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IRS institutes Early Interaction Initiative for Employment Tax matters

 

 

Blog.January 2016

 

IRS institutes Early Interaction Initiative for Employment Tax matters

  It is expected that the IRS will be instituting swifter action against employers that are falling behind on their Federal Tax Deposits (FTD’s) for employment taxes.  Those taxpayers who have had interaction with a field Revenue Officer are likely hearing from those Revenue Officers more quickly if they fall behind on their required deposits.  However, the IRS announced in December 2015 that it is instituting efforts to identify employers who appear to be falling behind on their tax payments – apparently even before their employment tax return is being filed. 

            The IRS has indicated that their identification efforts will result in letters, automated phone messages, and other communications which could include a visit from a field Revenue Officer.  The IRS has indicated that this effort will reduce the likelihood of the problem becoming uncontrollable.  Many taxpayers simply do not realize how steep the penalties can be for failure to properly make tax deposits, pay employment taxes timely, or failure to file timely returns.  Further, it is unlikely that most taxpayers understand the personal liability that can be assessed from unpaid employment taxes.  A liability that is not dischargeable in bankruptcy.

            While the education efforts are beneficial, certainly there is an enforcement aspect of this activity by the IRS.  The IRS readily admits that two-thirds of federal taxes are collected through the payroll tax system.  With a reduced budget, this activity makes good sense for the IRS.  However, it is most likely going to be most burdensome for small businesses. 

            No doubt early action is best.  If you know you have been falling behind on your payroll tax obligations and need assistance planning before you hear from the taxing authorities, feel free to call. 

2016 Inflation Adjustments on Several Tax Benefits and Retirement Adjustments

 

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IRS Announces 2016 Inflation Adjustments on Several Tax Benefits and Retirement Adjustments

The IRS recently announced annual inflation adjustments for several tax provisions, which will apply to the 2016 tax year. Some of the affected provisions include: income tax rate schedules, the estate tax exemption, long-term care adjustments, and retirement adjustments. Below is a summary of those adjustments.

Tax Rates. Beginning in the 2016 tax year, the following tax rates will apply:

If the Taxable Income Is:

The Tax for Married Individuals Filing Jointly is:

Less than or equal to $18,550

 

10% of the taxable income

Over $18,550 but not over $75,300

 

$1,855 plus 15% of the excess over $18,550

Over $75,300 but not over $151, 900

 

$10,367.50 plus 25% of the excess over $75,300

Over $151,900 but not over $231,450

 

$29,517.50 plus 28% of the excess over $151,900

Over $231,450 but not over $413,350

 

$51,791.50 plus 33% of the excess over $231,450

Over $413,350 but not over $466,950

 

$111,818.50 plus 35% of the excess over $413,350

Over $466,950

$130,578.50 plus 39.6% of the excess over $466,950

 

If the Taxable Income Is:

 

The Tax for Heads of Households is:

Not over $13,250

 

10% of the taxable income

Over $13,250 but not over $50,400

 

$1,325 plus 15% of the excess over $13,250

Over $50,400 but not over $130,150

 

$6,897.50 plus 25% of the excess over $50,400

Over $130,150 but not over $210,800

 

$26,835 plus 28% of the excess over $130,150

Over $210,800 but not over $413,350

$49,417 plus 33% of the excess over $210,800

 

Over $413,350 but not over $441,000

 

$116,258.50 plus 35% of the excess over $413,350

 

Over $441,000

 

$125,936 plus 39.6% of the excess over $441,000

 

If the Taxable Income Is:

The Tax for Unmarried Individuals is:

Not over $9,275

 

10% of the taxable income

Over $9,275 but not over $37,650

 

$927.50 plus 15% of the excess over $9,275

Over $37,650 but not over $91,150

 

$5,183.75 plus 25% of the excess over $37,650

 

Over $91,150 but not over $190,150

 

 

$18,558.75 plus 28% of the excess over $91,150

Over $190,150 but not over $413,350

 

 

$46,278.75 plus 33% of the excess over $190,150

Over $413,350 but not over $415,050

 

 

$119,934.75 plus 35% of the excess over $413,350

Over $415,050

 

 

$120,529.75 plus 39.9% of the excess over $415,050

 

If the Taxable Income Is:

The Tax for Married Individuals Filing Separate Returns is:

Not over $9,275

 

10% of the taxable income

Over $9,275 but not over $37,650

 

$927.50 plus 15% of the excess over $9,275

Over $37,650 but not over $75,950

 

