensure timely tax examinations. Statutes of Limitations (SOL) are intended to prevent the examination of a return many years after a return is filed. Possibly long after documentation and responsible parties for the filed return are no longer available. Or, long after the demise of a troubled business. Generally the SOL limit the time a tax assessment can be made to within three (3) years of a return’s due date or filing date, whichever is later. The day the return is filed the SOL begins to run counting down the days the Service has left to examine a return and make a determination if additional taxes or a refund are due.

The SOL for a return timely filed on April 15th will end on April 15th three years following. Example: The SOL for a return filed April 15, 2014 will end April 15, 2017. If the return is filed late the filing date still is the start date of the SOL. Example: A return due October 15, 2012 is filed December 12, 2014. The SOL starts on December 12, 2014 and ends December 12, 2017. If the IRS files a substitute return the SOL starts on that date and the SOL clock is reset when the taxpayer files a return for that year replacing the substitute return with theirs. Example: The Service files the substitute return Feb 3, 2015 for the 2012 tax year. The taxpayer motivated by a notice of deficiency prepares and files a 2012 tax return May 14, 2017. The SOL for the Substitute return is Feb 3, 2018 and for the taxpayer’s filing is May 14, 2020.

The SOL applies to the taxpayer too limiting the time for filing amended returns, applications for refunds, or requests for credit to the SOL period. The Service is legally prohibited from making a refund or credit if the request is filed after the SOL ends. If the taxpayer disagrees with the findings of a return examination the Service will provide an administrative appeal only if sufficient time remains on the SOL. Otherwise the taxpayer must take it to court or seek an SOL extension.

Agreements between the Service and taxpayer to extent the SOL are termed “consents” and are made using various forms dependent on the return filed and type of extension sought. The extension allows the taxpayer to present additional evidence and the IRS time to complete an examination. Consents are one of two types; a) Fixed Date terminates on a specified date, b) Open-ended exist for an indefinite length of time, usually 90 days after either the taxpayer or Service sends the prescribed notice ending the agreement. The extension can be extended by agreement between the IRS and taxpayer. Some consent agreements may be restricted to specific tax issues and can be either fixed date or open-ended.  Restricted agreements are only made if certain conditions exist.

A taxpayer refusing to sign an extension leads may lead to assessments of taxes the Service determines to be due. Usually the taxpayer receives a Notice of Deficiency and administrative options are generally closed to the taxpayer in resolving the tax issue.

Bankruptcy proceedings suspend the SOL until the bankruptcy proceedings end at which time the SOL starts counting down the remaining time.

There is a special case where the SOL is extended to six (6) years when gross income reported on the return is understated by 25% or more. 


The Important of Conducting a Business Like a Business

When in business do as business’ do is an important idea for a person entering business to grasp and act on. As an accountant with a growing tax practice people retain my service to prepare returns and many times represent them before the IRS. Usually after not conducting their profit motivated activity like a business. A recent tax case illustrates the importance of acting like a business as a business.

A Mr. Boneparte, an employee of the NY and New Jersey Port Authority claimed on his federal tax return to be a professional gambler. The treatment of gambling losses for a professional gambler is to deduct the losses to the extent of winnings directly from the winnings. Much as a merchant deducts the cost of goods sold from the sales proceeds from those goods. Casual gamblers deduct the losses as a miscellaneous expense subject to the 2% floor on Schedule A to the extent of winnings. The ability to deduct the losses directly from the winnings has huge tax implications. Primarily a lower Adjusted Gross Income (AGI), a number used in many critical tests for various credits and deductions and for a self-employed person a lower SE tax.

When the losses are deducted subject to the 2% floor on Schedule A AGI is higher and the deduction may not be used if less than the standard deduction leading to a higher tax on total income.

The Tax Court looked at the facts of Mr. Boneparte’s return and relevant law and ruled the taxpayer was not a professional gambler. The court’s questioned if Mr. Boneparte had as an objective of being a gambler a profit motive. A profit motive is evidence partly by the fact the taxpayer maintains complete and accurate books and records. (Reg. §1.1832(b)(1))

Central to the Tax Court’s ruling was Mr. Boneparte’s failure to keep complete and accurate records of his gambling activities. Mr. Boneparte maintained a running total of winnings and losses in his head. He did not record where, when, and the amount of each wager or each day of gambling activity. The handwritten notes he provided to the auditor were created while the audit was in progress. Part of the complete and accurate records requirement is that the records be contemporaneous to the activity meaning “originating, arising, or being formed or made at the same time; marked by characteristics compatible with such origin.” (Merriam –Webster) A classic example is the receipt showing the name of the vendor, the date and time, the amount paid or received.

Mr. Boneparte could not demonstrate he had a profit motive in being a gambler and lost the deduction of his losses directly against his winnings. Keep the receipts, keep books showing a detailed accounting of income and expenses using those receipts.


