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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.


Where ARE My Tax Forms?

April 15th is on a Tuesday this year so taxpayers will not have the additional time they enjoyed last in prior years when the tax due date fell on weekends.  Everyone understands the need to gather tax documents, records, total receipts and the general summarization required for filing tax returns.  Most however do not make it a habit thru out the year like CPAs.

You will need to dig thru that stack of mail growing on the hall table and look inside magazines for them.  Maybe even look in the recycle bin (you know, that big green garbage can the city left at your house) for them.  Many people do not recognize the envelope the form comes in, some taxpayers stick the 1099-B with the rest of their investment retirement papers unopened.

If your CPA sends a Tax Organizer to you look on the first page for a list of tax forms used in prior years. Typically the tax forms are listed on the first page in most tax organizers as taxpayers only look at the organizer once. This list will help you determine what forms are missing before you contact your employer, investment advisor, CPA at a time that is most stressfull for them.

As a final check check your paystub for the website were you will be able to download a copy of your W-2 (if download is offered by your company) and the investment advisor or brokerage house website for download of Forms 1099-DIV, 1099-INT and 1099-B. And check your email for such websites and links to them.

If you are unable to locate a copy of the tax form contact your employer for your W-2. If the employer has moved or closed try anyway. Try Google for new address of old employers and send them a letter. Most will have forwarding address or someone responsible for wrapping up the business. 

Make every reasonable effort to collect the forms. They may have been mailed to your old address and and not forwarded, your address was incorrect or incomplete in the sender's records or they may not be aware they are suppose to provide you the form. (More on that in a later post.)

If you have been unable to get a form copy or contact the one responsible for providing a copy then wait until April 14th and call the IRS at 1.800.829.1040. Have your personal information handy (name, social security number, address, and blood type). Also have information on your employer such as Name, Address, Phone Number and Wages, Withholding, (from your last paystub or best guess) and the dates you worked for them. The IRS will Form 4598, Form W-2, 1098 or 1099 Not Received, Incorrect, or Lost to you and to your employer. Smart form providors will send you your tax forms.

WAIT until April 15th to file your return using Form 4598.

If you use Form 4852 for “improper use” you could be hit with accuracy-related penalties equal to 20% of the amount of taxes that should have been paid; civil fraud penalties equal to 75% of the amount of taxes that should have been paid, and/or a $5,000 civil penalty for filing a frivolous return or taking a frivolous position.

If, after filing your return, you receive the tax document and need to correct the filing do so using Form 1040X-Amended U.S. Individual Income Tax Return

Please wait to file your return until you have ALL your tax documents. If you file telling your preparer that is all the forms or provide information for missing forms you will be forced to file an amended return. Tax preparers charge the same or greater fees for preparing an amended return. And amended returns are a red flag to the IRS to audit a taxpayer.

So get your forms together and if you do not have them all by April 15th then pay an estimated tax amount and EXTEND until October 15th.

The most common forms taxpayers will need to send to their tax preparer are:

W-2: Wages

W-2G: Gambling Winnings

1099-B: Proceeds from Broker and Barter Exchange Transactions

1099-C: Cancellation of Debt

1099-DIV: Dividends and Distributions

1099-G: Government Payments

1099-H: Health Insurance Advance Payments

1099-INT: Interest Income

1099-K: Merchant Card and Third Party Network Payments

1099-MISC: Miscellaneous Income

1099-OID: Original Issue Discount

1099-Q: Payment from Qualified Education Programs

1099-R: Distributions from Pensions, Annuities, Retirement Plans, IRAs, or Insurance Contracts

1099-S: Proceeds from Real Estate Transactions (Typically tax payer home)

1099-SA: Distributions From an HSA, Archer MSA, or Medicare Advantage MSA

SSA-1099: Social Security Benefit Statement

1098: Mortgage interest

1098-C: Contribution of a motor vehicle, boat, or airplane to a charity

1098-E: Student loan interest

1098-T: Tuition Statement

K-1: From a Partnership (Form 1065), S-Corp (Form 1120S), Trusts (Form 1041)



Identity Theft and the IRS.

Identity theft has become the BIG FEAR of many American's as horror stories of accounts drained, exploding credit card bills, arrests for fruadulant checks, and lives ruined as opportunities and reputations are lost.

Add to this a bold new crime of Refund Fraud. Identity thieves file a federal return claiming a substantial refund using a stolen social security number and other relevant information and fabricated tax information. Google searches for identity theft and tax returns returns 1 million plus articles about this crime. Those few convicted of this crime have collected millions, some hundreds of millions in refunds.