$5,183.75 plus 25% of the excess over $37,650

 

Over $75,950 but not over $115,725

 

 

$14,758.75 plus 28% of the excess over $75,950

Over $115,725 but not over $206,675

 

$25,895.75 plus 33% of the excess over $115,725

 

Over $206,675 but not over $233,475

$55,909.25 plus 35% of the excess over $206,675

 

Over $233,475

$65,289.25 plus 39.6% of the excess over $233,475

 

 

If the Taxable Income Is:

The Tax for Estates and Trusts is:

Not over $2,550

 

15% of the taxable income

Over $2,550 but not over $5,950

 

$382.50 plus 25% of the excess over $2,550

Over $5,950 but not over $9,050

 

$1,232.50 plus 28% of the excess over $5,950

Over $9,050 but not over $12,400

 

 

$2,100.50 plus 33% of the excess over $9,050

Over $12,400

 

$3,206.00 plus 39.6% of the excess over $12,400

 

 

Estate Tax Exemption. The Estate Tax is a tax imposed on the transfer of property at a person’s death, for any portion of the decedent’s gross estate that exceeds the Federal Estate Tax Exemption. This year the estate tax exclusion has increased from a total of $5,430,000 to $5,450,000. This means that decedents who die in 2016 have an estate tax exclusion that has increased by $20,000 from the previous year.

Long-term Care. Deductions for Long Term Care Insurance Premiums have increased slightly from 2015. The 2016 deductible limits under §213(d)(10) for eligible long-term care premiums are as follows:

Attained Age Before Close of Taxable Year

Limitation on Premiums

40 or less

$390

More than 40 but not more than 50

$730

More than 50 but not more than 60

$1,460

More than 60 but not more than 70

$3,900

More than 70

$4,870

 

Retirement Adjustments. The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the government’s Thrift Savings Plan remains unchanged at $18,000. In addition, if you are 50 or over you can contribute an additional $6,000 as a catch-up contribution. The limit on annual contributions to IRA accounts remains unchanged at $5,500 with the catch-up contribution limit remaining $1,000.

The deduction for taxpayers making contributions to traditional IRA accounts is phased out gradually starting at an Adjusted Gross Income (AGI) of $61,000 for single taxpayers and heads of households, $98,000 for married couples filing jointly (when the spouse who makes the IRA contribution is covered by a workplace retirement plan).  These amounts are unchanged in 2016.  The phase out moves from a starting point of $183,000 to $184,000 for an IRA contributor not covered by a workplace retirement plan but who is married to someone who is covered. 

The deduction for taxpayers making contributions to a Roth IRA is phased out gradually starting at an AGI of $184,000 for married couples filing jointly and $117,000 for singles and heads of households.

Lastly, the AGI limit for the saver’s credit (retirement savings contribution credit) for low and moderate income workers has also increased slightly for 2016. The credit is now $61,500 for married couples filing jointly, $46,125 for heads of household, and $30,750 for singles and married couples who file separately.

If you have any questions about how these adjustments might affect your tax situation, please feel free to contact our office for further assistance. 

2015 Inflation Adjustments on Several Tax Benefits and Retirement Adjustments

 

 

 

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IRS Announces 2015 Inflation Adjustments on Several Tax Benefits and Retirement Adjustments

The IRS recently announced annual inflation adjustments for several tax provisions, which will apply to the 2015 tax year. Some of the affected provisions include: income tax rate schedules, the estate tax exemption, long-term care adjustments, and retirement adjustments. Below is a summary of those adjustments.

Tax Rates. Beginning in the 2015 tax year, the following tax rates will apply:

If the Taxable Income Is:

The Tax for Married Individuals Filing Jointly is:

Less than or equal to $18,450

 

10% of the taxable income

Over $18,450 but not over $74,900

 

$1,845 plus 15% of the excess over $18,450

Over $74,900 but not over $151, 200

 

$10,312.50 plus 25% of the excess over $74,900

Over $151,200 but not over $230,450

 

$29,387.50 plus 28% of the excess over $151,200

Over $230,450 but not over $411,500

 

$51,566.50 plus 33% of the excess over $230,450

Over $411,500 but not over $464,850

 

$111,324 plus 35% of the excess over $411,500

Over $464,850

$129,996.50 plus 39.6% of the excess over $464,850

 

If the Taxable Income Is:

 

The Tax for Heads of Households is:

Not over $13,150

 

10% of the taxable income

Over $13,150 but not over $50,200

 