Prepare for a Disaster – Plan to Keep Your Tax Records Safe

June 1st is the start of the Hurricane season and recent rains have demonstrated the very real potential of flooding. The IRS urges taxpayers plan to keep tax records safe and this firm agrees. The savings in time, aggravation, and money make protecting tax records sensible. The following are suggestions to help make that plan.

  • ·         Use Electronic Records. Banks, brokerage houses, and other financial service providers provide and maintain financial records in electronic format available online for download. With home scanners you can make your own scans of records. Either way you can keep an additional set of records electronically. Download the files to an external hard drive, USB flash drive, o burn them onto a CD or DVD. Prepare a second copy to place some place other than your home; a safe deposit box, self-storage unit, or trusted family, friend, or your attorney in the event your home is affected. You may not be able to retrieve the copy held at your home in a disaster covering a large area so consider places outside your home area.
  • ·          Original Paper Copies. Keep the original paper records and consider keeping a second set in a waterproof container away from the originals. Fireboxes are designed and built to protect the contents from fire, not water. Water will enter a firebox and wreck documents, usually within seconds of submersion.
  • ·         CPAs. CPAs maintain records for clients indefinitely, often outside the immediate area of their office. Firms have moved or are moving rapidly to paperless offices choosing to store documents electronically. Electronic records are easier to access and retrieval and with the falling costs of electronic storage more years are maintained.
  • ·         What records to keep? Keep copies of; mortgage contracts, sales documents on properties, vehicles (including boats), insurance contracts, tax returns for current and prior years and the documents used in their preparation, birth certificates, identifications such as driver licenses and social security, business and personal credit card accounts numbers, equipment ID numbers and statements, bank statements and canceled checks, photographs, videos, lists of valuables, descriptions of them, and photographs of the valuables including business equipment. Keep lists of the documents backed up to help in gathering documents and keeping them updated. Label and date the containers, hard drives, USB flash drives to make it easier to find what you are looking for. After a disaster you will want quick access to many of these documents.

Hopefully you will have no need to access the stored documents. If you do need to you will glad you prepared.


Under Reporting the Mortgage Interest Deduction?

Bank of America has asked a Federal judge to dismiss a nationwide class action lawsuit. Bank of America is accused of intentionally and fraudulently under reporting interest collected by the bank on the Form 1098 Mortgage Interest Statement. The suit was brought under IRC §7434 which provides for civil damages for fraudulent filing of information returns. The lawsuit is centered on homeowners who fell behind on mortgage payments owing both principle and interest and then received a modified loan from Bank of America. The modifications basically added the interest to the balance of the mortgage principle.

To illustrate, assume a homeowner facing foreclosure has mortgage principle of $300,000on a 15 year mortgage issued by Bank of America. At the time the modification is initiated the homeowner may owe $15,000 in delinquent interest. After the modification, the homeowner has a 30 year mortgage and owes Bank of America $315,000 consisting of the original principle amount of $300,000 plus the $15,000 in back interest.

The homeowner is not permitted to take the $15,000 interest as a mortgage interest deduction at the time the loan is modified. The courts have upheld the IRS disallowance of the interest deduction for back interest due in the year of modification.  This is consistent with IRS and IRC rules and regulation permitting deduction only when the cash has been paid by a cash basis taxpayer.

When the homeowner pays the delinquent interest over the course of the modified loan, the delinquent interest plus the interest paid on the modified $300,000 mortgage give rise to a home mortgage deduction under §163 in each year of payment.  Here is the crux of the suit, since the homeowner may not deduct the delinquent interest until it is paid in future years and Bank of America failed to include the delinquent interest in subsequent Form 1098s to its borrowers, the borrowers have overpaid on their taxes because the mortgage deduction reported was under reported on the Form 1098. Because of IRS regulations limiting the time an amended return may be filed many homeowners will not be able recover the taxes paid.

There are additional elements to the lawsuit; a claim by the borrower’s attorneys that Bank of America knowing the practice was wrong but intentionally under reported the interest to minimize its reporting of income. Interest is deductible to the taxpayer paying and income to the taxpayer collecting the payment. Principle is not deductible or reportable as income. Counter claims by the bank the plaintiffs are seeking to make the bank their tax preparer as no statue or rule requires lenders to track payments of interest that has become part of the loan’s principle balance.

Given the number of home mortgage modifications following the 2008 and 2009 housing debacle the potential exists that many or all lenders have followed the same practice as Bank of America. There is no information as yet on what if anything homeowners can or should do to determine if they have overpaid taxes as a result of Bank of America’s and other lenders conduct.

I recommend homeowners with loan modifications consult with their tax advisor on how to best handle the potential tax consequences of a lender’s treatment of the delinquent interest under a loan modification.

Article link 1 Thomas Rueters article covering the classaction suit.

Article Link 2 Procedurly Taxing blog post discussing the legal and tax implications of the suit.