In the Select Committe on Aging, United States Senate on April 10, 2013; Chairman Bill Nelson stated in his opening comments the following facts:

  • The U.S. Treasury is loosing $5 Billion each year to refund fraud, and the number is growing.
  • The IRS reported that from 2010 to 2011 Identity Theft incendents nearly tripled.
  • The Federal Trade Commission reported Tax Related Fraud is growing at an 'astronomical' rate. While credit card related identity theft is declining.
  • The IRS reports a backlog of cases exceeding 300,000 taking  an average of180 days to resolve.
  • Taxpayers victimized in one year are victimized in the following year
  • Many victimes of Refund Fraud

The IRS claims that only 1% of taxpayers are victims of identity theft. For those who are the victims of identity theft the IRS will issue a Identity Protection Personal Identifer Number (IPPIN) for use in filing returns. It has yet to be determined if such PINs detere identity theft and many victims continue to wait for the IPPIN to be issued by the IRS.

According to TIME Magazine in a March 26 article stated the IRS has 3,000 employees devoted full time to resolving 650,000 cases of identity theft. A TaxPro Today article referred to the Treasury Inspector General for Tax Administration report where these numbers were first issued.

The IRS is facing an uphill task in combating this crime. The theives operate across the nation, quickly change operations to avoid apprehension or detection and are sphisticated and are becoming more sophisticated.

Suggested steps to protect our Identity follow.

  • Protect yourself by filing early.
  • Don’t carry your Social Security card or any documents with your SSN or Individual Taxpayer Identification Number (ITIN) on it.
  • Don’t give a business your SSN or ITIN just because they ask. Give it only when required.
  • Protect your financial information. Shred any document with a social security number, bank or credit card account number or other personal information.
  • Check your credit report every 12 months.
  • Secure personal information in your home. Put the documents with the information in a strongbox, safe, or other secure place.
  • Protect your personal computers by using firewall, anti-spam/virus software, update security patches and change passwords for Internet accounts. Keep your antivirus and malware protection software up to date. Identity monitoring company LifeLock says that if you use online tax preparation software, make sure the URL starts with “https” as opposed to just “http.” (The “s” indicates a secure connection.)
  • The IRS never contacts taxpayers via email or social networks. Delete suspisious emails.
  • Don’t give personal information over the phone, through the mail or on the Internet unless you have initiated the contact or you are sure you know who you are dealing with.
  • Order a tax return transcript from the IRS  and compire it to your own records of income andexpenses and filing history.
  • Collect your mail daily and read it. If you get a notice from the IRS about a tax return you never filed, or regarding income you never earned, you should get in touch with them.

To this I add a sole proprietorship who must provide a social security number for IRS information forms to contact the IRS for a Tax Payer Identification Number (TPIN) to use in place of your social security number. This number will appear on Forms 1099-MISC provided by businesses you provide services to. Doing so will reduce the number of people who have access to your social security number.

The most often stressed advise was to file your return early.

If you suspect that you are the victim of identity theft file FORM 14039 with the IRS. This will notify the agency of the theft. There will be more steps you will need to take to reclaim your life from the theives that stole it.


NII Tax - Net Investment Income Tax

To pay for Healthcare and the other goodies we will receive Congress has created two new taxes for the coming year. While the final regulations are not out the proposed regs give an idea of how the tax will be collected and from whom. Remember, these are proposed regulations and are subject to change and are not effective until finalized. Both are a Medicare Tax; one on Net Investment Income and the other on earned income exceeding $250,000 for married filing jointly (MFJ), and $200,000 if a single filer (SF).

Net Investment Income Tax' (NII) is the first new tax and will be assessed on individuals with Modified Adjusted Gross Income (MAGI) above threshold amounts given in the chart below.

These threshold amounts are not indexed for inflation! If you are exempt from Medicare Taxes you may still be subject to the NII.

Investment Income comes from the taxpayer's passive income activities that generate interest, dividends, capital gains, rents, royalties, non-qualified annuities. This is not

an all inclusive list. Other forms of non-service income could be subject to this tax. Income not subject to this tax includes wages, unemployment compensation, operating income from non-passive businesses, social security, alimony, tax exempt interest, SE income.

Also the income from a business involved in the trading of financial instruments or commodities and businesses that are passive activities for the taxpayer is subject to NIIT. If you own an interest in a partnership, LLC or S corp and are not activiley involved in the enterprise your share of the income is subject to NIIT.

Capital gains from stocks, bonds and mutual funds are subject to NIIT as are capital gain distributions from mutual funds.

NIIT will not apply to any gain on the sale of a principle residence that is excluded from gross income for regular income purposes. However, the gain from investment real estate including the gain on the sale of a second home that is not a primary residence is subject to NIIT.

Gains from the sale of interests in partnerships and S corporations to the extent the taxpayer was a passive owner are subject to NII.

The tax is assessed on the Net Investment Income after applying deductions that are properly allocable to items of gross investment income; i,e, investment interest expense, investment advisory and brokerage fees, expenses related to rental and royalty income, and state and local property taxes.

Remember the regulations are proposed, the tax will be in effect for years beginning after December 31, 2012.

If you anticipate your MAGI exceeding the threshold and that you will have table net investment income you will want to make estimated tax payments. If you have substantial investment income increase your estimated tax deposit accordingly.