$1,315 plus 15% of the excess over $13,150

Over $50,200 but not over $129,600

 

$6,872.50 plus 25% of the excess over $50,200

Over $129,600 but not over $209,850

 

$26,722.50 plus 28% of the excess over $129,600

Over $209,850 but not over $411,500

$49,192.50 plus 33% of the excess over $209,850

Over $411,500 but not over $439,000

$115,737 plus 35% of the excess over $411,500

Over $439,000

$125,362 plus 39.6% of the excess over $439,000

 

If the Taxable Income Is:

The Tax for Unmarried Individuals is:

Not over $9,225

 

10% of the taxable income

Over $9,225 but not over $37,450

 

$922.50 plus 15% of the excess over $9,225

Over $37,450 but not over $90, 750

 

$5,156.25 plus 25% of the excess over $37,450

Over $90,750 but not over $189,300

 

 

$18,481.25 plus 28% of the excess over $90,750

Over $189,300 but not over $411,500

 

 

$46,075.25 plus 33% of the excess over $189,300

Over $411,500 but not over $413,200

 

 

$119,401.25 plus 35% of the excess over $411,500

Over $413,200

 

 

$119,996.25 plus 39.9% of the excess over $413,200

 

If the Taxable Income Is:

The Tax for Married Individuals Filing Separate Returns is:

Not over $9,225

 

10% of the taxable income

Over $9,225 but not over $37,450

 

$922.50 plus 15% of the excess over $9,225

Over $37, 450 but not over $75,600

 

$5,156.25 plus 25% of the excess over $37,450

Over $75,600 but not over $115,225

 

 

$14,693.75 plus 28% of the excess over $75,600

Over $115,225 but not over $205,750

 

$25,788.75 plus 33% of the excess over $115,225

 

Over $205,750 but not over $232,425

$55,662 plus 35% of the excess over $205,750

 

Over $232,425

$64,989.25 plus 39.6% of the excess over $232,425

 

 

If the Taxable Income Is:

The Tax for Estates and Trusts is:

Not over $2,500

 

15% of the taxable income

Over $2,500 but not over $5,900

 

$375 plus 25% of the excess over $2,500

Over $5,900 but not over $9,050

 

$1,225 plus 28% of the excess over $5,900

Over $9,050 but not over $12,300

 

 

$2,107 plus 33% of the excess over $9,050

Over $12,300

 

$3,179.50 plus 39.6% of the excess over $12,300

 

 

Estate Tax Exemption. The Estate Tax is a tax imposed on the transfer of property at a person’s death, for any portion of the decedent’s gross estate that exceeds the Federal Estate Tax Exemption. This year the estate tax exclusion has increased from a total of $5,340,000 to $5,430,000. This means that decedents who die in 2015 have an estate tax exclusion that has increased by $90,000 from the previous year.

Long-term Care. Deductions for Long Term Care Insurance Premiums have increased slightly from 2014. The 2015 deductible limits under §213(d)(10) for eligible long-term care premiums are as follows:

Attained Age Before Close of Taxable Year

Limitation on Premiums

40 or less

$380

More than 40 but not more than 50

$710

More than 50 but not more than 60

$1,430

More than 60 but not more than 70

$3,800

More than 70

$4,750

 

Retirement Adjustments. The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the government’s Thrift Savings Plan has increased from $17,500 to $18,000. In addition, if you are 50 or over you can contribute an additional $6,000 as a catch-up contribution. However, the limit on annual contributions to IRA accounts remains unchanged at $5,500 with the catch-up contribution limit remaining $1,000.

The deduction for taxpayers making contributions to traditional IRA accounts is phased out gradually starting at an Adjusted Gross Income (AGI) of $61,000 for single taxpayers and heads of households, $98,000 for married couples filing jointly (when the spouse who makes the IRA contribution is covered by a workplace retirement plan), and $183,000 for an IRA contributor not covered by a workplace retirement plan but who is married to someone who is covered. 

The deduction for taxpayers making contributions to a Roth IRA is phased out gradually starting at an AGI of $183,000 for married couples filing jointly and $116,000 for singles and heads of households.

Lastly, the AGI limit for the saver’s credit (retirement savings contribution credit) for low and moderate income workers has also increased slightly for 2015. The credit is now $61,000 for married couples filing jointly, $45,750 for heads of household, and $30,500 for singles and married couples who file separately.

If you have any questions about how these adjustments might affect your tax situation, please feel free to contact our office for further assistance.

Court Affects Payments from Conservation Reserve Program

 

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8th Circuit Ruling Affects Characterization of Payments from Conservation Reserve Program:

The US Court of Appeals for the 8th Circuit recently handed down a decision in Morehouse v. C.I.R, (8th Cir. Oct. 10, 2014), which decided whether or not payments received under the Department of Agriculture’s Conservation Reserve Program (CRP) should be included as income from self-employment on a taxpayer’s return.

In this case, the taxpayer inherited 1223 acres of land in 1994, located on three different properties in South Dakota (503 acres in Grant County, 320 acres in Roberts County, and 400 acres in Day County). All of the land was tillable cropland with exception of a gravel pit on the Grant County property and 129 acres on the Roberts County property that the taxpayer’s father placed under the CRP program. The taxpayer never farmed any of the land.

In 1997, the taxpayer enrolled the remaining acreage of the Roberts County property and the tillable land in Grant County in the CRP program. The primary purpose of the CRP program is to reduce soil erosion and improve soil conditions on highly erodible cropland by limiting the taxpayer’s use of the property. Therefore, by enrolling in the program, the taxpayer entered into a contractual obligation with the Commodity Credit Corporation (CCC) requiring him to implement conservation plans for the properties in the program. These plans required the taxpayer to establish and maintain certain types of grass or vegetative cover on the land and engage in periodic weed and pest control. As compensation for implementing the conservation plans, the taxpayer was reimbursed for a portion of his costs and was paid an “annual rental payment.”

In both 2006 and 2007, the taxpayer received CRP payments of $37,872. The taxpayer included the CRP payments on his return in both years as a rental payment received from real estate. As a result, on October 14, 2010 the IRS sent the taxpayer a notice of deficiency stating that the CRP payments should have been reported as self-employment income on a Schedule F, Profit or Loss from Farming. The taxpayer petitioned the Tax Court for review of this determination, claiming that the CRP payments were rentals from real estate under 26 U.S.C. §1402(a)(1), and therefore should be excluded from his net earnings from self-employment. However, the Tax Court sustained the service’s conclusion that the CRP payments constituted self-employment income reasoning that because the payments were proceeds from the taxpayer’s own use of the land they did not constitute rental payments.

On appeal, the primary issue centered on whether or not CRP payments should be categorized as “net earnings from self-employment.” In deciding this question, the Appeals Court first looked at types of payments that would generally be classified as self-employment income. The Court explained that self-employment income consists of the gross income derived from the taxpayer’s trade or business. Or in other words, the trade or business must give rise to the income before it can be included as self-employment income.

Contrary to the Tax Court’s opinion, the Appeals Court found that the CRP payments did not derive from the taxpayer’s activities on the land because the only reason the taxpayer engaged in any activities such as tilling and seeding on the land was because it was required by the CRP contracts. The Appeals Court further determined that because the contracts reserved a right of entry for the government onto the CRP property for purposes of inspection, that the government was “using” the land as much as if not more than the taxpayer. Therefore, the CRP payments were given to the taxpayer in consideration for this right to use and occupy the taxpayer’s property.

Next the Court looked at how similar payments to taxpayers have been categorized in the past. In doing so, the Court looked to Rev. Ruling 60-32, 1960-1 C.B. 23 (1960) concerning the CRP’s predecessor, the Soil Bank Act. In this ruling the IRS concluded that soil bank payments to people who did not operate or materially participate in a farming operation were to be viewed as rental income, not self-employment income. However, the ruling further stated that soil bank payments made to farmers were self-employment income.  Although this precedent was not controlling, the Court decided that given the significant overlap in the CRP and Soil Bank programs, and because it reflects a longstanding and reasonable interpretation of the Agency’s regulations, the revenue ruling was persuasive. Therefore, the Court decided to follow the Soil Bank Program distinction between payments to farmers and non-farmers in concluding that CRP payments to the taxpayer in this case were rental income because he was not engaged in farming operations. Looking forward it appears that at least in the 8th Circuit, taxpayers who receive payments from the CRP program will be able to include the income as rental income rather than self-employment income on their tax return, if they are not operating farming activities on the land.

If you have any questions about how this ruling might affect the characterization of your CRP payments, please feel free to contact our office.

Texas Receives “High Performance Bonus”

 

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Texas Receives “High Performance Bonus” Under Federal Worker Misclassification Initiative:

The U.S. Department of Labor (DOL) recently awarded $10.2 million in grants to 19 states as part of the Department’s Misclassification Initiative. The Misclassification Initiative was created in 2011, as part of a Memorandum of Understanding (MOU) signed between the DOL and IRS.  The MOU formed an agreement between the two agencies to work together to reduce the incidence of worker misclassification, by sharing information and coordinating enforcement efforts.

A worker misclassification occurs when an employer or business owner classifies a worker on their tax returns as something other than an employee (such as an independent contractor), when they should be classified as an employee. Generally, the distinction between an employee and independent contractor is in how much control the person paying for the service has over (1) what work will be done and (2) how that work will be done. The more control the person paying has over the work being done, the more likely it is that the person providing the service should be classified as an employee.

From the worker’s perspective, misclassification can mean denial from benefits and programs such as family medical leave, overtime, minimum wage, and unemployment insurance. From the government’s perspective, misclassification leads to a substantial loss to the Treasury by way of lost Social Security, Medicare, unemployment insurance, and worker’s compensation funds.

While the Misclassification Initiative was started in 2011, this year is the first year that individual states were eligible to receive grant funding for their efforts to decrease worker misclassification. Although several states already had existing programs designed to reduce misclassification, under the federal Misclassification Initiative individual grants up to $500,000 were awarded to 19 states under a competitive award process.

The Misclassification Initiative also offers additional grant funding to states through its “High Performance Bonus” program.  This bonus program is based off the Federal Supplemental Nutrition Assistance Program (SNAP), formerly called the food stamp program, which also provides bonuses for high performing states. So far, four states (Maryland, New Jersey, Texas, and Utah) have received such bonuses. Of those states, Texas has received $775,529 in bonuses, which is almost $300,000 more than the next highest recipient, New Jersey. According to the DOL the bonuses are awarded to the states that are most successful in detecting and prosecuting employers that fail to pay taxes due to misclassification. The bonus program is designed to give states both an extra incentive to carry out enforcement actions and additional funds to upgrade their misclassification enforcement programs.

If you’re unsure how your workers should be classified and would like assistance, please contact our office.   

Colorado Real Estate Transactions - What Rights are Included?

 

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Colorado S.B. 14-009: Real Estate Transactions—What Rights are Included?

For years, landowners whose estates contain energy producing minerals have been dividing their estates into a separate surface estate and subterranean estate or “Mineral Estate.” In such areas, subsurface rights to minerals such as oil and natural gas are often severed from the surface estate, vesting ownership in multiple parties. These severances are different than others such as a wind energy right in that ownership of the mineral estate is severable from the surface estate, giving the owner of the mineral estate an exclusive right to the subterranean portion of the estate. Common ownership schemes for such an operation include the following:

  1. The owner of the undivided estate leases the mineral estate to an oil and gas company.
  2. The owner of the undivided estate sells the mineral estate to a party who then leases that mineral estate to an oil and gas company.
  3. The owner of the undivided estate sells the mineral estate to the oil and gas company.

Generally, a separate surface use agreement regulates the interaction between the owner of the surface estate, owner of the mineral estate, and leasee of the mineral estate. Such agreements commonly include conditions under which the mineral leaseholder may access the surface estate in order to access the mineral estate and whether or not compensation will be required to the surface estate owner.

Recently, with the growth of unconventional drilling technologies such as hydraulic fracturing, more landholders find themselves on land with drilling potential. Thus, more landowners are severing mineral rights to property in more densely populated and developed areas, which has the potential of creating uncertainty for a purchaser of real property.

To address this issue, the Colorado State Legislature recently passed Senate Bill 14-009. The Bill adds an additional disclosure requirement to the list of disclosures already required for conveyances of real property. This new disclosure requires a seller to provide information to a buyer regarding any potential split in ownership between the land and mineral estates. More specifically, in each contract for the sale of real property the seller must disclose the following:

  1. That the surface and mineral estate may be owned separately;
  2. Transfer of the surface estate may not include the mineral estate;
  3. Third parties may own or lease interests in oil, gas, or other minerals under the surface and may enter and use the surface estate to access the mineral estate (The use of the surface estate to access the mineral estate may be governed by a separate surface use agreement recorded with the county clerk and recorder); and
  4. The types of oil and gas activities that may occur on or adjacent to the property.

The above disclosure is intended to protect the purchaser of real property, by providing them with the information necessary to understand exactly what property rights they are acquiring when purchasing a parcel of land. By January 1, 2016 the Real Estate Commission is required to promulgate a rule regarding the above land disclosure. At that time all land subject to the real estate commission’s jurisdiction will be subject to the commission’s rule regarding disclosure. Any land not under the Real Estate Commission’s jurisdiction, will be required beginning January 1, 2016 to include, in bold typed face, a disclosure statement in any sale for real property in substantially the same form as the statutory language provided in the bill.

A copy of S.B. 14-009 can be located at the following link: http://www.leg.state.co.us/clics/clics2014a/csl.nsf/fsbillcont/CC524473860B676F87257C3000061544?Open&file=009_enr.pdf

Missouri Legislature Overrides Vetoes on Taxpayer Friendly Bills

 

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Missouri Legislature Overrides Vetoes on Taxpayer Friendly Bills: An Overview of Senate Bills 829 & 727

This past week the Missouri Legislature voted to override the governor’s veto on several bills including Senate Bill 829 regarding the burden of proof in taxpayer liability cases, and Senate Bill 727 regarding sales taxes for farmer’s markets. Both of these bills are effective retroactively beginning August 28, 2014.

Senate Bill 829 repeals and replaces section 136.300 of the Missouri Revised Statutes, amending the burden of proof requirements in taxpayer liability cases. Although Senate Bill 829 was signed by both the house and senate earlier this year, it was vetoed by Governor Jay Nixon on June 11. While the governor’s veto was in place, the Department of Revenue (DOR) only had the burden of proof in tax liability disputes if the taxpayer met certain threshold requirements. Such requirements included whether (1) the taxpayer was a partnership, corporation, or trust, (2) the taxpayer’s net worth did not exceed $7 million and (3) the taxpayer had less than 500 employees.

On September 10 the legislature overturned the governor’s veto, enacting Senate Bill 829. The bill replaces the threshold requirements mentioned above, and places the burden of proof on the DOR with respect to any factual issue relevant to ascertaining the liability of the taxpayer as long as the taxpayer has (1) produced evidence that shows that there is a reasonable dispute with respect to the issue and (2) has adequate records of its transactions and provides the DOR reasonable access to the records. Now because the burden of proof is on DOR, they have to prove liability for claims stating that a taxpayer owes additional taxes (this act includes issues regarding the applicability of an exemption but excludes issues regarding the applicability of any tax credit). In addition, by placing the burden of proof on DOR, the bill mirrors current Internal Revenue Service procedure concerning federal tax liability. Overall the bill is favorable to the taxpayer and creates consistency between the state and federal tax liability procedures.

Senate Bill 727 amends Chapters 144 and 208 of the Missouri Revised Statutes by adding three new sections, the first of which, section 144.527, is related to sales taxes at farmer’s markets.

Section 144.527, specifically exempts “all sales of farm products sold at farmer’s markets” from sales and use taxes as defined in Chapter 144. In addition, the section states that in order to qualify as a “farmer’s market,” the individual farmer, group of farmers, nonprofit, or cooperative must (1) consistently occupy a given site throughout the season, (2) operate as a “common marketplace” for farmers to sell farm products directly to consumers, and (3) be a marketplace where the sole intent and purpose of the farmers is to generate a portion of their household income. While section 144.527 limits farmer’s markets to the “sale of farm products,” it defines “farm products” very broadly so as to encompass almost any type of food that one might find at a farmer’s market (including baked goods made with farm products). However, the term “farm products” would exclude any third party goods or other non-farm product goods that a farmer may want to sell. Lastly, the exemption does not apply to persons or entities with total annual sales of $25,000 or more from farmer’s markets participating in the tax exempt program. 

If you have any questions regarding how these bills may affect your tax matter or farmer’s market, please feel free to contact our office.

Changes to the Colorado Probate Code

 

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H.B. 14-1322: Changes to the Colorado Probate Code

The Colorado General Assembly recently passed several changes to the Colorado Probate Code, which became effective August 6 of this year. In particular, House Bill 14-1322 made changes to the administration of revocable trusts. These changes include the expansion of default rules governing trust revocation and the enumeration of powers and duties afforded to certain fiduciaries acting under the terms of the trust.  

Before House Bill 14-1322, a trust could be revoked by any method expressing the “clear and convincing” intent of the trust creator (“settlor”) to revoke the trust, or if a method was expressly mentioned in the trust, revocation could be accomplished by such a method. Clear and convincing intent also included any revocation in a later drafted will or codicil that expressly referred to the revocable trust or which specifically devised property that would have otherwise passed through the trust. 

With the enactment of House Bill 14-1322, the code now requires settlors to use specific language to signal that a method of revocation is meant to be exclusive. More specifically, a trust must include the terms “sole” or “only” when referring to a method of revocation, otherwise the trust may be revoked by any other method manifesting “clear and convincing” evidence of the settlor’s intent to revoke. This change to the revocation procedure provides for a slightly higher burden on the settlor who wishes to specify an exclusive method of revocation, but also reaffirms the importance of the settlor’s intent when determining whether or not revocation is valid.

House Bill 14-1322 also adopts the statutory concepts of “trust advisors” and “directed trustees” and adds a non-exhaustive list of duties and powers applicable to directed trustees and trust advisors. A directed trustee is a person who is named in the trust as trustee, but whose actions are subject to the direction of a named fiduciary who is in charge of investment decisions on behalf of the trust. Often this named fiduciary is a trust advisor. The trust advisor will assist in the management and investment of trust property. The bill also defines the term “excluded trustees.” An excluded trustee is simply a directed trustee who, under the terms of the trust, must follow the direction of a trust advisor whereas some directed trustees have discretion over whether or not to follow the advice of the trust advisor.  

Before this Bill was passed, the Colorado Probate Code provided a set of specific and general powers in Title 15, Article 1, Part 8 of the Colorado Probate Code, which applied to all persons acting in a fiduciary capacity and which remains applicable after House Bill 14-1322. The provisions in House Bill 14-1322 allow a settlor to establish a trustee-beneficiary relationship with trust advisors, affording the trust advisor the ability to exercise the powers generally afforded to trustees and other fiduciaries. House Bill 14-1322 also imposes particular duties on trust advisors. For example, the bill explicitly states that the decisions of a trust advisor are subject to the Colorado “Uniform Prudent Investor Act.” The Bill also creates reciprocal duties among the trustee and trustee advisor, which require each to keep the other informed about the administration of the trust.

Overall, House Bill 14-1322 made several changes to the Colorado Probate Code, but for the most part they seem to clarify administrative procedures and fiduciary duties of individuals acting under a trust. If you have any questions about how these changes might affect your estate planning documents, please feel free to contact our office.

How do you decide if an Offer In Compromise is a good way to resolve your IRS debt?

 

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In the past couple of years, the IRS has dramatically changed its formula for calculating the amount a taxpayer must pay to settle a tax debt.  Fundamentally, the changes were favorable for the taxpayer and the IRS appears to better understand that acceptance of an Offer in Compromise likely results in collection of more tax dollars than simply continuing to enforce collection efforts through levies and lien filings.  However, the movement towards a more favorable calculation by the IRS of the taxpayer’s ability to pay, and thus the taxpayer’s reasonable collection potential, has actually been further adjusted in a manner that removes some of the initial excitement about formula changes to Offer calculations.

The basis of acceptance of most Offers in Compromise is doubt as to collectability.  Basically, the IRS performs an analysis of a taxpayer’s financial situation and if the taxpayer’s ability to pay is less than the amount they owe, then the taxpayer could theoretically qualify for an Offer in Compromise settlement.  The ability to pay analysis consists of the calculation of both a taxpayer’s equity in assets and “future income potential.”

A taxpayer’s future income potential for a settlement is typically calculated by performing a monthly financial analysis in which the IRS compares gross earnings to allowable expenses to determine if there is any excess monthly income remaining from which the taxpayer could pay the IRS.  If so, this excess income was historically multiplied by a factor – either 48 or 60, to determine the future income potential portion of a settlement Offer.  The taxpayer would be allowed to multiply the excess monthly income by 48 if the Offer was for a lump sum settlement, and 60 if the payments were to be made over a couple of years.

Recently, a favorable adjustment was made to the multiplier.  Rather than asking the taxpayer to multiply excess income over expenses by 48 for a lump sum Offer, the IRS dramatically adjusted this number down to 12!  And, rather than multiplying by 60 for a short term payment Offer over up to a couple of years, the multiplier was altered to 24! 

This seemed almost too good to be true. And in part, it was. The IRS clarified, through the adoption of guidance in its Internal Revenue Manual, that even if a taxpayer calculates that he or she qualifies under the new formula, the taxpayer will not qualify for a settlement Offer if the IRS could collect the entire debt through establishment of an Installment Agreement over the statutory period of collections, unless there are special circumstances.

What this means is that at the time of analyzing a taxpayer’s situation, it is important to be aware that even though the formula indicates a taxpayer would qualify for a settlement, if the monthly excess income over expenses would retire the debt under the statute of limitations, then the taxpayer is wasting time submitting an Offer.  Furthermore, the taxpayer will be putting the statute of limitations for collection on hold while the defective Offer is under review, and for a period of time after rejection.

Here’s a simple example of how this would work.  Assume a taxpayer owes $50,000 in tax debt.  If the taxpayer just filed the return, the IRS will have 10 years, or 120 months to collect the debt, with exceptions for extensions of time – such as when an Offer is filed. If the taxpayer has no equity in assets, but a financial analysis shows an ability to pay $1,000 a month, the taxpayer might think a lump sum Offer would be a good way to put the debt to rest forever.  Under the lump sum analysis, the future income potential would be $1,000 x 12 or $12,000.  With no equity in assets, this is less than the tax debt and would make this look viable.  Even the short term Offer looks good as the future income potential would be $1,000 x 24 or $24,000.  The settlement would be paid over 24 months, or $1,000 per month.

The reality in the above example is that the Offer will be rejected, absent special circumstances, because the monthly future income potential of $1,000 multiplied by the life of the collection statute exceeds the tax debt as follows: $1,000 x 120 months (or 10 years as the return was just filed) = $120,000.  The exception to this is if special circumstances exist as disclosed on submission of the Offer.  Generally, special circumstances would include creation of economic hardship, or alternatively, compelling public policy or equity factors, such as health concerns or age, could tip the analysis in favor of settlement, in spite of the above.

Fundamentally, and especially because of the fact that the statute of limitations is placed on hold during a lengthy analysis period (several months), a taxpayer has to be careful to review their particular situation so that submission of an Offer in Compromise doesn’t do more harm than good.  If you would like assistance with your tax matter, or the tax situation of a client, please don’t hesitate to contact us.

Final Regulations Issued for Use of Truncated Taxpayer Identification Numbers

 

 

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New IRS Regulations Aim to Fight Identity Theft Through Use of Truncated Taxpayer Identification Numbers

This week, in an effort to safeguard taxpayers from identity theft, the IRS issued its final regulations regarding the use of Truncated Tax Identification Numbers or (TTINs). The final regulations, published on July 15, are amendments to the Income Tax Regulations and Procedure and Administration Regulations, which allow the tax filer to truncate a payee’s identification number on certain documents. The Service states that the amendments are specifically targeted at reducing the risk of identity theft, which can stem from the use of an employee’s entire identification number on documents.

A “Truncated” identification number simply takes an existing nine-digit identification number and replaces the first five numbers with either asterisks or “X”s so that only the last four digits remain. (i.e. A tax identification number of 99-9999999 would become XX-XXX9999). Because a TTIN is merely a method of masking taxpayer identification numbers that already exist, use of a TTIN does not require the Service to issue any new identification numbers or expend any funds for the taxpayer to be able to use a TTIN. The new regulations allow for TTIN to be used for a taxpayer’s social security number (SSN), IRS individual taxpayer identification number (ITIN), IRS adoption taxpayer identification number (ATIN), or employer identification number (EIN) on payee statements and certain other documents.

Before issuing their final regulations, the IRS ran a pilot program, which allowed certain qualified filers to truncate an individual’s payee identification number on a paper payee statements for Forms 1098, 1099, and 5498. This program ran from 2009 to 2010. In 2011 the IRS extended the pilot program for two more years and modified it by removing Form 1098-C from the list of eligible documents.

In January of 2013, the US Treasury and the IRS issued proposed regulations, in response to the growing threat of identity theft and associated tax fraud. The proposed regulations largely mirrored the pilot program, with TTINs permitted on electronic payee statements in addition to paper statements.

The final regulations became effective on July 15, 2014 and permit the use of TTINs “on any federal tax-related payee statement or other document required to be furnished to another person….” TTINs may not be used (1) on any return or statement filed with, or furnished to, the IRS, (2) where prohibited by statute, regulation, or other guidance by the IRS, or (3) where a SSN, ITIN, ATIN, or EIN is specifically required. Further a TTIN cannot be used by an individual to truncate their own identification number on any statement or other document that they give to another person. This includes an employer’s EIN on a W-2 or Wage and Tax Statement that they might give to an employee, and also an individual’s identification number on either a W-9 or Request for Taxpayer Number and Certification. 

If you have questions about the use of TTINs, please contact our office.

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